The Service 1. This War Tax Service when sent you is complete to the time of subscription. It is kept up to date by the insertion of new pages as often as new regulations, rulings or decisions are released. 2. Reports of new matter are sent you by first class mail with a Report Letter which lists the pages in- cluded in the report. The report letters are con- secutively numbered. If the number of a new report indicates the non-receipt of the preceding report, or if pages are found missing, notice thereof should be sent us that we may forward duplicates. 3. The several divisions of this War Tax Service are indicated and separated by guide cards. Every division is complete in itself including, as it does, the statutory provisions pertaining to its subject, a compilation of the regulations, decisions and rul- ings in force January 1, 1922, forms, new matters, and, where necessary, an index. 4. All paragraphs are numbered for reference pur- poses. The paragraph numbers appear in bold- face print in the left margin. Small numbers below the paragraph numbers are references to other para- graphs bearing on the same subject. When new matter is inserted, the Service should be kept fully cross referenced by the entry of the new paragraph numbers opposite the respective preceding para- graphs to which back reference is shown. 5. The numbering of paragraphs and pages is con- secutive throughout the Service, except for the hiatus, in both paragraph and page numbers, after each of the several divisions to permit the insertion of new matter in place. The Corporation Trust Company 37 Wall Street, New York Bsa m aii f i i i fwwii i i i r :..,r 1 i ■■ 1 r ===== Knivri THE WAR TAX SERVICE 1922 Reporting Estate Taxes War-Profits and Excess-Profits Taxes Capital Stock Tax Stamp Taxes Sales (Excise) Taxes Tax on Telegraph and Telephone Messages Tax on Admissions and Dues Special Taxes on Occupations Copyright 1922 by tote ^ib^^ot^ mmi 4 w&s^s^s 37 Wall Street, New York Affiliated with (Sift (Earjmratum ISxtxnt (&un# Sgafrm 15 Exchange Place, Jersey City Chicago, 112 W. Adams Street Pittsburgh, Oliver Bldg. Washington, Colorado Bldg. Los Angeles, Title Ins. Bldg. Wilmington, du Pont Bldg. (Corp. Trust Co. of America) Portland Me., 281 St. John St. Philadelphia, Land Title Bldg. Boston, 53 State Street (Corporation Registration Co.) St. Louis, Federal Reserve Bank Bldg. Detroit, Dime Savings Bank Bldg. Albany Agency, 158 State St. Buffalo Agency, Ellicott Square Bldg 10-30-22. CONTENTS Pages Estate Taxes : 1918 Act - 3 1921 Act - - 124 War-Profits and Excess-Profits Taxes :* 1918 Act - - - 301 1921 Act - - 401 Capital Stock Tax on Corporations - 601 Stamp Taxes - - 701 Sales (Excise) Taxes - - - - - 901 Tax on Telegraph and Telephone Messages - - 1101 Tax on Admissions and Dues - - - 1301 Special Taxes on Occupations - - 1501 Miscellaneous Law Provisions and Regulations having a General Application - - - - - - -1601 Forms, Finder, etc. : Table of Forms, Guides to Revenue Acts of 1918 and 1921 by Sections, Table of Court Cases, List of Internal Revenue Districts and Collectors, etc. - 1701 Running Table of Contents for Each Subject — Yellow Supplementary Page 1, at the Back of Each Division of the Book. Indexes — Blue Pages Throughout the Book. ^SPECIAL EXCESS-PROFITS TAX RULINGS. See the white pages immediately following the blue-page 1918 Act Index in the excess-profits tax division of the book. Please read the foreword to these supplementary rulings. Copyright 1922, by The Corporation Trust Company. WAR TAX 2 SERVICE SERVICE DEPARTMENT . TAX SERVICE -REPORT NO. 57- 1922 S ERVICE JANUARY 4, 1923. FINAL REPORT FOR TKS 1922 SERVICE. Enclosed herewith are pages for insertion in you 1S22 Service book, all being for substitution. 'Excess Profi w its Tax" division: / upplementary Bulletin Rulinjp: Sec. 325. Art. 853. - 7/8. Perpetual Check Sheet J "Stamp Taxes? 1 ' division: / ] 767-768 (See note at tl^ asterisk on page 763.) / * w * /tHc) 192/ SERVICE, As stated apove th/s is the final report to sub- scribers to thG/1922 s/rvice. The next report (to those who n&vo Renewed: their subscriptions) will be Report No. 1, &23 S err vice, which will include the United States Supranre Court decisions in the Green- port Basin Co.! a nor tne Baltimore and Ohio R. R. Co. cases. (The yi esprit Report was delayed as Bulletin No. 52 was not printed by the Government until after New Years . } vary truly yours, I'HE CORPORATION TRUST COMPANY. Wlp Corporation Qvmt (Eompattg SERVICE DEPARTMENT 37 WALL STREET, NEW TORE WAR TAX SERVICE -REPORT NO. 56- DECEMSER 21, 1922. ' Enclosed herewith are pages designated as follows "Extase Profile Tax" division: Supplementary Bulletin Kulingpf: ^/Sec. 325. Art. 817. - f. (Mew,) \/£ec. 326. Art, 83§. -/25 to 28. (New.) v/feec. 326. Art. 845. -j 7, (New.) ^Perpetual Check Shee^t (For substitution.) # * y THE 192;i WAR TA^ SERVICE. The new 1923 War! Tax Se/rviee will be ready for die tribution on January | 1, 19^3 %o those whose subscrip- tions have been renewed. / w truly yours, THE CORPORATION TRUST COMPANY. 1# ifl £ri en SERVICE DEPARTMENT 37 WALL STREET, JXMlff YOEK WAR TAX SERVICE -BEPOBT NO. 55- DECEMBEH 6. 1922, Enclosed herewith are pages as designated below, all for substitution except as otherwise noted: 'Excess Profits Tax" division:' Supplementary Bulletin Rulings: /Sec. 326. Art. 631. 1 25- / Sec. 326 . Art. 840. - i, ^Perpetual Check She©" / "Saie^ Taxes" division: V953 (No*'.) . v Sales /axes Supplementary Page 1. "Telegraph/ and Telephone"/divi sion : y 11^6-1104 (N^j/Form 72? on page 1103 J "Occupations Taxefr division: ^//Occupat^ns Taxes Supplementary Page 1 ¥ery truly yours , THE CORPORATION TRUST COMPANY 1 1 St}? Corporation Uxmt (Eompattg SERVICE DEPARTMENT WAS TAX i^evfC- -REPORT NO. 54- NOVEMBER 29, 1922/ Enclosed herewith are pages for a'u' dicated below: "hsalek Taxes" division: / 951-952 (New matter begin! "Occ/patiiiis Taxes" division: 1537-1538 (New mat 4 4 f 4 4 4 Gtye Corpmatimt ©rust (Hompany SERVICE DEPARTMENT 37 WALL STREET. NEW YORK WAR TAX SERVICE -REPORT NO. 53- NOVEMBER 22, 1922. Enclosed herewith are pages designated as follows: 'Excess Profits Tax" division: Supplementary Bulletin Rulings: tfS©c. 327. Art. 901./- 41 to 45. (For substitut- V!3MT«A"=l3a 30IVH33 (Sip (Enrpot&ium OLruat (Eout|iang SERVICE DEPARTMENT 3T WALL STREET, NKW YORK. WAR TAX SERVICE -BEPGBT HO. 52- NOVEMBEB 6, 1922. / ' Enclosed herewith are pages designated as follows, all for substitution except as jefEherwise noted: Title Page and page 2 "Sales Taxes" dhzisicn: //g09-910/(New Form/?2SA on page 909 ) J/951-95^ (New mairaer begins at <|| 4795. j/Sales ^Taxes Supplementary Pag© 1 "Occupational Taxes" yGivision : //153'/l53^ [New. ) / 009(1 patrons Taxes Supplementary Page 1 "ForjjLa/ Fklder, etc.,'' division: 7; >5-l?06 y@ry truly yours, THE CORPORATION TRUST COMPANY . 9 *W0 Ui}2 (Ect^av&iwvL mxvim (Ecmpatig SERVICE DEPARTMENT 37 WALL STREET, NEW YORK WAR TAX SERVICE -HEFOBT KO. 51- .. OCTOBER 17, 1922, Enclosed herewith are pages for substitution as indicated below: "Sale& Taxes" division: J 1/ 907-908 (Revised Form 728.) y/ "Admissions and/Dues" division: / /1305-1^06 (Revised Form 72^/) / ^ery yfxxly yours, THE COREQfiATIQN TRUST COMPANY , 9 0 $ I $ Sty? (Eorparatum Enmi (Eimtpatuj SERVICE DEPARTMENT 37 WALL STR£ET, NEW YORK WAR TAX SERVICE -REPORT HO. 50- V SEPTEMBER 27, 1922. Enclosed herewith are pages as designated below: 'Estate Taxes" division: etual Check Sheet Very Jfcptfly yours, iPQRATION TRUST COMPANY (I (I i Sfty* (Enrjioratim! ©rust (Eompang SERVICE DEPARTMENT WAR TAX SERVICE -REPOHT MO. 47- SEPTEMBER 1, 1922, Enclosed herewith are pages designated as follows, for substitution; "Excess Profits Tax" division: Supplementary Bulletin Hulings: V$4o. 325. Art. 815 - 3 (Foj^ •erpetual Check Sheet •y truly yours, CORPORATION TRUST COMPANY. ~3 ij QHp (Earimraium ©ritst (totpattij SERVICE DEPARTMENT ;JT WAtlfe STUKKT. NKW VOttK WAR TAX SERVIC S -REPORT MO. 46- AUGUST 28, 1922. *r Enclosed herewith are pages designate&^is follows: "Excess Profits Tax" division: ^JT / 465 to 468 (Substitute for pass's 465-466 . - New j> j matter begins at q 1289.) Excess Profits jrax Supplementary Pages 1-2 (For / f ^Substitution . ) / y&ry truly yours , / THE/TORPOR AT I Otf TRUST COMPANY . t SERVICE DEPARTMENT WAR TAX SERVICE -REPORT MO. 45- AUGUST 24, 1922. / Enclosed herew si gnat ed as follows "Stamp Taxes" division, 773 (New. ) i/ Stamp Taxes Supplementary/pages 1-2 (For substitu tion, ) truly yours, IFORATION TRUST COMPANY. 0% CBnriiuratiiw amist (Eumpauij SERVICE DEPARTMENT WAR TAX SERVICE -REPORT NO. 44- AUGUST 17, 1922. / Enclosed herewit for substitution exc "Estate Taxes'* division: i/2£5 (New. ) /Estate Tax Supplementary "Excess Profits Tax" divisi Supplementary i/ , Sec. 326. Perpetual? as follows icated ; youn THE CORPORATION TRUST COMPANY . I I alii? (Enrjinratuin Sntst QTompang SERVICE DEPARTMENT S7 WALL STREET, NEW WAR TAX SERVICE f -REPORT NO. 43- / AUGUST 10, 1922. / Enclosed herewith are pages/designated as follows for substitution except as otherwise indicated; "Estate Taxes" division: / J Forepage-Forepage \j 223-224 (New. Reproducing revised form ?04.) "Occupations Taxes" division: / 150? to 1512 (Repr/ducing revised forms 11, il-A and/732. ) "Forms, Finder, etc.," divisiij V .1703-1704 \j 1709-1710 Very truly yours , THE CORPORATION TRUST COMPANY . Uiii? dm^nratttm ©rust (Emnjiauy SERVICE DEPARTMENT WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 42- AUGUST 7, 1922 SPECULATIONS 63, relating to E3t&£© Tax under the Kevenue Act of 1921, were released /or publication to day and are reproduced on the accompanying pages (be- ginning on page 158^". / P The enclosed p4fi6§ are designated as follows, al for substitution: "Estate Taxes" division: V Forepage-Forepage 33-34 /125-126 \ \j 157 to 218 (Substitute* for page with M 157 M on on© side\ aii^/"218" on the other. Do not remove pages 219 to 222.) Estate Tax Supplementary Pages 1 to 3 Very truly yours , THE CORPORATION TRUST COMPANY . oivnaa ©hr (Unrunraihm ©ntat (totpjwg SERVICE DEPARTMENT WAR TAX SERVICE -BEPOHT NO. 41- AUGUST 3, 1922. Enclosed herewith are pages for substitution desig nated as follows: 'Excess Profits Tax" division: Supplementary Bulletin Ruli; Sec. 326. Art. 833 /Perpetual Check Shae; "Stamp Taxes" division: ^ * 707-708, /and 733-73^f These pages are reprinted to / embody ajpTa to reflect an on-preas change / made y'the Government in Article 37 (f), / «J Sijfi, providing that, as in the case of / stamps for documents, the additional can- l illation oy means of three parallel in- cisions is not required for stamps of the value of less than 50 cents. "Telegraph and Telephone" division: *Tel. & Tel. Supplementary Page 1 "Forms, Kinder, etc.," division: 2/1707-1708 Very truly yours , THE CORPORATION TRUST COMPANY , 4 i Wht (Enrpuratuin (Burnt (ftmttpattg SERVICE DEPARTMENT :$T WAJLL M'fRKET, NEW YORK WAR TAX SERVICE -REPORT MO. 40- AUGUST 2, 1922. Regulations 59 relating to the special taxes on oc cupations and businesses and on the use of boats im- posed by the Revenue Act of 1921 were released for L publication to-day. A reprint , of those regulations, f together with associated matters aro sent herewith. Enclosed are pages designated as follows: '"Occupations Taxes" division: j/' Special Taxes on Occupations Fore-Page (For sub- stitution for the Fore-Page now in the / binder facing page 1501.) / 1501 to 1506 (For substitution for pages 1501 to 1506. ) (Do not remove pages 150? to 1512 - forms - now in the binder. ) . 1/1513 to 1536 (For substitution' for pages 15 13 to 1540 how in the binder.) occupations Taxes Supplementary Page 1 (For substi tut ion. ) Very truly yours , THE CORPORATION TRUST COMPANY. Oll)T (Eitrtinratum (UnuU (Emupauy SERVICE DEPARTMENT WAR TAX SERVICE -REPOKT NO, 39- J'JLY 27, 1922. Enclosed herewith are pages des/gnated as follows for substitution except as otherwi/e indicated: "Excpss Profits Tax" division: 'Supplementary Bulletin Rulings; i Sec, 326= Art. 845, /-6 1 Sec. 326. Art. 854. --/l-2 ^ Sec. 326. Art. 854. 7 3-4 (New.) Perpetual Check She< "Stamp Taxes" division: ^761-762 (Reprinting waef adviaable to insert foot- )n page #62, because of the elimin- from tMe Service of temporarily in note ation sertej3 Regulations 40 (1918 Act). "Telegraph and Telephone ^ 1117-1118 (New division: matt/r begins at r 5591.) "Forms, Finder, etc.," divi\ioi \ 1705-1706 Very truly yours, THE CORPORATION TRUST COMPANY. ®t|? (Enrjuiraium ©rust dompattg SERVICE DEPARTMENT WAR TAX SERVICE -REPORT NO. 38- JULY 21 , 1922, Enclosed herewith are pages, for substituj/fon , de- signated as follows: '•Capital Stock Tax" division: Capital Stock Tax Supplementary 'Stamp Taxes" division: /.707-708* /771-772* / Stamp Taxes Supplementary "Telegraph and Telephone" division Tel. and Tel. Suppleme; i •y Page 1. *In noting differences between Reg. 40 (1918 Act and Reg. 40 (1921 Act)/rj the tabulation at the top of page 708 as mailed yesterday (7-20-22) we failed to give conside/ation t/ T , D. 025), which amends Art. 4 (h) Art. 4 /l ) , and Art,. 5 ( i ) of Reg. 40 (1918 Act), to re/ad exactly as those particular paragraphs read in Rerg. 40 Act) - hence there are no dif- ferences Lo he JK)ted at q 3561, ^ 3564a, and q 3584 anc page 708 /(here/ith) has been changed accordingly. Page 771 (hereUitJr for substitution) is reprinted to change the small type numeral under bold face paragraph number 4027 from 3553a to 3564a. Very truly yours, THE CORPORATION TRUST COMPANY. 3% (Enrjmratum Uvmt (&ompm\# SERVICE DEPARTMENT ;:vr Wa.',L STREET, NEW YORK wAE TAX SERVICE -REPOitf NO. 37- JULY 20, 1922, Enclosed herewith are pages designated as follows all for substitution except as otherwise noted: "Ex/ess Pron / 317-3 rofits Tax" division: 317-318 Supplementary Bulletin Rulings; c/ Sec. 326, Art. 831. ~ 23- A Sec. 326. Art. 857. - 3 I Sec. 331. Art. 941 ^Perpe/ual Check //431-432 20 (New. ) "Capital Stock/Tax" division ] f 643 "Stamp Takes" divisi 70/ to 73^ (On pages 709 to 736 are reproduced Regulations 40 (1922 Ed.) released today, July 20. Pages 707-708 were reprinted in order to list on page 708 the essential differences be- tween the old and new regulations.) 771-772 "Telegraph and Telephone" division: ^1117-1118 (For substitution for page 1117.) Very truly yours, THE CORPORATION TRUST COMPANY « 4 4 f 4 4 Wire Corporation Utmi <2Jompmtg SERV'CX DEPARTMENT WaR tax service -REPOBT NO. 36- JULY 12, 1922. Enclosed herewith are pages designated as follows for substitution: "Excess Profits Tax" division: Supp 1 em^n t a ry Bu 1 1 a t Lrf fi u 1 i ng s : / j S«£. 326. Art ,/3L ~ 23-24 v Perpetual Che^K Sheet, / 465-46^ (New matter beginning at Q 1288.) / Excess-Prof its^ax Supplementary Pages 1-2 Very truly yours, THE CORPORATION TRUST COMPANY . 0% ®or|u!rat!nii QJntat (Eampaug SERVICE DEPARTMENT :JT WALL STK1CIST, Nk\V VORK WAR TAX SERVICE "REPORT NO. 35-> JULY 7, 19^£ Enclosed herewith are pap£s designated as follows all for substitution ©xceptyms otherwise indicated, "Excess Fronts yax division: Supplementary Bulle/in Rulings; /f y §fO. 312, Arte 791. - 3-4 / Sfec. 326. An£. 836. - 21-22 l/Jec. 326. aft. 836. - 23-24 (New.) \j perpetual/ Check Sheet, 'Capital Stoik Tax" cjrvision: /643 (ijew^tter begins at q 3170.) ^ Capital Stock Tax Supplementary Page 1 Very truly yours, THE CORPORATION TRUST COMPANY . QJhc (Unrjuiratton ©mat (Eontpmtg SERVICE DEPARTMENT :5T WALL STREET, N15>V ><>UIv WAR TAX SERVICE -REPORT NO. 34- JULY 5, 1922. REGULATIONS NO. 55 - 1922 EDITION , Stamp Taxes on Documents. These Regulations, promulgated June 12, 1922, are released for publication to-day, July 5- A reprint thereof, with other matters, is sent herewith in ac- M\ cordance with the su'bjoinatf'listing. "Stamp Taxes" division: > / 707-708 (For substitution/ - Particular attention //s called to the matter on page 708.) 737 to 768 /For substitution, - Caution: Pages 769 . to 772 -new in the binder are not to be removed . ) Stamp Taxes Supplementary Pages 1-2 (For substitu- tion. ) Note: The date "July 5" may be inserted in the ap- proval line following 3993 on page 761.) REGULATIONS 40 - 1922 EDITION. Stock Issues and Transfers, etc. Regulations 40 (1922 Edition) are well advanced and will be promulgated and released soon, we are lead to believe . Very truly yours , THE CORPORATION TRUST COMPANY. ®tj# QJoriuiraiinn must (Snutytatuj SERVICE DEPARTMENT WAR TAX SERVICE -REPORT NO. 33- JUNE 30, 1922. Enclosed herewith are pages designated as fol for substitution except as otherwise indicated; "Excess Profit^ Tax" division: Supplementary Bulletin Rulings. y Sec . 325 . Art . Z&l. - 23 ^ec/ 326. Art^858. J 7-8 ^Perpetual CJileck Sheet '463 to/465 Hifefo. ) Excess-(Pro£#X3 Tax Supplementary Pages 1-2 Very truly yours, THE CORPORATION TRUST COMPANY. 4 4 4 4 4 4 4 QJlir gjiu'fuiratum Olrust (Enm^.auj SERVICE DEPARTMENT :JT WAIJL STREET, NKW YORK WAR TAX SERVICE -REPORT MO. 32~ JUNE 26, 1922. Enclosed herewith are pages designated as follows: Estate Taxes" division: f I (/ 219 to 222 (For substitution fon/pAfip 219.) 'Excess Profits Tax" division: / Supplementary Bulletin Rulings; v Sec. 326. Art. 838. - /-10 (For substitution.) / Art. 838. yil-12 (New.) / Art. 838./ 13-14 (New.) j J Art. 838/- 15 (New.) 'Perpetual Check Sheet (For substitution. fcapital Stock Tax" division: Capital Stock Tax / Index Pages 1 to 5 (New five blue/Capital Stock Tax - Index Pages dated l~2r-2£ having been removed as per Report getter No. 31.) Note: Pages/620-630 dated 1-2-22 should be removed front tJne binder if this has not already b«en /done 'Saks Taxes" division y 951 (For substitution'. - Recent cash discount rul / ing revoked . ) /Sales Taxes Supplementary Page 1 (For substitution 'Forms* Finder, etc.," division: J 1705-1706 (For substitution.) Very truly yours, THE CORPORATION TRUST COMPANY. 3Jl)£ (&&t$&it mum ' ©rust (Baiupang SERVICE DEPARTMENT 37 WALL STREET, NEW YORK ^ , TAX SERVICE -REPORT NO . 31- JUNE 22, 1922. Enclosed herewith are pages designated as follows CAPITAL STOCK TAX REGULATIONS . - 1922 EDITION . * . (Released to-day, June 22, 1922.) 'Capital Stock Tax" division: ^Remove and destroy the "Capital Stock Fore-Pagb'V facing page 601. 601-602 (For substitution.) / 609 to 628 (All for substitution.) '^/Capital Stock Tax Supplementary Page L/TFcr' sub- stitution.) \J Remove and destroy the five blue Capital Stock Tax IndeyK Pages. (A r&vi&M index is in the printer's hands andyshould be ready for ing as a part jsf the next Report,) Regulations M (under the 1921 Act), ,ions 50 ( I9L8 Act) revised to apply If considered as a "revision", 1 be said to "have been re- the subject matter undergone the changes within the Art- differences, however, in the refinements of expression and the wit in formal regulations of es- .et- na: "These are ne^ not old Regu to the 1921 the regulations may r: written. Net only hai much rearrangement icies are miny. T3 main repres* initial embc< tablished policy and practice, rather than modified interpretations, going to the fundamentals. Part- icular attention is called to Art. 15, "Fair aver- age value of capital 3tock" beginning at being no "reasonable doubts as to the legislative intent to tax such products as sweet chocolate when manufactured and sold for consump- tion in the form sold, and not for cooking or domestic purposes". Tne full opinion goes forward as a part of our next report. Very truly yours 5 THE CORPORATION TRUST COMPANY . 3IX v >IVfl38 XAT SI AW Stye (Enrjmratfon ©rust (Kampunt} SERVICE DEPARTMENT 37 WALL STREET, NEW \ORK WAR TAX SERVICE -REPORT NO. 26- / WAR TAX SERVIC * MAY 19, 1922. Enclosed herewith are pages designated as follows, for substitution except as otherwise, noted: "Estate Taxes" division: j/l55 (New. ) / / Estate Tax Supplementary Pa^ge 3 / "Excess Profits Tax/' division: / Supplementary Bulletin/feulings /gee/ 326. Art. 808. - 7-8. / ^/Perpetual Check/ Sheet ^461-462 / / J Excess profits Ta:/ Supplementary Pages 1-2. ' Occupations T^xes" divisk " ^515-1^16 /1517-ldl8 ^/L539-15*4 // " Exc e 8 8 -Pr o f i t s Tax "/d ivi s i o n : Supplementary Bulletin Rulings: Sec. 326/ Art. 858. - 5-6 (For substitution. /Sec. 326. Art. 858. - 7 (New.) Perpetual Check Sheet (For substitution.-] r/ / " Fo vpaJJ F i ndarr/ etc." division: \4m-\ifkf \?Gr substitution. ) r / Very truly yours, * / % / THE CORPORATION TRUST COMPANY. turn® TUBMTtfAH: S&r (Ewrjjwratian $xu$t (Emitiiautf S £ R V I C E DfcPAR T M E N T Enclosed WAR X-AX SERVIQJ / > (EPORT N0.^~ MAY £ ^1922 ; ewithy&fe pages designated as follows: Excess-Profits Taxy^secLion Supple^ntarwBulietin Rulings: *^fty 326/Art, 336. - 19-20 (For substitution.) rfrtf- Zjd> Art. 836. - 21-22 (New.) //^rpe^ual Check Sheet (For substitution.) Very truly yours THE CORPORATION TRUST COMPANY. K ©l|r (Hnrporattnn GJrust Qlmitpang SERVICE DEPARTMENT WAR TAX SERVICE -REPORT NO. 23- MAY 3, 1922. Enclosed herewith are pages designated as follows: Estate Tax Section: / y^l43 to 153 (For substitution for page 143.; /Estate Tax Supplementary Pages 1 to 3 (For substi- tution for Estate Tax Supplementary Pages 1-2 now in the binder immediately before the yel- low guide card marked "Excess Profits Tax".] Forms, Finder, etc. Section: 1705-1706 (For substitution.) Very truly yours, THE CORPORATION TRUST COMPANY, ( ( I (Uif? (&8X$zvzixnil Xxnst (ilnmpamj SERVICE DEPARTMENT CT "WA.UL STIvEJET, NEW TOSK WAR TAX SERVICE -REPORT NO. 22- APRIL 19, 1932. < y Enclosed herewith are pages designated as follows / Excess Profits Tax Section - / Supplementary Bulletin Rulings: //Sec. 326. Art. 836. / 19 (For substitution.) Sec. 3^6. Art. 838/- 7-8 (For substitution.) Sec. #26. Art. 83^. - 9 (New.) >^Sec./326. Art. §08. - 5 (For substitution.) a /Perpfetual Chec^ Sheet (For substitution. ) /459-460/(For substitution for page 459.) //461 (Neiv.) Very truly yours, E COLORATION TRUST COMPANY. Stye Glnrporatinn SJntat dmnpatig SERVICE DEPARTMENT 3T WALL STREET, NEW "YORK. VAR TAX SERVICE : PEPORT NO. 21- APRIL 14, 1922 Enclosed/herewith are page^ designated as follows, til for substitution except ad indicated: / / 141 to 143 (For substitution for page 141.) Supplementary Bulletin Rulings: t/Set. 326. Art. 84p< - 11 (New.) vS^c. 326. Art. 860. - 1-2 V^ec. 326. Art/858. - 5 ^Perpetual Chjgfck Sheet 1? ; $5-1706 Very truly yours, THE CORPORATION TRUST COMPANY, \ 5£i Ul}? Corporation ©mat C5oitqj$mjj j SERVICE DEPARTMENT 5 3T WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 20- APRIL 7, 1922. Enclosed herewith are pages designated as follows: i / / ;^/l41-142 (For substitution.) / | ^/fSstate Tax Supplementary Page" 1 (For eubstitution. ) ^/Sales (Excise) Taxe. Supplementary Page 1 (For sub- stitution. ) / Very truly yours, THE CORPORATION TRUST COMPANY. TH3MTHA< Obr^nratum ©rust dnmpsng SERVICE DEPARTMENT 3T WALL STREET, NEW YOItI£ WAR TAX SERVICE -REPORT NO. 19- APRIL 6, 1922. Enclosed herewith are pages designated as follows / i-fcin Ruli Supplementary Bulletin Rulings: j| Bee. 326. Art. &33. - 3-4 (For substitution.) 4 * " / M - 5-6 (New/) / » / " -7 (New. / /'Sec. 326. Art/ 836. - 19 (For/' substitution. ) /Sec. 327. Art. 901. - 39-40 /(New. ) •/ " 41 (New.) i/Sec. 351. Art. 941. - 15-16 (For substitution * » 17-18 (New.) ^Perpetual Chkcjk Sheet (For substitution . ) /945-946 (For substitution for page 945.) Very truly yours, ■ / THJI^ORPORATION TRUST COMPANY, Zi)t (Eoiyoratum ©rust ©mttpatti} SERVICE DEPARTMENT 37 WAUL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 18- / / MARCH 30, L922/ 7 Enclosed herewith are pages/ designated as follows : / 135 to 141 (For cuts ti tut ion ^or page 135.) /Estate Tax Supplementary Pag^' 1 (For substitution.) Supplementary Bulletin Rulings: /Sec. 326. Art. 831. - 23 (For substitution. ) *^TSec. 326. Art, 845. - jp-6 (For substitution.) / /Perpetual Check Sheet /(For substitution.) (/Sales (excise) Taxes Supplementary Page 1 (This sheet / is to be/inserted immediately following / page 94^. The yellow sheet now there, | or immediately following the blue Manu- I facturyr's Sales Taxes index, should be I destroyed.) ^705-1706 (For substitution. ) Tp CORPORATION TRUST COMPANY 33IV5 Uty? (Eorpcraiinu ©rust (Enmpang SERVICE DEPARTMENT 37 WALL STREET, NEW YORK WAR TAX SERVICI -BBPORT HO. X' MARCH 22, Enclosed herewith aro /pages designated as follows Stamp Taxes Supplementary /age 1 (For substitution,) /945 (New. ) / / / /Sales (Excise) Jaxes Supplementary Page 1 (For substi i ft tutlonj ^1539-1540 (Fo// substitution for page 1539.) [/ Occupations Hik^a /CuppXemcntary Page 1 (For substitu- X// tionj (7 Vary truly your si, OBPOBATIOH THUET COMPANY. Ti/13MT^A^3a 30IVF13S ollol Sndua 10%) I egal xTfrtotaw Iqqu& Nlil (aeioxSf) adlA8 (Enr^mnttum ©rust (Eotnpattg SERVICE DEPARTMENT 37 WALL STREET, NEW YOMl WAR TAX SERVICE -REPORT NO. 16- MARCH 16, 1922. Enclosed herewith are pages designated as follows Supplementary Bulletin Rulings:/ /Sec. 326. Art, 862. - 5-6 (For substitution.) ^-Sec. 326. Art. 862. - 7-8 (New. ) /Sec. 326. Art. 862. - 9-10 (New.) /Sec. 326. Art. 862. - 11-12 (New.) /Sec. 326. Art. 862. - 13 (New.) \ / fSec. 327. Art, 901. -/31-32 (For substitution.) . ^Sec. 327. Art. 901. - 33-34 (New.) /Sec. 327. Art. 901. - 35-36 (New.) y ' Sec. 327, Art. 901./- 37-38 (New.) Perpetual Check Sheet (For substitution.) y Very truly yours, THE CORPORATION TRUST COMPANY. ®tf? (Eorporaitrm ©rust (Enmpatty SERVICE DEPARTMENT 37 WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 15- MARCH 7, 1922. Enclosed herewith are pages designated as follows: Supplementary Bulletin Rulings; //pec. 326. Art. 831. - 21-22. (For substitution.) i/Sec. 326. Art. 831. - 23. (New.) /Perpetual Check Sheet (For substitution . ) //Excess-Profits Tax Supplementary Pages 1-2. (For sub- stitution. ) j/1703-1704 (For substitution.) * * # REVENUE STAMPS ON POWERS -OF-ATTORNEY . The power-of-attorney given by a taxpayer to an attorney, or other person to represent him for it) before the bureau must carry a 25^ Internal Revenue stamp, properly cancelled. If the power-of-attorney is not stamped (tax-paid) everything stops. Very truly yours, THE CORPORATION TRUST COMPANY. gmjtjraoID tain® imitjnntnalD i^M f)33 XAT HAW Wqt (Eurporattntt (Frust OJmttpaitg SERVICE DEPARTMENT 3T W.AUL STREET, NEW YORK. i I -BKPOBT NO. 13- / WAR TAX SERVICE / -REPORT NO. 1^/ MARCH 2, 1922. Enclosed herewith are tne Admissions Tax Regula- tions, fully/ indexed, releAsod for publication February 28, 1922. The pages accompanying this report are designated as follows, all for insertion as a unit, ^between page 1320 ana £ne blue Dues Tax index. 1321 to 1^66 Admission^ and- Dues ;/ Supplementary Page 1 (For substi- l tut ion.) ylndex Pages 1 to 6. - Admissions. Very truly yours, THE CORPORATION TRUST COMPANY. Wl}t (EatpWman ©rust ©cmptrng SERVICE DEPARTMENT 3T WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 13- FEBRUARY 28, 1922. j Hegulations 62,/eIeased >March 1 1922 Enclosed herewith are pages designated as follows: Reproduction of Form 11203. (Insert between pages 424 / and 425.) Excess-Profits Tax - 1921 Ac/£ - Index Pages 1 to 8. (New. - Insert immediately before the "Capital / ' Stock Tax" guide/card.) 1101 to 1117 (For substitution for pages 1101 to 1117 now in the binder. This includes the revised Regulations 57/ released to-day, and the necessary reprinting of other matters.) Tel. and Tel. Supplementary Page 1 (For substitution. / To follow page 1117. ) Tel. and Tel. Index P^ges 1 to 3 (New. To follow yel- low Supplementary Page 1, just inserted.) * * * REVISED ADMISSIONS TAXES REGULATIONS. Revised Regulations 43, Pt. 1, Admissions, have come from the Government presses, for release to-day. These are being reproduced for the Service, and will be mailed to subscribers at the earliest possible mom- ent . Very truly yours, THE CORPORATION TRUST COMPANY . 2% Corporation ©rust OJompang SERVICE DEPARTMENT 3T WALL STREET NEW YORK WAR TAX SERVICE — REPORT No. 12— February 24-28, 1922.* *This report letter with its accompanying pages is being mailed by us so as to reach subscribers in the continental United States on the day of the release of Regula- tions 62, i.e.. on March 1, 1922. Regulations 62, released March 1, 1922. Enclosed herewith are pages designated as follows: 431 to 459 (being a reprint of those Articles of Regulations 62 which relate specifically to the excess-profits tax for 1921. — Released March 1, 1922.) Also enclosed are: Supplementary the trouble caused future convenience obvious. Bulletin Rulings (all for substitution). We regret by these substitutions the necessity for which, for (forward references to 1921 Law and Reg. 62) is / {Insert / .Sec. 301, ^Sec. 301 ✓ Sec. 301 ^ Sec. 301 A/Sec. 302 Sec. 303 /Sec. 312 ySec. 320 /Sec. 325 / Sec. 325 V^Sec. 325 V Sec. 325 // Sec. 325 tfSec. 325 / Sec. 326 /Sec. 326 \j Sec. 326 /jBec. 326 /Sec. 326 /Sec. 326 /Sec. 326 v, Sec. 326 / Sec. 326 / Sec. 326 according , Art. 711- . Art. 714 . Art. 715 . Art. 719 . Art. 731 . Art. 741 . Art. 791 . Art. 801 . Art. 811 . Art. 812 . Art. 813 . Art. 815 . Art. 816 . Art. 818 . Art. 831 . Art. 833 . Art. 834 . Art. 835 . Art 836 . Art. 837 . Art. 838 . Art. 839 . Art. 840 . Art. 841, to left I. .—1-2, .—1-2 .— 1. .— 1. .— 1. .—1-2. .— 1. .— 1. .—1-2. .—1-2. .—1-2. .— 1. .— 1. .—1-2. .—1-2. .—1-2. .—1-2. .—1-2. .—1-2. .—1-2. — 1. ,—1-2. —1-2. hand column first; then right hand column/) ■ i -2. */ -2. ^ '" V Sec. 326. Art. 843.— Sec. 326. Art. 844.— Sec. 326. Art. 845.— Sec. 326. Art. 846.— Sec. 326. Art. 850.— Sec. 326. Art. 851. — Sec. 326. Art. 852.— Sec. 326. Art. 853.— Sec. 326. Art. 854.— Sec. 326. Art. 855.— Sec. 326. Art. 857.— Sec. 326. Art. 858.— Sec. 326. Art. 859.— Sec. 326. Art. 862.— Sec. 326. Art. 871.— Sec. 327. Art. 901.— Sec. 328. Art. 911.— Sec. 328. Art. 912.— Sec. 328. Art. 913.— Sec. 328. Art. 914.— Sec. 331. Art. 941.— Sec. 335. Art. 952.— Sec. 337. Art. 971.— Perpetual Check Sheet Very truly yours, THE CORPORATION TRUST COMPANY. IVR33 XAT RAW SERVICE DEPARTMENT 3T WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 11- FEBRUARY 24, 1922. Enclosed herewith are pages designated as follows; Supplementary Bulletin Rulings; / j^Zzo.. 326. Art. 831. - 21-22. [Fyt substitution.) /^Perpetual Check Sheet. (For substitution.) Admissions and Dues Tax - Supplementary Page 1 (For substitution. ) REGULATIONS 62 RELEASED MARCH 1, 1922. The big regulations interpreting the Excess Profits Tax for 1921 law (the "Regulations 45" of the 1921 Act) will be released by\ the Government on March 1, 1922. A copy, in Service forta, will be in your hands on the morning of that day — Wednesday next. * # # Very truly yours, THE CORPORATION TRUST COMPANY. Wqz (Eor^nration ©rust (Sum^aiti; SERVICE DEPARTMENT 3T WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 10- FEBBUARY 17, 1922. Enclosed herewith are pages designated ae follows: /?69-770 (For substitutibn. ) / ! / * * * OUltTA BOARD&f. The U. S. Circuit Cqurt of Appeals for the Fourth Circuit has affirmed the\ District Court decision in Baltimore Talking Board Company vs. Miles, Collector, that Ouija Boards are games. (Bee. 900, Revenue Act of 1918. ) Very\t3?iily yours, THE CORPORATION TRUST COMPANY. federalism ©rust (Hnntpattg SERVICE DEPARTMENT 37 WALL STREET, NEW YORK. WAR TAX SERVICE -REPORT NO. 9- FEBRUARY 15, 1922, Enclosed herewith are pages obsignated as follows I / Supplementary Bulletiii Rulings/ /^Sec. 328. Art. 93j2. - l-2/(For substitution.) ^Perpetual C^eck Sheet (For substitution ! V Wry truly yours, THE CORPORATION TRUST COMPANY Ccrporattmt SJntat dompattg SERVICE DEPARTMENT 3T WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO, 8™ FEBRUARY 12, 1922, I Enclosed herewith afe/pAgas- <$$lRva/e& as follows: Enclosed herewith are pages designated as follows: J /423 to 430 (For substitution for page 423. - The new pages carry reproductions of Forms 1120 and y ii22.) 1609 to 1612 (For substitution. 4 Form 843, reproduced on pages 1609-1610 supersedes Forms 46, 47 J and 47A. ) 1703-1704 (For substitution. ) / 1711 to 1716 (For substitution.) Also enclosed is a full size copy of the Corpora- tion Return Form 1120, released February 13, 1922. Very truly yours, THE CORPORATION TRUST COMPANY, 6 OSII era' . YHA C ©Iff Corporation ©mat Company SERVICE DEPARTMENT 3T WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 7- •KEPQBT MO, 6~ FEBRUARY 9, 1922, Enclosed herewith are pages 6?e signaled as follows / / Supplementary Bulletin Rulings/ ^/Sec. 326. Art. 831. /- 21 /For substitution.) p Sec. 326. Art. 836- /- 15/16 (For substitution.) fSec. 326. Art. 836./- 1JT-18 (New.) /Sec. 326. Art. 836.1 - 19 (New.) /Perpetual Check Shej'et /(For substitution.) * ; * # FORM 1120. - EXCESS-PROFITS TAX RETURN. 1/ This form will be released by the Government on Monday, February 13, 1922. Very truly yours, THE CORPORATION TRUST COMPANY. 4 1 0% (tepnrattmt SJniBt (Enmpang SERVICE DEPARTMENT 3T WALL STREET, NEW YORK. WAR TAX SERVICE -REPORT NO. 6- FEBRUARY 6. 1922, Enclosed herewi th are pages designated as follows Supplementary Bulletin Rulings; 836. - 9-10 (For substitution.) 836. - 11-12 (New. ) 836. 1 13-14 (New. ) 836. - 15 (New. ) : Sheet (For substitution.) /769 (New.) f Stamp Taxes Supplementary Page 1 (For substitution.) Very truly yours, THE CORPORATION TRUST COMPANY. . YHA 3J1|£ (£0r$mrait0tt Emai (Emnpatig SERVICE DEPARTMENT 37 WALL STREET, NEW YOH£ WAR TAX SERVICE -REPORT NO. 5- JANUABY 31, 1922, Enclosed herewith are "Excess-Profits Tax" pages r f. designated as follows; Supplementary Bulletin Rulings; ^ Sec, 325. Art, 615., - 3 (For substitution, } *-Sec. 326. Art. 831. - 19-20 (For substitution.) ~"Sec. 326. Art. 831. - 21 (New.) ^Sec. 331. Art. 941. - 15-16 (For substitution.) ,|_ * Perpetual Check Sheet (For substitution.) (Remove and destroy pages 907 to 933, both in- 1 elusive, new in your War Tax binder. Then insert the following, herewith encloeed.) i/907 to 944 (For substitution for pages 907 to 933 re- ferred to above. These pages carry re- printed Forms 728 and 728A, and Revised Regulations 47 and 48 (Revenue Act of 1921) released for publication, February ' 1, 1922.) > / 1703-1704 (For substitution. ) / 1709-1710 (For substitution.) «/ Blue "Calendar for Excise Taxes" to face page 901 /'Manufacturers' Saleg Taxes - Index Pages 1-3 (Insert at back of SALES TAXES division.) Is Sales Taxes Supplementary Page 1 (To precede the blue- page index just inserted and in substi- tution for the similarly designated page now in binder. ) Very truly yours, THE CORPORATION TRUST COMPANY. BqmtiJD tmrM nnftn 3DIVH: 10%) OS-ei S'V bn» 8S I) it 5n« "atxrf oqiq oT) I tg ;ht hoitah Wip Corporation Sfrwai Olompang SERVICE DEPARTMENT 3T WAUL STREET, NEW YORK. WAR TAX SERVICE -REPORT NO. 4- JANUARY 24, 1922. Enclosed herewith are pages designated as follows *^21 to 423 (For substitution for page 421.) ^Excess-Profits Tax Supplementary Page 1 (For sufcstitu tion. ) Very truly yours, maex fagei - Dwi , ( To/To 1 low yellow .Supplement a I J THE CORPORATION TRUST COMPANY. Sty? (Eorpnratimt ©rust Cnmpamj SERVICE DEPARTMENT 3T wall street, nbw york WAR TAX SERVICE -REPORT HO. 3- JANUARY 23, 1922. Enclosed herewith are pagee designated as follows: Supplementary Bulletin Rulings: -Sec. 331. Art. 941. - 13-14 (For substitution.) - Sec. 331. Art. 941. - 15-16 (New.) » Perpetual Check Sheet (For substitution . ) - 1303-1304 (For substitution.) I - 1305-1306 (New. Form 729.) -1307-1318 (New. Dues Regulations.) - Supplementary Page 1 - Admissions and Dues. (To follow page 1318. ) - Index Pages 1-4. - Dues. (To follow yellow Supplementary Page 1 - Admissions and Dues, just inserted. ) -1703-1704 (For substitution.) -1709-1710 (For substitution.) Very truly yours, THE CORPORATION TRUST COMPANY. 5% (Eorpnratum (Urttst OInmpang SERVICE DEPARTMENT 3T WALL STREET, NEW YORK WAR TAX SERVICE -REPORT NO. 2- JANUARY 17, 1922, Enclosed herewith are pages designated as fellows: Supplementary Bulletin Rulings (Bulletin No. 2, - 1922.) Foreword to Supplementary Bulletin Rulings (For substitution for the first white page following blue excess-profits tax index page 8 . ) --Sec. 301. Art. 714. - 3-4 (For substitution . } -^Sec. 301. Art. 714, !- 5 (New,) — See. 312. Art. 791. - 1-2 (For substitution.) Sec. 312. Art. 791. - 3-4 (New.) Sec. 326. Art. 831. - 19-20 (For substitution.) - Perpetual Check Sheet (For substitution.) -Stamp Taxes Supplementary Page 1 (For substitution.) y Stamp Tax Index Pages 1 to 12 (Insert at back of STAMP TAXES division. ) INTERNAL REVENUE BULLETIN. The present year's Bulletin issues are designated as "Volume I". The attention of subscribers is called, particularly to the third paragraph from the bottom on the first page of the "Foreword" enclosed herewith Very truly yours, THE CORPORATION TRUST COMPANY e HAW (Eorporatiott &rcst (Sompang SERVICE DEPARTMENT 37 WALL STREET, NEW YORK WAR TAX SERVICE •REPORT NO. 1- 1922 SERVICE. / JANUARY 4, 1922. / The pages rent, herewith are for insertion in the n © w 'iUL2 V/'ir : iV* $?\<->y\r.B tuck. If ::,h:U h-. r not reached yen please hold theft e gee for ar day or two - it is on the way. / ^135 (New.) /Estate T-')X Supplementary Basra * (For substitution. ) i/8upplementary Bulletin Rulings (Bulletin No. 52.) ^Sec . 326 . Art. 862. 1-2 (For substitution. ) Sac. 3*6, Art, 662, 3 4 (Hew.) ^ See. 526, Art. 862. 5 (Hew.) — Perpetual Chock Sheet (Hew.) 4 this is to be inserted to face blue pa«e 401, / 417 to 422 (To follow bine vam 4l6.) ( Supplementary Page 1 - EKGes8~£rof its Tax (For sufceti tut ion.) Y 1705-1706 (For siibstitaitiOi>_.j/ Very truly yours, Qij-fiiftttnlD tain® iraitjnntpolD ovc-namod decedent on date of death, or I carne into possession of cuch properly on the day of .-. _ , 19 The description and approximate value of such property at the time of death were as follows: Description. Valtu. ( Attach schedule it more space is required.) I also have information that property or an interest in property situated in, tho United States belonging to said decedent was in the possession of others, as Bhown below: Name of possessor. Address. Description of property. 2. To the best of ray knowledge the value of the gross estate of the decedent situated in the United States is $ bnd the approximate values of the various classes of property comprising such gross estate at date of death were as follows: Real estate _ „ $ Stocks and bonds t, .-. „ Miscellaneous personalty „ .._ Property transferred (see Instructions 4 (c))' .. Property owned jointly .... , _ _ Life insurance for benefit of estate „.. Other life insurance ~ , „ , (Estimated values will be accepted.) Total... _ , That cent. $50,000 $50,000 1 lli 2 1 $50,000 i wi nnn mo nnn 2 3 4 2 150,000 250,000 100,000 3 4^ 6 3 250,000 450,000 200,000 4 6 8 i 450 000 750,000 300,000 5 10 750,000 1,000,000 250,000 5 9 10 8 1,000,000 1,500,000 500,000 6 12 10 1,500,000 2,000,000 500,000 6 9 12 12 2,000,000 3,000,000 1,000,000 7 WM 14 14 3,000,000 4,000,000 1,000,000 8 12 16 16 4,000,000 5,000,000 1.000,000 9 1334 18 18 5,000,000 6,000,000 1,000,000 10 15 20 20 6,000,000 7,000,000 1,000,000 10 15 20 20 7,000,000 8,000,000 1,000,000 10 15 20 20 8,000,000 9,000,000 1,000,000 10 15 22 22 9,000,000 10,000,000 1,000,000 10 15 22 22 10,000,000 10 15 25 25 48 The rates given by the different acts, as set forth above, apply to the estates of decedents dying within the following dates: Column 1, Revenue Act of 1916, effective Sept. 9, 1916, to Mar. 2, 1917, inclusive. Column 2, amendment of Mar. 3, 1917, effective Mar. 3, 1917, to Oct. 3, 1917, inclusive. Column 3, Revenue Act of 1917, effective Oct. 4, 1917, to Feb. 24, 1919, inclusive. Column 4, Revenue Act of 1918, effective after 6.55 P. M., Feb. 24, 1919. 49 and 50 Blank. 51 Art. 8. — Computation of tax.— For the purpose of computing the tax, the net estate is divisible into blocks, each block being taxed at a different and increasing rate. The preceding table gives the amount at the various blocks and the applicable rate of tax under each of the taxing acts. For example, the tax upon the net estate of $1,240,000 of a decedent dying on or after February 25, 1919, would be computed as follows: Amount of first block $50,000 at 1 per cent $500 Amount of second block 100,000 at 2 per cent 2,000 Amount of third block 100,000 at 3 per cent 3,000 Amount of fourth block 200,000 at 4 per cent 8,000 Amount of fifth block 300,000 at 6 per cent 18,000 Amount of sixth block ! 250,000 at 8 per cent 20,000 Remainder 240,000 at 10 per cent 24,000 Total net estate 1,240,000 Total tax. . . .75,500 62 There is subjoined a table for ascertaining the tax without the detailed computation given above. An illustration of its use is as follows: The net estate of a decenclent dying on or after February 25, 1919, amounts to $1,240,000. By reference to the table it will be seen that the last complete block prior to this amount is $1,000,000, and that the total tax on a million dollars under the rates in force amounts to $51,500. Copyright 1922, by The Corporation Trust Company. WAR TAX 37 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. lipon the remainder of the estate, $240,000, the tax is computed at the rate contained in the following line, or at 10 per cent. The tax on this amount is consequently $24,000. The following result is thus obtained: Total tax on $1 ,000,000 $5 J ,500 Tax on 240,000 24,000 Total 1,240,000 75,500 CopytigJit 1922, by The Corporation Trust Con,f>any. WAR TAX 38 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX RKGTTL&TTCfrJTS. — 1 Q 1 8 LA.W. oooooooooooooooo IT3 "3 »0 iO «3 "3 «0 "O iO 'O iC Hi iO "3 lO ndUJOOOlO'#-f'#T(iOCO f-i >-i co ec oo qci o 2 6o "3 -O »0 r-l CN ^ oooooooooooooooo oooooooooooooooo «o q q o_ q q q o_ o_ q q o_ qqqo w Rate (per HIMPJijiOOOCIN^tDCCCOONNil r-lr-trHrHr-lCMNINCNlNIN O oooooooooooooooo oooooooooooooooo qqqqqq q q q q o_ o_ q q q q "rt r-l lO r-*r>*l>1 'N IN o t»- m 1917, to Fel e (Revenue Tax. oooooooooooooooo oooooooooooooooo oc f qqqqqqqqqqqqqq ri^oo" o o o*c*c*o"o"o* o"o"o* o" Sfc HM«!OOiiOuOOOOMO) te tax. ;ath. ^ 3 Rate (per cent) . HHHr-IHHHOlMtMNNW _ ■6 % oooooooooooooooo • i0«5i0i0i0OOOOOOOCC3O • ^ N >N t^- *C lO lO 1*3 »0 "3 »C iO "3 lO *0 - ^CC 00 O M rl(D H O 0 0000000000 i- q»qq>qt^qqqo_o qqqqq ^co*tj*t>.05aJOi7o q q q q 10 q q q q q q q c_ q q 1916, (Reve: rt EH ^ IN CO* 00 K3 CM* O* O* O* 0' O* O* O* O* O* O* HHPJMNOOOIOOOOO Sept. 9, nclusive Rate (per cent) . HNM^iOi0(0 03N00 0)COOOOO *o OOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOO qqqqqccqqqcqqqqq ©*c*o*o*'o*o"©*c*o*c* 0*0*0*0*0*0" "3000 0 0 0000000000 (ShhIMHINIOIOCOOCCOCO 3* 3 w o o as < 3 as $50,000 150,000 250,000 450.000 750,000 1 ,000,000 1,500,000 2,000.000 3,000,000 4.000.000 5,000.000 6,000,000 7,000,000 8,000,000 9.000,000 10.000,000 00 S 43 09 V. Nol ceed i M •oooooooooooooooo a :SS8S8S8§8S8BSS88 .' © q" q* q* 0* 0* 0* 0* 0" 6 0* 0* 0* 0" 0* 0* .lfi«0»CU3»0000000 3 O O O © .«*rHCN ^r>-q»r}qq qqqqqq© rtrH(MMrtlinS?)N.Ylrt\n bd Copyright 1922, by The Corporation Trust Company. WAR TAX 39 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. MILITARY EXEMPTION. [See Tf423 for retroactive provision in the 1921 Act.j 64 Art. 9. Exempt estates. — The estates of persons dying while actu- 6 ally serving in the military or naval forces of the United States in the present war with Germany are exempt from tax. The date of the termination of the war, for the purpose of this tax, is that fixed by proclam- ation of the President. An estate is also exempt if a person so serving dies after leaving the service, provided his death is directly traceable to injuries received, or disease contracted, while in such service. The term "military or naval forces of the United States" includes, among other units, the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female. This exemption applies to any estate tax imposed, whether by the Revenue Act of 1916 or subsequent statutes. If the tax has been collected, the executor should make claim for refund. For pro- cedure in the case of claims for refunds, see Article 11. 66 Art. 10. Exemption must be proved. — In every case where the ex- emption is claimed the right must be proved by the executor* Formal claim for military exemption on Form 793, accompanied by support- ing evidence, should be filecr with the 60-day notice, or as soon there" after as the necessary evidence may be secured, and in any case not later than one year after the decedent's death. Where the decedent died while actually serving in the military or naval forces during the war with Germany, the evidence in support of the claim should consist of a certificate stating the occurrence of death under those circumstances, issued, in the case of a soldier, by The Adjutant General, in the case of a sailor by the Surgeon General of the Navy, and in the case of a marine by the Commandant. 66 Where the decedent died while serving in the military or naval forces, but after the termination of the war with Germany, there should be submitted: (1) Certificate of The Adjutant General, Surgeon General of the Navy, or commanding officer as above, stating the occurrence of death while in the service, and the cause of death. (2) Affidavits or other evidence to show that the death resulted from injuries received, or disease contracted, while serving in the military or naval forces during the war with Germany. 67 Where the decedent died after discharge from the military or naval forces there should be submitted: (1) Certificate of discharge from the service, or copy of such certificate. (2) Certified copy of public record of death, showing cause of death. (3) Affidavit of physician who attended decedent during last illness, setting forth the medical history of the decedent while under his treatment. (4) Affidavits or other evidence to show that the death resulted from injuries received, or disease contracted, while serving in the military or naval forces during the war with Germany. 68 If it is determined by the Commissioner of Internal Revenue that the estate is entitled to the exemption, the executor will be notified to that effect, and his duties with respect to the tax will cease. If the evidence submitted in support of the claim is found not to be satisfactory, such further evidence will be called for, or such investigation instituted- as the Commissioner may direct. If it is determined that the estate is not entitled to the exemption, the executor will be required tolfile return and pay tax in the same manner as executors of other taxable estates. Copyright 1922, by The Corporation Trust Company. WAR TAX 40 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. 59 Art. 11. Claims for refund. — Prior to the passage of the Revenue Act of 1918 there was no military exemption from estate tax except with respect to the increase of rates imposed by the Revenue Act of 1917. The provision in the Revenue Act of 1918 granting the exemption is retro- active, and authorizes the refund of all estate taxes collected under the provisions of former acts from estates now entitled to the exemption. Where such taxes have been collected, the executor should file a claim for refund on Form 46, accompanied by the same evidence as is required in support of a claim for military exemption. GROSS ESTATE: INDIVIDUAL PROPERTY 60 Art. 12. Character of interests included. — This provision is designed 8 to include all property interests of the decedent, of whatever charac- ter. It is the commonest form of taxable transfer. As a basis for tax, there must be an actual, beneficial ownership in the decedent, not a bare legal title, or one held in trust. Thus, property actually devoted to religious or charitable purposes, and placed in the name of an individual solely for convenience in administration, is not included in his gross estate. The statute also includes only property rights existing in the decedent in his lifetime and passing to his estate. It consequently does not include a right which came into existence only after the decedent's death, such as a cause of action by statute fo causing the death. The proceeds of such a cause of action should not be included in the gross estate, whether payable generally to the estate or to some specified class of persons, such as the widow or children. 61 The value of a vested remainder should be included in the gross estate. Nothing should be included, however, on account of a contingent remainder where the contingency does not happen in the life time of the decedent, and the interest consequently lapses at his death. Nor should anything be included on account of a life estate in the dece- dent. There should be included, however, the value of an annuity payable to the decedent upon the life of a third person who survives him, and the value of an estate for the life of a person other than the decedent. For rules as to valuing such annuities and illustrations, see Article 20. 62 Art. 13. Specific property to be included. — Real property owned by the decedent, when situated in the United States, should be included in the gross estate, whether the decedent was a resident or a nonresident, and whether the property came into the possession and control of the executor or administrator or passed directly to heirs or devisees. Real property not situated in the United States should not be included, whether the decedent was a resident or nonresident. Where the decedent was a resident, all personal property owned by him should be included, wherever situated. Where decedent was a nonresident, so much of his personal property as was actually situated in the United States at the time of his death should be included. For further discussion of the rules relating to the estates of nonresidents, see Article 60. 63 A cemetery lot owned by the decedent is part of his gross estate, but its value is limited to the salable value of such part of it as is not designed for the interment of the decedent or members of his family. Rent which had accrued upon real property at the time of the decedent's Copyright 1922, by The Corporation Trust Company. WAR TAX 41 SERVICE 1-2 22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. death, whether then payable or not, is included in the gross estate. The amount of interest accrued upon bonds on the day of death, whether payable then or subsequently, should be included. All matured coupons, whether presented for payment or not, should be included. The value of notes or other claims held by the decedent should be included, though they are canceled by his will or appear to be barred by the statute of limitations. As to the valuation of notes or claims apparently barred, see Article 15. paragraph 3. All bonds, whether federal, state, or municipal, and whether or not containing a tax-free covenant, should be included. 64 Dividends, whether upon preferred or common stock, should not be included unless actually declared prior to the date of death. The amount of dividends upon stock which have been declared, but not paid, must be returned where the value of the stock at the time of the decedent's death does not reflect the dividends; that is, where the death occurs after the closing of the books of the corporation and the stock consequently sells "ex dividend. " Where the death occurs before the closing of the books, the value of the stock reflects the dividend, and it should not be included. 85 Example: A 5 per cent dividend upon stock is declared March 1, payable on April 1 to stockholders of record on March 15. If the death occurred on March 10 and the market price on that day w^as 90, the value to be returned for both stock and dividend is 90, the dividend being reflected in the quoted price. If the death occurred on March 20, the books have been closed and the dividend is not reflected in the selling price. Under these circumstances the dividend must be returned in addition to the quoted price of the stock; and the proper return would be stock 90, dividend $5. 66 Art. 14. Value. — The value at which property included in the gross estate is to be returned for tax purposes is the value at the time of the decedent's death. Neither depreciation nor appreciation in value subsequent to the date of death is considered. The value to be ascertained is the market, or sale, value of the property. The highest price obtainable for the property within a reasonable period of the decedent's death is the value to be included. A sale of the property, however, in order to be accepted as the criterion of value, must be made in such manner as to insure the best price obtainable under existing circumstances. This requires (a) that the sale be made as a matter of business, and not merely in order to establish value; (b) that it be made in absolute good faith, with a view to realizing as high a price as possible; and (c) that reasonable care and skill be exercised to obtain such price. If one method brings better results than another, the better method must be employed. 67 For example, if individual sales of property are better adapted to procure a good price than auction sales, the price obtained at an auction sale will be accepted only after reasonable effort to find individual purchasers has been made. See further on this point Article 15. 68 Great care must be exercised by the executor to arrive at a fair valuation of every asset of the gross estate. 69 Art. 15. Rules for the valuation of property. — (1) Real estate. — Where real property has been sold, the amount received will be taken as its value provided the sale was made within a reasonable period of the decedent's death, and in such manner as to insure the highest possible price. Where no sale has been made, the criterion of value is the best price Copyright 1922, by The Corporation Trust Company. WAR TAX 42 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE T/ X REGULATIONS.— 1918 LAW. which could have been obtained within a reasonable period of the decedents' death. The amount brought at an auction sale should be considered, but will be accepted only if it appears that there was no available method of obtaining a higher price. The assessed valuation of the property should be considered, but is not conclusive. All relevant facts and all elements of value should be considered in every case. See further the general rules laid down in Article 14. 70 (2) Stocks and bonds. — The value of stocks and bonds listed upon a stock exchange should be obtained by taking the mean between the highest and the lowest sale price upon the day of death, provided the sales were made in the regular course of business, and not for the special purpose of establishing value. If there were no sales upon the date of death, the price nearest to that date, and within a reasonable period thereof, either before or after death, should be taken. Such sale price obtains irrespective of the number of shares held by the estate. If the security was listed upon more than one exchange, the records of the exchange where the security is principally dealt in should be employed. If the decedent died on Sunday or a legal holiday, the business of the previous day will govern. 71 If the stock is not listed upon an exchange, but is dealt in actively by brokers or has other active market, the latest sale price prior to the day of death will govern. If there is no active market for the stock and no sales of it have been made within a reasonable period of the decedent's death, and in particular where it is closely held (stock of a "close corpor- ation"), return should be made upon the basis of the value of the stock, as evidenced by the clear value of the excess of the assets of the corporation over its liabilities, and its earning capacity for the five years preceding the death of the decedent. Where the earnings of the corporation have been greater than a fair return on its invested capital, computed according to the nature of the business, and where the business is a going business, there should be added to the net value of the other assets of the business the value of the good will, computed in accordance with sound accounting principles. Where the earnings of the corporation have been less than a fair return on the invested capital, if the difference is material and the decreased earnings affect value, the net worth of the corporation as disclosed by its balance sheet may be adjusted on a reasonable basis to allow for this decreased value. In all cases where stock of this character forms a principal asset, there should be submitted with the return, Form 706 [Page 11], a copy of the balance sheets for the five preceding years, and of the balance sheet on the day of death or the nearest date thereto, together with a statement of the net earnings of the invested capital for the preceding five years. 72 The full value of securities pledged to secure a loan should be included in the gross estate. If the decedent had a trading account with a broker, all securities belonging to the decedent held by the broker at the date of death must be included at their market value on that date. Securities purchased on margin for the decedent's account and held by the broker should also be returned at their market value on the day of death. The amount of the decedent's indebtedness to the broker will be allowed as a deduction from the gross estate. (See Art. 45.) 73 (3) Notes, secured and unsecured. — Notes, whether secured or un- secured, will be presumed to be worth their full face value, plus ac- crued interest to the date of decedent's death, unless the executor establishes the right to return them at a lower valuation. Interest should be computed Copyright 1922, by The Corporation Trust Company. WAR TAX 43 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. upon the basis of 365 days to the year. In the case of an unsecured note it must be shown by satisfactory evidence, in order to justify failure to include it, that the note is uncollectible, either in whole or in part, from the maker or other parties to the note, on account of the insolvency of the parties thereto, or other cause. Where the note is secured it must also be shown that the security is insufficient to satisfy it. Where a note appears to be barred by the statute of limitations its value must be included in the gross estate in the absence of proof that the liability has not revived by promise to pay or part payment, and also that the parties liable refuse to pay the debt and intend to assert the defense. 74 (4) Cash on hand or on deposit. — Bank deposits should be re- turned at the amount for which the bank would be liable if the de- posit were withdrawn upon the date of the decedent's death. Interest which the bank agreed to pay upon condition that the money remain on deposit after the death should not be included. 75 (5) Interest in business. — Care should be taken to arrive at an accurate valuation of any business in which the decedent was inter- ested, whether as partner or proprietor. A fair appraisal as of the date of death should be made of all the assets of the business, tangible and in- tangible, and the business should be given a net worth equal to the amount which a purchaser, whether an individual cr corporation, would be willing to pay therefor at a normal sale in view of the net value of the assets and the demonstrated earning capacity. Special attention should be given to fixing an adequate figure for the value of the good will of the business in all cases where the decedent has not, for a fair consideration in money or money's worth, agreed that his interest therein shall pass at his death to his surviving partner or partners. 76 (6) Patents, trade-marks, and copyrights. — The basis for valua- tion of intangible assets of this character is the present worth of the estimated future earnings of the exclusive right during the rest of its exis- tence. The return received by the decedent should be considered in estimat- ing future earnings. 77 (7) Accounts receivable, claims, judgments, etc. — A fair valuation for assets of this character at the time of death should be fixed by the executor according to the best information available to him at the time of making return. A right of action which died with the decedent should not be included in the gross estate. 78 (8) Furniture, personal effects, and other ^ tangible property. — For the method of valuation to be employed in the case of household furniture and personal effects see Articles 16 to 19. With respect to all other tangible property the executor should endeavor to arrive at the sound and actual value at the day of death. Where such property is subsequently Copyright 1922, by The Corporation Trust Company. WAR TAX 44 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. sold the sale price must be returned if the sale was a bona fide sale and for the best price obtainable. In the case of growing crops the executor should ascertain from expert opinion what the value of the growing crop was on the day of death, as evidenced by subsequent yield and crop prices. Where the crop is matured the value is the value of the crop unit on the day of death for the entire yield, less the cost of harvesting and marketing. Where the crop is not matured these factors should be considered; and the opinion of those expert in such matters should be ascertained as to what the crop was reason- ably worth as a growing crop on the day of death. 79 Art. 16. Appraisal of household and personal effects — General pro- visions. — Executors and administrators are required to have careful appraisal made of all household and personal effects of the decedent, and to furnish in duplicate detailed lists and affidavits in the manner directed below. No distribution of such effects may be made until the lists and affidavits have been filed with the collector, and, if deemed necessary, sufficient time afforded the Bureau to have personal inspection made by an official appraiser. Where it is desired to distribute or sell all the property in advance of the filing of the return, the lists and affidavits should be filed with the collector, together with a letter stating when it is desired to effect distribution. If personal inspection by an internal-revenue officer is not deemed necessary, a waiver of such examination will be sent to the executor, who may thereupon proceed with distribution. 80 Art. 17. Same — When value is less than $2,000. — When the value of the personalty involved is less than $2,000, the detailed lists may be prepared by the executor personally. A room by room appraisal is desir- able; and all the articles should be named specifically, except those of small value, such as common bric-a-brac or cheap books. A separate value should be given for each article named, except that the values of a number of articles contained in the same room may be grouped. The value of an article worth more than $50 should be stated separately. Such an entry as the following would be acceptable: 81 Dining room: Table, six chairs, three pictures (common prints), value $75; sideboard, $60; total, $135. 82 If there should be included in the lot, however, jewelry or silver- ware of more than ordinary value, or articles having a marked artistic value, the executor must furnish an appraisal by persons thoroughly qualified by training and experience to judge of the value of such articles. 83 In the case of effects having a total value of less than $2,000, the executor may furnish as an alternative requirement a sworn estimate in duplicate of the approximate total value of the property by a professional appraiser of recognized standing and ability, or by a dealer in the class of personalty involved. 84 In addition to the lists or estimates described above, the executor must furnish in duplicate his affidavit as to the completeness of the lists and the qualification of the appraiser. 85 Art. 18. Same — When value is more than $2,000. — When the value of the effects is more than $2,000, detailed lists must be furnished, prepared by professional appraisers of recognized competence, or by dealers in the particular classes of personalty involved. The lists must be prepared Copyright 1922, by The Corporation Trust Company. WAR TAX 45 SERVICE 1-2-2?, Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — J 513 OOT. in the same detail as that indicated above for the executor's list. Where the personalty includes jewelry, silverware, or like articles, except in cases where the value of these items is insignificant, the appraisal of a reputable dealer or appraiser of jewelry must be furnished. 86 In the case of articles having marked artistic value, such as paint- ings, engravings, etchings, statuary, vases, oriental rugs, or antiques, the appraisals of experts will be required. The description of such articles should be fully given. Where paintings having artistic value are listed, the size, subject, and artist should be named. In the case of oriental rugs, the size, make, age, etc., should be given. The weight in ounces of each article of silverware should be stated. With the duplicate lists there must be filed the executor's affidavit as to the completeness of the list and the qualifications of the appraisers. 87 Art. 19. Same — Appraisers and basis of appraisals. — Wh°re exp ert appraisers are to be employed, care should be taken to see that they are men of recognized competence with respect to the particular class of property involved. In order to facilitate the acceptance of the appraisal, appraisers should be employed whose competence is well established. 88 The basis to be employed in appraising articles of this character is what they would bring at a bona fide sale to individual purchasers, to dealers, or upon a well-advertised auction sale. If there has been an actual bona fide sale, the amount received may be returned as the value of the property. Where property is valued by legatees for purposes of dis- tribution, such value will not necessarily be accepted. The original cost of the articles is not necessarily a proper basis, on account of depreciation or appreciation in value. 89 Household effects and like personalty used by husband and wife in the marriage relation are presumed to be the property of the husband, and, in the absence of sufficient evidence to rebut this presumption must be returned as a portion of his gross estate. — In reviewing returns on Form 706 in this office, it is found that oftentimes there are reported no household goods or other miscellaneous personalty of that character. This fact is brought to the attention of the examining officer, and in most cases results in the discovery of the existence of such property belonging to the estate of the decedent. In other cases the examining officers have been reporting the substance of the following: "Widow of deceased claims the household effects, etc., as her own separate property." 90 Statements to the above effect, unexplained, are not sufficient to relieve the estate from returning and paying tax upon the household furniture used by the decedent in the household occupied by himself and wife. Upon the decease of a husband the household goods and other chattels used by husband and wife in the marriage relation are presumed to be the property of the husband. If the wife claims the same as her separate property, she has the burden of establishing that claim. 91 There are certain situations where the widow's claim will not be questioned and will consequently relieve the estate from returning the household goods as part of the gross estate of the deceased husband. All that is required in such cases is sufficient evidence of the existence of the facts in question. Such situations are as follows: (l) Where the articles of household furniture were owned by the wife prior to marriage; (2) where t'ie wife has purchased the household effects during- coverture with her Copyright 1922, by The Corporation Trust Company. WAR TAX 46 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. separate funds; {3) where the household effects represent gifts from a third person to the wife individually during coverture. 92 It is not at all uncommon, however, that the household effects have been purchased by the husband since the marriage and at his death the wife claims that the decedent made her a gift of the various articles during the marriage, although the articles have never left the possession of the husband — i. e., they remain in the household occupied by the husband and wife and are used by them jointly. Such property is presumed to be owned by the husband, and if the wife, or any other person for that matter, claims the household effects as a gift from the deceased the burden of proving the gift rests upon the person asserting it. A gift from husband to wife must be clearly established. There must be clear and incontrovertible evi- dence of the delivery of the property by the husband with the intention of divesting himself of all dominion and control and of vesting title in the wife. The requirements necessary to a valid executed gift must be present. If the gift be in contemplation of death, of course another question would arise. 93 The following proposition has been announced by the courts and is believed by this office to be sound: To constitute a valid gift there must be an absolute transfer of the property from donor to donee, taking effect immediately, and fully executed by a delivery of the property by the donor, and the acceptance thereof by the donee. It is essential that the transaction should be fully executed by the delivery of the property to the donee, or to some person for him. In several States statutes have been enacted providing that no gift, except by deed or will, shall be valid unless actual possession shall come to and remain with the donee or his agent, and if the donor and donee reside together at the time of the gift, possession by the donee at their place of residence is not a sufficient possession within the meaning of the statute. 94 The foregoing should be carefully considered when examining officers are investigating the completeness and accuracy of estate tax returns. (T. D. 2529, Oct. 4, 1917.) 95 Art. 20. Valuation of annuities, life, and remainder interests. — Where the decedent was entitled to receive an annuity of a definite amount during the lifetime of another person, and the right constitutes an asset of his estate, the present worth of the annuity at the time of the decedents death must be computed upon the basis of the expectancy of life of the other person. The table marked "A" upon page 19 105] should be used for this computation. The amount of annual income should be multiplied by the figure in column 2 of the table opposite the number of years in column 1 nearest to the actual age of the other person. 96 Example: The decedent received under the terms of his father's will an annuity of $10,000 for the life of his elder brother. The brother at the decedent's death was 40 years 8 months old. By reference to the table the figure in column 2 opposite 41 years, the number nearest to the brother's age, is found to be 14.86102. The present worth of the annuity is therefore $148,610.20. 97 Where the decedent was entitled to receive the annuity during a specified number of years, the table marked "B" upon page 20 HI 106] should be used. 98 Example: The decedent received under the terms of his father's will an annuity of $10,000 for a period of 20 years, 15 of which had expired at the decedent's death By reference to the table it is found that Copyright 1922, by The Corporation Trust Company. WAR TAX 47 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. the figure in column 2 opposite 5 years, the unexpired portion of the 20-year period, is 4.45182. The present worth of the annuity is, therefore, $44,- 518.20 (4.45182 multiplied by 10,000). 99 Where the decedent was entitled to receive the entire income of certain property during the life of another or for a term of years, and where the rate of income is fixed by the instrument creating the trust or is definitely determinable at the time of the decedent's death, the average annual income which the property actually yields should be determined, and its present worth computed, as explained above in the case of annuities. 1 00 Example: The decedent's father placed $100,000 in trust, with directions that it be invested in state and municipal bonds and the entire income paid to the decedent during the life of his elder brother, who was 41 years old at the decedent's death. Before the decedent's death the money was invested in state and municipal bonds, and actually yielded a net return of $5,000 per annum. In this case the rate of income is definitely determinable. By reference to the table it is found that the present worth of an income of $5,000, dependent upon the life of a person 41 years of age, is $74,305.10 (14.86102 multiplied by 5,000). 101 Where the rate of annual income is not determinable, or where the decedent was entitled merely to the personal use of nonincome-bear- ing property, a hypothetical annuity at a rate of 4 per cent of the value of the property should be made the basis of the calculation. 102 Example: The decedent died before a fund of $100,000, of which he was entitled to receive the income during the life of a person 41 years old, had been invested by the trustees. The value of a hypothetical annuity of $4,000, dependent upon the life of such a person, is indicated by the table to be $59,444.08. 103 Where the decedent possessed a remainder interest in property sub- ject to the life estate of another, and such interest constituted an asset of his estate, the present worth of the remainder interest at the time of death should be obtained by multiplying the value of the property at the time of death by the figure in column 3 of Table A [1f 105] opposite the num- ber of years nearest to the age of the life tenant. Where the remainder interest is subject to an estate for a term of years Table B 106] should be used. 104 Example: The decedent was entitled to receive property worth $50,000 upon the death of his elder brother, to whom the income for life had been bequeathed. The brother at the time of the decedent's death was 31 years old. By reference to the table it is found that the figure in column 3 opposite 31 years is 0.31262. The present worth of the remainder interest is, therefore, $15,631. Copyright 1922, by The Corporation Trust Company. WAR TAX 48 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. 105 TABLE "A." Table, single life, 4 per cent, showing the present worth of an annuity, or life interest, and of a reversionary interest. ■ 1 d->*9 io fcmo ! 1 2 o •» 2 3 Annuity, or Reversion, or Annuity, or Reversion, or present value oi j>i aue ai present value of $1 due at present value present value of SI due at j of $1 due at Age the end of the end of the Age the end of the end of the each year year of death each year jyear of death during the of a person during the I of a person life of a of specified life of a i of specified person of age person of age specified age specified age Reversion Annuity Reversion Annuity n u VIA 79Q9Q #14 . i &o&\) $u.oyou< oi $12.17919 $0.49311 i i 1 7 QO.771 9qcqa 5.9 OA 11.88408 .50446 <) 1 Q AO.K7Q lo.oyo/o 9A9/17 .44Z4 / CO Oo 11.58531 .51595 o o in i con. 1 iy .ioyui .ZZ400 04 11.28325 .52757 A 4 1 O A 1 9QA iy .4izzo 91 AQ1 • Z14yi OO 10.97789 .53931 e O iy .oooui .zuyou KR OO 10.60982 .55116 ft D 1 O A1 7Q1 iy .01 1 oi K7 OI 10.35931 .56310 7 Q iy .ozoua in A1HQ7 iy .oiuy / 9H.A7Q .ZUOfO 9f\797 .ZU/Z< Oo oy 10.04630 9.73131 .57514 .58726 o Q 1 O K.1A 1 Q iy .ooiio 9.41474 .59943 in in iy .loooy <>1 QQO A1 ol 9.09765 .61163 1 1 i i in ORQAt iy .ooy4o .ZiOOO A9 BBS 8.78052 .62382 1 9 iy .zoio4 CO OO 8.46412 .63600 1 9. 14 in 1 onfi K iy .iyuoo .ZZo44 RA o4 8.14888 .64812 1 A. 14 in nncnft iy .uyoyu 0070.Q CE OO 7.83552 .66017 1 c 10 1 Q OQ7A/1 io.yy/04 oonoft .ZoUoo Aft OO 7.52476 .67212 1 A 10 1 Q QQCRQ lo.oyooy OQ/I7Q 1 .Zo4/o o/ 7.21699 .68397 17 1 / i c 7oni n. OQQQ/I .Zooo4 AC OS 6.91298 .69565 1 8 io i c AQn"7n le .ooU/U .24305 AO oy 6.61301 .70719 1Q iy 1 O :R7i;i lO.OO/OI .24740 6.31716 .71857 lo.4oUoo OK101 .zoiy i 71 71 6.02612 .72976 21 18.32932 .25656 72 5.74003 .74077 99 1 Q Ofl/t 1 A lo.ZU41o .zoloo 71 7o 5.45928 .75157 9Q 1 Q CilA 71 lo.U<4/l .ZOOOO *TA 5.18402 .76215 9J. 1 7 ("Mn.07 .27150 7K /O 4.91463 .77251 1 7 C007/1 1 I .oUZ < 4 07AQ0 7A /O 4.65125 .78264 9fi 1 7 AK.GQ/1 OOOQ1 .Zo-iol 77 4 39383 79254 97 17 CI OO/I I / .01.SZ4 00700 7Q 4! 14286 !80220 no 17 oen^O lv.ooybo onoQc .zyooo | 79 3.89858 .81159 on 1 7 OAOOC 17 ./UZZD .29991 80 3.66071 .82074 30 17.03961 .30617 81 3.42900 .82965 31 16.87176 .31262 82 3.20258 .83836 32 16.69846 .31929 83 2.98024 .84691 33 16.51964 .32617 84 2.76106 .85534 34 16.33503 .33327 85 2.54366 .86371 35 16.14437 .34060 86 2.32795 .87200 36 15.94755 .34817 87 2.11384 .88024 37 15.74427 .35599 88 1.90115 .88842 38 15.53421 .36407 89 1.69107 .89650 39 15.31722 .37241 90 1.48540 .90441 40 15.09295 .38104 91 1.28432 .91214 41 14.86102 .38996 92 .1.09024 .91961 42 14.62122 .39918 1 93 .90647 .92667 43 14.37356 .40871 94 .73687 .93320 44 14.11860 .41852 95 .58435 .93906 45 13.85713 .42857 96 .46182 .94378 46 13.58958 .43886 97 .36698 .94742 47 13.31698 .44935 98 .24038 .95229 48 13.03942 .46002 | 99 .00000 .96154 49 12.75716 .47088 50 12.47032 .48191 - Copyright 1922, by The Corporation Trust Company. WAR TAX 49 SERVICE 1-2-22. Reg. 37, Rev. 1921 ESTATE TAX REGULATIONS. — 1918 LAW. 106 TABLE "B." ao r Present worth of $1, payable at the end of a certain number of years i r , 3 ! Present worth of I an annuity of Present worth of Number of ! payable at the [ SI, payable at , years |end of each year,, the end of a cer- 1 for a certain I tain number of nmuber of years I years Annuity $0.96154 1 .88609 2.77509 3.62989 4.45182 5.24214 6.00205 6.73274 7.43533 8.11089 8.76047 9.38507 9.98565 10.56312 11.11839 Reversion $0.961538 .924556 .888996 .854804 .821927 .790314 .759918 .730690 .702587 .675564 .649581 .624597 .600574 .577475 .555265 Number of years I Present worth of j jan annuity of $1, I payable at the end of each year,] for a certain ! number of years Annuity $11.65229 12.16667 12.65929 13.13394 13.59032 ! 14.02916 14.45111 14.85684 15.24696 15.62208 15.98277 I 16.32958 16.66306 16.98371 17.29203 Reversiort $0.533908 .513373 .493628 .474642 .456387 .438834 .421955 .405726 .390121 .375117 .360689 .346816 .333477 .320651 .308319 DOWER AND COURTESY 107 Art. 21. Dower and courtesy. — This provision includes dower and 9 courtesy and all interests created by statute in lieu thereof, although the estate or interest so created is different in character. The effect of the provision is to require the inclusion of the full value of the property, with- out deduction of the value of the interest of the surviving husband or wife. This rule does not apply to the estate of any decedent dying after September 8, 1916, and prior to 6:55 P. M. February 24, 1919 (the effective date of Title IV of the Revenue Act of 1918), unless the property has its situs in a jurisdiction wherein dower, courtesy, or the statutory interest in lieu thereof, is subject to the payment of charges against the estate, the expenses of its administration and is subject to distribution as part of the estate, or unless there has been an election to take property devised or bequeathed in lieu of dower, courtesy, or such statutory interest, and the property so taken has its situs in a jurisdiction by the laws of which it is subject to the pay- ment of such charges and expenses, and to distribution as a part of the estate. (As amended by T. D. 3165, May 18, 1921.) TRANSFERS BY DECEDENT IN HIS LIFETIME. 1 08 Art. 22. Nature and time of transfer. — A transfer made by the de- 10 cedent in his lifetime, if made by way of gift, is taxable when made in contemplation of death, or intended to take effect in possession or enjoyment at or after the death of the transferor. No distinction is made between ordinary transfers and transfers involving the creation of a trust. Where a transfer, however, constitutes a bona fide sale for a fair consideration in money or money's worth, it is not taxable. In order to constitute such a bona fide sale, there must be a valuable consideration, as distinguished from love and affection. A sale implies the receipt of a price, in money or thing of value. The release of an existing claim, by way of accord and satisfaction, is not sufficient. The price must also be a fair equivalent for the property transferred. Where the price is not a fair one, the sale will not be considered to have been made bona fide. Such transfers are taxable whether made before or after September 8, 1916. Copyright 1922, by The Corporation Trust Company. WAR TAX 50 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. TRANSFERS IN CONTEMPLATION OF DEATH. 109 Art. 23. Nature of transfer. — The words "in contemplation of 10 death" do not refer to the general expectation of death which all persons entertain. A transfer, however, is made in contemplation of death wherever the person making it is influenced to do so by such an expectation of death, arising from bodily or mental conditions, as prompts persons to dispose of their property to those whom they deem proper objects of their bounty. The cause which induces such bodily or mental conditions is immaterial; and it is not necessary that the decedent be in the immediate expectation of death. Such a transfer is taxable, although the decedent parts absolutely and immediately with his title to and possession of the property. Transfers made within two years of a decedent's death are pre- sumed to be taxable if they are of a material part of his property and are in the nature of a final disposition thereof. Where a transfer is of this character, the executor must disclose the transfer in the return; but he may submit therewith evidence that it was not made in contemplation of death. The executor must also return transfers by the decedent of a material part of his property to relatives, though made more than two years before his death; but he need not list them as taxable if he contends otherwise. All facts relating to the transfer should be stated, including the motive therefor, the decedent's state of health, and his anticipation of death. The presumption of taxability may be rebutted by proof that the transfer was not induced by bodily or mental conditions leading the grantor to make a disposition of property testamentary in its nature. The fact that a gift was made as an advancement, to be taken into account upon the final distribution of the decedent's estate, is not enough, standing alone, to establish taxability; but it is a circumstance to be considered in determining whether the transfer was made in contemplation of death. TRANSFERS INTENDED TO TAKE EFFECT AT OR AFTER DEATH. 1 1 0 Art. 24. Reservation of income. — A transfer is taxable where the 10 grantor reserves to himself during life the income of the property transferred. In such a case the transfer of the principal takes effect in possession and enjoyment after the death of the grantor, and the value of the entire property should be included in the gross estate. Where the grantor reserves a proportionate part of the income, only a corresponding proportion of the property should be included in the gross estate, unless the transfer was made in contemplation of death. If, for example, he reserves one-half of the income, the value of one-half of the property transferred should be included in the gross estate. If he reserves an annuity, so much of the property as is necessary to produce the annuity should be included in the gross estate. Where the property does not produce income, its value as of the date of the decedent's death should be ascertained, and so much of this sum as is necessary to produce the annuity should be included in the gross estate. A transfer is taxable in accordance with these principles whether the grantor makes a reservation of the annuity out of the property conveyed, or exacts from the grantee an agreement to pay the annuity. A gift of the principal of a trust fund which takes effect at or after the decedent's death is taxable, although the income during the decedent's life is payable to some one other than himself. Example: The decedent transfers property to his son, the latter agreeing to pay the income to his mother during the decedent's life. The transfer to the son is taxable. Copyright 1922, by The Corporation Trust Company. WAR TAX 51 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. 1 1 1 Art. 25. Power of revocation or control. — Property held in trust under any instrument in which the grantor has reserved a power of revocation, or any power which has that effect, constitutes a part of the gross estate of such grantor for the purposes of this tax. For example, where a father places property in trust for the present benefit of his son, but reserves power to revoke the trust at any time during his life, the value of the entire property transferred should be included in the gross estate. 1 1 2 Art. 26. Valuation of property transferred. — The property to be valued is the interest owned and transferred by the decedent; but the value of such property must be ascertained as of the date of the deced- ent's death. Where the transferee makes additions to the property, or betterments, the value of the additions or betterments at the time of death are not to be included. For example, a father makes a transfer to a son, in contemplation of death, of unimproved real estate valued at $20,000. The son erects buildings on the land at a cost of $10,000. The amount to be included in the gross estate of the father is the value of the entire property at the time of his death less the value of the buildings on that date. PROPERTY HELD JOINTLY. 1 1 3 Art. 27. Property held jointly or as tenants in the entirety. —The 11 statute provides for the taxation of interests held jointly, or as tenants in the entirety, by the decedent and any other person or persons. This class of property includes all interests, whether in real or personal property, in which the survivor takes the entire property by right of survivorship, and it consequently does not form part of the decedent's estate for purposes of administration. It does not include interests held as tenants in common, where the interest of each tenant passes to his estate, free from any right of survivorship. 114 The following are examples of this class of property: Real estate held jointly; real estate held by husband and wife (known as an estate in the entirety); money deposited in a bank or trust company in the joint names of the decedent and another and payable to either or the survivor; joint trading accounts with brokers; stocks and bonds held in the joint names of several owners. [See 1(356.] 1 1 5 Art. 28. Taxable portion. — The value of such property to be re- turned for tax is the value of the entire property, unless it can be shown that part of it originally belonged to the other joint owner and never belonged to the decedent. In order to exclude any part of such property from the gross estate the executor must show an original contribution of value by some person other than the decedent. If such a contribution can be established, the proportion thereof to the entire purchase price represents the interest in the property which should be excluded from the gross estate. Three cases may arise: (1) The decedent may have paid the entire purchase price, in which case the entire property should be included; (2) the decedent may have paid only a portion of the purchase price, in which case only a corresponding portion of the property should be included; (3) the decedent may have paid no part of the purchase price, in which case no part of the property should be included. In the case of bank de- Copyright 1922, by The Corporation Trust Company. WAR TAX 52 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. posits, the same rule applies; that is, the interest of the decedent in the account is determined by the amount of his contribution. For example: An account of $1,000 is opened, of which the decedent contributes one-half. Interest of $40 has accumulated at the time of the decedent's death, and nothing has been withdrawn. Under these facts $520 should be included in the gross estate. 1 1 6 Art. 29. Husband and wife. —Property owned by husband and wife as tenants in the entirety is governed by the rule given above. The whole value of the property must be included, in the absence of a showing as to the original contributions. An exception is made, however, where property is conveyed to husband and wife without valuable considera- tion, or where the property was purchased out of common funds, represent- ing the savings of husband and wife, or was the fruit of joint labor, the proportion of the several contributions having been lost sight of. In such cases one-half of the total value of the property should be returned. PROPERTY PASSING UNDER POWER OF APPOINTMENT. 1 17 Art 30. General rules. — As a general rule, property passing under 12 a general power of appointment must be included in the gross estate of the person exercising the power (known as the donee, or appointor) where the power is exercised by will, or by deed executed in contemplation of death, or intended to take effect at or after death. This general rule applies wherever the decedent died after September 8, 1916, although the power was created prior to that date. In certain cases, how- ever, the transfer is taxable under the Revenue Act of 1918 when it would not be taxable under the Revenue Act of 1916 (See Art. 31). 118 Only property passing under a general power should be included. A general power is one to appoint to any person or persons in the discretion of the donee. Where the donee is required to appoint to a specified person or class of persons, the property should not be included in his gross estate. Property appointed under a general power should be included in the estate of the appointor, although the persons to whom the appointment was made would have taken the property had the power not been exercised. A copy of the instrument granting the power should be filed with Form 706 in all cases in order that the Bureau may determine whether the power is general or special. 1 19 Example: The income of property is left to a person for life, with the right to name in his will the person who shall receive it upon his death. He exercises this power in his will. Upon his death, if occurring after September 8, 1916, the property so appointed should be included in his gross estate. [See 1f396.] 120 Art. 31. Special rules— Powers exercised before and after Feb- ruary 25, 1919. — The Revenue Act of 1918 taxes all transfers effected by the exercise of a general power of appointment, provided the exercise was by will, or by deed made in contemplation of death, or intended to take effect at or after death. It follows that all transfers of this character, where the decedent died after February 24, 1919, are taxable, and the property must be included in the gross estate. Copyright 1922, by The Corporation Trust Company. WAR TAX 53 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. 121 Where the decedent died between September 8, 1916, and February 25, 1919, the taxability of the transfer depends upon whether the property was subject to the claims of the creditors of the appointor, in preference to the person or persons in whose favor the power was exercised. The general rule is, that the property is so subject; and it should conse- quently be included in the gross estate unless this rule has been abrogated in the State whose laws determine the nature and effect of the transfer. All such transfers should be disclosed to the Bureau in order that it may pass upon the question of taxability. [See T|396.] INSURANCE. 122 Art. 32. Taxable insurance. — The statute provides for the inclu- 13 sion in the gross estate of certain forms of insurance taken out by the decedent upon his own life. Two kinds of insurance are tax- able: (a) all insurance payable to the estate; (b) insurance payable to indi- vidual beneficiaries to the extent that it exceeds $40,000. The term "in- surance" refers to life insurance of every description, including death benefits paid by fraternal beneficial societies, operating under the lodge system. Insurance is deemed to be taken out by the decedent in all cases where he pays the premiums, either directly or indirectly, whether or not he makes the application. On the other hand, the insurance should not be included in the gross estate, even though the application is made by the decedent, where the premiums are actually paid by some other person or corporation, and not out of funds belonging to, or advanced by, the de- cedent. Where the decedent takes out insurance in favor of another person or corporation, as collateral security for a loan or other accommodation, and the decedent, either directly or indirectly, pays the premiums thereon, the insurance must be considered in determining whether there is an excess over $40,000. Where the decedent assigns a policy, and retains no interest therein, and thereafter pays no part of the premiums, the insurance will not be considered in determining whether there is such a taxable excess. 123 Art. 33. Insurance in favor of the estate. — The provision requiring the inclusion in the gross estate of all insurance receivable by the executor, without any deduction, applies to policies made payable to the decedent's estate or his executor or administrator, and all insurance, re- gardless of the manner of execution, which is in fact receivable by the estate, or which must be used to pay charges against the estate or the expenses of administration. This provision includes insurance taken out to provide funds to meet the estate tax, state inheritance taxes, or any other legal charge upon the estate, The manner in which the policy is drawn is immaterial so long as there is an obligation, legally binding upon the beneficiary, to use the proceeds in payment of the charge. 124 Art. 34. Insurance receivable by other beneficiaries. — The estate is entitled to only one exemption of $40,000 upon insurance pay- able to beneficiaries other than the executor. For example, if the decedent left life insurance payable to three persons in amounts of $10,000, $40,000, and $50,000 (total $100,000), the amount of $60,000 should be returned for taxation, which is the excess of the sum of the three policies over the exempted amount. The word "beneficiary," as used in reference to the Copyright 1922, by The Corporation Trust Company. WAR TAX 54 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. $40,000 exemption, means a person entitled to the actual enjoyment of the insurance money. 125 Art. 35. Effective date of insurance provisions. — Insurance re- ceivable by the executor must be included in the gross estate of al! decedents who died after September 8, 1916. Insurance payable to benefi- ciaries other than the executor, however, need not be included in the gross estate of decedents who died before February 25, 1919, the effective date of the Revenue Act of 1918, unless the insurance was originally payable to the estate, and was transferred by the decedent to specific beneficiaries in contemplation of death. 126 Art. 36. Valuation of insurance. — The amount to be returned in the case of any policy is the amount actually receivable by the executor or beneficiary. In cases where the proceeds of a policy are made payable to the beneficiary in the form of an annuity for life or for a term of years, the present worth of the annuity at the time of death should be in- cluded in the gross estate. For the method of computing the value of such an annuity, see Article 20. Where the insurance contract gives an option to receive a fixed sum of money in lieu of an annuity, this sum. if accepted, represents the value of the insurance for the purpose of the tax. If such sum is not accepted the value of the annuity is to be included in the gross estate. Where there is more than one option, and none of them is convertible, the value of the insurance should be determined in accordance with the option actually exercised. DEDUCTIONS. 21 Inijornx zinJ ttirll dYte b3'f{'3ndDDt)d iftuoriiij 9ffj oi lruo^ ?\ grtoi??rfnrno # > 1 27 Art. 37. Deductions in the case of resident estates. — In the case of 16 the estates of residents, the deductions are made from the value of the entire gross estate, wherever situated. The deductions specified in the above provisions [1[16], contained in the Revenue Act of 1918, are proper in all cases where the decedent died on or after February 25, 1919. Where the decedent died prior to February 25, 1919, the case is governed by the provisions of the Revenue Act of 1916, which permits the following deductions: (1) Funeral expenses. (2) Administration expenses. (3) Claims against the estate. (4) Unpaid mortgages. (5) Losses from casualty or theft. (6) Support of decedent's dependents. (7) Other charges against the estate. (8) Specific exemption of $50,000. (9) In the case of decedents dying after December 31, 1917, public, religious, charitable, sci- entific, literary, and educational bequests. 128 The provision in the Revenue Act of 1916 for the deduction of "such other charges'' than those previously specified as may be allowed by the laws of the jurisdiction is omitted in the Revenue Act of 1918. Consequently, in the case of estates of all persons dying after Febru- ary 24, 1919, the executor, in order to obtain a deduction, must bring the item within one of the classes specifically described. Copyright 1922, by The Corporation Trust Company. WAR TAX 55 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1913 LAW. 129 Art. 38. General provisions relating to deductions. — In order to be deductible, the item must be of the character described in the statute; and it must also be one the payment of which out of the estate is allowed by the law of the jurisdiction administering it. Where the item is not one of those described, it is not deductible merely because payment is allowed by the local law. On the other hand, no item is deductible unless its payment is so allowed. It must appear in every case either that pay- ment of the item has been made, or that such payment is clearly contem- plated. Where the amount which may be expended for the particular pur- pose is limited by the local lav/, no deduction in excess of such limitation is permissible. Where the local courts have approved the expenditure it will ordinarily be allowed for deduction. (See Art. 39.) Where the disburse- ment has not been made, the item may be entered for deduction where the amount is certain, and it appears satisfactorily that it will be paid. No deduction may be taken upon the basis of a vague or uncertain estimate. Where an uncertain or contingent liability, not allowed as a deduction, becomes fixed, and payment is made, the remedy is a claim for a refund of the excess tax. 130 Art. 39. Effect of court decree. — The decision of a local court as to the amount of a claim or administration expense will ordinarily be accepted where the court passes upon the fact upon which deductibility depends. Where the court does not pass upon such fact its decree will, of course, not be followed. For example, where the question before the court is whether a claim should be allowed, the decree allowing it will ordi- narily be accepted as establishing that the claim is valid and the amount of it. Where, however, a legacy is left to an executor in lieu of commissions, the allowance of the legacy does not establish that the executor's claim for commissions is equal to the amount bequeathed, and that this amount is consequently deductible. (See Art. 42.) Nor will the decree necessarily be accepted even where it purports to decide the fact upon which deduct- ibility depends. It must appear that the court actually passed upon the merits of the case. This will be presumed in all cases where there is an active and genuine contest. Where the result reached appears to be un- reasonable, this is some evidence that there was not such a contest, but it may be rebutted by proof to the contrary. Where the decree was ren- dered by consent, it will be accepted, provided the consent was a bona fide recognition of the validity of the claim — not a mere cloak for a gift — and was accepted by the court as satisfactory evidence upon the merits. It will be presumed that the consent was of this character, and was so accepted, where it is made by all parties having an interest adverse to the claim, when all aspects of the matter, including its effect upon taxation, are considered. The decree will not be accepted where it appears to be at variance with the law of the State; as, for example, if an allowance is made to an executor in excess of the rate prescribed by statute. 131 Art. 40. Funeral expenses. — An executor may deduct such amounts for funeral expenses as are actually expended by him, provided expenditures of this nature are a liability of the estate under the laws of the local jurisdiction. A reasonable expenditure by the executor for a tombstone, monument or mausoleum, or for a burial lot, either for the decedent or his family, may be deducted under this heading, provided such Copyright 1922, by The Corporation Trust Company. WAR TAX 56 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS— 1913 LAW. an expenditure is made a charge upon the estate by the local law. In- cluded in funeral expenses is the transportation of the person bringing the body to the place of burial. 132 Art. 41. Administration expenses. — The amounts deductible from the gross estate as "administration expenses ,, are such expenses as are actually and necessarily incurred in the administration of the estate; that is, in the collection of assets, payment of debts, and distribution among the persons entitled. The expenses contemplated in the law are such only as attend the settlement of an estate by the legal representative preliminary to the transfer of the property to individual beneficiaries or to a trustee, whether such trustee is the executor or some other person. Expenditures not essential to the proper settlement of the estate, but in- curred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions. Administration expenses include (1) exe- cutor's commissions; (2) attorney's fees; (3) miscellaneous expenses. Each of these classes is considered separately. (See Arts. 42 to 44.) 133 Art 42. Executor's commissions. — No amount may be deducted as executor's commissions in excess of that actually paid or to be paid, and in no case in excess of the amount allowable by the law of the jurisdiction wherein the estate is being administered. If at the time of filing the return the commissions of the executor have not been allowed or awarded by the court or tribunal having jurisdiction in the premises, the commissions may nevertheless be entered on the return and claimed as a deduction, sub- ject to future allowance or disallowance by the Commissioner, provided: (1) That the amount entered and claimed is within the amount allowable by the laws of the jurisdiction wherein the estate is being administered; (2) that such amount is in accordance with the usually accepted practice in such cases within said jurisdiction; and (3) that it may reasonably be expected that the said amount will be paid within one year and 180 days after the decedent's death. Except in those cases in which the commissions have been both awarded and paid, the Commissioner may at any time require the executor to furnish satisfactory evidence of his right to take or claim the deduction. Whenever it shall appear to the Commissioner that the commissions claimed but not awarded, whether paid or unpaid, exceed the amount allowed by law or exceed the amount usually allowed within the commonly accepted practice of the jurisdiction wherein the estate is being administered, or where in any case the Commissioner finds after the lapse of 1 year and 180 days after the decedent's death that the commissions have not been paid, the deduction will be disallowed, subject to the right of the executor thereafter in a proper case to file a claim for abatement or refund as he may be advised, when the commissions shall have been actually awarded and paid. Where the executor does not intend to make any charge upon the estate for his services, no deduction may be claimed. 134 No deduction may be made for trustees' commissions, and an ex- ecutor who acts as trustee is not entitled to deduct the commission he receives for his services in the latter capacity. The executor's duties are complete when he has turned over the estate or the proceeds to the persons entitled thereto. Such persons may be beneficiaries entitled to receive the property in their own right, or trustees entitled to receive it in the right of their cestuis que trustent. The services of the trustees are distinct from, and additional to, the ordinary duties of an executor in the settlement of Copyright 1922, by The Corporation Trust Company. WAR TAX 57 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. estates; and commissions for such trustees' services do not constitute an expense of administration. 1 35 Where a bequest is made to an executor in lieu of commissions, it 138 may be deducted as an administration expense only to an amount 137 thereof not in excess of the amount allowable as commissions by the law of the jurisdiction wherein the estate is being administered. If the legacy is in excess of such allowable commissions, the excess may not be deducted. 138 Art. 43. Attorney's fee. — No amount may be deducted in any case 139 as attorney's fees in excess of that actually paid or to be paid. If at the time of filing the return the attorney's fees have not been allowed or awarded by the court or tribunal having jurisdiction in the premises, they may nevertheless be entered on the return and claimed as a deduction, subject to future allowance or disallowance by the Commissioner, provided: (1) That the amount so entered and claimed is reasonable in consideration of the services performed and the value of the estate; and (2) that it may reasonably be expected that such amount will be paid within 1 year and 180 days after the decedent's death. Except in those cases in which the attorney's fees have been both awarded and paid, the Commis- sioner may at any time require the executor to furnish satisfactory evidence of his right to take or claim this deduction. Whenever it shall appear to the Commissioner that the fees claimed were not awarded, and whether paid or unpaid, exceed a reasonable amount in the discretion of the Com- missioner, or where in any case the Commissioner finds after the lapse of 1 year and 180 days after the decedent's death that the fees have not been paid, the deduction will be disallowed, subject to the right of the executor thereafter, in a proper case to file a claim for abatement or refund as he may be advised, when the fees have actually been awarded and paid. The cost of litigation instituted by the beneficiaries as to the amount of their respec- tive interests may not be deducted, since expenses of this character are properly charges against the beneficiaries personally, rather than against the general estate. 140 Art. 44. Miscellaneous administration expenses. — This item in- cludes expenses incident to court proceedings, or the administra- tion of the estate, such as court costs, surrogates' fees, accountants' fees, appraisers' fees, clerk hire, etc. Expenses necessarily incurred in dis- tributing the estate are deductible. This includes the cost of storing or maintaining property of the estate, where it is impossible to effect imme- diate distribution to the beneficiaries. Expenses for preserving and caring for the property may be deducted, but do not include additions or improve- ments; nor will such expenses be allowed for a longer period than the exe- cutor is required to retain the property. A brokerage fee for selling prop- erty of the estate is deductible where the sale is necessary in order to pay the decedent's debts, or the expenses of administration, or to effect dis- tribution. Other expenses attending the sale are deductible, such as the fees of an auctioneer, where it is reasonably necessary to employ one. 141 Art. 45. Claims against the estate. — The amounts that may be deducted under this heading are such only as represent personal obligations of the decedent existing at the time of his death, whether then matured or not. Obligations contracted by the executor are not deduct- ible. Only such claims as are actually enforcible against the estate may be deducted. Copyriglit 1922, by The Corporation Trust Company. WAR TAX 5^ SERVICE 1-2-22. Reg. 37, Kev. Ib2\. ESTATE TAX REGULATIONS. — 1918 LAW. 142 Art. 46. Taxes. — Taxes upon real property should be accrued to the date of death. This is done by ascertaining the time between the first day of the taxable period wherein the death occurs and the date of death, and computing the proportion of the entire tax which this period bears to the entire taxable period. Such proportion of the tax has accrued upon the date of death, and is deductible. 143 Taxes upon personal property are either wholly deductible, or are not deductible at all, depending upon whether the tax did, or did not, become the personal obligation of the taxpayer in his lifetime. If the tax became his personal obligation during his life, the whole amount is deductible as a claim against his estate. If it did not become such per- sonal obligation in his lifetime, no part of it is deductible. The question when the tax became the personal obligation of the taxpayer depends upon the law of the jurisdiction where the decedent was domiciled at the time of his death. Prima facie, the date when the tax became the personal obli- gation of the taxpayer is the date when the assessment was laid. 144 In the case of federal taxes upon income, the tax upon income received or accrued during the decedent's lifetime constitutes the personal obligation of the decedent, and is deductible. Taxes upon in- come received after the decedent's death are not deductible. No estate, succession, legacy, or inheritance tax is deductible. [See H390.] 145 Art. 47. Unpaid mortgages. — The full amount of unpaid mort- gages on property included in the gross estate should be deducted under this heading, including interest which had accrued at the time of death, whether payable at that time or not. Interest should be computed upon the basis of 365 days to the year. The full value of the real estate, without any deduction for mortgages, must be returned as part of the gross estate. As real property situated outside of the United States is not part of the gross estate, the amount of mortgages upon such property should be deducted only where the decedent was personally liable for the mortgage debt. Sfi D3m4JJ31 /BJSW, 3J&JjJ3 /lOVIG -<&ij~4 XHOll iJ,3VI3D3l ,Yj13QOTQ (*flJ j£fU . \!ry 146 Art. 48. Losses from casualty or theft. — There may be deducted under this heading losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualty, or from theft, when such losses are not compensated by insurance or otherwise. If the loss is partly compensated, the excess of the loss over such compensa- tion may be deducted. Losses not of the nature described are not deduct- ible. Losses sustained by reason of depreciation in the value of the assets of the estate subsequent to the decedent's death are not deductible. The term "casualty" includes only losses of a fortuitous and unusual character, such as result from violence, or from a disaster which could not be foreseen or prevented by the exercise of reasonable care. Losses due to the death of animals from disease are deductible. In order to be deductible a loss must occur during the settlement of the estate. Where property has been delivered to the beneficiary, settlement has been effected, and no deduction may be had for loss of the property. 147 Art. 49. Support of dependents. — The support during the settle- ment of the estate of dependents of the decedent should be de- ducted, but pursuant to the following rules: Copyright 1922, by The Corporation Trust Company. WAR TAX 59 SERVTCE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. 148 (1) In order to be deductible, the allowance must be authorized by the laws of the jurisdiction in which the estate is being admin- istered, and not in excess of what is reasonably required. 149 (2) The allowance for which deduction may be made is limited to support during the settlement of the estate. Any allowance for a more extended period is not deductible. 150 (3) There must be an actual disbursement from the estate to the dependents, but after payment has been made the right of deduction is not affected by the fact that the dependents do not expend the entire amount for their support during the settlement of the estate, PROPERTY PREVIOUSLY TAXED. [See l[434/or retroactive provision in the 1921 Act.} 1 52 Art. 50. Property taxed within five years. — There may be deducted 17 from the gross estate under this heading an amount equal to the value at the time of the decedent's death of any property which can be identified as having been received by him as a share in the estate of any person who died within five years prior to the decedent's death, if an estate tax under the Revenue Act of 1917 or the Revenue Act of 1918 was collected from such estate. There may also be deducted an amount equal to the value of property which can be identified as having been acquired by the decedent in exchange for property received as a share in the estate of such a prior decedent. In order to establish the right to this deduction it must be shown — (1) That the two deaths occurred within five years of each other; (2) That the first decedent died after October 3, 1917, the date of the pas- sage of the Revenue Act of 1917, and that the second decedent died after February 24, 1919, the date of the passage of the Revenue Act of 1918; (3) That an estate tax has actually been collected from the estate of the prior decedent (the mere riling of a return for such an estate not being suffi- cient); and (4) That the property received from the prior estate was returned as part of the gross estate of the prior decedent, and the property the value of which is sought to be deducted, or property taken in exchange therefor, has been included in the gross estate of the second decedent. 153 The statute limits the deduction to the value of property which can be identified by the executor as having been received or acquired in the manner described. The burden rests upon the executor of proving that the estate is entitled to this deduction. 154 Art. 51. Property originally received. — If the property originally received from the prior estate is included in the decedent's gross estate, the executor must describe it fully, and prove its identity with the property received from the prior estate. The value to be deducted is the value at the time of the second decedent's death. 155 Art. 52. Property acquired in exchange. — The deduction for sub- stituted property is limited to property acquired in exchange for the identical property received from the estate of the prior decedent. Where there is a subsequent exchange, the right to deduction is lost. Where, Copyright 1922, by The Corporation Trust Company. WAR TAX 60 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. however, property is sold, and the proceeds immediately invested in other property, the property purchased is deemed to be taken in exchange, and its value is deductible. 156 In the case of an exchange the executor must describe and identify fully both the property originally received from the prior estate and the property acquired in exchange therefor. He must also state the date and nature of the transaction by which the exchange was effected, the name and address of the transferee, and the consideration, if any, given or re- ceived by the decedent in addition to the property received from the prior estate. If the exchange was made by written instrument of public record, a precise reference must be made to the record containing the instrument, and if by instrument not of record a copy of the instrument must be sup- plied. If there was no written instrument, an affidavit as to facts of the exchange by one or more persons having personal knowledge of the matter must be furnished. 157 If at the time of exchange the decedent gave a consideration in addition to the property received from the prior estate, and acquired property of greater value than the property so received, there may be de- ducted the proportion of the value of the property received in exchange which the value of the original property bears thereto. CHARITABLE AND SIMILAR BEQUESTS. [See $435 for retroactive provision in the 1921 Act.] 1 58 Art. 53. Public, charitable, and similar bequests. — Bequests to relig- 18 ious, charitable, scientific, literary, or educational corporations are deductible only if the corporation is organized or operated exclusively for one of the purposes specified (see Art. 54). Similarly, in the case of a trust, the trust must be exclusively for such purposes. It does not prevent deduction, however, that the property placed in trust is also subject to another trust for a private purpose. Thus, where money or property is placed in trust to pay the income to an individual during life, and then to pay or deliver the same to a charitable corporation, or apply the principal to a charitable purpose, the charitable bequest or devise forms the basis for a deduction. The amount of the deduction, in such case, is the value, at the date of the decedent's death, of the remainder interest in the money or property which is devised or bequeathed to charity. For the manner of determining the value of such remainder interest, see Article 20. Gifts made in the decedent's lifetime are deductible only if made in contemplation of death, or intended to take effect at or after death, and the property is consequently included in the gross estate. Gifts made in satisfaction of a legacy are also deductible. The deduction is not limited in the case of the estates of residents to bequests to domestic corporations or to trustees for use within the United States. 159 Art. 54. Religious, charitable, scientific, and educational corpora- tions. — In order to be exempt the corporation or association must meet three tests: (1) it must be organized and operated for one or more of the specified purposes; (2) it must be organized and operated exclusively for such purposes; and (3) no part of its income must inure to the benefit of private stockholders or individuals. 160 (1) Charitable corporations include an association for the relief of the families of clergymen, even though the latter make a contribu- Copyright 1922, by The Corporation Trust Company. WAR TAX 61 SERVICE 1-2-2'?. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. tion to the fund established for this purpose; or for furnishing the services of trained nurses to persons unable to pay for them; or for aiding the general body of litigants by improving the efficient administration of justice. Educational corporations include an association whose sole purpose is the instruction of the public, even if it merely disseminates propaganda on a single question. Thus an association inculcating prohibition or protectionist principles is exempt. The same is true of an association to promote ac- quaintance with the Spanish language and literature, although it has in- cidental amusement features; of an association to increase knowledge of the civilization of another country; and of a Chautauqua association whose primary purpose is to give lectures on subjects useful to the individual and beneficial to the community, and whose amusement features are incidental to this purpose. Societies designed to encourage the performance of first- class orchestral music are not exempt, the purpose being merely to provide a high grade of entertainment. Scientific corporations include an associa- tion for the scientific study of law, to the end of improvement in its ad- ministration. 161 (2) Where a religious corporation owns a large quantity of farm land and works it, and also manufactures and sells clothing and other articles for profit, it is not operated exclusively for religious purposes and is not exempt, even though its property is held in common and its profits do not inure to the benefit of individual members of the society. 162 (3) It does not prevent exemption that private individuals, for whose benefit a charity is organized, receive the income of the cor- poration or association. The statute refers to individuals having a personal and private interest in the activities of the corporation, such as stockholders. If, however, a corporation issues "voting shares," which entitle the holders upon the dissolution of the corporation to receive the proceeds of its prop- erty, including accumulated income, the right to exemption does not exist, even though the by-laws provide that the shareholders shall not receive any dividend or other return upon their shares. 163 Art. 55. Proof of exemption. — In order to prove his right to this deduction the executor must submit: (1) Certified copy of the will of the decedent, or the instrument of gift in the case of a transfer of property in contemplation of death. (2) A receipt, statement, or other documentary evidence to show the beneficiary's receipt of, or intention to accept, the legacy, devise, or gift. (3) Affidavit of the executor stating whether any action has been in- stituted to contest the will, or whether, according to his information and belief, any such action is contemplated. (4) Such other document or evidence as may be specified by the Bureau. 164 Art. 56. Conditional bequests. — Where the bequest, legacy, devise, or gift is dependent upon the performance of some act, or the happen- ing of some event, in order to become effective it is necessary that the per- formance of the act or the occurrence of the event shall have taken place before the deduction can be allowed. Where the legatee, devisee, donee, or trustee is empowered to divert the property or fund, in whole or in part, to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed, devised, or given by the decedent, deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of such power. (As amended by T. D. 3241, Nov. 1, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 62 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. 165 Art. 57. Effective date. — The deduction may be claimed by the estates of all decedents dying after December 31, 1917. Where the tax has been paid without taking the deduction a claim for refund may be made, as provided by Article 110. SPECIFIC EXEMPTION. 1 66 Art. 58. Specific exemption. — There may be deducted from the gross 19 estate of all resident decedents a specific exemption of $50,000. No part of this exemption is allowed in the case of nonresident decedents. (See Art. 59.) If more than one return is made for purposes of the tax, the exemption may be taken only once. DEDUCTIONS IN THE CASE OF NONRESIDENT ESTATES. 1 67 Art. 59. Manner of making deduction. — The gross estate of a resi- 21 dent and of a nonresident are made up in the same way. In ascer- taining the net estate, however, which is subject to tax, there is a radical difference between the two cases. Whereas the net estate in the case of a resident is determined by making the specified deductions from the entire gross estate, the net estate in the case of a non-resident is de- termined by making the deductions from the value of so much of the gross estate as is situated in the United States. Thus, in substance, the statute attempts to tax only the transfer of so much of the estate of a nonresident as is situated in the United States. On the other hand, nonresident estates are not entitled to the specific exemption of $50,000. 168 Art. 60. Situs of property. — The situs of property, both real and personal, for the purpose of the tax is its actual situs. Stock in a domestic corporation, and insurance payable by a domestic insurance com- pany, constitute property situated in the United States, although owned by, or payable to, a nonresident. A domestic corporation or insurance com- pany is one created or organized in the Umted States. Bonds actually situated in the United States, moneys on deposit with domestic banks and moneys due on open accounts by domestic debtors constitute property sub- ject to tax. 169 Where insurance is payable to the estate, all insurance in domestic companies should be included in the gross estate. Where insurance is payable to individuals other than the executor, there should be included in the gross estate only the excess of domestic insurance over the sum of $40,- 000. Foreign insurance is not considered. 170 Example: The testator leaves $30,000 of insurance in domestic companies and $30,000 of insurance in foreign companies, payable in each case to individual beneficiaries. As the domestic insurance does not exceed $40,000, there is nothing to be included in the gross estate. 171 Example; The testator leaves $50,000 of insurance in domestic companies and $50,000 of insurance in foreign companies, payable in each case to individual beneficiaries. There should be included in the gross estate $10,000 being the excess of the domestic insurance over $40,000. 172 Any property of which the decedent has made a transfer, or with respect to which he has created a trust, in contemplation of, or to take effect at or after, death, is deemed to be situated in the United States Copyright 1922, by The Corporation Trust Comban-o, WAR TAX 63 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. if so situated either at the time of the transfer or the creation of the trust, or at the time of the decedent's death. 173 The value of United States Bonds can not be excluded from the Gross or Net Estate in determining Estate Tax due. — The following opinion of the Solicitor of Internal Revenue, rendered February 13, 1917, is published for the information of all concerned: Sir: , Answering the question presented by under date of the 10th instant, relative to the liability of estates to taxation under the recent Federal Estate Tax Act, it is manifest from the following decisions of the U. S. Supreme Court that U. S. Government bonds must be added to the value of estates for the purpose of taxation under said Act. The U. S. Supreme Court in Plummer v. Coler, (178 U. S. 134), consider- ing the question whether, under the inheritance tax laws of a state, a tax might be validly imposed upon a legacy consisting of United States bonds issued under a statute declaring them exempt from state taxation in any form, said: "We think the conclusion, fairly to be drawn from the state and Federal cases, is, that the right to take property by will or descent is derived from and regulated by municipal law; that, in assessing a tax upon such right or privilege, the State may lawfully measure or fix the amount of the tax by referring to the value of the property passing; and that the incidental fact that such property is com- posed wholly or in part of Federal securities, does not invalidate the tax or the law under which is is imposed." And dealing directly with the power of the Federal Government under the Inheritance Tax Act of 1898, to impose legacy taxes upon the trans- mission of an estate consisting of "free-tax" Government bonds, the Court in Murdock v. Ward, (178 U. S. 147), referring to the discussion and decision in the Plummer case, held'. "If a state inheritance law can validly impose a tax measured by the amount or value of the legacy, even if that amount includes United States bonds, the reasoning that justifies such a conclusion must, when applied to the case of a Federal inheritance law taxing the very same legacy, bring us to the same conclusion. We must therefore, hold that if, as held in Knowlton v. Moore, the tax imposed under the Act of June 13, 1898, is not invalid as a direct unapportioned tax, nor for want of uniformity, nor as an infringe- ment upon the laws of the states regulating wills and descents, then the tax upon legacies or bequests, descendible under and regulated by state laws, is valid even if such legacies incidentally are composed of Federal bonds." And further, in Sherman v. United States (178 U. S. 151), the Court said: The proposition that bonds of the United States and the income therefrom are not lawfully taxable under an inheritance tax law of the United States, because exempted by contract from such tax has just been decided not to be well founded." This is clearly conclusive of the whole question. (T. D. 2449, Feb. 13, 1917.) [For exception see ^[174 below.] Copyright 1922, by The Corporation Trust Company. WAR TAX 64 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. 174 U. S. Bonds owned by non-resident alien decedent. — Please wire our expense whether United States bonds held in trust for non- resident alien individual but situated in United States are included in gross estate for purposes of estate tax. Has ruling published Corporation Trust Company War Tax Service nineteen twenty paragraph one-seventy-three, denying exemption, been modified? (Answer.) United States bonds situated in the United States owned by non-resident alien decedent form no part of gross estate of such decedent situated in the United States for purposes of federal estate tax. (Telegram of inquiry from Herrick, Smith, Donald & Farley, Boston, Mass., and the answer thereto signed by Deputy Com- missioner James Hagerman, Jr., and dated Aug. 6, 1920.) 175 [Letter supplementing the telegram above.] Referring to your letter dated May 26, 1920, relative to the taxability of bonds, notes and certificates of indebtedness of the United States and bonds of the War Finance Corporation owned by or held in trust for a nonresident alien at the time of his death, you are advised that bonds of the United States, beneficially owned by a nonresident alien, should not be included as a part of the gross estate in the United States for the purpose of the estate tax (Revenue Act of 1916, Sec. 202 (a); Revenue Act of 1918, Sec. 402 (a); Victory Liberty Loan Act, Act of March 3, 1919, Sec. 4 [1fl76] amending Fourth Liberty Bond Act, Act of July 9, 1918, Sec. 3). This ruling is not in conflict with Treasury Decision No. 2530 [If 177], and applies only to bonds enumerated in the above-mentioned Acts. (Letter to Herrick, Smith, Donald & Farley, Boston, Mass., signed by Deputy Commissioner James Hagerman, Jr., and dated August 21, 1920.) 176 Sec. 4 [of the Victory Liberty Loan Act]. — That section 3 of the Fourth Liberty Bond Act is hereby amended to read as follows: "Section 3. That, notwithstanding the provisions of the Second Liberty Bond Act or of the War Finance Corporation Act or of any other Act, bonds, notes, and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a non- resident alien individual, or a foreign corporation, partnership, or association, not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States or by any local taxing authority." (Section 4 of "An Act to amend the Liberty Bond Acts and the War Finance Corporation Act, and for other purposes," known as the "Victory Liberty Loan Act," approved by the President, March 3, 1919.) 177 Bonds of domestic corporations owned by nonresident decedents, such bonds being physically situated outside of the United States, are not returnable as a portion of the gross estate of said decedent. — Section 202 of the revenue act of September 8, 1916, in defining the gross estate, provides that stock in a domestic corporation owned and held by a non- resident decedent shall be deemed property within the United States. The holding of this office has been that bonds of a domestic corporation owned and held by a nonresident decedent were likewise deemed property within the United States and taxable as a portion of the gross estate of the decedent. 178 This question has had careful reconsideration, and it is the opinion of this office that the language of the section of the act above referred to does not evidence the intention of Congress to impose a tax upon bonds of a domestic corporation owned and held by a nonresident decedent, when Copyright 1922, by The Corporation Trust Compmny. WAR TAX 65 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX. REGULATIONS.— 1918 LAW. such bonds are physically situate outside of the United States, Hawaii cr Alaska at the time of the death of the nonresident owner. 179 It is clear, however, that Congress has the power and evidenced an intention in the act above referred to to impose a tax upon bonds both foreign and domestic, owned by a nonresident decedent, which bonds are physically situate in the United States, Hawaii or Alaska, at the time of the owner's death, and such bonds must be returned as a portion of his gross estate. 1 80 It is of course clear that bonds, both foreign and domestic, owned by resident are taxable, regardless of where such bonds are situated at the time of the owner's death. 181 Rulings of this office announced in Regulations and Treasury De- cisions, inconsistent with and contrary to the above, are hereby revoked. (T. D. 2530, Oct. 8, 1917.) 182 Art. 61. Deduction for claims and expenses. — The character of the deduction is the same as in the case of resident estates (see Arts. 37 to 49). It is immaterial whether the expenditures are incurred or paid in this country or elsewhere. The deduction, however, is subject to limitations which do not apply in the case of a resident estate. Only that proportion of the claims and expenses is deductible which the value of the property situated in the United States bears to the value of the entire gross estate, wherever situated; and in no event may a sum be deducted in excess of 10 per cent of the value of the property situated in the United States. This 10 per cent limitation does not apply to the deductions subsequently consi- dered. (See Arts. 62, 63.) 183 Art. 62. Property previously taxed.— The value of property owned 22 by a nonresident person dying after October 3, 1917, or forming part of the gross estate of the decedent, may be deducted within the limi- tations prescribed with reference to resident estates (see Art. 50), and subject to the further condition that the property shall have been situated in the United States at the time of the death of the second decedent. The detailed rules for deductions in the case of nonresident estates are consequently as follows: [See 1f439 for retroactive provision of the 1921 Act.] (1) That the two deaths occurred within five years of each other. (2) That the first decedent died after October 3, 1917, and that the second decedent died after February 24, 1919. (3) That an estate tax has actually been collected from the estate of the first decedent (the mere filing of a return not being sufficient). (4) That the property originally received from the prior estate has been returned as part of the gross estate of the prior decedent, and that the property sought to be deducted is either the identical property so returned or was taken in exchange for such property; and (5) That the property sought to be deducted shall have been situated in the United States at the time of the death of the present decedent. 184 For the rules for determining when property is acquired in exchange, within the meaning of the statute, see Article 52. 185 Art. 63. Public, charitable, or similar gifts.— Where the bequest is 23 to a corporation, it is limited to a domestic corporation; that is, one created or organized in the United States. Where the bequest is to a trustee, it must be for use exclusively within the United States, j The Copyright 1922, by The Corporation Trust Company. WAR TAX 66 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. requirements are different and should not be confused. The first relates to the character of the donee; the second to the character of the use of the gift. With these exceptions the rules for deduction are the same as in the case of resident estates (see Arts. 53, 54). 186 This deduction applies to the estates of all decedents dying aftei December 31, 1917. In the case of any estate entitled to the de- duction which paid the tax without receiving the benefit of the right, the excess tax will be refunded upon filing of claim for refund. [See ^[440 for retroactive provision in the 1921 Act.] 187 Art. 64. Determination of net estate. — The following example will show the manner of determining the net estate, subject to tax, of a nonresident decedent. The gross estate of the decedent, wherever situated, amounts to $1,000,000, of which the property in the United States, Hawaii, and Alaska amounts to $200,000. The total legal deduction for claims and expenses (see Art. 61) amounts to $75,000; and there are charitable bequests, for use within the United States, amounting to $25,000. Inasmuch as the property in the United States, Hawaii, and Alaska constitutes 20 per cent of the entire gross estate, one-fifth of the total deductions for claims and expenses is the proportionate share corresponding to this property. This proportion amounts to $15,000; and as this amount does not exceed ten per cent of the property situated in the United States, Hawaii, and Alaska, the entire amount is deductible. The following result is accordingly obtained: Gross estate within the United States $200,000 Proportion of deductions for claims and expenses under subdivision 1 $15,000 Charitable bequests in United States 25,000 40,000 Net estate subject to tax 160,000 188 The tax on this amount should be computed in the manner previ- ously provided for estates of residents. (See Art. 8.) 189 In the example given, if the total legal deductions for claims and expenses had amounted to $150,000, the proportionate amount of deductions, $30,000, would not have been deductible, inasmuch as this would have exceeded ten per cent of the property in the United States, Hawaii, and Alaska. In such case the total amount of the deductions allowable for claims and expenses would have been ten per cent of the gross estate within the United States, or $20,000, making, with the charitable bequests of $25,000, a total deduction of $45,000. The net estate subject to tax would accordingly have been $155,000, instead of the amount given in the example. 190 Art. 65. Payment of tax. — The regulations with reference to rates of tax and payment are the same in the case of estates of nonresidents as of residents. The statute provides that the executor shall pay the tax. If no executor or administrator has been appointed in the United States, every person in the United States in possession of any part of the decedent's gross estate is constituted an executor for the purpose of tax payment, and is liable for the tax upon the transfer of the portion of the gross estate in his possession. All checks, drafts, or money orders should be made payable to the order of Collector of Internal Revenue. Payment so made of an amount indicated to be due upon the return discharges the tax only in case Copyright 1922, by The Corporation Trust Company. WAR TAX 67 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. subsequent investigation and audit disclose that the correct amount has been paid. (See Art. 90.) SIXTY-DAY NOTICE— RESIDENT ESTATES. 1 9 1 Art. 66. When notice required. — A preliminary notice, called the 60- 27 day notice, is required to be filed in the case of every resident dece- dent who died on or after February 25, 1919, the gross amount of whose extate exceeds $50,000. This notice must be filed in duplicate with the collector in whose district the decedent had his domicile at the time of death. Where there is doubt as to whether the gross estate exceeds $50,000, the notice should be filed, as matter of precaution, in order to avoid penalties. 192 Prior to February 25, 1919, the notice was required if the gross estate exceeded $60,000, or if there was any net estate after the deductions allowed by law, including the $50,000 exemption, had been taken. These provisions are not now in effect except to determine delin- quency under previous acts. 193 In the case of the estates of nonresident decedents, notice is re- quired if there is any property situated in the United States, without reference to its value. 1 94 Art. 67. Notice by executor or administrator.— The executor or ad- ministrator of an estate is required to file notice on Form 704 within 60 days of his appointment by the court, or of coming into possession of any property of the estate, whichever event occurs first. The primary purpose of the notice is to advise the Government of the existence of taxable estates, and filing should not be delayed beyond the 60-day period because of uncertainty as to the exact value of the assets. Since the filing of the notice within the prescribed period is mandatory, the estimate of the gross estate called for by the notice is merely the best approximation of value which can be made within the time allowed. The instructions upon the back of the form should be read carefully before executing the notice. The signature of one executor or administrator upon Form 704 is sufficient. For penalties for delinquency in filing notice, or filing of false or fraudulent notice, see Articles 103 and 104. 195 Art. 68. Notice by others than the executor or administrator. —The notice upon Form 704 must be filed by others than the executor or administrator if either of the following situations exists: (1) No executor or administrator has been appointed. (2) There is property included in the gross estate, as defined by statute, which has not, and will not, come into the custody and control of the executor. 19S In these cases, the persons in possession of the property included in the gross estate are executors, within the meaning of the statute, for the purpose of filing the notice. 1 97 Art. 69. Notice when no executor appointed. — Where no executor or or administrator has been appointed, the person taking possession of property at the time of death is required to file notice within 60 days of the date of death. The notice must be filed whether possession of the property was held at the date of death, or was acquired thereafter. The notice on Form 704 [Page 27] must be filed by such persons in any case where an Copyright 1922, by The Corporation Trust Compo \y. WAR TAX 68 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. executor or administrator has not been appointed within 60 days of the decedent's death, although one is appointed subsequently. Where an executor or administrator is appointed within the 60-day period, the duty of filing the notice devolves upon him; and all other persons are relieved from liability to file with respect to property coming into the custody and control of the executor or administrator.* *The subjoined extract from an opinion of the Solicitor of Internal Revenue dated September 23, 1916, is published for the information of those concerned "The said law, the Revenue Act of September 8, 1916, section 200, defines the term 'executor' as meaning, 'the executor or admin- istrator, of the decedent, or, if there is no executor or administrator any person who takes possession of any property of the decedent.' "Section 205 requires 'that the executor, within 30 days after qualifying as such, or after coming into possession of any property of the decedent, whichever event first occurs, shall give written lotice thereof to the collector;' and that 'the executor shall also, at such times and in such manner as may be required by the regula- tions made under this title, file with the collector a return under oath in duplicate, setting forth the value of the gross estate,' etc. "Manifestly the purpose of the law is to secure such information and returns as will enable the Government to properly execute the the law and collect such taxes as may be thereby imposed. "In view of this uniform interpretation as to the requirement of notice and returns in all matters of revenue taxation, as well as the specific language of the law, I am of the opinion that you are justified in the preparation of regulations requiring persons who come into possession of the property of a decedent, or any part thereof, prior to the appointment of executors or adminis- trators, to give due notice to the Collector of that fact. When executors or administrators are appointed, they, of course, super- sede all other persons in the control of the propoerty whether such persons are in possession or not, and the duty of giving notice and making returns for the entire estate immediately devolves upon such executors or administrators." (T. D. 2372, Sept. 25, 1916.) 198 Art. 70. Notice where property not within executor's control. — Where there is property that will not come into the custody and control of the executor, but which is included in the gross estate as defined by the statute, the notice on Form 704 [Page 27] must be filed within 60 days of the date of death by the person in possession or control of the property at the time of death. 199 The persons required to file Form 704, in compliance with this requirement, include the following: (1) The surviving husband or wife in the case of property owned as tenants in the entirety. (2) Donees who have received within two years prior to the decedent's death any gift of material value from the decedent, or who have received at any time whatever gifts made by the decedent in contemplation of death or intended to take effect at or after death. (3) Trustees holding property conveyed during lifetime by decedent in contemplation of death, or with intent to provide for others at or after the decedent's death, regardless of the date of execution of the instrument making the conveyance. Copyright 1922, by The Corporation Trust Company. WAR TAX 69 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. (4) Fiduciaries holding property of any kind jointly for the decedent and another or others. Example: A savings bank holding a joint account in the name of the decedent and another, payable to either or to the survivor, must file Form 704 for the full amount of the account. (5) Trustees having in charge property over which the decedent exercised a general power of appointment, and which will not come into the possession and control of the executor or administrator. (6) Beneficiaries other than the executor who receive insurance upon the decedent's life, provided the total amount of the insurance receivable by all such beneficiaries exceeds $40,000. 200 The primary duty of filing notice with respect to property which will not come into the executor's control rests upon the person ac- tually in possession at the time of death. It is the duty of the succeeding owner, however, where property of this character is held at the time of death by an agent or fiduciary, to give notice within 60 days of the date of taking possession, unless he finds that notice has already been filed. For example, the appointee of property, under a general power of appointment exercised by the decedent, should file notice within 60 days of receiving possession, unless the notice has already been filed. 201 Art. 71. Insurance companies' 60-day notice. — Sixty-day notice upon Form 787 must be filed by every insurance company which pays insurance upon the life of a resident decedent to beneficiaries other than the executor or administrator in amounts aggregating more than $40,000, or which has knowledge of insurance payable to such beneficiaries by other insurance companies, aggregating, with amounts payable by the company itself, more than $40,000. If the proceeds of any policy are payable in the form of an annuity, the present worth of such annuity, for the purpose of deducting the $40,000 exemption, should be computed in accordance with the provision of Article 20. Notice should be filed with the collector of the district in which the decedent had his domicile within 60 days of receipt by the company of notification of death. If the insurance company is in doubt as to its liability to give notice, the notice should be filed. [See 1|313.] 202 Where insurance is taken out with a foreign branch of a domestic insurance company, the notice should be given by the home office of the company within 60 days of the receipt by the foreign branch of informa- tion of the decedent's death. a 03 Art. 72. Where military exemption claimed 60-day notice required. — The executors of estates exempted from the tax (see Art. 9) are required to file the 60-day notice with the proper collector in the same manner as the executors of taxable estates. The executor should, in addition, write across the face of the form the words "Military exemption claimed." SIXTY-DAY NOTICE— NONRESIDENT ESTATES. 204 Art. 73. Nonresident 60-day notice. — A 60-day notice on Form 705 27 [Page 29] should be filed with the Commissioner of Internal Revenue, Washington, D. C, by every executor or administrator appointed in the United States. The notice is necessary if any part of the decedent's gross ertate was situated in the United States at the time of death, regardless of the value of that part or of the entire gross estate. If no executor of administrator has been appointed in this country, notice must be filed within Copyright 1922. by The Corporation Trust Company. WAR TAX 70 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. 60 days of the date of death by every person in possession of any part of the gross estate in the United States. If such person has no knowledge of the decedent's death within 60 days of its occurrence, he should file this notice immediately upon obtaining such knowledge. The filing of notice by a foreign executor or administrator does not relieve persons in possession from the duty of filing notice. If there is a delay in the appointment of a local executor or administrator of more than 60 days after the death, persons in possession should file notice. The term "person in possession of property of the decedent" includes the decedent's agents or representatives; donees and transferees or trustees of property transferred in contemplation of death; the surviving owner of property held jointly; safe-deposit companies, warehouse companies, and similar custodians of property in this country of a nonresident decedent; brokers holding as collateral securities belonging to the decedent or investment funds owned by the decedent; banking institu- tions holding money on deposit or for any specific purpose, such as purchase of goods, if the title rests in the decedent; and debtors of the decedent in this country. 205 Art. 74. Transfer agents' 60-day notice. — A 60-day notice upon Form 714 is required to be filed whenever a corporation, its transfer agent, register, or paying agent, is called upon to make a transfer of stocks or bonds, or to pay interest or dividends, to any successor in interest of any nonresident stockholder or bondholder who died after September 8, 1916, unless the transfer is made upon the order of an executor or adminis- trator appointed in the United States. The notice is required for dividends declared prior to the day of death, and for interest which had accrued on bonds prior to the death of the decedent although payable thereafter. Notice should be filed with the Commissioner of Internal Revenue at Washington, D. C, within 60 days of the date of death, or immediately upon receipt of the order of transfer or payment. A transfer agent should be vigilant to report all cases in which the fact of the death of a nonresident appears. Where the securities are received without the personal assignment of the de- cedent, but with the transfer order of the foreign executor, it is clear that the case should be reported. Where the securities bear the personal assign- ment of the decedent, the transfer should be reported if made upon the order of a foreign executor, or if information is received in any other manner that the record owner has died a non-resident of the United States. 206 Art. 75. Importance of requirement.— In order to prevent loss of the tax upon nonresident estates, it is essential that transfer agents should exercise great care in reporting all transfers of the kind described. Their records will be examined from time to time by internal-revenue officers to determine whether this regulation is being strictly complied with Failure to file notice in the manner prescribed will render the transfer agent liable to a fine. 206a Art. 75-A. Transfer of stock of nonresident decedent, how made. — Wherever a transfer agent is required to file 60-day notice as provided in Article 74, he shall not make transfer of the stock standing in the name of the decedent until there has been delivered to such collector of internal rev- enue as may be designated by the Commissioner the bond of the party to whom the stock is to be transferred with corporate surety in an amount to be fixed by the Commissioner, conditioned for the payment of the tax upon the transfer of the decedent's estate, not. exceeding in amount the value of Copyright 1922, by The Corporation Trust Company. WAR TAX 71 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. the stock to be transferred. Upon receipt of the 60-day notice the Commis- sioner will at once, upon request, fix the amount for which the bond is to be given. In lieu of the bond a deposit of the amount so fixed may be made with such collector of internal revenue as the Commissioner may designate. Where a sum of money is deposited in lieu of the bond, and it exceeds the amount of the tax as finally determined, the excess will be refunded to the person making deposit. In lieu of the provisions and restrictions herein- before set forth, transfer agents are authorized to make a transfer of stock standing in the name of a nonresident decedent to the duly qualified ancillary executor or administrator within the United States, who shall make a return on Form 706, as any other executor is required by law to do, provided that such transfer agent at the time of making such transfer gives notice thereof in writing to the Commissioner of Internal Revenue. 207 Art. 76. Insurance companies' 60-day notice. — The 60-day notice upon Form 788 must be filed by every domestic insurance company which pays insurance upon the life of the nonresident decedent in any amount either to a foreign executor or administrator, or to individual beneficiaries. The notice should be filed with the Commissioner of Internal Revenue, Washington, D. C, within 60 days of receipt of proof of claim. No notice is required to be filed, if the only insurance paid is receivable by an executor appointed in the United States. If, however, the company is liable to give notice, it is required to report insurance of all classes in order that its statement may be complete. [See 1f313.] 207a Art. 76-A. Payment of policy of life insurance taken out by resident and nonresident decedents, how made. — Wherever an insurance company is required to file a 60-day notice, as provided in Article 76, where the insured was a nonresident it shall not make payment of any policy or policies to a foreign executor or administrator, or to an individual beneficiary, until there has been delivered to such collector of internal revenue as may be designated by the Commissioner the bond of the party to whom the insurance is to be paid, with corporate surety in an amount to be fixed by the Commis- sioner, conditioned for the payment of the tax upon the transfer of the de- cedent's estate, not exceeding the amount of insurance payable under such policy to the executor, and the excess over $40,000 of the aggregate insurance payable to specific beneficiaries other than the executor or the estate of the decedent. Upon receipt of the 60-day notice the Commissioner will at once, upon request, fix the amount of the bond to be given. In lieu of such bond a deposit of the amount fixed may be made with such collector of internal revenue as the Commissioner may designate. If in lieu of the bond a sum of money is deposited, and such sum exceeds the amount of tax as finally determined, the excess will be refunded to the person making the deposit. In lieu of the bond or a deposit of money, where insurance is payable to a foreign executor or administrator, the insurance may be paid to ancillary executor or administrator appointed within the United States, provided that such ancillary executor or administrator shall have given bond with corporate surety in an amount sufficient, in the opinion of the Commissioner, to dis- charge the tax liability of the estate, not exceeding the amount of insurance subject to be included within the gross estate of the decedent. [See ,T 313.] 207b Wherever insurance companies are required to file a 60-day notice, as provided in Article 71, where the decedent is a resident and there is subject to be included within the decedent's gross estate any excess over $40,000 in the aggregate of insurance payable to specific beneficiaries other than the executor or the estate of the decedent, the same provisions and Copyright 1922, by The Corporation Trust Company. WAR TAX 72 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. restrictions in regard to payment of insurance shall apply and govern insurance companies as are set forth in this article in the case of nonresidents. 207c Where insurance companies are required to file a 60-day notice, as provided in Article 71 or in Article 76, if the decedent is a resident or nonresident, and there is an excess over $40,000 in the aggregate of all insurance payable to specific beneficiaries other than the executor or the estate of the decedent, insurance companies are authorized, in lieu of the provisions and restrictions hereinbefore set forth, upon consent of the bene- ficiaries to make payment of such insurance to such beneficiaries through the duly qualified executor or administrator within the United States or through the duly qualified ancillary executor or administrator in the United States, who shall make return on Form 706 of the excess over $40,000 of such insur- ance, if the estate be that of a nonresident, or that of a resident if there be a net estate subject to tax. THE RETURN— RESIDENT ESTATES. 208 Art. 77. When return required — Date of filing. — A return on Form 27 706 [Page 11] is required in the case of every resident decedent who 28 died on or after February 25, 1919, leaving a gross estate exceeding $50,000 in value. This return must be filed with the collector in whose district the decedent resided. It must be filed within one year after the date of death, unless an extension is granted, and must be in duplicate. In the case of decedents who died before February 25, 1919, the effective date of the Revenue Act of 1918, the return is required if the gross estate exceeds $60,000, or if there is any net estate after the legal deductions, including the $50,000 exemption, have been taken. In the case of estates of non-residents return is required if the decedent owned any property in the United States regardless of value. (See Art. 88.) 209 Art. 78. Procedure where no return has been made. — The statute 29 provides that if no return is filed for the estate of a decedent, or if a return contains a false or incorrect statement of a material fact, the collector or deputy collector shall make a return. The Commissioner may amend this return from such knowledge or information as he can obtain, through testimony or otherwise. A return so made by the Commissioner, or made by the collector and approved by the Commissioner, is a sufficient basis for assessing the tax. Where a tax is found to be due upon such a return, the estate will be liable for penalties as well as for the tax. 210 Art. 79. Investigation where return has been filed. — An investiga- tion of every return for estate tax will be conducted to verify the accuracy of the return. The investigation will be made by special officers of the Bureau. The fact that an investigation is made does not reflect upon the competence or good faith of the executor, since investigations are required in all cases as a matter of administrative procedure. The executor should cooperate with the examining officer in order that the full tax liability may be definitely determined and the case closed. During the course of the investigation the examining officer will inspect the books and records of the estate, interview the executor and other persons having knowledge of the decedent's affairs, verify the value of the assets and the amounts of debts and administration expenses, and take such other steps as may be necessary to determine the correct tax. 211 It is the purpose of the Bureau to make these investigations as soon as practicable after the filing of the return. Whenever there are special and urgent reasons for an early investigation, the collector should be notified in order that the case may be given special attention. Upon Copyright 1922, by The Corporation Trust Company. WAR TAX 73 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1913 LAW. completion of the investigation the executor will be apprised by the examin- ing officer of his findings, and will be given an opportunity to discuss the case and present such data as he may desire, to be considered by the Bureau in connection with the examining officer's report. Upon the completion of the review and audit by the Bureau of the return and examining officer's report, the executor will be informed by letter from the Commissioner of the , result of the audit. If the letter contains notification of an unpaid balance of tax, the executor should make payment to the collector. After the expiration of 30 days from receipt of the notification interest will accrue upon the excess tax at the rate of ten per centum per annum. If the executor wishes to file claim for abatement of any part of the excess tax, such claim must be filed within 30 days of receipt of notification, or he may pay the tax in order to prevent the running of interest, and submit claim for refund. 212 Art. 80. Persons liable for return. — The statute provides that the 27 executor or administrator shall file the return. If there is more than 28 one executor or administrator, the return must be made jointly by all. Where no executor or administrator has been appointed, every person in possession of any part of the gross estate is considered to be an executor for the purposes of the tax, and is liable for a return as to the property in his possession. The executor or administrator is required to make a return of the entire gross estate of the decedent, including property which will not come into his possession, such as property transferred by the decedent before death, and property owned by tenants in the entirety. If the executor is unable to make a complete return as to any part of the gross estate, he is required to give all the information he has as to such property, including a full description, and the name of every person holding a legal or beneficial interest in the property. Where the executor is unable to make a return as to any property, the statute requires every person holding a legal or beneficial interest therein, upon notice from the collector, to make return as to such part of the gross estate. For penalties for delinquency in filing return, or filing of false or fraudulent return, see Articles 103 and 104. 213 Art. 81. Extension of time for filing return. — If it is impossible for the executor to file a complete return within a year from the date of death, he may make application to the collector for an extension of time for filing the return, stating in detail in his application the circumstances which prevent the filing of the return by the due date and setting forth briefly but fully a statement of what the gross estate consists, together with a state- ment of the amount of deductions claimed, provided that in the first instance the application be made at least 30 days prior to the due date of the return. If the collector is satisfied that a complete return can not be made he may grant extensions of time not to exceed 180 days from the due date, no single extension exceeding 60 days. At the expiration of the last extension period granted a return must be filed. If at that time it is still impossible to file a complete and accurate return, on account of the unsettled condition of the affairs of the estate, the return filed by the executor must be as complete as possible, and must set forth all the facts in his possession as to the gross and net estate. Such a return will be accepted by the collector; but the executor must file an amended return as soon as the condition of the estate permits. The granting of an extension of time for filing a return does not operate to extend the time for the payment of the tax, which is due one year after decedent's death unless the time for payment thereof be extended by the Commissioner, as provided in Article 93. Where application has been Copyright 1922, by The Corporation Trust ( ompany. WAR TAX 74 SERVICE ^2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. made for an extension of time to file a return, but no extension of time for the payment of the tax has been granted, the executor will be required to pay on the due date a sum of money sufficient, in the opinion of the collector, to discharge the tax, even though an extension of time to file the return has been or may be granted. The statements accompanying the application will be subject to investigation and verification in acting upon the application for extension and in fixing the amount which the executor will be required to pay on the due date of the tax as sufficient in the opinion of the collector to discharge the tax. 214 Art. 82. Execution of return. — The return must be made on Form 706, copies of which will be supplied by the collector. It must con- tain an itemized inventory, by schedule, of the property constituting the gross estate, together with a full statement of deductions claimed, as therein provided. The instructions printed on the form should be carefully fol- lowed. All documents and vouchers used in preparing the return should be retained by the executor, so as to be available for inspection whenever required. Certified copies of the will, if any, must be submitted with the return, together with duplicate copies of the other documents required by the instructions printed on the form, or any documents which the executor may desire to submit with the return in explanation thereof. 215 Art. 83. Supplemental data. — The statute provides that the execu- tor, in addition to filing notice and return, shall furnish such supple- mental data as may be necessary to establish the correct tax. It is there- fore the duty of the executor to furnish upon request copies of any docu- ments in his possession relating to the estate, or on file in any court having jurisdiction over the estate, appraisal lists of any items included in the gross estate, copies of balance sheets or other financial statements relating to the value of stock, and any other information obtainable by him that may be found necessary in the determination of the tax. Failure to comply with such a request will render the executor liable to a fine not to exceed $500, and proceedings may be instituted in the proper United States court _to secure compliance with the requirement. 216 Art. 84. Same — Nonresident estates. — Pursuant to this provision the executor of a nonresident decedent is required to file with the return: (1) Certified copy of will, or, if the decedent left several wills, to govern in different jurisdictions, certified copy of each will. (2) Certified copy of inventory of foreign property filed under a foreign estate, succession or death-duty act; or, if no such inventory was filed, copy of inventory filed with the foreign court of probate jurisdiction. (3) Certified copy of schedule of claims filed under a foreign taxing act in cases where such claims are presented for deduction. If any item of deduction is not included in the schedule, the affidavit of the foreign executor or administrator with reference thereto should be submitted. 217 The specified information is required whether or not the executor wishes to claim deduction, and is subject to the provision of the statute (see Sec. 403) [1[20] requiring him to include in his return the value of the gross estate situated in the United States. j Copyright 1922, by The Corporation Trust Company WAR TAX 75 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. PRIVILEGED CHARACTER OF RETURNS. 2 1 8 Art. 85. Returns confidential. — All estate tax returns and notices are treated as privileged communications and may not be exhibited to any person other than the executor or his duly authorized attorney, except as stated in Article 86. This requirement of secrecy will be rigidly enforced, and extends to information of a private nature submitted or obtained in connection with a return or notice. The requirement does not operate to prevent internal revenue officers from disclosing the returned value of any item or the amount of any specific deduction where such disclosure is necessary in order to arrive at a correct determination of the tax. This right of disclosure, however, does not extend to such information as the amount of the estate, the amount of tax, or other general data. Nor are the records in possession of the Bureau, whether on file with the Commissioner or the collector, open to inspection, except as provided herein. 219 Art. 86. Disclosure to persons having material personal interest. — Where any person other than the executor has a material interest in ascertaining any fact disclosed by the return, or in obtaining information as to the payment of the tax, he shall make a written application to the Commissioner of Internal Revenue for such information, setting forth the nature of his interest and the purpose of the application. The Commissioner will review the application, and, if it is approved, give written instruction to the collector to exhibit the return to the applicant, or give him such information as is specified. Under no circumstances shall the collector give information to persons other than the executor except upon the written order of the Commissioner, and to the extent authorized by such order. 220 Art. 87. Attorneys must have authorization. — In all cases where information is sought regarding an estate, or an interview asked, by an attorney whose name does not appear on form of 706 [Page 11] as the attorney for the estate, the information or interview will be denied unless the attorney presents a signed statement from the executor, authorizing him to appear in his behalf. The limitation does not apply where an attorney asks a general ruling on a question relating to a specific estate, or where he asks information of the procedure to be followed in regard to filing notice or making payment. Where an attorney asks information, or an interview, and his name appears on the return as attorney for the estate, the informa- tion or interview will be granted if his identity is established. THE RETURN— NONRESIDENT ESTATES. 221 Art. 88. Return of nonresident estates. — A return on Form 706 [Page 11] must be filed in duplicate with the Commissioner of Internal Revenue, Washington, D. C, or with such collector of internal revenue as the Commissioner may designate, within a year from the date of death of every nonresident decedent, if any part of the gross estate of such decedent was situated in the United States at the time of his death. It is the duty of any executor or administrator appointed in the United States to file a return for the whole of that part of the gross estate situated in the United States, whatever its value. If there is no such executor or administrator, every person in possession of any part of the gross estate in the United States may be required to file a return for such part. Except as otherwise specifically provided by these Regulations, notice will be given to such persons, however, Copyright 1922, by The Corporation Trust Company. WAR TAX 76 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. where a return is required; and they are relieved of the duty of filing returns by the appointment of an executor or administrator in the United States, but not, however, by the appointment of a foreign executor or administrator. If, however, a complete return is actually filed by the foreign executor of property in the United States, the person in possession need not file a return, except as otherwise specifically required by these Regulations. (See Arts. 75-A and 76-A.) RETURN BY COLLECTOR. 222 Art. 89. Return by collector. — Where the executor fails to file a 29 return, or files an inaccurate one, the collector or deputy collector is required to make a return from such information as he possesses or is able to obtain. In such cases the Commissioner assesses the tax in the same manner as though the return had been filed by the estate. PAYMENT OF TAX. 223 Art. 90. Payment. — The tax is due and payable one year from the 30 date of death. No discount will be allowed for payment in advance of the due date. The collector will grant to the person paying the tax duplicate receipts, either of which will be sufficient evidence of such pay- ment, and entitle the executor to be credited with the amount by any court having jurisdiction to audit or settle his accounts. [See ^[3 15.] 224 Payment will not be accepted before a return in proper form has been filed, except in cases where an extension of time to file a return has been granted but no extension of time has been granted within which to pay the tax, and the executor desires to make payment under section 407 of the act of an amount sufficient in the opinion of the collector to discharge the tax. Payment of the amount of tax shown to be due by a return accepted by the collector, executed in good faith and accurate so far as the executor could ascertain from his own knowledge and in the exercise of diligence, will be considered payment of the tax in full under section 407 of the act, sub- ject to adjustment resulting from investigation, except as to any item which should have been but was not embodied in the return. If at the time pay- ment is made the exact amount of the tax can not be determined, the pay- ment of a sum of money sufficient, in the opinion of the collector, to dis- charge the tax will be considered payment in full, except as the tax is ad- justed after investigation. (See Arts. 78, 95.) If the return filed contains a gross or fraudulent misstatement of fact, the payment of the amount of tax shown to be due thereby will not be deemed to be payment in full of the tax, since the collector's decision is based upon the assumption that the return is made in good faith. 225 Tax payment may be enforced any time after expiration of one year 30 period, in absence of extension, without regard to ISO day interest 33 provision. — Reference is made to the memorandum dated June 19, 1920, transmitted by your Mr. Akers, who has requested to be advised whether the Bureau of Internal Revenue intends to require payment of Federal estate taxes within one year after the date of death of decedents whose estates are liable for the payment of such taxes. [See 1|307a and 1f309.] 226 You are advised that the Bureau of Internal Revenue has ruled in specific cases, and it is its present ruling, that Federal estate taxes are due and payable one year after the death of a decedent whose Copyright 1922, by The Corporation Trust Company. WAR TAX 77 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. estate is liable for the payment of such taxes. Section 406 of the Revenue Act of 1918 contemplates that the Federal estate tax shall be paid one year after decedent's death in every case except where the Commissioner of Internal Revenue finds that payment of the tax within one year after the decedent's death would impose undue hardship upon the estate and for that reason has granted an extension of time for the payment thereof. Article 90 of Regulations 37, Revised, 1919, relating to estate tax, requires payment of the tax at the expiration of one year from the date of the deced- ent's death. 227 There is nothing contained in Section 408 of the Revenue Act of 1918 which fixes a different due date for the payment of the tax than that specifically set forth in Section 406 thereof, nor is there anything con- tained therein which prohibits the collection of the tax at any time after it is due. There is a provision in Section 408 [1f33], which will not permit a collector in any case to withhold proceedings for the collection of the tax longer than one hundred and eighty days after it is due unless there be reasonable cause for the delay. 228 In view of the foregoing, you are advised that payment of Federal estate taxes at the expiration of one year after the death of a decedent may be required in all cases except where the Commissioner finds that pay- ment thereof within one year after decedent's death would impose undue hardship upon the estate. Payment of estate taxes, therefore, may not be withheld for a period of one year and one hundred and eighty days after decedent's death by those liable therefor. In all cases, however, no interest may be added to the tax unless one year and one hundred and eighty days have expired without payment having been made, except in a case where one year and ninety days since decedent's death hadexp ired prior to February 25, 1919, and payment had not been made. 229 There is returned herewith the memorandum which you transmitted to the Bureau. (Letter to The Corporation Trust Company, signed by Deputy Commissioner James Hagerman, Jr., and dated June 24, 1920.) [See Court Decision at H315.J 230 Art. 91. Payment by bonds. — Payment of the estate tax may be made by the delivery of Liberty Bonds or other bonds of the United States Dearing interest at a higher rate than 4 per cent per annum, provided they were owned by the decedent for at least six months prior to the date of his death. Such bonds are received in payment to the amount of par and interest accrued at the time of the payment. [For the other paragraph of Art. 91, see ^[266.] 231 United States bonds bearing interest at a higher rate than four per centum to be accepted at par and accrued interest in payment of estate tax. — Section 14 [6] of the Act of April 4, 1918 (Public- No. 120 — 65th Congress), provided in part: "That any bonds of the United States bearing interest at a higher rate than four per centum (whether issued unded section one of this Act or upon conversion of bonds issued under this Act or under said Act approved April twenty-fourth, nineteen hundred and seventeen), which have been owned by any person continuously for at least six months prior to the date of his death, and which upon such date constitute part of his estate, shall, under rules and regulations prescribed by the Secretary of the Treasury, be receiv- able by the United States at par and accrued interest in payment of any estate or inheritance taxes imposed by the United States, under or by virtue Copyright 1922, by The Corporation Trust Company. WAR TAX 78 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. of any present or future law upon such estate or the inheritance thereof." 232 Bonds of the United States falling within the classification specified will be accepted in payment of estate tax at par and accrued interest. Bonds so receivable must (1) bear a higher rate of interest than four per centum per annum, and (2) have been owned by the decedent continuously or at least six months prior to the date of his death, and upon such date constitute a part of the estate of the decedent. The reckoning of the required period of ownership may begin on the date when the decedent acquired bonds bearing interest at a higher rate than four per centum, by purchase, by conversion of other bonds, or otherwise. 233 The entire estate tax may be paid in bonds, or the tax may be paid partially in bonds and partially by cash or- check. Collectors may not, however, accept bonds the par value and accrued interest on which aggregate a greater amount than the tax. (T. D. 2705, April 23, 1918.) (T. D. 3227.) {Decision. — Act oj April 4, 1918.) Receipt of Liberty Bonds for Estate Taxes. 234 1. Four per cent bonds converted — Computation of time. — Where a dece- dent converted second Liberty 4% Bonds into third Liberty 4j^% Bonds three weeks prior to his death, the latter bonds are not receivable for estate or inheritance taxes under the provisions of Section 14, Act of April 4, 1918 [^231 herein] (40 Stat. 503, 505), as they were not held by him for at least six months prior to his death, and as the time that the four per cent bonds were held can not be tacked onto the period of holding the 434% bonds. • 235 2. Constitutionality oj Act. — Section 14, so construed, does not work such unwarranted discrimination against that class of holders whose death occurred within the six months' period after the issue of the bonds, as to render unconstitutional so much of Section 14 as makes possible such result, as the classification is reasonable and proper, and treats all persons alike. (The decision [syllabus only, as shown above] of the United States Circuit Court of Appeals for the Seventh Circuit, rendered at the April session, 1921, in the case of Julius S. Smietanka, Collector, v. Charlotte T. P. Ullman, reversing the decision of the District Court of the United States for the Northern District of Illinois, Eastern Division is published not as a ruling of the Treasury Department, but for the information of Internal Revenue officers and others concerned.) Copyright 1922, by The Corporation Trust Company WAR TAX 79 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. RECEIPT OF LIBERTY BONDS AND VICTORY NOTES FOR ESTATE OR INHERITANCE TAXES. Department Circular No. 225. 236 1. The following regulations are prescribed pursuant to section 14 of the Second Liberty Bond Act, approved September 24, 1917, as amended by Third Liberty Bond Act, approved April 4, 1918, which section is as follows: Sec. 14. That any bonds of the United States bearing interest at a higher rate than four per centum per annum (whether issued under section one of this Act or upon conversion of bonds issued under this Act or under said Act approved April twenty-fourth, nineteen hundred and seventeen), which have been owned by any per- son continuously for at least six months prior to the date of his death, and which upon such date constitute part of his estate, shall, under rules and regulations prescribed by the Secretary of the Treasury, be receivable by the United States at par and accrued interest in payment of any estate or inheritance taxes imposed by the United States, under or by virtue of any present or future law upon such estate or the inheritance thereof. Pursuant to section 18(d) of the Second Liberty Bond Act, approved Septem- ber 24, 1917, as amended by the Victory Liberty Loan Act, approved March 3, 1919, the word "bonds" where it appears in the above section shall be deemed to include notes issued under said section 18. This circular super- sedes Treasury Department Circulars No. 132, dated January 30, 1919, and No. 151, dated June 24, 1919. 237 2. The bonds and notes coming within the provisions of said sec- tion at present issued and outstanding are — Official title. Date of issue. Short title.* (a) First Liberty Loan Converted per cent bonds of 1932-47. . . (6) First Liberty Loan Second Converted 434 per cent bonds of 1932-47 May 9, 1918 Oct. 24, 1918 May 9, 1918 May 9, 1918 Oct. 24, 1918 May 20, 1919 First 4M's. First Second 4M's. Second 4 J4's. Third 4M's. Fourth 4M's. Victory 4%'s. (c) Second Liberty Loan Converted 4J4 per cent bonds of 1927-42 (/) Victory Liberty Loan 4% per cent convertible gold notes of 1922-23 1 Use short titles. 238 The words "bonds or notes" where they appear in this circular shall be deemed to refer, respectively, to the six issues of Liberty bonds and Victory notes above described. The First Liberty Loan 3}^ per cent bonds of 1932-1947, the First Liberty Loan Converted 4 per cent bonds of 1932-1947, the Second Liberty Loan 4 per cent bonds of 1927-1942, and the 3J4 per cent Victory Liberty Loan notes of 1922-23 are not accept- able in payment of Federal estate or inheritance taxes and are not "bonds or notes" within the meaning of these regulations. General Provisions. 239 3. Bonds or notes of the issues above specified are receivable for such taxes only in case such bonds or notes have been owned by the decedent continuously for at least six months prior to the date of his death and upon such date constitute part of his estate. The reckoning of the required period of ownership will begin on the date when the decedent acquired such bonds or notes by original subscription, by purchase, by con- version of bonds or notes of other issues, or otherwise. For the purpose of reckoning the required period of ownership a fraction of a day shall be con- Copyright 1922, by The Corporation Trust Company* WAR TAX 80 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. sidered a whole day. In the case of acquisition of bonds or notes by original subscription, the date of original subscription, or the date of issue of the bonds or notes, whichever shall be later in time, shall be deemed to be the date of acquisition, provided that payment in full on the subscription shall have been completed and the bonds or notes delivered thereon. In the case of acquisi- tion of bonds or notes by purchase, if registered bonds or notes of one of the issues above enumerated as acceptable in payment of Federal estate or inheritance taxes have been duly assigned in blank or for exchange or transfer, and delivered to the decedent assignee pursuant to such assignment, the date of such delivery will be deemed the date of acquisition, although such bonds or notes may not have been presented to the Treasury Depart- ment or to a Federal Reserve bank for transfer or exchange until a later date. In the case of acquisition of bonds or notes by conversion of bonds or notes of other issues previously owned, the date of presentation for con- version to the Treasury Department or a Federal Reserve bank will be deemed the date of acquisition: Provided, however, That (a) per cent bonds of the First Liberty Loan Converted and of the Second Liberty Loan Converted issued on conversion of 4 per cent bonds presented after July 1, 1918, and on or before November 9, 1918, pursuant to the provisions of Treasury Department Circular No. 114, dated May 9, 1918, shall, for the purpose of reckoning the required period of ownership, be deemed to have been acquired on June 15, 1918, in the case of bonds of the First Liberty Loan Converted, and on May 15, 1918, in the case of bonds of the Second Liberty Loan Con- verted; and (b) 4 per cent bonds of the First Liberty Loan Converted and of the Second Liberty Loan presented for conversion into 4j^ per cent bonds on or after March 7, 1919, pursuant to the extension of the conversion privilege under Treasury Department Circular No. 137, as amended and supplemented, shall be deemed to be converted as of the interest payment date next succeeding the date of presentation for conversion, and such next succeeding interest payment date, and not the date of presentation for conversion, will be deemed to be the date of acquisition of such bonds for the purpose of reckoning the required period of ownership. Exchange of coupon for registered bonds or notes, or of registered for coupon bonds or notes, or of bonds or notes of one denomination for bonds or notes of other denominations of the same issue, or of temporary coupon bonds for permanent bonds, whether before or after the death of the decedent, will not prevent the receipt of the bonds or notes issued upon such exchange for estate or inheritance taxes, provided that no change of ownership takes place. 240 4. Bonds or notes tendered in payment of taxes pursuant to these regulations must be accompanied by an affidavit of one or more of the legal representatives of the estate on Form 760 Revised (Exhibit A), hereto attached, and the collector is authorized to require such further evidence as may be necessary to enable him to determine that the bonds or notes are properly receivable in payment of estate or inheritance taxes pursuant to law and these regulations. The term "legal representative" where it appears in this circular means the executor or administrator of the decedent's estate or, if there be no executor or administrator, such other person or persons as may be recognized as such under the Estate Tax Law and regulations and entitled to assign any registered bonds or notes owned by the decedent under the regulations of the Treasury Department with regard to United States bonds and notes. Copyright 1922, by The Corporation Trust Company., WAR TAX 81 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. 241 5. On receipt of such bonds or notes, and on making such determina- tion, and provided that the bonds or notes tendered conform to the other provisions of these regulations, the collector shall stamp or plainly write upon the face of each bond or note, over his signature, the following legend in indelible ink: This bond/note has this day been received in (Date) payment of estate (or inheritance) taxes on the estate of (Name of decedent.) under authority of law, and will not be redeemed by the United States except for credit of the undersigned J Collector of Internal Revenue for the District of 242 Coupons, if any, attached to each bond or note, shall be indelibly stamped or marked "canceled" on the face of each coupon in letters of sufficient size to be plainly legible. 243 6. Where bonds or notes are owned by a partnership of which the decedent was a member for the six months prior to his death, and have been continuously so owned for at least the six months prior to his death, a fractional part of such bonds or notes proportionate to the deceased partner's share in the capital of the partnership will, for the purposes of these regulations, be deemed to have been owned by him to the extent that such fractional part is actually distributed to his estate upon liquidation: Provided, however, That nothing herein contained shall be deemed to make bonds or notes acceptable in amounts less than some authorized denomination thereof. In addition to the affidavit on Form 760 Revised, proof satisfactory to the Secretary of the Treasury must be presented as to the ownership of the bonds or notes by the partnership and the decedent's interest in the partnership; such proof in general should include affidavits of the surviving partners and of the legal representative of the decedent's estate showing (1) the character and extent of the interest of the decedent in the capital of the partnership, (2) any special interest of the decedent in the bonds or notes, (3) the period of ownership of the bonds or notes by the partnership and the period of the dedecent's membership in the partnership, and (4) the distribution of the bonds or notes to the decedent's estate on account of his distributive share in the partnership. 244 7. Where bonds or notes are held in trust for or otherwise beneficially owned by any person on terms which entitle him unconditionally to demand and receive the legal title or a divided share thereof at any time, he will, for the purposes of these regulations, be deemed the owner of such bonds or notes or such divided share thereof: Provided, however, That nothing herein contained shall be deemed to make bonds or notes acceptable in amounts less than some authorized denomination thereof. In addition to the affidavit on Form 760 Revised, proof satisfactory to the Secretary of the Treasury must be presented as to the ownership of the bonds or notes by the trust and the decedent's interest therein; such proof in general should include affidavits by the trustee and the legal representative of the decedent's estate showing (1) the creation of the trust, the terms and duration thereof, and the interest of the decedent therein; (2) the property included under the trust, and particularly the period of ownership of the bonds or notes by the trust; and (3) the distribution of the bonds or notes to the decedent's estate on account of his share in the trust estate, and the liability to Federal estate (or inheritance) tax in respect to such bonds or notes. 245 8. The entire tax may be paid in bonds or notes, or the tax may be paid partly in bonds or notes and partly by any other form of pay- Copyright 1922. by The Corporation Trtist Company. WAR TAX 82 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. ment permitted by law or regulations duly in force. Collectors may not, however, receive bonds or notes the par value and accrued interest of which, computed in accordance with these regulations, aggregate a greater amount than the tax in payment of which the bonds or notes are tendered. After bonds or notes, or cash, have been tendered and duly received in payment of the tax, an election as to the method of payment will be deemed to have been made by the taxpayer, and thereafter requests for the return of such bonds or notes, or cash, and the acceptance of payment in the alternative form will be refused. Coupon Bonds or Notes. 246 9. Coupon bonds or notes received for estate (or inheritance) taxes must be delivered to the collector with all unmatured coupons attached and with all matured coupons detached. Detached matured coupons will not be receivable in payment of such taxes. The portion of the face amount of the current coupon which represents accrued interest to date of receipt for taxes will be determined in the manner prescribed by the interest tables (Exhibits B and C) hereto attached, and such accrued interest will be receivable for estate or inheritance taxes. 247 10. Temporary coupon bonds, all coupons originally attached to which have matured and been detached, will not be accepted in payment of estate or inheritance taxes pursuant to the provisions of this circular, but must first be exchanged for permanent bonds, pursuant to the provisions of Treasury Department Circular No. 164, dated December 15, 1919, as amended and supplemented: Provided, however, That Fourth Liberty Loan per cent bonds of 1933-1938, in temporary form, will be acceptable until April 15, 1921, and First Liberty Loan Second Converted per cent bonds of 1932-1947, in temporary form, will be acceptable until June 15, 1921, in payment of such taxes, accrued interest on such bonds to date of receipt of taxes being covered for the current interest period by the temporary coupon bond; but after such dates, respectively, such temporary bonds must be exchanged for permanent bonds before presenta- tion. 248 11. Coupon bonds or notes, after being received, and reception in- dorsed on the bonds or notes as above required, will be deposited by the collector in the Federal Reserve Bank of the district in which his office is located (or Federal Reserve branch bank, as hereinafter provided) as a deposit of the par value with accrued interest, determined as above required. Such bonds or notes, unless delivered direct to the Federal Reserve bank or branch when located in the same city, must be transmitted by registered mail but will not be insured. The collector will transmit with the bonds or notes an accurate schedule on Form 761 Revised (Exhibit D) hereto attached, showing the serial number and denomination of each bond or note transmitted, the issue, the date of receipt for taxes, the amount of accrued interest, and the amount for which credited against estate or inheritance taxes. Such schedule shall be made in quadruplicate, the original to accom- pany the bonds or notes deposited with the Federal Reserve bank, the duplicate to be transmitted to such Federal Reserve bank under separate cover, the triplicate to be transmitted to the Secretary of the Treasury, Division of Loans and Currency, Washington, and the remaining copy to be retained by the collector. Collectors located in Federal Reserve bank branch cities will deposit coupon bonds or notes received by them hereunder with such branches in accordance with the provisions hereof, and the term Copyright 1922, by The Corporation Trust Company. WAR TAX 83 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. "Federal Reserve bank," where it appears herein, includes such branches unless otherwise indicated by the context. 249 12. The Federal Reserve bank on receipt and examination of such bonds or notes will charge the Treasurer's account with par and accrued interest to date of receipt for taxes as reported by the collector, give credit in the Treasurer's account to the collector for like amount, and issue a certificate of deposit in triplicate on National Bank Form 15, trans- mitting the original to the Secretary of the Treasury through the Treasurer of the United States with its transcript, and the duplicate and triplicate to the collector, who will forward the duplicate to the Commissioner of Internal Revenue. Such Federal Reserve bank will then physically cancel the bonds or notes nnd coupons attached, and transmit the same to the Treasurer of the United States with the original or duplicate of the collector's schedule (Form 761 Revised), to which shall be added the Federal Reserve bank's certificate as shown thereon. 250 13. In the event that bonds or notes in coupon form are tendered to a collector of internal revenue in payment of Federal estate or inheritance taxes hereunder, and after having been received by the collector and stamped or otherwise indorsed by him as provided herein, are found to be not acceptable in payment of such taxes, Federal Reserve banks will issue clean bonds or notes in exchange for such erroneously stamped or indorsed coupon bonds or notes through the denominational exchange account: Provided, however, That the bonds or notes erroneously stamped or endorsed and presented for such exchange must be accompanied by an official certificate on Form 834 (Exhibit E) attached hereto, signed by the collector of internal revenue concerned, to the effect that the stamp or indorsement was affixed in error and that the bonds or notes (which must be specifically described) were not in fact accepted in payment of estate or inheritance taxes. Such exchanges need not be reported specifically to the Department, but the bonds or notes so stamped or indorsed and replaced must be accompanied by the certificate above described when forwarded by the Federal Reserve bank to the Department for credit. In case any such bonds or notes have been deposited with a Federal Reserve bank and charged to the Treasurer's account and credit therein given to the collector therefor, pursuant to paragraph 12 hereof, the Federal Reserve bank will issue new bonds or notes therefor as herein provided through its denomina- tional exchange account, taking the receipt of the collector for such bonds or notes on Form N-2 (Exhibit G) attached hereto, and charging the collector in the Treasurer's account with the amount previously credited therein on account of such bonds or notes, supporting the entry with the receipt on Form N-2. Registered Bonds or Notes. 251 14. Registered bonds or notes are also receivable for estate or in- heritance taxes in accordance with these regulations. In addition to requiring the affidavit (Form 760 Revised) the collector shall determine that the registered owner whose name is inscribed on the bond or note is the decedent whose estate is liable to estate (or inheritance) taxes and that the bond or note is presented from the custody or control of the legal repre- sentative or representatives of such estate. Such bond or note shall be assigned to "the Secretary of the Treasury for redemption in payment of estate (or inheritance) taxes" by the authorized legal representative or representatives of the deceased registered owner. If an executor or Copyright 1922, by The Corporation Trust Company. WAR TAX 84 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. administrator of the decedent's estate has been appointed, such representa- tive or representatives must furnish to the collector a certificate under the seal of the court in which the estate is being administered or a duly certified copy of the letters testamentary or of administration, showing the appoint- ment of such representative or representatives, the date thereof, and that the appointment is still in force. Such certificate or certification of the copy must be dated not more than thirty days prior to its presentation to the col- lector. All such documents of authority will be attached to the bond or note and forwarded therewith by the collector as hereinafter provided, where there are two or more legal representatives, all must unite in the assignment, unless by decree of court or testamentary provision some one or more of them is designated or empowered to dispose of the bonds or notes. If no executor or administrator has been appointed, the assignment must be made by the person or persons entitled to assign the bonds or notes under the regulations of the Treasury Department as to transfers without adminis- tration, and the bonds or notes will be accepted subject to submission to the Secretary of the Treasury, Division of Loans and Currency, for specific approval of the transfer. The form printed on the back of the bond or note must be used for assignment, and the assignment must be dated and properly acknowledged as prescribed in the note printed on the back of the bond or note. Officers authorized to take acknowledgements of assignments of registered bonds or notes in addition to those mentioned on the back of the bond are designated in paragraph 16 of Treasury Department Circular No. 141, dated September 15, 1919, and in the general regulations of the Treasury Department with regard to United States bonds and notes. The collector will satisfy himself that the above-mentioned documents of authority and the requisite signatures and acknowledgements are in hand before noting on the bond or note its reception for taxes, as provided in paragraph 5 hereof, but the final determination of the correctness or validity of the assign- ment will be made by the Secretary of the Treasury, Division of Loans and Currency, at Washington, on receipt of all such bonds or notes and docu- ments, when transmitted as hereinafter provided. 252 15. By reason of the periodical closing of the transfer books of the Treasury Department for the payment of interest on registered bonds and notes, and the impossibility of stopping payment of interest to the regis- tered holder during the period of such closing, registered bonds and notes will not be receivable in payment of estate or inheritance taxes during the period of closing of the books of the issue in question unless an adjustment of interest is made with the collector as prescribed by paragraph 17 hereof. The books are closed with respect to each issue for one month prior to each interest date. The closed periods with respect to each bond or note may therefore be determined by inspection of the bond or note itself, being one month prior to each interest payment date named thereon, and until the day follow- ing such interest payment date. The closed periods for each issue of bonds or notes receivable for estate or inheritance taxes are also stated in the table (Exhibit H [1f264]) hereto attached. 253 16. Collectors will examine each registered bond or note tendered for estate or inheritance taxes to determine whether the transfer books of the issue in question are then opened or closed. If the books are then open but are due to close on a date too early to permit the bond or note to be transmitted to the Secretary of the Treasury, Division of Loans and Currency, and to be received by such division prior to the closing date, the collector will advise the Secretary of the Treasury, Division of Loans Copyright 1922, by The Corporation Trust Company. WAR TAX 85 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. and Currency, by telegraph at the time of receipt of the bond or note, using form (Exhibit I) hereto attached, and will immediately confirm the same by mail. The Division of Loans and Currency will thereupon stop interest payment on such bond or note. The Secretary reserves the right to require an adjustment of the interest on any registered bond or note tendered to the collector during an open period but received at the Division of Loans and Cur- rency during a closed period of the transfer books of the issue in question. Executors and other legal representatives are urged to tender registered bonds or notes at a time when the transfer books of such bonds or notes are open, or to exchange such bonds or notes for coupon bonds or notes before the transfer books of such bonds or notes close in order to avoid the necessity for interest adjustments. 254 17. Registered bonds or notes tendered pursuant to these regulations will be received at par and accrued interest computed in accordance with tables (Exhibits B and C), hereto attached. If such bonds or notes are tendered while the transfer books are 6pen, the interest will be computed from the last preceding interest date as shown thereon to the date of receipt. If they are tendered while the transfer books are closed, since it is impossible to stop the mailing of the next interest check, they may be received at par, with a deduction for the interest from the date of receipt to such next following interest date, computed in accordance with said tables. 255 18. Registered bonds or notes received pursuant to these regulations, and bearing the stamp or writing required by paragraph 5 hereof, will be transmitted with all accompanying documents of authority to the Secretary of the Treasury, Division of Loans and Currency, Washington, by registered mail, but not insured. The collector will make an accurate schedule on Form 762 Revised (Exhibit J), hereto attached, in triplicate, showing the date of death of the decedent, the serial number and denomina- tion of each bond or note, the issue, accrued interest, the date of receipt for taxes, and the amount for which credited against estate or inheritance taxes. The original of this schedule must accompany the bonds or notes sent to the Secretary of the Treasury, Division of Loans and Currency; the duplicate shall be transmitted to the Secretary of the Treasury, Division of Loans and Currency, under separate cover; and the triplicate shall be retained by the collector. 256 19. On receipt of such bonds or notes, the Division of Loans and Cur- rency will determine whether the assignment is sufficient and has been properly executed, whether the bonds or notes are of an issue receivable for estate or inheritance taxes hereunder, whether the Department's record of registration is consistent with the affidavit of ownership (Form 760 Revised), and the amount at which such bonds or notes are receivable for estate or inheritance taxes, and will, if it finds the bonds or notes in order, transmit them with its advice on Form L. & C. 122 (Exhibit K), hereto attached, to the Treasurer of the United States for redemption. The Treasurer will thereupon cancel the bonds or notes and issue a certificate of deposit in the name of the collector, in triplicate, and will forward the original to the office of the Secretary of the Treasury, Division of Bookkeeping and War- rants, and transmit the duplicate and triplicate of such certificate to the Commissioner of Internal Revenue, Accounts Division, who will forward the triplicate to the collector. 257 20. In the event that bonds or notes in registered form are tendered to a collector of internal revenue in payment of Federal estate or inheritance taxes, pursuant hereto, and after having been assigned to the Secretary of the Treasury for redemption in payment of such taxes and re- Copyrxght 1922, by The Corporation Trust Company. WAR TAX 86 SERVICE 1-2-22. ESTATE lk% EFCriATJONS.— 1918 LA^W. ceived and stamped or otherwise indorsed by the collector as provided herein, are found to be not acceptable in payment of such taxes, the Secretary of the Treasury, or the Federal Reserve banks, will either (1) accept such registered bonds or notes for exchange for new registered bonds or notes registered in the same name, or (2) accept such registered bonds or notes, notwithstand- ing the assignment to the Secretary of the Treasury and the collector's stamp or indorsement thereon, for transfer or exchange pursuant to such subsequent assignments as may appear on such bonds or notes: Provided, however, in either case, that such registered bonds or notes are accompanied by an official certificate on Form 835 (Exhibit F), attached hereto, signed by the collector of internal revenue concerned, to the same effect as the certificate prescribed in paragraph 13 hereof, with reference to coupon bonds or notes. Registered bonds or notes so tendered in payment of Federal estate or inheritance taxes and erroneously assigned and stamped or indorsed must be forwarded by the Federal Reserve bank to the Treasury Department, Division of Loans and Currency, in regular course, and when forwarded must be accompanied by the official certificate of the collector. General. 258 21. Until certificates of deposit are received by the collector, the amounts of bonds or notes deposited must be carried as "Cash on hand," and not credited as "Collections," as the dates of the certificates of deposit determine the dates of collections. 259 22. The Secretary of the Treasury may amend or withdraw the fore- going regulations in whole or in part at any time. (Department Circular No. 225, signed by D. F. Houston, Secretary of the Treasury, and dated January 31, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 87 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW 260 Exhibit A. AFFIDAVIT OF OWNERSHIP OF BONDS/NOTES. Treasury Department internal revenue. Form 760 (Revised). State of County of ss: We (I), , the undersigned execut. . . ., administrat. . . ., beneficiar. . . ., legal representative of the estate of , deceased, who died on , 19...., do severally swear that the bond. ./note. . described below bearing interest at a higher rate than 4 per centum per annum was (or were) each owned by the decedent continuously for at least six months prior to the date of his (or her) death and upon such date constituted part of his (or her) estate, and that the following statements with respect to each such bond/note are true to the knowledge of deponent, to wit: Description of issue (use short titles of loans). Coupon or registered. Name of registered holder (in the case of registered bonds or notes). Date of acquisition by decedent.* Serial number. Face value. (Each bond or note must be entered separately.) (Signature.) (Address for mail.) (Signature.) (Address for mail.) Subscribed and sworn to before me at this day of , 19. . [seal.] Notary Public, Dtputy Collector. ♦See paragraph 3 of Department Circular No. 225, dated Jan. 31, 1921. Where date of acquisition is unknown, supplemental affidavit should be attached stating all facts and circumstances from which date of acquisition may be inferred. Statements not within the knowledge of deponent will be disregarded unless sources of information and grounds of belief are given in full. Copyright 1922, by The Corporation Trust Company. WAR TAX 88 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. 261 EXHIBIT B. LIBERTY LOAN INTEREST TABLE FOR 4V 4 PER CENT BONDS. Interest at $100 per cent per annum, payable semi-annually 2 l A per cent per half year), (Tables prepared by Government Actuary.) NOTE. — Interest on United States bonds is computed on actual days basis within the interest period. For any given interest computation the appropriate columnHo be used may be determined from the following: NUMBER OF DAYS IN EACH HALF YEAR. Half year ending the 15th day of — Regular years — Days. Leap years — Days. March, May, July, August 181 March, May, July, August 182 April, June 182 April, June, October, December. . 183 October, December 183 January, February, September, January. February September November 184 November 184 Days. Half year of 181 days. Half year of 182 days. Half year of 183 days. Half year of 184 days 1 $0.01174033 $0.01167582 $0.01161202 $0. 01154891 2 .02348066 .02335165 .02322404 02309783 3 .03522099 03502747 .03483607 03464674 4 .04696133 04670330 .04644809 04619565 5 .05870166 05837912 .05806011 05774457 6 .07044199 07005495 .06967213 06929348 7 .08218232 08173077 .08128415 08084239 8 .09392265 09340659 .09289617 09239130 9 . 10566298 10508242 . 10450820 10394022 10 .11740331 11675824 .11612022 11548913 11 .12914365 12843407 .12773224 12703804 12 . 14088398 14010989 . 13934426 . 13858696 13 .15262431 15178571 . 15095628 15013587 14 . 16436464 16346154 .16256831 16168478 15 . 17610497 17513736 .17418033 17323370 16 . 18784530 18681319 .18579235 18478261 17 . 19958564 . 19848901 . 19740437 .19633152 18 .21132597 .21016484 .20901639 . 20788043 19 .22306630 .22184066 .22062842 .21942935 20 .23480663 .23351648 .23224044 23097826 21 .24654696 .24519231 .24385246 .24252717 22 .25828729 .25686813 . 25546448 .25407609 23 .27002762 .26854396 .26707650 .26562500 24 .28176796 .28021978 .27868852 .27717391 25 .29350829 .29189560 . 29030055 .28872283 Copyright 1922, by The Corporation Trust Company. WAR TAX 89 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. Days. Half year of 181 Half year of 182 Half year of 183 Half year of 184 26 *A 1f\7 C*7 1 A 7 0. 5055 / 143 4t>A 2 A 1 A 1 O C 7 «fi>0. 3019125/ frf\ O AAO H -i 1 A n>0. 300271 74 O n 27 .31698895 .51524/25 7 1 3 C O /t C A .51552459 OHO ^ f\»C C .31182065 28 . 328/29/8 ?TKdO O AO . 52092508 old -? /C/C 1 . 52513001 . 32330957 29 1 A f\A AC\A 1 . 34046901 7 70 C AO AA .33859890 7 7 A1 AO A7 .550/4803 1 1 A f\4 OAO . 33491848 30 .35220994 .35027473 .34836066 .34646739 31 3 a ^o CAT o . 30595028 . 50195055 ■5 r OO70AQ . 5599/208 1 COA1 A1C\ . 55801630 32 .37569061 .37362637 .37158470 30950522 33 7 O 7 /I •? AA/I . 38/43094 7 O C 7 AO OA . 5o550220 TOI 1 AA70 . 5o5 1V0 / 2 .381H413 34 .39917127 7 AAA7 OAO .3909/802 "2A/I QA07/1 . 594808/4 . 59200504 35 .41091160 .40865385 .40642077 .40421196 36 .42265193 A O f\7 O AA7 . 421)3290/ A 1 O A "2 0 7 A .418U52/9 A 1 C7/CA07 . 415 / 008/ 1 7 37 .43439227 /I 9 o aa cin . 45200549 A O AA/I A O 1 .42904481 /I O 7 3 AA70 .42/509/8 38 .44613260 /I /I ? A O 1 21 . 44308132 A A 1 1 C/CO"? . 44125085 A ") O O C O 7 A .458858/0 39 .45787293 /i ca/ia7*:i .45U4U/01 .45535/14 /l COO/COO c . 45280885 40 .46961326 .46703297 .46448087 .46195652 41 .48135359 .4/8/08/9 A 7AAAOAA . 4/0U9290 All CAC/4 ^ .4/550543 A AA? O /I /:o A O 7 7 A/1 AO A Q Cf\C A "i C 42 .49309392 .49058402 .48/ /0492 .48505435 43 .50483425 . 50200044 /l AA? 1 AA/I . 49951094 A C\AA(\1 r i A .49000520 A A 44 .51657459 . 515/5020 C 1 OOOQOA . 51Uy2ovO c aq 1 c o 1 7 . 5U81521 / 45 .52831492 .52541209 .52254098 .51970109 46 .54005525 C "2 7 AO 7 A 1 .55/08/91 CIA 1 C 9 A1 . 55415501 C "7 1 O C AAA . 55125U00 47 .55179558 .54876374 .54576503 .54279891 A O 48 .56353591 c ao/i inc^ . 50045950 CC7 7.770C . 55 /5 / /05 C C A 1A 1Q.1 . 55454 too 49 .57527624 C70 1 1 C?0 .5/211558 CAQOQ007 . 50oyoyo/ . 505oy0/4 50 58701657 .58379121 .58060109 .57744565 51 .59875691 CO C/l A7A'2 . 59540 /U5 COOO 1211 . 5y221511 CQQOO/1 C7 . 5ooVV45 / 52 .61049724 /CAT 1 /I OQA . 00/ 14280 AO"?. QO C 1 /I . 005o2514 /C AA C A 7AQ . 0(JU5454o 53 0222,5/5/ A1 QO 1 QAQ . 01881808 A1 C/l "27 1 A .01545 / 10 At onoo^o . 012Uy25y 54 63397790 . 03049451 AO 7A/1 A 1 o .02/04918 All A A A 1f\ . 02504150 55 64571823 .64217033 .63866120 .03519022 56 65745856 . 65384015 A CA07200 .0502/322 A A Al 1C\t 1 . 040/5915 57 66919890 . 00552198 aa 1 oo co r . 00188525 /;cooooa/i . 05828804 58 68093923 a 1 'i 1 at on . 07/19/80 A73/1A707 .0/549/2/ AACiO 1 AC\A . 00983090 59 69267956 . 08887363 /TOC1 AA "1 A . 08510929 AO t lOCOT . 0813858/ 60 70441989 . 70054945 .09072131 .09293478 61 71616022 .71222527 7 AO 7 7 7 7 7 . /voooooo 7 A/1 1 O 3 7 A . / 04485 /0 62 72790055 . 72390110 7 1 AA A CI A . 1 1994550 7 1 AA2 O/C 1 . / 10U5201 63 73964088 . 7355/692 731 CC730 . /5155/58 707CQ1 CO . /2/58152 64 75138122 . 74/25275 7 A 7 1 AC\A A . / 45 10940 7"2A1 7f\A 1 . /591504-1 65 76312155 .75892857 .75478142 .75067935 66 77486188 . 7 / 060440 7AAT.OT./1 A . 1 0059544 . /O222o20 67 78660221 'roil OA1 1 . 78228022 77QAAC/1 A . 1 / 800540 771777 1 7 .//5///1/ 68 79834254 . /9395604 7QOA1 7 A O . /8901 /49 7Q c 7. OAflO . /o55200y 69 81008287 . 80563187 o a 1 0 OO C 1 . 80122951 70AC 7 COO . /V08/500 /u 82182320 81 730709 81 984-1 S3 80842 391 71 83356354 O O O AO 9 PI . 82898352 00,1/fC2CC .82445355 Q 1 OO70 Q 7 .8199/283 72 84530387 . 84065934 O 7 A C\A C C 7 . 8300055 / oti CO 1 7/1 . 851521 /4 73 85704420 .85233516 O /I 1 ATI Af\ . 84/6/ /00 O 1 7 A7 AA C . 84o0/005 74 868784-3 . 86401099 OfAl OA/: ^> . 85928962 OC Iicint7 .8540195/ / 5 88052486 . ol OOOOol 87090104- 86610848 76 89226519 .88736264 .88251366 .87771739 77 90400552 .89903846 .89412568 .88926630 78 91574586 .91071429 .90573770 .90081522 79 92748619 .92239011 .91734973 .91236413 80 93922652 . 93406593 .92896175 .92391304 Copyright 1922, by The Corporation Trust Company. WAR TAX 90 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAY/. Days. Half year of 181 days. Half year of 182 days. Half year of 183 days. Half year of 184 days. 81 si;o 95096685 $0 94574176 $0.94057377 SO 93546196 82 96270718 95741758 ! 95218579 94701087 83 9744475I 96909341 '. 96379781 95855978 84 98618785 98076923 .97540984 97010870 fie; oo QQ709S1 fi yy /yzoio 99244505 . yo / uz loo 98165761 86 1 00966851 V-/V7 -7 V7 VVi7 v> A 1 00412088 .99863388 99320652 87 1 02140884 1 01579670 1. 01024590 1. 00475543 88 1 03314917 1 02747253 l!02185792 1.01630435 89 1 04488950 1. 03914835 1 03346995 1.02785326 90 1 05662983 1.05082418 1. 04508197 1. 03940217 91 1 06837017 1. 06250000 1.05669399 1 05095100 92 1 08011050 1.07417582 1.06830601 I 06950000 93 1 09185083 I 08585165 1.07991803 I 07404K01 94 1. 10359116 I 09752747 1.09153005 1. 08559783 95 1. 11533149 l[ 10920330 X \J y tfi \J\J %J \J 1.10314208 1. 09714674 96 1. 12707182 1. 12087912 1. 11475410 1 10869565 97 l] 13881215 1. 13255495 1.12636612 I 1 9094457 98 1 15055249 1. 14423077 1 . 13797814 I 1 31 79348 XO X / yOTrO 99 1 [ 16229282 1. 15590659 1 . 14959016 1.' 14334239 100 u 17403315 1. 16758242 1.16120219 1. 15489130 101 i 18577348 1. 17925824 1.17281421 i X . 1 6644099 102 1 19751381 1. 19093407 1. 18442623 1 1 . 1 77Q8.Q1 3 X / / 7 07 XO 103 l' 20925414 1. 20260989 1 . 19603825 1 JL . 1 8.0 5 3804. 104 1 22099448 1. 21428571 1.20765027 i. 20108696 105 I; 23273481 1 22596154 1.21926230 i. 21263587 106 1. 24447514 1. 23763736 1.23087432 i X . 994.1 0.4.78 107 1 25621547 1. 24931319 1.24248634 1 1 . 9^7'? / ?7n ZOO / 00 / u 108 i] 26795580 1. 26098901 1.25409836 1 1 . 947989A1 L'it Z0Z01 109 l' 27969613 1. 27266484 1.26571038 u 25883152 110 1. 29143646 1. 28434066 1.27732240 l. 27038043 111 1, 30317680 1. 29601648 1 . 28893443 l. 28192935 112 1 31491713 1. 30769231 1^30054645 l. 29347826 113 1. 32665746 1. 31936813 1.31215847 l. 30502717 114 l] 33839779 1. 33104396 1.32377049 l. 31657609 115 i! 35013812 1.34271978 1 133538251 l. 32812500 116 1. 36187845 1. 35439560 1.34699454 l. 33967391 117 fl 37361878 1. 36607143 1.35860656 l. 35122283 118 1 [ 38535912 1. 37774725 1.37021858 l. 36277174 119 1 39709945 1. 38942308 1 38183060 l. 37432065 120 1. 40883978 i. 40109890 1.39344262 l. 38586957 121 1 , 42058011 i 41277473 1 .40505464 l. 39741848 122 1 [ 43232044 i. 42445055 1 .41666667 l. 40896739 123 I _ 44406077 i. 43612637 1 42827869 X . x U i- ' \J\J y l. 42051630 124 1 455801 10 i. 44780220 1 43989071 X • A v7 7U7 V < X l. 43206522 125 1. 46754144 i. 45947802 1.45150273 1.44361413 126 1 j 47928177 i. 47115385 1 .46311475 1. 45516304 127 1 1 49102210 i. 48282967 1 .47472678 1. 46671196 128 50276243 i. 49450549 1 48633880 1. 47826087 129 1 51450276 i. 50618132 1 49795082 1. 48980978 130 i! 52624309 i. 51785714 1 . 50956284 1. 50135870 131 i. 53798343 i. 52953297 1.52117486 1.51290761 132 i. 54972376 i. 54120879 1.53278689 1. 52445652 133 i. 56146409 i. 55288462 1.54439891 1. 53600543 134 i. 57320442 i. 56456044 1.55601093 1. 54755435 135 i. 58494475 i. 57623626 1.56762295 1. 55910326 Copyright 1922, by The Corporation Trust Company. WAR TAX 91 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. Days Half year of 181 Half year of 182 Half year of 183 Half year of 184 days. days. days. days. 136 $1.59668508 $1.58791209 u. 57923497 $1. 57065217 137 1.60842541 1.59958791 1. 59084699 1. 58220109 138 1.62016575 1.61126374 11 60245902 1 59375000 139 1.63190608 1.62293956 1. 61407104 1 60529891 140 1.64364641 1.63461538 1. 62568306 1 61684783 141 1.65538674 1.64629121 1. 63729508 1. 62839674 142 1.66712707 1.65796703 1. 64890710 1. 63994565 143 1.67886740 1.66964286 1. 66051913 1 . 65149457 144 1.69060773 1.68131868 1. 67213115 1. 66304348 145 1.70234807 1.69299451 1. 68374317 1. 67459239 146 1.71408840 1 . 70467033 1. 69535519 1. Z" O Z" -4 A 4 o r\ 68614130 147 1.72582873 1.71634615 1. 70696721 1 . s C\*1 S f\r\r\ r\ 69769022 148 1.73756906 1.72802198 1. 71857924 1 . 70923913 149 1.74930939 1 . 73969780 1. 73019126 1. 72078804 150 1.76104972 1.75137363 1. 74180328 1. 73233696 151 1.77279006 1 . 76304945 1. 75341530 1. 74388587 152 1.78453039 1.77472527 1. 76502732 1 755434/8 153 1.79627072 1.78640110 1. 77663934 1 76698370 154 1.80801105 1 . 79807692 1. 78825137 1 77853261 155 1.81975138 1.80975275 1. 79986339 1 79008152 156 1.83149171 1.82142857 1. 81147541 1 80163043 157 1 . 84323204 1.83310440 1. 82308743 1 81317935 158 1.85497238 1.84478022 1. 83469945 1 8z4/z8/6 159 1.86671271 1.85645604 1. 84631148 1 83627717 160 1.87845304 1.86813187 1. 85792350 1 84782609 161 1.89019337 1.87980769 1. 86953552 1 85937500 162 1.90193370 1.89148352 1. 88114754 1 87092391 163 1.91367403 1.90315934 1. 89275956 1. OOI A TOO'? 88247283 164 1.92541436 1.91483517 1. 90437158 1. 89402174 165 1.93715470 1.92651099 1. 91598361 1. 90557065 166 1 . 94889503 1.93818681 1. 92759563 1. f\ 4 *7 4 4 f\C *7 91711957 167 1.96063536 1.94986264 1. 93920765 1 . 92866848 168 1.97237569 1.96153846 1. 95081967 1 . 94021739 169 1.98411602 1.97321429 1. 96243169 1. 95176630 170 1.99585635 1.98489011 1. 97404372 1. 96331522 171 2.00759669 1.99656593 1. 98565574 1 . 97486413 172 2.01933702 2.00824176 1. 99726776 1 . r\o H A 4 1 (~\ A 98641304 173 2.03107735 2 01991758 2. 00887978 1 . 99796196 174 2.04281768 2.03159341 2. 02049180 2. 00951087 175 2.05455801 2.04326923 2. 03210383 2. 02105978 176 2.06629834 2.05494505 2. 04371585 2. 03260870 177 2.07803867 2.06662088 2 05532787 2. 04415761 178 2 ! 08977901 2.07829670 2. 06693989 2 05570652 179 2. 10151934 2.08997253 2. 0785^191 2 06725543 180 2. 11325967 2.10164835 2. 09016393 2 07880435 181 2.12500000 2.11332418 2. 10177596 2 09035326 182 2.12500000 2. 11338798 2. 10190217 183 2. 12500000 2. 11345109 184 o i o =; 00000 Copyright 1922, by The Corporation Trust Company. WAR TAX 92 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. Example. 262 $10,850 Third 4j^s tendered in payment of estate taxes January 5, 1921. Interest payment dates on Third 4j^s are shown on the face thereof to be March 15 and September 15 in each year. Current half year interest period therefore ends March 15, 1921. The year 1921 being a "regular" (not a "leap") year, find "March" in the list at head of table under "Regular years." This list shows that the half year ending March 15 in a regular year has 181 days. Compute number of days since the beginning of such half year that have expired to date of tender of bonds, thus: 1920. Days. Sept. 15 to Sept. 30 15 October.. 31 November 30 December 31 1921. January 5 Total 112 Enter table headed "Half year of 181 days" (second column) and seek in that column the amount of interest on $100 for 112 days. This will be found opposite the figure "112" (days) in first column, and proves to be $1.31491713, which is the decimal for $100 for 112 days. The amount of bonds presented being $10,850, the decimal above stated must be multiplied by 108.5; the result is $142.6685, which is the amount of accrued interest due on January 5, 1921, on $10,850 Third 4j^s; accordingly the bonds are worth for estate taxes $10,992.67. Fractions of cents if less than 3^2 cent, will be disregarded; if 3^2 cent or more, will be counted as 1 cent. Exhibit C. 263 VICTORY LIBERTY LOAN Form L. & C. 226 Interest Table for 4%% Per Cent Victory Notes Received for Estate or Inheritance Taxes. (Prepared by Government actuary) Note.— Interest on Victory notes is computed on actual day's basis within the interest period. For any given interest computation, the ap- propriate column to be used may be determined from the following. Number of Days in Each Half Year Half year ending the 15th day of Regular years Days June 182 December 183 Leap years Days 7 i June 183 December 183 Copyright 1922, by The Corporation Trust Company. WAR TAX 93 SERVICE 1-2-21. ESTATE TAX REGULATIONS. — 1918 LAW. Interest on $100 at k% V er cen ^ V er annum, payablesemi-annually 'per cent per half year). Days Half vf*ar nf i a tii k y\^cLX yji Half vpar nf Days Half vpar nf H a 1 t v^ar nf 182 Havs 183 davs 182 davs 183 davs x {jyj w ay 3 1 $0.0130495 $0.0129781 51 $.6655220 $.6618852 2 0260989 0259563 52 6785714 6748634 3 .0391484 .0389344 53 .6916209 .6878415 4 .0521978 !0519126 54 .7046703 .7008197 5 .0652473 .0648907 55 .7177198 .7137978 6 .0782967 .0778689 56 7307692 .7267760 7 .0913462 .0908470 57 7438187 .7397541 8 .1043956 .1038251 58 7568681 .7527322 9 !l 174451 '. 1168033 59 .7699176 .7657104 10 .1304945 .1297814 60 .7829670 .7786885 11 .1435440 .1427596 61 .7960165 .7916667 12 .1565934 J557377 62 .8090659 .8046448 13 .1696429 .1687158 63 .8221154 .8176230 14 A 826923 .1816940 64 8351648 .8306011 15 !l957418 .1946721 65 .8482143 .8435792 16 .2087912 2076503 17 .2218407 .2206284 66 .8612637 .8565574 18 .2348901 .2336066 67 .8743132 .8695355 19 .2479396 .2465847 68 .8873626 .8825137 20 2609890 2595628 69 .9004121 .8954918 70 .9134615 .9084699 21 .2740385 .2725410 22 ]2870879 .2855191 71 .9265110 .9214481 23 3001374 *sJ\J\J X\J 1 X .2984973 72 .9395604 .9344262 24 3131868 '.3114754 73 9526099 .9474044 25 3262363 3244536 74 9656593 .9603825 Q787088 • 7 / O / vOO 9733607 26 3392857 3374317 27 3523352 • sJ *J \J %J \J £d 3504098 76 .9917582 .9863388 28 3653846 • \J \J \J sJ C_9Tt \J 3633880 77 1 0048077 .9993169 29 3784341 3763661 78 1 0178571 1.0122951 30 .3914835 .3893443 79 1.0309066 L0252732 31 4045330 .4023224 80 1 0439560 X • V/x\J j \J \J\J 1.0382514 32 .4175824 41 53005 33 4306319 .4282787 81 1.0570055 1.0512295 443681 3 •ttJUO 1J 4412568 82 1 0700549 1.0642077 4567308 4542350 • tt \J 83 1 0831044 1.0771858 84 1 0961538 1.0901639 36 46Q7809 46791 31 85 1 1031421 x* 1 v j n* x 37 4898997 4801913 38 .4958791 .4931694 86 1.1222527 1.1161202 39 5089786 5061475 87 0/ 1 1353022 1.1290984 4ft 591Q780 5101957 88 00 1 1483516 1.1420765 89 1.1614011 1.1550546 41 .5350275 .5321038 90 1.1744505 1.1680328 42 .5480769 .5450820 43 .5611264 .5580601 91 1.1875000 1.1810109 44 .5741758 .5710383 92 1.2005495 1.1939891 45 .5872253 .5840164 93 1.2135989 1.2069672 94 1.2266484 1.2199454 46 .6002747 .5969945 95 1.2396978 1.2329235 47 .6133242 .6099727 48 .6263736 .6229508 96 1.2527473 1.2459016 49 .6394231 .6359290 97 1.2657967 1.2588798 50 .6524725 .6489071 98 1.2788462 1.2718579 Copyright 1922, by The Corporation Trust Company. WAR TAX 94 SERVICE 1-2-22 ESTATE TAX REGULATIONS.— 1918 LAW. 99 $1.2918956 $1.2848361 141 $1.8399725 $1.8299180 100 1.3049451 1.2978142 142 1.8530220 1.8428962 143 1.8660714 1.8558743 101 1.3179945 1.3107923 144 1.8791209 1.8688525 102 1.3310440 1.3237705 145 1.8921703 1.8818306 103 1.3440934 1.3367486 104 1.3571429 1.3497268 146 1.9052198 1.8948087 105 1.3701923 1.3627049 147 1.9182692 1.9077869 1 148 1.9313187 1.9207650 106 1.3832418 .3756831 149 1.9443681 1.9337432 107 1.3962912 1.3886612 150 1.9574176 1.9467213 108 1.4093407 1.4016393 109 1.4223901 1.4146175 151 1.9704670 1.9596995 1 1 A 1 10 1.4354396 1.4275956 152 LVooj loo 1 Q77A77A i.y / zo/ /o 153 1.9965659 1.9856557 111 1.4484890 1 .4405738 154 2.0096154 1.9986339 112 1.4615385 1 .4535519 155 2.0226648 2.0116120 113 1,4745879 1 .4665301 114 1.4876374 1.4795082 156 2.0357143 2.0245902 115 1.5006868 1.4924863 157 2.0487637 2.0375683 158 2.0618132 2.0505464 116 1.5137363 1.5054645 159 2.0748626 2.0635246 117 1.5267857 .5184426 160 2.0879121 2.0765027 118 1.5398352 1.5314208 119 1.5528846 1.5443989 161 2.1009615 2.0894809 120 1.5659341 1.557377C 162 2.1140110 2.1024590 163 2.1270604 2.1154372 121 1.5789835 1.5703552 164 2.1401099 2.1284153 122 1.5920330 1.5833333 165 2.1531593 2.1413934 123 1.6050824 1.5963115 124 1.6181319 1.6092896 166 2.1662088 2.1543716 125 1.6311813 1.6222678 167 2.1792582 2.1673497 168 2.1923077 2.1803279 126 1.6442308 1.6352459 169 2.2053571 2.1933060 127 1.6572802 1.6482240 170 2.2184066 2.2062842 128 1.6703297 1.6612022 129 1.6833791 1.6741803 171 2.2314560 2.2192623 130 1.6964286 1.6871585 172 2.2445055 2.2322404 173 2.2575549 2.2452186 131 1.7094780 1.7001366 174 2.2706044 2.2581967 132 1.7225275 1.7131148 175 2.2836538 2.2711749 133 1.7355769 1.7260929 134 1.7486264 1.7390710 176 2.2967033 2.2841530 135 1.7616758 .7420492 177 2.3097527 2.2971311 178 2.3228022 2.3101093 136 1.7747253 1.7650273 179 2.3358516 2.3230874 137 1.7877747 1.7780055 180 2.3489011 2.3360656 138 1.8008242 1.7909836 139 1.8138736 1.5039617 181 2.3619505 2.3490437 140 1.8269231 .5169399 182 2.3750000 2.3620219 183 2.3750000 Example. $-11,350 per cent Victory notes tendered in payment of estate taxes, January 5, 1921. Interest payment dates on Victory notes are shown on the^face thereof to be June 15 and December 15 in each year, and at maturity. Current half-year interest period therefore ends June i5, 1921. The year 1921 being a regular year, find "J une " in the list at head of table under "Regular year." This list shows that the half 4 year ending June 15, in a regular year, has 182 days. Copyright 1922, by The Corporation Trust Company. WAR TAX 95 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. Compute number of days since the beginning of such half year that have expired to date of tender of note, thus : 1920. Days. December 15 to December 31 16 1921. January. Total 21 Enter table headed "Half year of 182 days" (second column) and seek in that column the amount of interest on $100 for 21 days. This will be found opposite the figure "21" (days) in the first column, and proves to be $0.2740385, which is the decimal for $100 for 21 days. The amount of notes presented being $11,350, the decimal above stated must be multiplied by 113.5; the result is $31.1034, which is the amount of accrued interest due on January 5, 1921, on $11,350 Victory 4^s — accordingly, the notes are worth for estate taxes, $11,381.10. Fractions of cents, if less than Y% cent, will be disregarded; if cent or more, will be counted as 1 cent. Exhibit H. 264 Periods During Which Transfer Books are Closed for the Various Issues of Liberty Bonds and Victory Notes Receivable for Estate or Inheritance Taxes. Title of bonds/ notes. Short title. Closed periods. From close of business. First Liberty Loan converted 434 per cent bonds of 1932-47.. . . First Liberty Loan second converted 434 per cent bonds of 1932-47 Second Liberty Loan converted 434 per cent bonds of 1927-42 . . Third Liberty Loan 434 per cent bonds of 1928 Fourth Liberty Loan 434 per cent bonds of 1933-38 Victory Liberty Loan 4% per cent convertible gold notes of 1922-23 First 434's First Second 434's Second 434's Third 4J4's Fourth 434's Victory 4%'s May 15 Nov. 15 Apr. 15 Oct. 15 Feb. 15 Aug. 15 Mar. 15 Sept. 15 May 15 Nov. 15 and from close of business Apr. 20, 1923. NOTE. — If the closing date falls on a Sunday or a legal holiday the transfer books will close on the preceding day; if the opening date falls on Sunday or legal holiday the books will open on the following day. (Exhibits A, B, C, and H, above, from Department Circular No. 225, signed by D. F. Houston, Secretary of the Treasury, and dated January 31, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 96 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. (T. D. 3144.) 265 Receipt of Liberty bonds for Victory notes for estate and inheritance taxes. — The appended [foregoing] Department circular No. 225 [beginning at If 234], issued under date of January 31, 1921, with reference to receipt of Liberty bonds and Victory notes in payment of estate and in- heritance taxes, is published for the information of internal-revenue officers and others concerned. This circular supersedes Department circulars No. 132, dated January 30, 1919 (T. D. 2802), and No. 151, dated June 24, 1919 (T. D. 2905). (T. D. 3144, signed by Acting Commissioner Paul F. Myers, and dated March 3, 1921.) 266 Art. 91. Payment by uncertified check. — [For first paragraph of Art. 91, see 1f230.] Collectors may accept uncertified checks in pay- ment of the estate tax provided such checks are collectible at par — that is, for their full amount, without any deduction for exchange or other charges. If the bank on which any such check is drawn should refuse to pay it at par, the check should be returned through the depositary bank, and be treated in the same manner as a bad check. All expenses incident to the attempt to collect such a check and the return of it through the deposi- tary bank must be paid by the drawer of the check to the bank on which it is drawn, since no deduction can be made from amounts received in payment of taxes. (See Revised Statutes, Sec. 3210.) 267 Art. 92. The executor shall pay the tax. — The statute provides that 31 the executor shall pay the tax. This duty applies to the tax upon the transfer of the entire estate, including property which will not come into the possession of the executor or administrator. As to the personal liability of the executor, see Article 113. 268 Art. 93. Extension of time for payment. — In any case where the 30 Commissioner finds that payment of the tax within one year after the decedent's death would impose undue hardship upon the estate, extensions of time will be granted for the payment of the tax for a period not to exceed in all three years from the due date. Extensions of time for tax payment will be granted only in exceptional cases, where it is evident that the payment of the tax within the statutory period would cause the estate serious financial loss. No extension shall be for more than one year, and a substantial payment shall be made before each extension. Application for extension of time for payment should be filed with the collector, and should contain a full statement of the facts upon which the application is based. The collector will refer the application to the Commissioner, with suitable recommendations. [See 1f309.] 269 The extension of time for the payment of the tax should not be confused with extension of time for filing the return. An extension of time to pay the tax does not relieve from the duty of filing the return within one year from the date of death. An extension of time for tax payment will not operate to prevent the accrual of interest upon the tax. 270 Art. 94. Interest on unpaid tax. — The statute provides that, if the 30 tax is not paid within one year and 180 days after the decedent's death, interest at six per centum per annum from the expiration of one year after the decedent's death shall be added as part of the tax. This provision applies to the original amount of tax shown to be due by the return accepted by the collector. It applies in all cases in which penalties have not accrued under the Revenue Act of 1916. (See Art. 120.) [See H310.] Copyright 1922, by The Corporation Trust Company. WAR TAX 97 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS.— 1918 LAW. ADJUSTMENT OF TAX— INTEREST. 27 1 Art. 95. Adjustment of tax after investigation. — An investigation of 31 every return for estate tax will be made by an internal-revenue officer, and the tax liability of the estate will be finally determined by the Commissioner upon the basis of such investigation. If at the time the Commissioner's determination is made the tax has been paid upon the basis of the return, an adjustment will be made of the amount of tax. If the amount of tax already paid exceeds the amount of tax as finally deter- mined, the Commissioner will refund such excess payment to the collector. If the amount of tax as finally determined exceeds the amount of tax already paid, the collector will notify the executor of the amount of the unpaid balance of the tax and will demand payment thereof. Payment should be made by the executor immediately upon the receipt of such notification. Where the investigation of the return shows that no further tax is due, the executor will be notified to this effect. Until the receipt of such notifica- tion, he should reserve a sufficient portion of the estate to satisfy any excess tax. 272 Art. 96. Interest on additional tax. — If an unpaid balance of tax is found to be due by the Commissioner after investigation, the statute provides that interest shall be added to the amount of such excess part of the tax at the rate of ten per centum from the expiration of 30 days after notification to the executor, provided the tax is not paid within such 30-day period. This interest will not begin to accrue, however, until the ex- piration of one year and 180 days after the decedent's death. (See Art. 94.) 273 If a return is filed containing a gross or fraudulent misstatement of fact, and payment made of the tax shown to be due thereby, such payment will not be considered payment in full within the meaning of the statute. (See Art. 90.) Consequently, in such a case, interest upon the unpaid balance of tax, determined after investigation, will be added at the rate of six per centum per annum from the expiration of one year after the decedent's death. COLLECTION OF TAX. 274 Art. 97. Remedy not exclusive. — The remedy by action, here pro- 33 vided for, is not exclusive. For other available remedies for the collection of the tax, see Article 116. REIMBURSEMENT. 275 Art. 98. Right to reimbursement not enforcible by bureau. — Two 34 rights are here given. Persons in possession of property, and paying the tax, are entitled to reimbursement, either out of the undistributed estate or by contribution from other beneficiaries, of any excess of the amount paid over the amount of the tax upon the particular property in their possession. The executor is also entitled to require beneficiaries under insurance policies to bear their proportion of the tax. These provisions, however, are not designed to curtail the right of the Bureau to collect the tax from any person, or out of any property, liable therefor. The Bureau may not be required to apportion the tax among the persons liable. For example, where a transfer has been made in contemplation of death, the Bureau may hold both the executor and the transferee liable with respect to the tax upon the property transferred. In such case, if the tax is paid by the executor, he may not look to the Bureau for relief by refund of part of the tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 98 SERVICE -2-22, Reg. 37. Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. LIEN. 276 Art. 99. Property subject to lien. — This lien attaches to every part 35 of the gross estate, whether or not the property comes into the cus- tody or control of the executor. The only property divested of the lien is such part as is used to pay charges against the estate and administra- tion expenses allowed by the court which administers the estate. With this exception, the lien can only be divested by payment. It attaches to the extent both of the original tax shown to be due by the return and of any additional tax found to be due upon investigation. Payment of the entire tax is necessary in order to destroy the lien. 277 Art. 100. Release of lien. — The statute provides that, if the Com- missioner is satisfied that the tax liability of an estate has been fully discharged or provided for, he may issue his certificate releasing any or all property of the estate from the lien. The issuance of certificates is a matter resting within the discretion of the Commissioner, and certificates will be issued only in case there is actual need therefor. In most cases the receipts issued by the collector constitute sufficient acquittance. 273 The tax will be considered fully discharged for the purpose of the issuance of a certificate only when investigation has been completed, and payment of the excess tax determined to be due, if any, has been made. A certificate of release of lien may be issued by the Commissioner under these circumstances upon any or all property of the estate, upon the filing by the executor of an application in duplicate on Form 791. The form must be con- tain all the information called for. 279 Where the tax liability has not been fully discharged, as provided above, no general certificate of release will be granted, but releases of lien upon particular items of property will be issued upon the filing with the Commissioner of such security, if any, as he may require. Where security is required, a corporate indemnity bond must be furnished, or Liberty Bonds, or other bonds of the United States, must be deposited with the collector. In lieu of such security, the Commissioner may in any case issue the release upon payment of the estimated tax upon the transfer of the property released, computed at the highest rate applicable to the estate. If, upon consideration of the application, the Commissioner finds the issuance of the certificate to be warranted, the collector will notify the executor of the amount of the bond, as fixed by the Commissioner. 280 Transfer of stock: lien on stock and release of lien. — Reference 35 is made to your letter of June 16. You are advised that in all cases where the estate of a deceased person is liable for the payment of Federal estate tax under the Revenue Act of 1918, the entire gross estate, as that term is defined in Section 402 of the said Act, is impressed with a lien to the extent of the tax liability of the said estate for a period of ten years from the date of the decedent's death, except as provided in Section 409. It is the ruling of this Bureau that under Section 409 only the following parts of a decedent's gross estate are divested of the lien. Such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration, allowed by any court having jurisdiction thereof; and the value of any property included in the gross estate which was trans- ferred, or with respect to which a trust was created by the decedent, in contemplation of or intended to take effect in possession or enjoyment at or after his death (except where the making of such transfer or the creating Copyright 1922, by The Corporation Trust Company. WAR TAX 99 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. of such trust by the decedent constituted a bona fide sale for a fair con- sideration in money or money's worth), where the transferee or trustee has sold such property to a bona fide purchaser for a fair consideration in money or money's worth. No other part of the gross estate is divested of the lien by virtue of Section 409 of the said Act, nor may it be divested of such lien except by discharge of the tax liability of the estate or by a certificate issued by the Commissioner of Internal Revenue releasing it from the lien. 281 It will be seen from the foregoing, therefore, that any stock of a corporation which was owned by a decedent on the date of his death is not divested of the lien by virtue of anything contained in Section 409 of the Revenue Act of 1918. 282 This Bureau is at all times willing in any proper case to issue a release of lien with respect to any part of the gross estate where the tax liability of the estate has been discharged or provided for to the satisfaction of the Commissioner. Any transfer made by an executor of property forming a part of the gross estate of a decedent whose estate is liable for the payment of Federal estate tax, or the transfer by any person having in his possession property forming a part of such gross estate, except as provided in Section 409 aforesaid, will not operate to divest such property of the lien. (Letter to The Corporation Trust Company, signed by Deputy Commissioner James Hagerman, Jr., and dated June 26, 1920.) REMEDY AGAINST TRANSFEREE AND INSURANCE BENEFICIARY. 283 Art. 101. Remedy in case of property transferred by decedent, or of 36 individual insurance. — The amounts of the lien and of the personal liability of the transferee, trustee, or insurance beneficiary are limited to the amount of the tax upon the transfer of the particular property in the possession of the person liable. Where the transferee or trustee sells the property to a bona fide purchaser for a fair consideration in money or money's worth, the lien upon such property is divested; but there is sub- stituted a lien upon all of the property of the transferee or trustee, except such part as may be sold to a bona fide purchaser for a valuable considera- tion. PENALTIES. 284 Art. 102. Nature of penalties.— Two kinds of penalties are provided 37 for delinquency with respect to the duties imposed by the estate tax 8071 law: (1) A specific penalty, to be recovered by suit, unless adjusted by an offer in compromise; and (2) A penalty of a certain percentage of the tax, to be added to the tax and collected in the same manner as the tax. In any case of delinquency for which more than one penalty is provided the Government may impose either or both penalties. 285 Art 103. Penalties for false and fraudulent notice or return. — Where statements in the 60-day notice or in the return are knowingly and willfully false, the person making them is subject to a penalty of $5,000, or imprisonment for one year, or both; and, for the false return, 50 per cent may be added to the amount of the tax. 286 Art. 104. Penalty for failure to file notice or return. For failure to file the 60-day notice or the return within the time prescribed, the Copyriglit 1922, by The Corporation Trust Company. WAR TAX 100 SERVICE 1-2-22. Keg. 37, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. person in default is subject to a penalty not to exceed $500; and, for the failure to file the return, 25 per cent may be added to the amount of the tax. Where it appears, however, that the failure to file the return was due to a reasonable cause and not to willful neglect, no addition is made to the tax. 287 Art. 105. Penalty for failure to exhibit records or property. — Where a person in possession or control of any record, file, or paper, supposed to contain information relating to the estate, fails to exhibit the same, upon the request of the Commissioner or any collector, he is liable to a penalty not to exceed $500, to be recovered by civil action. He must comply with such a request whether or not he believes that the documents contain information relating to the estate. A person in possession of property forming part of the gross estate, and refusing to exhibit the same upon the request of the Commissioner or a collector, is subject to a similar penalty. CLAIMS FOR ABATEMENT AND REFUND. 288 Art. 106. General provisions. — Under these provisions of law 8021 [Rev. Stats. Sec. 3220, If 8023, and Sec. 3225, If 8047] two forms of 8047 relief are afforded the executor in cases where he believes that an excessive amount of tax has been assessed against or paid by him, either upon the basis of the return or of the investigation conducted by the Bureau. The two forms of relief are: (1) Claim for abatement on Form 47 [Page 1611] where the tax has been assessed but not paid. (2) Claim for refund on Form 46 [Page 1609] where the tax has been paid. 28S Art. 107. Claim for abatement. — Claims for the abatement of taxes or penalties illegally assessed must be made upon Form 47 [Page 1611], and must be sustained by the affidavits of the parties against whom the taxes were assessed or of other parties cognizant of the facts. When a tax has been assessed, the presumption is that the assessment is correct; and the burden of showing that it was improperly or illegally assessed rests upon the applicant for abatement. The affidavit must therefore contain a full and explicit statement of all the material facts relating to the claim in support of which they are offered and which are essential to proper consideration. Nothing should be left to inference, but all the facts relied upon should appear upon the papers themselves. The filing of a claim for the abatement of a tax alleged to have been erroneously assessed does not necessarily operate as a suspension of the collection of the tax. The collector may col- lect the tax if he thinks it necessary, and leave the taxpayer to his remedy of a claim for refund. 290 Art. 108. Accrual of interest as affected by abatement claim.— Where a claim for abatement is rejected, the making of the application does not affect the running of interest. The allowance of the claim, how- ever, in whole or part, discharges all interest obligations upon the portion of the claim allowed. The same rules apply where, upon the request of the executor, a reinvestigation is made of the amount of an additional tax. 291 Art. 109. Limitation of time to file claim for abatement of excess ' tax. — If it is desired to file claim for abatement of the excess amount of tax disclosed upon investigation, such claim should be filed with the col- Copyright 1922, by The Corporation Trust Company. WAR TAX 101 SERVICE 1-2-22. Reg. 37, Rev. 1921. ESTATE TAX REGULATIONS— 1918 LAW. lector within 30 days of receipt of the Commissioner's letter of notification. After that period the claim will not be considered, but the tax must be paid, and adjustment made by claim for refund. 292 Art. 110. Claim for refund. — Claims for refund of assessed taxes and penalties must be made on Form 46 [Page 1609]. In this case, as in the case of claims for abatement, the burden of proof rests upon the claimant. All the facts relied upon in support of the claim should be clearly set forth under oath. With the claim should be presented, in addition to the evidence: (1) Collector's receipt evidencing payment of tax. (2) Where the claim is made by the executor or administrator, a certified copy of letters testamentary or of administration, and a certificate that the appointment remains in full force and effect. (3) Where the executor or administrator has been discharged, a certified copy of the decree discharging him, and evidence as to the persons entitled to receive the refund, setting forth their names. Where the claim is made on behalf of a number of persons, there should be furnished a power of attorney duly executed by all the beneficiaries showing the claimant's authority to act in their behalf. 293 Art. 111. Payment of claims. — Warrants in payment of claims al- lowed will be drawn in the names of the parties entitled to the money, and will, unless otherwise directed, be sent by the Treasurer of the United States directly to the proper parties, or their duly authorized attorneys or agents; but if the claimants are indebted to the United States for taxes such taxes must be paid before the warrants are delivered. POWER TO COMPROMISE OR REMIT PENALTIES. 294 Art. 112. Power to compromise or remit. — The Commissioner, with 8059 the advice and consent of the Secretary of the Treasury, may com- 8061 promise any civil or criminal case arising under the internal-revenue 8062 laws instead of commencing suit thereon, and with the advice and consent of the Secretary, and upon the recommendation of the Attorney General, may compromise any such case after suit thereon has been commenced by the United States. Accordingly, the power to comp- romise extends to (a) both civil and criminal cases; (b) cases whether before or after suit; and (c) both taxes and penalties. Refunds can not be made of accepted offers in compromise in cases where it is subsequently ascertained that no violation of law was involved. No power exists, however, to comp- romise a tax where its existence and amount are not disputed in good faith, and the taxpayer is solvent. Where a fine, penalty, or forfeiture, not exceeding $1,000, is incurred without willful negligence or fraud, it may be remitted by the Secretary of the Treasury; and he may remit other fines, penalties forfeitures, and disabilities where the court has inquired into the matter and made findings [see 1f806l and H8062 for provisions of Revised Statutes]. PERSONAL LIABILITY OF EXECUTOR. 295 Art. 113. Extent of liability. — The executor is personally liable for 8052 the payment of the estate tax to the amount of the full value of the assets of the estate which have at any time come into his hands. (See also Revenue Act of 1918, Sec. 407 [1131].) Where no executor or adminis- trator has been .-appointed, every person in possession of any part of the gross estate is liable for the tax as an executor. Copyright 1922, by The Corporation Trust Company. WAR TAX 102 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. Rev. 1921. EXAMINATION OF RECORDS AND TAKING OF TESTIMONY. 296 Art. 114. Securing evidence — Taking of testimony. — In order to 8002 ascertain the correctness of a return, or to make a return where 8003 none has been made, the Commissioner has power to require the attendance, and to take the testimony, of the person rendering the return, or any officer or employee of such person, or any other person having knowledge in the premises. Such person may be required to produce any relevant book, paper or other record. This power may be exercised by any revenue agent or inspector designated for the purpose. 297 Art. 115. Power to compel compliance. — Where any person is summoned to appear and testify, or to produce books, papers, or other data, the District Court of the United States for the district in which such person resides has power to compel the giving of the testimony, or the pro- duction of the books, papers, or data, and to issue any appropriate process, writ, or order. REMEDIES FOR COLLECTION. 298 Art. 116. Remedies for collection of tax.— -The provision of the 8000 statute quoted above applies to the estate tax law; and three reme- dies are thus provided for the collection of the tax: 299 (1) Collection by distraint. — The collector may issue warrant of distraint authorizing the seizure and sale of any or all of the assets of the estate. (See R. S., Sees. 3187 et seq.; Comp. Sts., 1916, Sec. 5909 et seq.) 300 (2) Collection by suit to subject the property to sale. — The collector may commence in any court of the United States appropriate pro- ceedings, in the name of the United States, to subject the property of the decedent to sale under the judgment or decree of the court. (See Sec. 408 [1f33]; Art. 97.) 301 (3) Collection by suit for personal liability . —The personal liability of the executor, of the transferee or trustee of property transferred in contemplation of death, and of the beneficiary of taxable life insurance (See Art. 101) may be enforced by any appropriate action. 302 Art. 117. Executor's duty to keep records. — It is the duty of the ex- ecutor to keep such records as the Commissioner may require. Executors are required to keep complete and detailed records of the affairs of the estate, sufficient to enable the Bureau to determine accurately the amount of the tax liability. 303 Art. 118. Executor's duty to render statements.— It is also the duty of the executor not only to make the formal return, but also to ren- der any other sworn statement which the Commissioner may require for the purpose of determining whether a tax liability exists. SCOPE OF REPEAL. 304 Art. 119. Scope of repeal. — The Revenue Act of 1918 retains in 39 force all taxes or penalties which had accrued prior to February 25, 1919. The procedure, however, with reference to the assessment and collection of all taxes, whenever they accrued, is governed by the statute from the time when it went into effect on February 25, 1919. . Copyright 1922, by The Corporation Trust Company. WAR TAX 103 SERVICE 1-2-22. Reg. 87, Rev. 1921. ESTATE TAX REGULATIONS. — 1918 LAW. 305 Art. 120. Interest under Revenue Act of 1916.— The Revenue Act of 1916 provides that, where the tax is not paid within one year and 90 days from the date of the decedent's death, interest shall be added at the rate of ten per centum per annum from the date of death. Where the speci- fied period had elapsed prior to February 25, 1919, this penalty has been incurred, and is not affected by the passage of the Revenue Act of 1918. Where, however, the period of one year and 90 days had not elapsed prior to February 25, 1919, the Revenue Act of 1918 extends the time of payment to one year and 180 days from the date of death. These rules operate as follows: 306 Example: The year and 90 days, in a given case, expired on February 15, 1919, or ten days before the effective date of the Revenue Act of 1918. In this case interest at the rate of ten per centum per annum should be computed for the period of one year and 100 days from the date of death, or until the Revenue Act of 1918 took effect. If the tax is thereafter paid within the time prescribed by the new act (which allows an additional 80 days), no further interest accrues. If it is not paid within that period, additional interest accrues at the rate of six per cent from February 25, 1919, when the Revenue Act of 1918 took effect. 307 Example: On February 25, 1919, in a given case, only one year and 80 days from the date of the decedent's death had elapsed. No penalty having been incurred, the estate has 100 additional days in which to make payment, viz., the year and 180 days prescribed by the Revenue Act of 1918. If, however, the tax is not paid within this period, interest accrues at the rate of six per cent from the expiration of one year from the decedent's death, as provided by the Revenue Act of 1918 (see Art. 94). 307a While no interest may be added to the tax unless payment thereof has not been made within one year and 180 days after decedent's death, the tax itself is due and must be paid within one year after the decedent's death unless an extension of time for the payment thereof has been granted by the Commissioner. [See 1[225.] 308 Art. 121. Repeal of previous regulations. — The foregoing regula- tions are prescribed in pursuance of the authority conferred by the statute, and all rulings inconsistent with them are hereby revoked. WM. M. WILLIAMS, Commissioner of Internal Revenue. [Released for publication February 16, 1921.] Approved January 31, 1921. D. F. HOUSTON, Secretary of the Treasury. Copyright 1922, by The Corporation Trust Company. WAR TAX 104 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. 309 "Substantial payment" as a prerequisite to granting of extension of 225 time for payment of estate tax. — Article 93 [11268] of the regulations 268 provides that no extension of time shall be granted without a sub- stantial payment. This provision of the regulations has been uni- formly interpreted to require the payment of at least 25 per cent, of the tax. 310 Interest on unpaid tax— Articles 90 [1223], 94 [^270],^ and 96 fl[272] 270 of the Estate Tax Regulations deal with the application of interest under the sections of the law mentioned. Under the terms of Section 406 [1f30] of the Act the tax is subject to interest at the rate of six per cent per annum from the due date, if it is not paid within one year and 180 days after the decedent's death. 311 It is, therefore, the ruling of the Bureau that such part of an estate tax, assessed against an estate where the decedent died after the passage of the Revenue Act of 1918, as is paid within one year and 180 days of the decedent's death, is not subject to the interest provisions of Section 406 [1f30]. Where, however, the entire tax indicated by a return, filed in good faith, is not paid within one year and 180 days after decedent's death, or where an amount sufficient in the opinion of the Collector to discharge the tax within the meaning of Section 407 [1J31] of the Act is not paid within one year and 180 days after decedent's death, the Bureau determines the tax liability of the estate and assesses interest thereon at the rate of six per cent per annum from the due date, unless, however, a part payment of the tax was made before the expiration of one year and 180 days from the date of the decedent's death, in which event, interest would not be applied to the portion of the tax paid before the expiration of such period of time. In other words, the Bureau holds that any part of an estate tax paid within one year and 180 days from the date of decedent's death, where such death occurred after February 24, 1919, is not subject to the interest provisions of Section 406. 312 Extensions of time for paying the estate tax, as authorized by Section 406 of the Act and Article 93 tf[269] of the Estate Tax Regulations have no bearing whatever upon the question of the application of interest. The interest provisions of the law, so far as estate tax is concerned, are con- tained in Sections 406 and 407 [1f30, 31] of the Revenue Act of 1918 and these sections must be looked to entirely for guidance in the application of interest to the federal estate tax. (Letter to The Corporation Trust Com- pany signed by Dep. Com. F. G. Matson, and dated August 25, 1921.) 313 60-day notice and payment of insurance by insurance companies, 201 the insurance not being part of the decedent's gross estate. —Receipt . 207 is acknowledged of your letter dated the 5th instant, requesting to 207a be advised whether insurance companies are chargeable with the notice required by Articles 71 and 76A in cases where such insurance may not be regarded as taxable. 3 1 4 The question of whether life insurance is taxable, under the provisions of Section 402 (f) of the Revenue Act of 1918, and Articles 32, 33 and 34 [beginning at U"122] of Regulations 37, Revised January, 1921, has no bearing upon the question of the liability of insurance companies to give the notices required by Articles 71, 76 and 76A. If, therefore, the insurance is of the character described in Articles 71, 76 and 76A, the notices prescribed by these articles must be filed notwithstanding the fact that a part,^ or all, of such life insurance may, or may not, be taxable under the provisions of the law. (Letter to The Corporation Trust Company, signed by Deputy Commissioner James Hagerman, Jr., and dated March 12, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 105 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. {Decision.) November 17, 1921. Tax is not due and payable until one year and 180 days after decedent's death and hence the right to collect by distraint within that period is denied. The statutory inhibition against suit for restraining the collection of a tax has no application in the case of a tax not yet due and payable. United States District Court District of Rhode Island Frank L. Polk and the United States Trust Company of New York, as execu- tors of the last will and testament of Josephine Brooks, desceased, vs. Frank A. Page, individually and as Collector of Internal Revenue for the District of Rhode Island. 315 Brown, J. — The plaintiffs seek an injunction against the defendant 223 individually and as collector of Internal Revenue for this District, 225 restraining him from proceeding by distraint for the collection of an estate tax before the time fixed by Sec. 408 of the Revenue Act of February 24, 1919, 40 Stats. 1057 fl[33 herein]. 316 The plaintiffs, as executors of the will of Josephine Brooks, late of Newport, Rhode Island, who died August 17, 1920, allege that an estate tax of $245,787.67 was duly assessed by the Commissioner of Internal Revenue, and that the period of one year and one hundred and eighty days from the death of said Josephine Brooks will not expire until the expiration of the thirteenth day of February, 1922. 317 The bill alleges that despite the provisions of Sections 406 fl[30], 408 [1f33], and 1307 and 1400 tff39] of the United States Revenue Act, (Title IV, Act of February 24, 1912, 40 Stats. 1057), the defendant collector threatened immediately to distrain the assets of the estate for the payment of this tax unless plaintiffs paid the same in full to the collector for the Rhode Island District before the eighth day of October, 1921. They seek to enjoin the defendant from making any seizure, distress or distraint under pretense of collecting said tax or any part thereof, until the expiration of the 13th day of February, 1922, but no longer, and for general relief. 318 The plaintiffs insist that the sole right to distrain is conferred upon the Collector by Section 408: Sec. 408. That if the tax herein imposed is not paid within 180 days after it is due, the collector shall, unless there is reasonable cause for further delay, proceed to collect the tax under the provisions of general law, or commence appropriate proceedings in any court of the United States to subject the property of the decedent to be sold under the judgment or decree of the court. From the proceeds of such sale the amount of the tax, together with the costs and expenses of every description to be allowed by the court, shall be first paid, and the balance shall be deposited according to the order of the court, to be paid under its direction to the person entitled thereto. 319 It is the contention of the collector that he is entitled to distrain under Revised Statutes Section 3187, C. Stats. Sec. 5909; the perti- nent part of which is as follows: "If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with five per centum additional thereto, and interest as aforesaid, by distraint and sale, in the manner hereafter Copyright 1922, by The Corporation Trust Company. WAR TAX 106 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. provided, of the goods, chattels, or effects, including stocks, securities and evidences of debt, of the person delinquent as aforesaid: Provided," etc. 320 It will be observed that under this section the collector is to proceed to collect not only the tax, but five per centum additional; further, it provides for "interest as aforesaid" at the rate of one per centum a month; see R. S. sees. 3184 and 3185. 321 The collector contends that Sec. 408 above quoted must be read in connection with Sec. 406 [1f30]: Sec. 406. That the tax shall be due one year after the decedent's death; but in any case where the Commissioner finds that payment of the tax within one year would impose undue hardship upon the estate, he may grant an extension of time for the payment of the tax for a period not to exceed three years from the due date. If the tax is not paid within one year and 180 days after the decedent's death, interest at the rate of 6 per centum per annum from the expiration of one year after the decedent's death shall be added as part of the tax. 322 The inconsistency of the provisions of R. S. Sec. 3187 and of Sec. 406 and 408 concerning interest and the amount collectible is apparent. 323 The collector's contention amounts to this: That by Sec. 3187, a general provision, he is authorized to nullify the specific provisions of Sec. 406 relating to the amount to be collected, as well as the specific provision of Sec. 408 as to the time at which payment may be enforced under the provisions of general law or by suit. 324 He contends that Sec. 408 is applicable only after one year and 180 days, and that the provisions of general law Sec. 3187, are applicable before. But clearly both are not applicable, since if Sec. 3187 is enforced nothing remains to be done according to the provisions of Sec. 406 and 408. 325 This is clearly a case where the general and special provisions of law cannot be applied so as to give effect to both, and where the special provisions render inapplicable the general provisions of law until the time fixed by Sec. 408 for enforcement. 326 The contention of the collector seems to be based upon the provision of Sec. 406 of the Revenue Act; "that the tax shall be due one year after the decedent's death." It does not follow, however, that because the tax accrued or became due at this date, it was immediately enforceable by distraint. It is common in tax legislation to fix a date at which the tax ac- crues, a later date up to which it may be paid without interest, and a further date at which proceedings for its enforcement may be begun. 327 Because the statute fixes a date at which a tax becomes due, and because it is payable at any time after that date, it by no means fol- lows that it must be immediately collectible by the process of distraint. United States vs. The State Bank of North Carolina, 6 Peters 29, 36, shows that the word "due" is sometimes used to express the mere statement of indebtment, and then is an equivalent of "owe" or "owing." See also the decision of this court In re B. H. Gladding Co., 120 Fed. 809; In re West Norfolk Lumber Co., 112 Fed. 759, 767; Wiggin vs. Knights of Pythias, 31 Fed. 122, 125. 328 The collector relies also upon the provisions of Sec. 406: "But in any case where the Commissioner finds that payment of the tax within one year would impose undue hardship upon the state, he may grant an extension of time for the payment of the tax for a period not to exceed three years from the due date." 329 The provision is peculiar in that the power of the Commissioner to extend the time of payment is based upon the finding of hardship Copyright 1922, by The Corporation Trust Company. WAR TAX 107 SERVICE ESTATE TAX REGULATIONS.— 1918 LAW. in paying before the due date; but the grant of power to the Commissioner to extend the time of payment for a period not to exceed three years from the due date does not conflict with the section which imposes a statutory duty upon the collector in the absence of any extension of time by the Commissioner under Sec. 406, as in this case. Can it be said that the provision for an exten- sion of the time of payment by the Commissioner implies an authority of the collector, in the absence of such extension, to proceed at once under Sec. 3187, despite the specific provision of Sec. 406 that interest at six per cent from one year after the decedent's death is to be added if the tax is not paid within one year and 180 days after the decedent's death, and of the statutory direction to the collector as a ministerial officer contained in Sec. 408: "That if the tax herein imposed is not paid within 180 days after it is due, the collector shall, unless there is reasonable cause for further delay, proceed to collect the tax under the provisions of general law," etc. 330 The plaintiffs urge that the statute, by providing a 180 days period after the due date for payment without interest, and by providing for action by the collector after the expiration of that period, has given a substantial right to the executors of a decedent's estate in recognition of the difficulty of converting assets into cash for immediate payments of large sums for estate taxes. The time is given that loss, through immediate conversion of assets into cash, may be avoided. 331 The provision of the 180 days period is significant, in view of the fact that under Sec. 208 of the Revenue Act of 1916 the period of but 60 days was provided. It would hardly be contended that this period of 60 days could be cut off by resort to Sec. 3187. 332 It is also significant that under the Income Tax provisions of the Act of February 24, 1919, Sec. 250 (e) expressly excepts the estates of deceased persons from the provision that if any tax remains unpaid after the date when it is due, and for ten days after notice and demand by the collector, there shall be added as part of the tax 5 per centum, plus interest at the rate of 1 per centum per month. 333 A construction of Title IV which imposes upon the estate payments from which the income of an estate is relieved by the provisions of the same Revenue Act is to be avoided. 334 In the district of Rhode Island the difficulty of immediately con- verting estates of decedents into cash for payment of large estate taxes, and the danger of great loss to the principal of estates, were so serious that legislative relief was sought and was granted by the Rhode Island Legislature, by empowering executors and administrators to raise funds by mortgaging or pledging the personal estate of decedents in their hands. Public Laws of Rhode Island, January Session 1921, Chap. 2030. 335 The intent of Congress to give to the estates of decedents a substantial benefit from the 180 days provision is manifest, and the judgment of Congress that a period of 180 days without interest and without distraint was proper in respect to the collection of estate taxes, cannot be questioned; nor can it be assumed from the length of this period (180 days) that it was intended that this period fixed by Congress in legislative enactment should be shortened either by regulation or by act of the collector. 336 I am of the opinion that the plaintiffs' contention that Sees. 406 and 408 and 1307 of the Revenue Act are exclusive of the present application of the provisions of Sec. 3187 is sound, and that the threatened distraint is without statutory authorization. If this is correct it does not matter that there are regulations which direct or pretend to authorize this, since express provisions of the Revenue Act cannot be repealed by regulation. Copyright 1922, by The Corporation Trust Company. WAR TAX 10S SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. 337 The collector objects to jurisdiction, relying upon R. S. 3224: "No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." 338 As we have said, the validity of the tax, the obligation of the plaintiffs to pay, and the right of the United States to collect in accordance with the statute, are not contested. A restraint, however, is sought upon action which is not authorized by statute. 339 There appears to be here no element of interference with the discre- tion of the Commissioner of Internal Revenue in making an assess- ment, and the case does not involve interference with any quasi-judicial function; it seems to be merely a question of the statutory right of the col- lector, — a ministerial officer. 340 Sec. 3224 was before the court in Dodge vs. Osborn, 240 U. S. 118 and in Dodge vs. Brady, 240 U. S. 122. In Dodge vs. Osborn it was said — "* * * * it declares, by Sec. 3224, that its officers shall not be enjoined from collecting a tax claimed to have been unjustly assessed, when those officers, in the course of general jurisdiction over the subject-matter in ques- tion, have made the assignment (assessment) and claim that it is valid." 341 No question of that character is before us. The collector's authority to distrain is statutory; his duty purely ministerial. The plaintiffs acknowledge the validity of the law and of the assessment, and the right of the collector, while pursuing the provisions of the statute. Does the provision of Sec. 3224, that no court shall restrain the collection of a tax, prohibit a suit in which the plaintiff seeks to restrain a collector from proceeding pre- maturely and otherwise than in accordance with the statute that provides the method of collection? 342 This case must be distinguished from cases in which the right to collect is denied because of the asserted invalidity of the law or of the assessment. To restrain a premature enforcement, at a date earlier than that fixed by statute, protects the rights of the tax payer without impeding the execution of the law. 343 The system of "stringent measures, not judicial, to collect them [both customs duties and internal revenue taxes], with appeals to specified tribunals, and suits to recover back moneys illegally exacted was a system of corrective justice intended to be complete;" (Dodge vs. Osborn, 240 U. S. 121); but it seems inapplicable when the only wrong complained of is a violation of the statute by premature action of a ministerial officer whose power is defined by statute. 344 The term "collection of a tax" implies a statutory procedure. 345 Does Sec. 3224 require that the executors of an estate must comply with a demand which destroys the right to 180 days for the conversion of the estate into cash? 346 Dodge vs. Osborn recognizes that there may be exceptional cases to which the provisions of Sec. 3224 are inapplicable. The circumstances of an estate tax are so unusual as to lead Congress to make a special provision; a most unusual provision of 180 days. This is Congressional recognition of the unusual situation, demanding unusual delay. 347 It may be said that plaintiffs seek only protection against action which is not a collection of a tax in the sense of the statute, Sec. 3224, but, on the contrary, a violation of a statute, Sec. 408. There is no legal remedy for the loss of that time which Congress thought necessary. Copyright 1922, by The Corporation Trust Company. WAR TAX 109 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 19 1 8 LAW. They cannot recover if they pay the tax, in any event more than interest, and it is doubtful if they may recover that. 348 We may look into the statute sufficiently to determine whether the act complained of is "the collection of a tax" or a merely illegal and unauthorized act of a person without statutory authority. 349 If, as stated by Bouvier, p. 1569, "the writ of injunction may be regarded as the correlation of the writ of mandamus," etc., we should now observe the distinction between controlling the purely ministerial act of an officer directed by a statute, which leaves him no discretion, and the acts of officers having judicial or quasi-judicial functions to perform in the assessment of taxes. 350 The question of the power of a collector to distrain before the time fixed by the statute from which his power is derived, is a judicial question. Acting without statutory authority the distraint would be merely an unlawful seizure of property. 351 The loss of that substantial period of time, — 180 days, — expressly granted by Congress for the conversion of assets, may be regarded as an irreparable injury; for which the statutes providing for recovery of taxes illegally assessed or collected afford no remedy. If the plaintiffs pay now they lose all benefit of the provision of the 180 days period, and suffer any loss from compulsory shortening of that period. As the payment, if made within 180 days after the due date is without interest, the estate will lose upwards of $5,000 by enforced payment at the earlier date, under Sec. 3187. 352 As the tax is payable at the due date it is doubtful if interest, in any event, could be recoverable; but assuming that such recovery is possible, there remains irreparable damage in the loss of the benefit that Congress extended to estates of decedents by fixing the time of distraint at 180 days after the due date. 353 The plaintiffs, in my opinion, make a case justifying the interposition of a court of equity, in order to prevent irreparable injury from an unlawful act. Furthermore, I am of the opinion that Sec. 3224 R. S. does not forbid an injunction against a ministerial officer proceeding without authority and in violation of the controlling statute, since by the term "col- lection of a tax" is meant a proceeding in accordance with law, and not a merely unlawful and unauthorized act. 354 Defendant's motions to dismiss are denied. 355 A draft decree for an injunction against procedure otherwise than as authorized by Sec. 408 may be presented by the plaintiffs. [Comment: The Revenue Act of 1921, provides in Title IV, Estate Tax, Sec. 406 [1[449] that the tax shall be due and payable one year from decedent's death. — The Corporation Trust Company.] Copyright 1922, by Tht Corporation Trust Company. WAR TAX 110 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1 918 LAW. (T. D. 3138.) Community Property. 1. Income taxes — Husband and wife — Community property. *********** 356 2. Estate tax — Husband and wife — Community property. 11 In Washington, Arizona, Idaho, New Mexico, Louisiana and Nevada 113 there should be included in gross estate, in computing the estate tax of a deceased spouse, one-half only of the community property of husband and wife domiciled therein; this is not based upon any statute enacted subsequent to March 1, 1913, and applies under estate tax acts prior to the Revenue Act of 1918. [Captions to T. D. 3138, 1f357, below.] 357 There is given below in full for your information and guidance an opinion rendered by the Attorney General under date of February 26, 1921, dealing with the right of husband and wife domiciled in certain states having so-called "community property" laws to divide certain of their income for the purpose of the income tax, and as to the inclusion of community property in the gross estate of a deceased spouse. See, in this connection. Treasury Decision No. 3071 [see H378]. (T. D. 3138, signed by Commissioner Wm. M. Williams, and dated March 3, 1921.) 358 Dear Mr. Secretary: My opinion has been requested upon the fol- lowing questions: 359 1* * * * * * * **** 360 2. In which of the states in which the community property system exists should there be included in gross estate, in computing the estate tax of the estate of a deceased spouse, one-half and only one-half of the community property of husband and wife domiciled therein? [See answer at H387.] 361 3. If your answers to questions 1 and 2, as to any state are based upon a statute enacted subsequent to March 1, 1913, please give the rule as to such state existing from March 1, 1913 to the passage of such statute, for my guidance in allowing claims for refund. [See answer at ^[388.] 362 4. Do your answers to questions 1 and 2 apply under income and estate tax acts prior to the Revenue Act of 1918? [See answer at 1F389J 363 The community property system prevails in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. The application of the income tax act to the income from community property belonging to husband and wife domiciled in Texas was disposed of in my opinion of September 10, 1920. [See 1)378]. *********** 364 While the statutes of California are in some respects similar to the community property laws of the other community property states, the rule established by the highest courts of that state is that during coverture the wife has no vested interest in the community property, her interest therein being a mere expectancy. 365 In Spreckles v. Spreckles, 116 Cal. 339 (1897), the Supreme Court of that state held that prior to the amendment of 1891 to Sec. 172 of the Civil Code, forbidding the husband to give away community property without consent of the wife in writing, the code vested in the husband all the elements of absolute ownership of the community property; that the wife's interest was a mere expectancy, and as to all the wo'rld except the wife, there was, prior to that amendment, no distinction between the com- Copyright 1922, by The Corporation Trust Company. WAR TAX 111 SERVICE 1-2-22. ESTATE TAX REGULATIONS. — 1918 LAW. munity estate and the separate estate of the husband; and that the amend- ment could not be construed retroactively so as to deprive the husband of his vested right to dispose by gift of community property acquired prior.to the amendment, without the consent of the wife. 366 In 1905 California passed an inheritance tax law, and subsequently the question was raised whether a widow should be compelled to pay such tax on that one-half of the community property that she took on the death of her husband. In the Estate of Moffitt, 153 Cal. 359 (1908), the Supreme Court of California held that she did, since she had no vested interest in the community estate and took her one-half on the death of her husband as his heir. 367 This case was taken to the Supreme Court of the United States (Moffitt v. Kelly, 218 U. S. 400) where the judgment of the lower court was affirmed, the court laying down the rule that the nature and character of the right of the wife in community property for the purpose of taxation is a peculiarly local question, and the determination of the state court in regard thereto is not reviewable by the Supreme Court; and, further, that the law of California of 1905, taxing all property passing by will or intestacy, having been construed by the highest court of that state as applying to the wife's share of the community property, such tax is not in conflict with the contract, due process, or equal protection clauses of the Constitution. 368 Subsequently the inheritance tax law of California was amended tc provide "that for the purpose of this act" the one-half of the com- munity property which goes to the surviving wife on the death of her husband, under the provisions of Sec. 1402 of the Civil Code "shall not be deemed to pass to her as heir to her husband, but shall, for the purpose of this act, be deemed to go, pass, or be transferred, to her for valuable and adequate consideration." 369 It is obvious that this language does not change the rule of community property in the state nor vest in the wife any interest thereto prior to the dissolution of the community; rather it emphasizes the existing rule that the wife has no vested interest in community property. 370 As to the effect of Sec. 172a of the Civil Code, enacted in 1917, it is not to be presumed that the legislature intended, by the enact- ment of same to make so revolutionary a change in the existing rule of prop- erty in California as to devest the husband of his ownership in the community property. As was said in Spreckles v. Spreckles, supra, "If a husband cannot make a valid transfer of the property for the purpose of depriving his wife of it, that does not show a vested right in her;" and giving the fullest possible effect to the language, unless the wife had a vested interest by virtue of the law as it theretofore existed, which it must be conceded she did not, the operation of the amendment would necessarily be confined to community property acquired after May 23, 1917. SUMMARY. 371 Summarizing, it appears that in all of the community property states except California their own courts have held that the wife has, during the existence of the marriage relation, a vested interest in one-half of the community property. Her rights in the property of the community are perhaps most fully recognized in the state of Washington, where both spouses have testamentary disposition over one-half of the community property, and where in the absence of such disposition it descends to their issue, or, in the absence of issue, to the survivor; while the husband is manager of the community estate in Washington he may not sell, convey, or encumber Copyright 1922, by The Corporation Trust Company. WAR TAX 112 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. real estate unless the wife join with him in the conveyance; and as was held in Huyvaerts v. Roedtz, ante, and Schramm v. Steele, ante, the separate debt of the husband cannot be satisfied out of community property where it is not incurred in connection with the community business, nor for the benefit of the community. 372 In Idaho it is seen that the limitation upon the alienation of the community real property is the same as in Washington. But while the wife's earnings and the rents and profits of her separate estate are com- munity property she is given the management and control of same. The Idaho rule governing the disposition of community property on the death of either spouse is, with minor variations, the same as that of Washington. In neither state is an inheritance tax payable on the one-half of the community that goes to the one spouse on the death of the other. 373 In Arizona the husband only may dispose of community personal property, but the wife must join him in deeds or mortgages affecting real estate, except unpatented mining claims. One-half of the community property is subject to the testamentary disposition of either spouse, and in absence of such disposition goes to his or her descendants; where there is neither testamentary disposition nor descendants, it is subject to distribution in the same manner as the separate property of the husband. On decree of divorce the Court may divide the property as he sees fit, but in the absence of provision for the community property the parties from the date of the decree holds as tenants in common. The courts of Arizona hold that the wife is equal owner with her husband. 374 In Nevada the husband has the entire management and control of the community property, except that the wife has entire control of her earnings when living separate from her husband. Upon her death the husband takes the whole community estate, except that where he has abandoned her without good cause she may by will dispose of half and in absence of such disposition it goes to her heirs, exclusive of her husband. On the death of the husband the wife takes half and the husband may dis- pose of the other half by will, or it goes to his surviving children; if there is no will and no children survive, the whole goes to the wife without admin- istration, subject to certain provisos. On dissolution of community by divorce for any other ground than adultery or extreme cruelty, the com- munity property must be equally divided between the parties. The wife pays no inheritance tax under the inheritance tax law of Nevada on her interest in community property the courts holding that she takes not as heir but by a right vested in her at all times during marriage. It is to be noted that the Constitution of Nevada recognizes the wife's interest in community property. 375 In New Mexico while the husband is manager of the community estate, he may not transfer real property without a valuable considera- tion without the written consent of his wife; and under certain circumstances the wife may be substituted as manager; prior to 1915 he could not transfer community personal property except for a valuable consideration without her written consent; on dissolution of the community by the death of the wife the husband takes all except such portion as may have been set aside to the wife by judicial decree, which portion goes to her heirs unless she has disposed of same by will; on death of the husband one-half goes to the wife and the other half is subject to testamentary disposition by the husband. If he makes no will one-fourth of his one-half goes to the wife and the re- mainder to the children. On separation either may petition for division of Copyright 1922, by The Corporation Trust Company. WAR TAX 113 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. community property and after divorce continue to hold as tenants in common where no disposition has been made in the divorce decree. New Mexico has no state inheritance tax act. 376 In Louisiana the community property comprehends all property acquired during the marriage by either husband or wife except that acquired with separate funds or by inheritance or particular donation, and excepting the earnings of the wife when she is living separate from her hus- band; the husband is manager of the community but he may not convey community immovables by gratuitous title, and cannot dispose of moveables in fraud of the wife; either spouse may dispose of one-half the community property by will and the laws governing the descent of such property in the absence of testamentary disposition apply equally to both spouses, the sur- vivor taking the deceased spouse's half by inheritance when there is no will, and neither father, mother or descendants. As heretofore stated the survivor pays no inheritance tax on his or her one-half of the community property but does pay on that part inherited from the deceased spouse. 377 In California the wife has no power of testamentary disposition of community property except of such as may have been set aside to her by judicial decree; she takes one-half as heir on the death of the husband; but on the death of the wife the entire community property belongs to the husband without administration. The California courts have held that under the law as it stood prior to 1917 the wife had no vested interest in community property prior to the dissolution of the marriage; the amendment to the inheritance tax act being limited to the purposes of that act could not have had the effect of vesting an interest in her, and had the addition of Sec. 172a had that effect any amendment of the inheritance tax act would have been unnecessary to exempt her one-half from taxation thereunder. In the case of Blum v. Wardell, now pending before the Circuit Court of Appeals of the Ninth Circuit, on appeal from the District Court of the Northern District of California, the application of the Federal estate tax act of 1916 is under consideration. 378 As appears from my opinion of September 10, 1920, in Texas the con- trol of community property is divided between the husband and wife; in that state on the death of either spouse without issue the survivor takes the whole and where there is issue, takes one-half, the other half going to said issue or their descendants. Under the state inheritance tax law the wife pays no tax on her half of the community property. 379 In Warburton v. White, 176 U. S. 484, 496, the principle was enun- ciated that where state decisions have interpreted state laws govern- ing property or controlling relations that are essentially of a domestic and state nature the. United States Supreme Court will follow the state decisions if possible to do so, in the discharge of its duties. Also in De Vaughn v. Hutchinson, 165 U. S. 566, 570, it was held that to the law of the state in which property is situated we must look for the rules which govern its descent, alienation and transfer, and for the effect and construction of wills and other conveyances. In United States v. Crosby, 7 Cranch 115, it was held that the title to land can be acquired and lost only in the manner prescribed by the law of the place where same is situated. 380 In arriving at an answer to the questions propounded by you we are called upon to determine the rules of property in the community property states; we have, therefore, pursuant to the rules of the above cases, adopted the rules laid down by the highest courts of the various states. Copyright 1922, by The Corporation Trust Company. WAR TAX 114 SERVICE 1-2-22. ESTATE TAX REGULATIONS.— 1918 LAW. There remains to be determined the application thereto, of the income and estate tax provisions of Federal statutes. In my previous opinion it was stated that since in Texas the ownership in one-half of all community property vests in each spouse, whatever is income to the community is income to both. This conclusion applies, therefore, to all states in which community property is held to be vested equally in both spouses. 381 Section 201 of the Revenue Act of 1916 and Sec. 401 of that of 1918 impose a tax "upon the transfer of the net estate of every decedent" dying after the passage thereof, to be determined as is set forth in the sec- tions following, which are: Revenue Act of 1918. Sec. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — (a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate; *********** (d) To the extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person, or desposited in banks or other institutions in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have belonged to the de- cedent. 382 Subdivisions (a) and (c) of Section 202 of the Revenue Act of 1916 are identical with subdivisions (a) and (d) of Section 402 of the Revenue Act of 1918, quoted above. 383 While the community estate of husband and wife has not in the strictest sense all the incidents of a joint estate or an estate in the entirety as they were known at common law, I am convinced that the com- munity estate is for all practical purposes within the language of subdivision (d) of Sec. 402, there being deductible therefrom, in arriving at the net estate of decedent, the one-half interest of the surviving spouse, which may be shown to have originally belonged to such person, and never to have belonged to the decedent. 384 And even though it should be held that the community estate is not a "joint estate" or an "estate in the entirety" within the meaning of the revenue acts, the one-half interest of the deceased spouse in community property would still be subject to tax under the language of subdivision (a) above. 385 My answers to your questions are therefore: 386 (1) That in Washington, Arizona, Idaho, New Mexico, Louisiana and Nevada the husband and wife domiciled therein, in rendering separate income tax returns, may each report as gross income, one-half of the income which under the laws of the respective states becomes, simul- taneously with its receipt, community property. 387 (2) In the states mentioned in answer to question one there should be included in gross estate, in computing the estate tax of a deceased spouse, one-half only of the community property of husband and wife domiciled therein. 388 (3) Neither of the above answers is based upon a statute enacted subsequent to March 1, 1913. Copyright 1922, by The Corporation Trust Company. WAR TAX 115 SERVICE 1-2-22 ESTATE TAX REGULATIONS.— 1918 LAW. 389 (4) My answers to these questions apply under income and estate tax acts prior to the Revenue Act of 1918. (Summary of opinion by Attorney General A. Mitchell Palmer, dated February 26, 1921, appended to and made a part of T. D. 3138, ^[357. ) Copyright 1922, by The Corporation Trust Company, WAR TAX 116 SERVICE 1-2-22. ESTATE TAX SUPREME COURT DECISIONS. (Decision.) Revenue Act of 1916. Inheritance, legacy, succession, or transfer taxes are not deductible in the determination of the net estate subject to the Federal estate tax. Supreme Court of the United States. New York Trust Company and Albert W. Pross, as Executors of the Will of J. Harsen Purdy, Plaintiffs in Error, vs. Mark Eisner. In Error to the District Court of the United States for the Southern District of New York. [May 16, 1921.] Mr. Justice Holmes delivered the opinion of the Court. 390 This is a suit brought by the executors of one Purdy to recover an 144 estate tax levied under the Act of Congress of September 8, 1916, c. 463, Title II, § 201, 39 Stat. 736, 777, and paid under duress on December 14, 1917. According to the complaint Purdy died leav- ing a will and codicil directing that all succession, inheritance and transfer taxes should be paid out of the residuary estate, which was be- queathed to the descendants of his brother. The value of the residuary estate was $427,414.96, subject to some administration expenses. The executors had been required to pay and had paid inheritance and succession taxes to New York ($32,988.97) and other States ($4,780.91) amounting in all to $37,- 769.88. The gross estate as defined in § 202 of the Act of Congress was $769,799.39; funeral expenses and expenses of administration, except the above taxes, $61,322.08; leaving a net value for the payment of legacies, except as reduced by the taxes of the United States, of $670,707.43. The plaintiffs were compelled to pay $23,910.77 to the United States, no deduc- tion of any part of the above mentioned $37,769.88 being allowed. They allege that the Act of Congress is unconstitutional, and also that it was mis- construed in not allowing a deduction of state inheritance and succession taxes as charges within the meaning of § 203. On demurrer the District Court dismissed the suit. 391 By § 201 of the Act, "a tax * * * equal to the following. per- centage of the value of the net estate, to be determined as provided in section two hundred and three, is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this Act." * * * with percentages rising from one per centum of the amount of the net estate not in excess of $50,000 to ten per centum of the amount in excess of $5,000,- 000. Section 202 gives the mode of determining the value of the gross estate. Then, by § 203 it is enacted "That for the purpose of the tax the value of the net estate shall be determined — (a) In the case of a resident, by deduct- ing from the value of the gross estate — (1) Such amounts for funeral ex- penses, administration expenses, claims against the estate, unpaid mort- gages, losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise, support during the settle- Copyright 1922, by The Corporation Trust Company. WAR TAX 117 SERVICE 1-2-22. ESTATE TAX SUPREME COURT DECISIONS. ment of the estate of those dependent upon the decedent, and such other charges against the estate, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered; and (2) an exemption of $50,000." The tax is to be due in one year after the decedent's death. § 204. Within thirty days after quali- fying the executor is to give written notice to the collector and later to make return of the gross estate, deductions allowed, net estate and the tax payable thereon. § 205. The executor is to pay the tax. § 207. The tax is a lien for two years on the gross estate except such part as is paid out for allowed charges, § 209, and if not paid within sixty days after it is due is to be col- lected by a suit to subject the decedent's property to be sold. § 208. In case of collection from some person other than the executor, the same section provides for contribution from or marshalling of persons subject to equal or prior liability "it being the purpose and intent of this title that so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution." These provisions are assailed by the plaintiffs in error as an unconstitutional interference with the rights of the States to regulate descent and distribution, as unequal and as a direct tax not apportioned as the Constitution requires. 392 The statement of the constitutional objections urged imports on its face a distinction that, if correct, evidently hitherto has escaped this Court. See United States v. Field, [^[396 herein]. It is admitted, as since Knowlton v. Moore, 178 U. S. 41, it has to be, that the United States has power to tax legacies, but it is said that this tax is cast upon a transfer while it is being effectuated by the State itself and therefore is an intrusion upon its processes, whereas a legacy tax is not imposed until the process is com- plete. An analogy is sought in the difference between the attempt of a State to tax commerce among the States and its right after the goods have become mingled with the general stock in the State. A consideration of the paral- lel is enough to detect the fallacy. A tax that was directed solely against goods imported into the State and that was determined by the fact of im- portation would be no better after the goods were at rest in the State than before. It would be as much an interference with commerce in one case as in the other. /. M. Darnell & Son Co. v. Memphis, 208 U. S. 113. Welton v. Missouri, 91 U. S. 275. Conversely if a tax on the property distributed by the laws of a State, determined by the fact that distribution has been accomplished, is valid, a tax determined by the fact that distribution is about to begin is no greater interference and is equally good. 393 Knowlton v. Moore, 178 U. S. 41, dealt, it is true, with a legacy tax. But the tax was met with the same objection; that it usurped or interfered with the exercise of state powers, and the answer to the objection was based upon general considerations and treated the 'power to transmit or the transmission or receipt of property by death' as all standing on the same footing. 178 U. S. 57, 59. After the elaborate discussion that the sub- ject received in that case we think it unnecessary to dwell upon matters that in principle were disposed of there. The same may be said of the argu- ment that the tax is direct and therefore is void for want of apportionment. It is argued that when the tax is on the privilege of receiving, the tax is in- direct because it may be avoided, whereas here the tax is inevitable and therefore direct. But that matter also is disposed of by Knozvhon v. Moore. not by an attempt to make some scientific distinction, which would be at least difficult, but on an interpretation of language by its traditional use — on the practical and historical ground that this kind of tax always ha? bePfl Copyright 1922, by The Corporation Trust Compo*f. WAR TAX 118 SERVICE 1-2-22. ESTATE TAX SUPREME COURT DECISIONS. regarded as the antithesis of a direct tax; 'has ever been treated as a duty or excise, because of the particular occasion which gives rise to its levy. , 178 U. S. 81-83. Upon this point a page of history is worth a volume of logic. 394 The inequalities charged upon the statute, if there is an intestacy, are all inequalities in the amounts that beneficiaries might receive in case of estates of different values, of different proportions between real and personal estate, and of different numbers of recipients; or if there is a will affect legatees. As to the inequalities in case of a will they must be taken to be contemplated by the testator. He knows the law and the consequences of the disposition that he makes. As to intestate successors the tax is not imposed upon them but precedes them and the fact that they may receive less or different sums because of the statute does not concern the United States. 395 There remains only the construction of the Act. The argument against its constitutionality is based upon a premise that is unfavor- able to the contention of the plaintiffs in error upon this point. For if the tax attaches to the estate before distribution — if it is a tax on the right to transmit, or on the transmission at its beginning, obviously it attaches to the whole estate except so far as the statute sets a limit. 'Charges against the estate' as pointed out by the Court below are only charges that affect the estate as a whole, and therefore do not include taxes on the right of indi- vidual beneficiaries. This reasoning excludes not only the New York suc- cession tax but those paid to other States, which can stand no better than that paid in New York. What amount New York may take as the basis of taxation and questions of priority between the United States and the State are not open in this case. Decree affirmed. l\\o bikAi-Qno J&rfr nolaivoiq rhiw t zsoUui3 oJ ^dio^gsl niBiioo io Insra^&Q eirl to.-jrtanad sdl ioi bau\ Jam* 3j£i£q3<: s 2£ bbrj bne Si&qB od biuotte bfl£ rrroit bfi£ snhub isrt oJ bUq sd ot omooni 3oci sri} .bteil slfivi .aiiw -oi q JOIOXL iln^ItVgbUl Ofl£ J1IJ8 gift? .Jfl§U01d e 3L«n9V3ZL j further amended October 3 4917 (Cru 63 40 SjlUtHKLfo Vft^ft : \ QZ) f0£ .092 xii ? dIQI io 3d A suasr$% axfT 8e£ Copyright 1922, by The Corporation Trust Company. WAR TAX 119 SERVICE 1-2-22. ESTATE TAX SUPREME COURT DECISIONS. {Decision.) Gross estate does not include an interest passing under testamentary execu tion of a general power of appointment. {Act of Sept. 8, 1916, as amended by the Act of March 3, 1917.) Supreme Court of the United States. (255 U. S. 257) The United States, Appellant, vs. Stanley Field, as Executor of the Estate of Kate Field, deceased. [February 28, 1921.] Mr. Justice Pitney delivered the opinion of the Court. 396 This is an appeal from a judgment of the Court of Claims sustaining 119 a claim for refund of an estate tax exacted under Title II of the 121 Revenue Act of September 8, 1916, as amended by Act of March 3, 1917 (Ch. 463, 39 Stat. 756, 777; Ch. 159, 39 Stat. 1000, 1002). It presents the question whether the Act taxed a certain interest that passed under testamentary execution of a general power of appointment created prior but executed subsequent to its passage. 397 The facts are as follows: Joseph N. Field, a citizen and resident of Illinois, died April 29, 1914, leaving a will which was duly admitted to probate in that State, and by which he gave the residue of his estate, after payment of certain legacies, to trustees, with provision that one-third of it should be set apart and held as a separate trust fund for the benefit of his wife, Kate Field, the net income to be paid to her during life, and from and after her death the net income of one-half of said share of the trust estate to be paid to such persons and in such shares as she should appoint by last will and testament. The trust was to continue until the death of the last sur- viving grandchild of the testator who was living at the time of his death, and at its termination the undistributed estate was to be divided among named beneficiaries or their issue, per stirpes, in proportions specified. Kate Field died April 29, 1917, a resident of Illinois, leaving a will which was duly pro- bated in that State, by which she executed the power of appointment, direct- ing that the income to which the power related should be paid in equal shares to her children surviving at the date of the respective payments, the issue of any deceased child to stand in the place of such deceased child. The collector of internal revenue, assuming to act under the Revenue Act of 1916, as amended, and Regulations issued by the Commissioner of Internal Revenue, included as a part of the gross estate of Kate Field the appointed estate passing under her execution of the power; and proceeded to assess and collect an estate tax based upon the net value thereof, and amounting to $121,059.60. Her executor, having paid the tax under protest, and having made a claim for refund which was considered and rejected by the Commissioner of Internal Revenue, brought this suit and recovered judgment, from which the United States appeals. 398 The Revenue Act of 1916, in sec. 201 (39 Stat. 777) imposes a tax- equal to specified percentages of the value of the net estate "upon * Copyright 1922, by The Corporation Trust Company. WAR TAX 120 SERVICE Appeal from the Court of Claims. 1-2-22. ESTATE TAX SUPREME COURT DECISIONS. the transfer of the net estate of every decedent dying after the passage of this Act." By sec. 203 (p. 778) the value of the net estate is to be determined by subtracting from the value of the gross estate certain specified deductions. The gross estate is to be valued as follows: "Sec. 202. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: "(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate. "(b) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for a fair consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title; ..." 399 The amendment of March 3, 1917, (39 Stat. 1002), pertains merely to the rates, and need not be further considered.* 400 The provision quoted from sec. 202 was construed by the Treasury Department, in U. S. Internal Revenue Regulations No. 37, relating to Estate Taxes, revised May, 1917, Art. XI, as follows: "Property passing under a general power of appointment is to be included as a portion of the gross estate of a decedent appointor." 401 No question being suggested as to the power of Congress to impose a tax upon the passing of property under testamentary execution of a pow- er of appointment created before but executed after the passage of the taxing act (See Chandler v. Kelsey, 205 U. S. 466, 473, 478-479; Knowlton v. Moore, 178 U. S. 41, 56-61), the case involves merely a question of the construction of the Act. Applying the accepted canon that the provisions of such acts are not to be extended by implication {Gould v. Gould, 245 U. S. 151, 153), we are constrained to the view — notwithstanding the administrative construc- tion adopted by the Treasury Department — that the Revenue Act of 1916 did not impose an estate tax upon property passing under a testamentary execution of a general power of appointment. 402 The Government seeks to sustain the tax under both clauses above quoted from sec. 202. 403 The conditions expressed in clause (a) are to the effect that the taxable estate must be (1) an interest of the decedent at the time of his death, (2) which after his death is subject to the payment of the charges against his estate and the expenses of its administration, and (3) is subject to distribu- tion as part of his estate. These conditions are expressed conjunctively; and it would be inadmissible, in construing a taxing act, to read them as if prescribed disjunctively. Hence, unless the appointed interest fulfilled all three conditions, it was not taxable under this clause. 404 The chief reliance of the Government is upon the rule, well established in England and followed generally, but not universally, in this ♦The Act was further amended October 3, 1917, (Ch. 63, 40 S.tat. 300, 324); super- seded and repealed by Act of February 24, 1919 (Ch. 18, 40 Stat. 1057, 1096, 1149). Copyright 1922, by The Corporation Trust Company. WAR TAX 121 SERVICE 1-2-22. ESTATE TAX SUPREME COURT DECISIONS. country, that where one has a general power of appointment either by deed or by will, and executes the power, equity will regard the property appointed as part of his assets for the payment of his creditors in preference to the claims of his voluntary appointees. See Brandies v. Cochrane, 112 U. S. 344, 352. 405 The English cases are fully reviewed by the House of Lords in O'Gradv v. Wilmot (1916) 2 A. C. 231, 246, et seq. Illustrative cases in the American courts are Johnson v. Cushing, 15 N. H. 298, 307; Rogers v. Hinton. 62 N. C. 101, 105; Clapp v. Ingraham, 126 Mass. 200, 202; Knowles v. Dodge, 1 Mack. (D. C.) 66, 72; Freeman v. Butters, 94 Va. 406, 411; Tallmadge v. Sill, 21 Barb. 34, 51, et seq.; contra per Gibson, C. J., in Commonwealth v. Duf field, 12 Pa. 277, 279-281; Pearce v. Lederer, 262 Fed. Rep. 993; affirmed, Lederer v. Pearce, 266 Fed. Rep. 497. 406 It is tacitly admitted that the rule obtains in Illinois, and we shall so assume. 407 But the existence of the power does not of itself vest any estate in the donee. Collins v. Wickwire, 162 Mass. 143, 144; Keays v. Blinn, 234 111. 121, 124; Walker v. Treasurer, 221 Mass. 600, 602-603: Shattuck v. Burrage, 229 Mass. 448, 451. See Carver v. Jackson, 4 Pet. 1, 93. 408 Where the donee dies indebted, having executed the power in favor of volunteers, the appointed property is treated as equitable, not legal, assets of his estate; Clapp v. Ingraham, 126 Mass, 200, 203; Patter sori Co. v. Lawrence, 83 Ga. 703, 707; and (in the absence of statute), if it passes to the executor at all, it does so not by virtue of his office but as a matter of convenience and because he represents the rights of creditors. CGrady v. Wilmot (1916) 2 A. C. 231, 248-257; Smith v. Garey, 2 Dev. & Bat. Eq. (N.C.) 42, 49; Olney v. Balch, 154 Mass. 318, 322; Emmons v. Shaw, 171 Mass. 410, 411; Hill v. Treasurer, 229 Mass. 474, 477. 409 Where the power is executed, creditors of the donee can lay claim to the appointed estate only to the extent that the donee's own estate is insufficient to satisfy their demands. Patterson Co. v. Lawrence, 83 Ga. 703, 708; Walker v. Treasurer, 221 Mass. 600, 602-603; Shattuck v. Burrage. 229 Mass. 448, 452. 410 It is settled that (in the absence of statute) creditors have no redress in case of a failure to execute the power. Holmes v. Coghill, 7 Ves. 499, 507, affirmed, 12 Ves. 206, 214-215; Gilman v. Bell, 99 111. 144, 150: Duncanson v. Manson, 3 App. D. C. 260, 273. 41 1 And, whether the power be or be not exercised, the property that was subject to appointment is not subject to distribution as part of the estate of the donee. If there be no appointment, it goes according to the disposition of the donor. If there be an appointment to volunteers, then, subject to whatever charge creditors may have against it, it goes not to the next of kin or the legatees of the donee, but to his appointees under the power. 412 -It follows that the interest in question, not having been property of Mrs. Field at the time of her death, nor subject to distribution as part of her estate, was not taxable under clause (a). 413 We deem it equally clear that it was not within clause (b). That clause is the complement of (a), and is aptly descriptive of a transfer of an interest in decedent's own property in his life time, intended to take effect at or after his death. It cannot, without undue laxity of construction, be made to cover a transfer resulting from a testamentary execution by decedent of a power of appointment over property not his own. Copynglit 1922, by The Corporation Trust Co:>tfai:y. WAR TAX 111 SERVICE 1-2-22. ESTATE TAX SUPREME COURT DECISIONS. 414 It would have been easy for Congress to express a purpose to tax property passing under a general power of appointment exercised by a decedent had such a purpose existed; and none was expressed in the Act under consideration. In that of February 24, 1919, which took its place, the section providing how the value of the gross estate of the decedent shall be determined contains a clause precisely to the point (sec. 402 (e), 40 Stat. 1097); "To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except", etc. Its insertion indicates that Congress at least was doubtful whether the previous Act included property passing by appointment. See Matter of Miller, 1 10 N. Y. 216, 222; Matter of Harbeck, 161 N. Y. 211, 217-218; United States v. Bashaw, 50 Fed. Rep. 749, 754. The Government contends that the amendment was made for the purpose of clarifying rather than extending the law as it stood, and cites a statement to that effect in the Report of the House Committee on Ways and Means (House Doc. No. 1267, p. 101, 65th Cong. 2d Sess.). It is evident, however, that this statement was based upon the interpretation of the Act of 1916 adopted by the Treasury Department; the same report proceeded to declare (p. 102) that "The absence of a provision including property transferred by power of appointment makes it possible, by resorting to the creation of such a power, to effect two transfers of an estate with the payment of only one tax;" and this, together with the fact that the committee proposed that the law be amended, shows that the Treasury construction was not treated as a safe reliance. 4 1 5 The tax in question being unsupported by the taxing act, the Court of Claims was right in awarding reimbursement. Judgment affirmed. 416 For % 4 16 see page 125. Copyright 1922, by The Corporation Trust Company. WAR TAX 123 SERVICE [In Blank] WAR TAX 124 SERVICE 1-2-22. ESTATE TAX INDEX. — 1918 ACT. The references are to paragraph numbers. Abatement, claim for: Limitation of time to file. .291 Proof in support of. . 289 When may be made. .288 Accord and satisfaction of past claim — -not sufficient consideration to constitute transfer a "sale". . 108 Accountants, fees of — deductibility. . 140 Accounts, valuation of. . 69 Administration expenses, definition of. . 132 Advancements, not necessarily taxable. . 109 Annuity: Included in gross estate. .61 Tables. . 105, 106 Valuation of. . 95^ Annuity insurance, valuation of. . 126 Appointment, property passing under power of: General rules. .117 Rules where death occurred after February 25, 1919. . 120 Rules where death occurred prior to February 25, 1919. . 121, 396 Appraisal of household and personal effects. . 79-88 Appraisers: Experts required. . 87 Fees of — deductibility. . 140 Attorneys' fees, when deductible. . 138 Attorneys, necessary authorization. . 220 Auction sales, how far accepted. . 69 Auctioneers, fees of — deductibility. . 140 Bank deposits, amount included in gross estate. .74 Bare legal title, not included in gross estate. .60 Beneficiary, under insurance policies: Who is. . 124 When to give 60-day notice. . 199 Bequests: Conditional — when deductible. . 164 Public or charitable — -deductibility. . 158 Public or charitable — estates which may deduct. . 165 Public or charitable — proof required. . 163 To executors — not a basis for deduction. . 135 Bond interest, inclusion in gross estate. . 63 Bonds, situs of. . 168, 174, 177 Bonds, U. S. (See "United States Bonds.") Brokers, fees of — deductibility. . 140 Burial expenses, deductibility of. . 131 Burial lot, deductibility of charge for. . 131 BusinesSj valuation of interest in. . 75 Casualty, meaning of. . 146 Cemetery lot, inclusion in gross estate. . 63 Charitable corporations, what are. . 159 Checks, uncertified — effect of failure to pay. . 266 Citizenship not test of residence. .44 Claims, valuation of. . 77 Claims against estate: Decedent's personal obligations deductible. . 141 Obligations contracted by executor not deductible. . 141 Clerk hire, deductibility. . 140 Close corporation, valuation of stock. .71 Commissions of executors, rules for deduction. . 133 Commissions of trustees, not deductible. . 134 Community property. .356 Computation of -tax, how made. .45, 46, 51, 53 Compromise — power of Commissioner: Extends to any civil or criminal case. . 294 Limitation of. . 294 Requires advice and consent of Secretary. . 294 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Estate Tax — Index Page 1. 1-2-22. ESTATE TAX INDEX. — 1918 ACT. The references are to paragraph numbers. Consent decrees, effect of. . 130 Contemplation of death, transfers made in — nature of. . 109 Copyrights, valuation of. . 76 Coupons, interest, inclusion in gross estate. . 63 Court decision*. (See Table of Cases in "Forms-Finder" division.) Court costs, deductibility. . 140 Courtesy, included in gross estate. . 107 Crops, valuation of. . 78 Death, cause of action for — not included in gross estate. . 60 Death benefits, taxable as insurance. . 122 Deductions: Effect of decision of local court. . 130 General provisions. . 129 Taxes. . 144, 390 Dependent, of decedent — who is. . 150 Dependents, support of — rules governing deductibility. . 147 Depreciation, in value of assets after death — not deductible. . 66 Disease, loss from death of animals — deductible. . 146 Distraint, collection of tax by. . 299 Dividends: Not included in gross estate unless declared prior to death. .64 When to be included in value of stock. . 64 Domestic corporations, stock in part of estate of nonresident. . 168 Domestic insurance company, insurance in part of estate of nonresident. . 168 Domicile, definition of. . 44 Donees, when to give 60-day notice. . 199, 204 Dower, included in gross estate. . 107 Educational corporations, what are. . 159 Effective date of Act. . 48 Entirety, estates by — inclusion in gross estate. .113 Escheated property, transfer taxable. .40 Estate tax, character of — not a property or legacy tax. . 40 Excess tax: Executor to be notified of. . 271 How determined. .271 Executor: Commission. . 133 Duty to file return. .212 Duty to furnish supplemental data. .215 Duty to keep records. . 302 Duty to produce records and papers. . 287 Personal liability of. . 295 Required to pay tax. . 295 Term includes administrator. .2 Exemption, specific — in case of resident estates. . 166 Extension, of time to pay tax — when granted. . 268 Fiduciaries, when to give 60-day notice. . 199 Field, U. S. vs. . 396 Fires, loss from deductible. . 146 Forms. (See Estate Tax Fore-page, or "Forms-Finder" division.) Fraud, in return — effect of. . 224 Funeral expenses, deductibility. . 131 Furniture, valuation of. . 78 Good faith — payment in, suspends interest. . 224 Good will, valuation of. . 76 Gross estate: Includes only actual, beneficial interests. .60 Real property included only when situated in United States. .62 Household goods, appraisal of. . 79, 80, 85, 89 Husband or wife, when to give 60-day notice. . 199 Individual insurance, not taxable where death occurred prior to Feb. 25, 1919. . 125 Copyright 1922, by The Corporation Trust Compwny WAR TAX SERVICE Estate Tax— Index Page 2. 1-2-22. ESTATE TAX INDEX.— 1918 ACT. The references are to paragraph numbers. Insurance: Assignment by decedent — not taxable where he ceases to pay premiums. . 122 Foreign companies — not considered in determining gross estates of nonresident. . 169 Payable to estate — character of. . 123 Payable to estate — the whole included in gross estate. . 122 Payable to individuals — amount in excess of $40,000 included in gross estate. . 122 Taken out as security — taxable where decedent pays premiums. . 122 Insurance companies: Must furnish bond in certain cases before paying policy to beneficiary. .207a, 313 When to give 60-day notice. .201, 207, 313 Insurance premiums, payment of by decedent test of taxability. . 122 Interest: On bonds and notes — inclusion in gross estate. .63 On notes — how computed. . 73 On unpaid tax — Not affected by claim for abatement. . 290 On excess tax. . 272 On original tax. .270, 310 Suspended by payment in good faith. . 224 U. S. Bonds. (See "United States bonds.") Where liability accrued under prior statutes. .305 Inventory, of nonresident estate — power to require. .216 Investigation of estates. .210 Jewelry, appraisal of. . 85 Joint interests: Character of. . 113, 356 What interest included in. . 115 Judgments: Of local court — effect on deductions. . 130 Valuation of. . 77 Law provisions: 1918 Act. .1 1921 Act. .416 Lien: For excess tax. . 276 General provisions. .276 Release of. . 277 Stock transfers; lien in relation to. . 280 When divested by sale. .283 Life estate: For life of decedent — not included in gross estate. .61 For life of third person — included in gross estate. .61 Valuation of. . 95 Life interest table. . 105 Limitations, statute of — inclusion of notes barred by. . 63 Losses, when deductible. . 146 Mausoleum, deductibility of charge for. . 131 Military exemption: Proof of. . 55 When granted. . 54 Monument, deductibility of charge for. . 131 Mortgages: On property situated in United States — deductible. . 145 On property not situated in United States — when deductible. .145 Net estate: Deductions prior to Revenue Act of 1918. . 127 Deductions under Revenue Act of 1918. . 128 New York Trust Co. and Albert W Pross as Executors of the will'of J. Harsen Purdy vs. Eisner. . 390 Nonresident, definition of. . 43 Nonresident estates: Bonds situated in United States part of gross estate. . 168 United States bonds. . 174 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Estate T&*-^Im!*x Pag« 3,i 1-2-22. ESTATE TAX INDEX.— 1918 ACT. The references are to paragraph numbers. Nonresident estates: (concluded): Deductions: Claim for expenses — not to exceed 10 per cent of value of property in United States. .182 Claim for expenses — immaterial where incurred. . 182 - Property previously taxed — rules for deduction. .183 Property previously taxed — full amount deductible. . 182 Public or charitable gifts — full amount deductible. .182 Public or charitable gifts — must be to domestic corporation or for domestic _ use. .185 " ' • Determination of net estate. . 187 Insurance in domestic company — part of gross estate. 169 Liberty bonds beneficially owned by. . 174 Lien upon gross estate. .276 Moneys due by domestic creditors — part of gross estate. . 168 Moneys on deposit with domestic banks — part of gross estate. . 16H Net estate — how determined. . 167 No specific exemption. . 166 Part of gross estate not subject to tax. . 167 Payment of tax. . 190, 233, 307a, 315 Property included in gross estate. . 167 Requirement of information concerning. . 216 Return by. .221 Situs of property — how determined. . 168 Situs of property transferred by decedent — how determined. . 172 Stock in domestic corporations — part of gross estate. . 168 Tax confined to property situated in United States. . 167 United States bonds. . 173, 174 When may deduct public or charitable bequests. .185 When personal property included in gross estate. . 168 Notes, valuation of. . 73 Notice, 60-days: By transfer agents. . 205 Executor to file. . 194 In case of nonresident estates. .204 Should be given though military exemption claimed. . 203 Time for filing. . 194, 204 To be filed in duplicate. . 191 Patents, valuation of. . 76 Payment of claim allowed, how made. .293 Payment of tax: By Liberty bonds. . 230, 236 By uncertified check. .266 Enforcible any time after expiration of one year. . 225, 309, 315 Extension of time for. . 268 Nonresidents. . 190, 223, 307a, 315 Proceedings to enforce. . 298 Receipt for. .223 Return must be filed. .224 Shown due by return — effect of. . 224 Time of. .223, 315 Penalties: For failure to exhibit property. . 287 For failure to exhibit records. . 287 For failure to file notice or return. . 286 For false or fraudulent return or notice. . 285 Nature of. . 284 Personal effects: Appraisal of. . 79, 80, 85 Valuation of. . 78 Personal liability: Of executor. . 295 Of insurance beneficiary. . 283 Of transferee or trustee. . 283 Copyright 1922, by The Corporation Trust Company WAR TAX SERVICE Estate Tax— lodex Page 4. 1-2-22- ESTATE TAX INDEX. — 1918 ACT. The references are to paragraph numbers. Personal property: Estate of resident — all included in gross estate. . 62 Estate of nonresident — included in gross estate only when situated in United States. . 62 Persons in possession of property, when to file 60-day notice. . 195-197, 204 Polk vs. Page. .315 Power of appointment, property passing under: General rule. .117 Rule where death occurred prior to February 25, 1919. . 12.1, 396 Privilege: Disclosure of information to persons having interest. .219 Returns and other records confidential. .218 Property previously taxed, rules for deductibility. . 152, 183 Property transferred by decedent: Date of transfer determines subject of valuation. .112 To be valued as of date of death. .112 Rates of Tax. . 5, 47, 53 Real property, situated outside United States — not included in gross estate. .62 Records, power to compel production. . 287 Refund, claim for:^ In case of military exemption. . 59 Proof in support of. . 292 Regulations 37, Act of 1918. .page 33 Reimbursement: For tax payment — right to. .275 Not enforcible by bureau. . 275 Relatives, transfers to — must be returned. . 109 Religious corporations, what are. . 159 Remainders: Contingent — when not included in gross estate. .61 Valuation of. . 103 Vested — included in gross estate. .61 Remit, power of commissioner. . 295 Rent, inclusion., in gross estate. ,63 Resident, test of is domicile. .44 Return: By whom required. .212, 221 Executor to file. .212 Extension of time to file. .213 Form of. .214 Forms. (See Estate Tax Fore-page, or "Forms-Finder" division.) Time for filing. .208, 221 When required. . 208 Reversionary interest table. . 105 Sales: Character of, necessary consideration. . 108 Not taxable. . 108 Savings banks, when to give 60-day notice. . 199 Scientific corporations, what are. . 160 Scope of tax, imposed upon both residents and nonresidents. .43 Security, upon release of lien. . 277 Shipwreck, loss from — deductible. . 146 Silverware, appraisal of. . 85 Statutes, imposing estate tax — enumeration. .42 Stock transfers; lien on stock; release of lien. . 280 Stocks and bonds, valuation of. .70 Storage, deductibility of charge for. . 140 Storms, loss from — deductible. . 146 "Substantial payment". . 309 Suit: To enforce personable liability — collection of tax by. .301 To subject property — collection of tax by suit. .300, 315 Supplemental data, duty of executor to furnish. .215 Support of dependents — rules governing deductibility. . 147 Surrogate's fees, deductibility. . 140 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Estate Tax— Index Page 5. 1-2-22. ESTATE TAX INDEX. — 1918 ACT. The references- are to paragraph numbers. Tables: Annuity. . 105, 106, Computation of Estate Tax. . 53 Court cases. (See Table of Cases in "Forms-Finder" division.) Interest, for bonds. .261 Interest, for 4%% notes. .263 Life interest. . 105 Rates of estate tax. .47 Reversionary interest. . 105 Tax liability, manner of determining. . 45 Taxes: Computation of estate tax. .45, 46, 51, 53 Rates. . 5, 47, 53 Succession, legacy or inheritance — not deductible. . 144, 390 Upon income accruing after decedent's death — not deductible. . 144 Upon income accruing in decedent's lifetime — deductible. . 144 Upon personal property — when deductible. . 143 Upon real property — to be apportioned. . 142 Testimony: May be taken by revenue agent or inspector. . 296 Power of Commissioner to take. . 296 Requirement by subpoena. .297 Thefts, loss from — deductible. . 146 Tombstone, deductibility of charge for. . 131 Trade-marks, valuation of. . 76 Transfer, when taxable. .41 Transfer agents: Must furnish bond for payment of tax in certain cases. . 206a When to give 60-day notice — importance of. . 205, 206 Transfers in lifetime of decedent: In contemplation of death — Nature of. . 109 Transfers within two years of death — presumptively taxable. . 109 intended to take effect at or after death — pag Contract by grantee to pay annuity. . 110 Payment of income to third person. . 110 Reservation of annuity. . 110 Reservation of income to grantor. . 1 10 Reservation of portion of income. . 110 Reservation of power of management of property. .111 When taxable. . 108 Trust: Property held in — not included in gross estate. . 60 Transfer by way of — taxable. . 108 United States bonds as part of gross and net estate. . 173 Beneficially owned by nonresident alien decedent. . 174 Interest tables. .261, 263 Liberty bonds and Victory notes in payment of taxes. . 230, 236 Transfer books, closed periods for. . 264 Trustees: Commissions of — deductibility. . 134 Duty to give 60-day notice. . 199 Ullman, Smietanka vs. . 234 Valuation of property, rules for. . 69 Value: General rules for determining. . 66 Insurance — actual proceeds. . 126 Copyright 1922, by Tht Corporation Trust ComPmmy. WAR TAX SERVICE Estate Tax. — Index Page 6. i-2-22. (2) 8-4-22. 1921 ESTATE TAX LAW. BEING TITLE IV OF THE REVENUE ACT OF 1921. In effect after 3:55 P. M. November 23, 1921. {For Estate Tax Law, Revenue Act of 1918, see 1fl herein.) CALENDAR. 2-month notice Resident decedent. .. . Non-resident decedent 1f712 et seq. 11716 et seq. Return (within one year after death) Resident decedent Non-resident decedent 11721 1[729 Tax (due and payable one year from death) Non-resident H736 1T711; 1f736 Title IV.— Estate Tax. 416 Sec. 400. That when used in this title — 417 The term "executor" means the executor or administrator of the decedent, or, if there is no executor or administrator, any person in actual or constructive possession of any property of the decedent; 418 The term "net estate" means the net estate as determined under the provisions of section 403; 419 The term "month" means calendar month; and 420 The term "collector" means the collector of internal revenue of the district in which was the domicile of the decedent at the time of his death, or, if there was no such domicile in the United States, then the collector of the district in which is situated the part of the gross estate of the decedent in the United States, or, if such part of the gross estate is sit- uated in more than one district, then the collector of internal revenue of such district as may be designated by the Commissioner. 42 1 Sec. 401. That, in lieu of the tax imposed by Title IV of the Revenue Act of 1918, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 403) is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this Act, whether a resident or nonresident of the United States : 422 1 per centum of the amount of the net estate not in excess of $50,000; 2 per centum of the amount by which the net estate exceeds $50,000 and does not exceed $150,000; 3 per centum of the amount by which the net estate exceeds $150,000 and does not exceed $250,000; 4 per centum of the amount by which the net' estate exceeds $250,000 and does not exceed $450,000; 6 per centum of the amount by which the net estate exceeds $450,000 and does not exceed $750,000; [Rates.] Copyright 1922, by The Corporation Trust Company WAR TAX 125 SERVICE 1-2-22. (2) 8-4-22. 1921 ESTATE TAX LAW. 8 per centum of the amount by which the net estate exceeds $750,000 and does not exceed $1,000,000; 10 per centum of the amount by which the net estate exceeds $1,000,000 and does not exceed $1,500,000; 12 per centum of the amount by which the net estate exceeds $1,500,000 and does not exceed $2,000,000; 14 per centum of the amount by which the net estate exceeds $2,000,000 and does not exceed $3,000,000; 16 per centum of the amount by which the net estate exceeds $3,000,000 and does not exceed $4,000,000; 18 per centum of the amount by which the net estate exceeds $4,000,000 and does not exceed $5,000,000; 20 per centum of the amount by which the net estate exceeds $5,000,000 and does not exceed $8,000,000; 22 per centum of the amount by which the net estate exceeds $8,000,000 and does not exceed $10,000,000; and 25 per centum of the amount by which the net estate exceeds $10,000,000. 423 The taxes imposed by this title or by Title II of the Revenue Act of 1916 (as amended by the Act entitled "An Act to provide increased revenue to defray the expenses of the increased appropriations for the army and navy and the extensions of fortifications, and for other purposes," ap- proved March 3, 1917) or by Title IX of the Revenue Act of 1917, or by Title IV of the Revenue Act of 1918, shall not apply to the transfer of the net estate of any decedent who has died or may die from injuries received or disease contracted in line of duty while serving in the military or naval forces of the United States in the war against the German Government, or to the transfer of the net estate of any citizen of the United States who has died or may die from injuries received or disease contracted in line of duty while serving in the military or naval forces of any country while associated with the United States in the prosecution of such war, or prior to the entrance therein of the United States, and any tax collected upon such transfer shall be refunded to the estate of such decedent. [Determination of value of gross estate.] 424 Sec. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — 425 (a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is sub- ject to- distribution as part of his estate; 426 (b) To the extent of any interest therein of the surviving spouse, existing at the time of the decedent's death as dower, curtesy, or by virtue of a statute creating an estate in lieu of dower or curtesy; 427 (c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or Copyright 1922, by The Corporation Trust Company. WAR TAX 126 SERVICE 1-2-22. 1921 ESTATE TAX LAW. trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final dis- position or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title; 3ieq £ ^nirmoi vttaqoiq yjib \o suIbv arb oJ kups inuornfi nA (?) *ej> 428 (d) To the extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person, or deposited in banks or other institutions in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than a fair consideration in money or money's worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than a fair consideration in money or money's worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: Provided further, That where any property has been acquired by gift, bequest, devise, or inheri- tance, as a tenancy in the entirety by the decedent and spouse, or where so acquired by the decedent and any other person as joint tenants and their interests are not otherwise specified or fixed by law, then to the extent of one-half of the value thereof; 429 (e) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for a fair consideration in money or money's worth; and 430 (f) To the extent of the amount receivable by the executor as insur- ance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. [Determination of value of net estate.] baJfiiHie ei rlte^b sin to smu on.3 Jr; rfoirlw ^3R3^^ ssois airf \o Jisq 3bAi 43 1 Sec. 403. That for the purpose of the tax the value of the net estate shall be determined — to (I) nqiri^BTftq m bsrtiDsq? znoiJoubsb sds \o rrobioqoiq JbHT (I) 8£* 432 (a) In the case of a resident, by deducting from the value of the gross estate — Ji^q JBffj To 3uTbv 3fh to mutnao iaq 01 faD»z5 bsJoub^b oz Snuoms odi llsdz 433 (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebted- ness in respect to, property (except, in the case of a resident decedent, where such property is not situated in the United States), losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualty, or from theft, when such losses are not compensated for by insur- ance or otherwise, and such amounts reasonably required and" actually ex- Copyright 1922, by The Corporation Trust Company. WAR TAX 127 SERVICE 1921 ESTATE TAX LAW. pended for the support during the settlement of the estate of those de- pendent upon the decedent, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or any estate, succession, legacy, or inheri- tance taxes; 434 (2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commis- sioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property i s included in the decedent's gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made in case of the estates of all decedents who have died since September 8, 1916; 435 (3) The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration in money or money's worth, in contemplation of or intended to take effect in possession or enjoy- ment at or after the decedent's death, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any cor- poration organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes. This deduction shall be made in case of the estates of all decedents who have died since December 31, 1917; and 436 (4) An exemption of $50,000; 437 (b) In the case of a nonresident, by deducting from the value of that part of his gross estate which at the time of his death is situated in the United States — 438 (1) That proportion of the deductions specified in paragraph (1) of subdivision (a) of this section which the value of such part bears to the value of his entire gross estate, wherever situated, but in no case shall the amount so deducted exceed 10 per centum of the value of that part of his gross estate which at the time of his death is situated in the United States; 439 (2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property- can be identified as having been received by the decedent from such prior Copyright 1922, by The Corporation Trust Company. WAR TAX 128 SERVICE 1-2-22. 1921 ESTATE TAX LAW. decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commis- sioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is included in that part of the decedent's gross estate which at the time of his death is situated in the United States and not deducted under paragraphs (1) or (3) of subdivision (b) of this section. This deduction shall be made in case of the estates of all decedents who have died since September 8, 1916; and 440 (3) The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration, in money, or money's worth, in contemplation of or intended to take effect in possession or enjoyment at or after the decedent's death, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Colum- bia, for exclusively public purposes, or to or for the use of any domestic corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or indi- vidual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes within the United States. This deduction shall be made in case of the estates of all decedents who have died since December 31, 1917. 441 No deduction shall be allowed in the case of a nonresident unless the executor includes in the return required to be filed under section 404 the value at the time of his death of that part of the gross estate of the nonresident not situated in the United States. 442 For the purpose of this title stock in a domestic corporation owned and held by a nonresident decedent shall be deemed property within the United States, and any property of which the decedent has made a trans- fer or with respect to which he has created a trust, within the meaning of subdivision (c) of section 402, shall be deemed to be situated in the United States, if so situated either at the time of the transfer or the creation of the trust, or at the time of the decedent's death. 443 The amount receivable as insurance upon the life of a nonresident decedent, and any moneys deposited with any person carrying on the banking business, by or for a nonresident decedent who was not engaged in business in the United States at the time of his death, shall not, for the purpose of this title, be deemed property within the United States. 444 Missionaries duly commissioned and serving under boards of foreign missions of the various religious denominations in the United States, dying while in the foreign missionary service of such boards, shall not, by reason merely of their intention to permanently remain in such foreign ser- vice, be deemed nonresidents of the United States, but shall b.e presumed to be residents of the State, the District of Columbia, or the Territories of Copyright 1922, by The Corporation Trust Company. WAR TAX 129 SERVICE 1-2-22. 1921 ESTATE TAX LAW. Alaska or Hawaii wherein they respectively resided at the time of their commission and their departure for such foreign service. 445 In the case of any estate in respect to which the tax has been paid, if necessary to allow the benefit of the deduction under paragraphs (2) and (3) of subdivision (a) or (b) the tax shall be redetermined and any excess of tax paid shall be refunded to the executor. [Notice and return to be filed by executor.] ■446 Sec. 404. That the executor, within two months after the decedent's death, or within a like period after qualifying as such, shall give written notice thereof to the collector. The executor shall also, at such times and in such manner as may be required by regulations made pursuant to law, file with the collector a return under oath in duplicate, setting forth (a) the value of the gross estate of the decedent at the time of his death, or, in case of a nonresident, of that part of his gross estate situated in the United States; (b) the deductions allowed under section 403; (c) the value of the net estate of the decedent as defined in section 403; and (d) the tax paid or payable thereon; or such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct tax. 447 Return shall be made in all cases where the gross estate at the death of the decedent exceeds $50,000, and in the case of the estate of every nonresident any part of whose gross estate is situated in the United States. If the executor is unable to make a complete return as to any part of the gross estate of the decedent, he shall include in his return a description of such part and the name of every person holding a legal or beneficial interest therein, and upon notice from the collector such person shall in like manner make a return as to such part of the gross estate. The Commissioner shall make all assessments of the tax under the authority of existing administra- tive special and general provisions of law relating to the assessment and col- lection of taxes. [When Collector shall make the return.] 448 Sec. 405. That if no administration is granted upon the estate of a decedent, or if no return is filed as provided in section 404, or if a return contains a false or incorrect statement of a material fact, the collector or deputy collector shall make a return and the Commissioner shall assess the tax thereon. [Payment of tax. Extension of time. Penalty.] 449 Sec. 406. That the tax shall be cine and pa} able one year after ihe decedent's death; but in any case where the Commissioner fmds that pay ment of the tax within such period would impose undue hardship upon the estate, he may grant an extension or extensions of time for payment not to exceed three years from the due date. 450 The executor shall pay the tax to the collector or deputy collector, and to such portion of tlu- la.v. not paid within one year and six months after the decedent's death, interest at the rate of 6 per centum per Copyright 1922, by The Corporation Trust Company. WAR TAX 130 SERVICE 1-2-22. 1921 ESTATE TAX LAW. annum from the expiration of one year after such death shall be added as part of the tax irrespective of any extension or extensions of time that may have been granted for the payment of the tax, or any portion thereof. [Payment of additional tax. Receipts. Discharge of executor from personal liability.] 451 Sec. 407. That where the amount of tax shown upon a return made in good faith has been fully paid, or time for payment has been extended, as provided in section 406, beyond one year and six months after the decedent's death, and an additional amount of tax is, after the expiration of such period of one year and six months, found to be due, then such addi- tional amount shall be paid upon notice and demand by the collector, and if it remains unpaid for one month after such notice and demand there shall be added as part of the tax interest on such additional amount at the rate of 10 per centum per annum from the expiration of such period until paid, and such additional tax and interest shall, until paid, be and remain a lien upon the entire gross estate. 452 The collector shall grant to the person paying the tax duplicate receipts, either of which shall be sufficient evidence of such payment, and shall entitle the executor to be credited and allowed the amount thereof by any court having jurisdiction to audit or settle his accounts. 453 If the executor files a complete return and makes written applica- tion to the Commissioner for determination of the amount of the tax and discharge from personal liability therefor, the Commissioner, as soon as possible and in any event within one year after receipt of such applica- tion, shall notify the executor of the amount of the tax, and upon payment thereof the executor shall be discharged from personal liability for any addi- tional tax thereafter found to be due, and shall be entitled to receive a re- ceipt or writing showing such discharge: Provided, however, That such dis- charge shall not operate to release the gross estate from the lien of any addi- tional tax that may thereafter be found to be due while the title to such gross estate remains in the heirs, devisees, or distributees thereof; but no part of such gross estate shall be subject to such lien or to any claim or de- mand for any such tax if the title thereto has passed to a bona fide purchaser for value. 454 Sec. 408. That if the tax herein imposed is not paid on or before the due date thereof the collector shall, upon instructions from the commissioner, proceed to collect the tax under the provisions of general law, or commence appropriate proceedings in any court of the United States, in the name of the United States, to subject the property of the decedent to be sold under the judgment or decree of the court. From the proceeds of such sale the amount of the tax, together with the costs and expenses of every description to be allowed by the court, shall be first paid, and the balance shall be deposited according to the order of the court, to be paid under its direction to the person entitled thereto. 455 If the tax or any part thereof is paid by, or collected out of that part of the estate passing to or in the possession of, any person other than the executor in his capacity as such, such person shall be entitled to Copyright 1922, by The Corporation Trust Company. WAR TAX 131 SERVICE 1-2-22. 1921 ESTATE TAX LAW. reimbursement out of any part of the estate still undistributed or by a just and equitable contribution by the persons whose interest in the estate of the decedent would have been reduced if the tax had been paid before the distribution of the estate or whose interest is subject to equal or prior lia- bility for the payment of taxes, debts, or other charges against the estate, it being the purpose and intent of this title that so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution. If any part of the gross estate consists of proceeds of policies of insurance upon the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds, in excess of $40,000, of such policies bear to the net estate. If there is more than one such beneficiary the executor shall be entitled to recover from such beneficiaries in the same ratio. [Tax a lien for ten years.] 456 Sec. 409. That unless the tax is sooner paid in full, it shall be a lien for ten years upon the gross estate of the decedent, except that such part of the gross estate as is used for the payment of charges against the estate and expenses of its administration, allowed by any court having juris- diction thereof, shall be divested of such lien. If the Commissioner is satis- fied that the tax liability of an estate has been fully discharged or pro- vided for, he may, under regulations prescribed by him with the approval of the Secretary, issue his certificate, releasing any or all property of such estate from the lien herein imposed. 457 If (a) the decedent makes a transfer of, or creates a trust with respect to, any property in contemplation of or intended to take effect in possession or enjoyment at or after his death (except in the case of a bona fide sale for a fair consideration in money or money's worth) or (b) if insur- ance passes under a contract executed by the decedent in favor of a specific beneficiary, and if in either case the tax in respect thereto is not paid when due, then the transferee, trustee, or beneficiary shall be personally liable for such tax, and such property, to the extent of the decedent's interest therein at the time of such transfer, or to the extent of such beneficiary's interest under such contract of insurance, shall be subject to a like lien equal to the amount of such tax. Any part of such property sold by such trans- feree or trustee to a bona fide purchaser for a fair consideration in money or money's worth shall be divested of the lien and a like lien shall then attach to all the property of such transferee or trustee, except any part sold to a bona fide purchaser for a fair consideration in money or money's worth. [Penalty for failure to file, or for false, notice or return.] 458 Sec. 410. That whoever knowingly makes any false statement in any notice or return required to be filed under this title shall be liable to a penalty of not exceedi lg $5,000, or imprisonment not exceeding one year, or both. 459 Whoever fails to comply with any duty imposed upon him by section 404, or, having in his possession or control any record, file, or paper. containing or supposed to contain any information concerning the estate Copyright 1922, by The Corporation Trust Company. WAR TAX 132 SERVICE 1-2-22. 1921 ESTATE TAX LAW. of the decedent, or, having in his possession or control any property com- prised in the gross estate of the decedent, fails to exhibit the same upon request to the Commissioner or any collector or law officer of the United States, or his duly authorized deputy or agent, who desires to examine the same in the performance of his duties under this title, shall be liable to a penalty of not exceeding $500, to be recovered, with costs of suit, in a civil action in the name of the United States. [Probate proceedings in U. S. Court for China.] 460 Sec. 411. (a) That the term "resident" as used in this title in- cludes a citizen of the United States with respect to whose property any probate or administration proceedings are had in the United States Court for China. Where no part of the gross estate of such decedent is situated in the United States at the time of his death, the total amount of tax due under this title shall be paid to or collected by the clerk of such court, but where any part of the gross estate of such decedent is situated in the United States at the time of his death, the tax due under this title shall be paid to or collected by the collector of the district in which is situated the part of the gross estate in the United States, or, if such part is situated in more than one district, then the collector of such district as may be desig- nated by the Commissioner. 461 (b) For the purpose of this section the clerk of the United States Court for China shall be a collector for the territorial jurisdiction of such court, and taxes shall be collected by and paid to him in the same man- ner and subject to the same provisions of law, including penalties, as the taxes collected by and paid to a collector in the United States. 462 (c) The proviso in the Act entitled "An Act making appropriation for the Diplomatic and Consular Service for the fiscal year ending June 30, 1921," approved June 4, 1920, which reads as follows: "Provided, That in probate and administration proceedings there shall be collected by said clerk, before entering the order of final distribution, to be paid into the Treasury of the United States, the same inheritance taxes from time to time collected under the laws enacted by the Congress of the United States from the estates of decedents residing within the territorial jurisdiction of the United States," is hereby repealed. [Assessment and collection of estate taxes accrued under the Revenue Act of 1918.] 463 Sec. 1400 [of the Revenue Act of 1921]. (a) That the following parts of the Revenue Act of 1918 are repealed, to take effect (except as otherwise provided in this Act) on January 1, 1922, subject to the limita- tions provided in subdivision (b) : Title IV (called "Estate Tax") on the passage of this Act [i. e., at 3:55 P.1M., November 23, 1921]; jfs sjc sfs «|6 sj» sjc 464 (b) The parts of the Revenue Act of 1918 which are repealed by this Act shall (unless otherwise specifically provided in this Act) remain in force for the assessment and collection of all taxes which have Copyright 1922, by The Corporation Trust Company. WAR TAX 133 SERVICE 1-2-22. 1921 ESTATE TAX LAW. accrued under the Revenue Act of 1918 at the time such parts cease to be in effect, and for the imposition and collection of all penalties or forfeitures which have accrued or may accrue in relation to any such taxes. In the case of any tax imposed by any part of the Revenue Act of 1918 repealed by this Act, if there is a tax imposed by this Act in lieu thereof, the provision impos- ing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act. * * * . General Administrative Law Provisions. [Read under Miscellaneous Matters at back of the book.] 465 For 1f465 see page 135. I I C-9fyfi£ht 1922, by The Corpora to* /*./ .' v . WAR TAX 154 SERVKl. 1-3-22. (2) 3-30-22. ESTATE TAXES REGULATIONS, ETC.— 1922. OFFICIAL RULINGS, REGULATIONS, OPINIONS, AND DECISIONS UNDER THE ESTATE TAX LAWS MADE AVAILABLE DURING 1922. {Decision.) (Revenue Act of 1921.) December 21, 1921. 'As the 1921 Act, in specific terms, provides that the assessment and collection of taxes accrued under the 1918 Act shall be in accordance with the provisions thereof, a contention that the provisions of the 1921 Act, in this regard, are to be applied retroactively, is without merit. DISTRICT COURT OF THE UNITED STATES. District of Rhode Island. Frank L. Polk, et al. v. Frank A. Page, individually and as Collector of Internal Revenue. Equity No. 152. 465 Brown, J. (Orally): This case came on to be heard on plaintiff's 30 motion for the entry of a decree [see 1(355]; whereupon the United 223 States objected that by virtue of the Revenue Law of 1921 [1(449, 315 herein] the mode of collection heretofore ordered by the Commissioner was made applicable to the present case. 4 66 Upon hearing of counsel the Court was clearly of the opinion that such contention of the applicability of the Revenue Act of 1921 was with- out merit, and that, on the contrary, by the provisions of Sec. 1400, paragraph b [1f464 herein], the provision of the Revenue Act of 1918 relating to the assessment and collection of taxes was specifically continued in force, and that the argument of the United States was based upon omission of material portions of the statutes quoted. Copyright 1922, by The Corporation Trust Company. WAR TAX 135 SERVICE 3-30-22. ESTATE TAXES REGULATIONS, ETC. — 1922. (Decision.) Revenue Act of 1918. March 21, 1922. The tax being due and payable one year after decedent's death, in- junctive relief against its collection by distraint within the 180 day period thereafter will not be granted, there being ample remedy at law to redress any alleged injury consequent on enforced payment prior to the expiration of one year and 189 days. United States Circuit Court of Appeals for the First Circuit. MALCOLM E. NICHOLS, Individually and as Collector of Internal Revenue defendant, appellant, WILLIAM A. GASTON ET AL., Executors, plaintiffs, appellees. appeal from the district court of the united states for the district of massachusetts. 467 Bingham, J. This is an appeal from a final decree -of the District 30 Court for Massachusetts in a suit in equity brought by Gaston and 223 Falvey, executors of the estate of James M. Prendergast, against 315 Nichols individually and as Collector of Internal Revenue for the 465 District of Massachusetts, restraining the latter from collecting a tax assessed against the estate. 468 The complainants and the defendant are citizens of Massachusetts. Prendergast died November 29, 1920. The complainants duly filed their return, setting forth the value of the estate, and the Commissioner of Internal Revenue assessed thereon a tax of $83,900.36, under Title IV of the Revenue Act of February 24, 1919 (40 Stat, at Large, p. 1096). The jurisdiction of the District Court, as a Federal court, is invoked on the ground that the suit is one arising under the internal revenue laws of the United States. 469 It is conceded that the tax of $83,900.36 assessed against, the estate is legal and proper. The contention of the complainants is that, under Section 408 of the Act of 1919, they are given a year and 180 days after their testator's death in which to pay the tax, even though the Com- missioner of Internal Revenue had not extended the time of payment under Section 406 for 180 days after its due-date, and that the defendant was not authorized to enforce its collection by distraint or otherwise until after the expiration of the 180 days; that, in violation of this right, the defendant, pretending to act in his capacity as collector, on the 4th of January, 1922, and before the 180 days had expired, notified the complainants that, unless the tax was paid within ten days, he should proceed to collect the same, with costs, by seizure and sale of property; that, under Section 408 of the Act of 1919 the collector is prevented from collecting the tax by distraint or i Copyright 1922, by The Corporation Trust Co>,} fatty, WAR TAX 136 SERVICE 3-30-22. ESTATE TAXES REGULATIONS, ETC. — 1922. otherwise within the 180 days; and that the threatened seizure, if carried out, would have been unauthorized and an act not done by him in his official capacity or with color of law. They further contend and allege in their bill that, if to avoid such threatened distraint, they at this time paid the tax, they would be remediless in law, as they had the privilege, under Section 406, of paying the tax at any time down to May 28, 1922, without interest. It was also alleged in the bill that the payment of the tax at the time of the commencement of the suit, rather than on May 28, 1922, would subject the estate to a loss of interest on the money during the interim of about three thousand dollars and would subject the estate to the difficulty of converting the assets into cash for the immediate payment of a large sum of money. But it appears in the final decree that it was stipulated in open court that the complainants had, at the time of the commencement of the suit and at the time of entering the decree, assets in their hands sufficient to meet the tax, and that the loss which they would have sustained by the payment would have been the interest on the tax, unless they were able to recover it back from the United States. 470 The basis of the decree was that the payment of the tax was "not required by law or compellable by distraint until one year and 180 days after the death of" the decedent; that payment of the tax at the time of the filing of the bill instead of in May, 1922, "would have subjected the estate ... to loss of interest on the money so paid during the interim, amounting to the sum of approximately $3,000;" and that if, to avoid the threatened distraint, the complainants should "pay such tax prior to May 28, 1922, they would be remediless in the law." 471 The questions sought to be raised are (1) whether, on the facts herein stated, the complainants are entitled to injunctive relief; and (2) whether, in view of Section 3224 of the Revised Statutes, which provides that "no suit for the purpose of restraining the assessment or collec- tion of any tax shall be maintained in any court," this proceeding can be maintained. 472 We think that there can be no doubt but that the District Court as a Federal court, had jurisdiction authorizing it to entertain the proceeding, as it involves a controversy arising under the laws of the United States; and that the broad questions are whether, on the admitted and agreed facts, that court, as a court of equity, was warranted in granting the injunction, especially in view of the provisions of Section 3224. 473 It is a well recognized rule that a court of equity will not grant injunctive relief to complainants who have a remedy at law in the absence of a showing that the legal remedy is inadequate. If on the facts in this case the complainants would have had a remedy at law to redress their alleged injury, it cannot be contended that it would have been inadequate for the reason that the damages suffered would have been irreparable, as it appears that the only loss they would have sustained, had they paid the tax when demanded, would have been the loss of the use of the money during the balance of the 180 days, or in the vicinity of three thousand dollars. 474 The question therefore is, so far as equity jurisdiction is concerned, whether the complainants would have been without a legal remedy provided they had paid the tax under protest at the time of its demand. 475 Under Title XIII of the Revenue Law of 1919, — General Admin- istrative Provisions — Section 1316 (a), it is provided: — "Sec. 1316 (a) That Section 3220 of the Revised Statutes is hereby amended to read as follows: Copyright 1922, by The Corporation Trust Company. WAR TAX 137 SERVICE 3-30-22. ESTATE TAXES REGULATIONS, ETC.- 1922. " 'See. 3220. The Commissioner of Internal Revenue, subject to regula- tions prescribed by the Secretary of the Treasury, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive in amount, or in any manner wrongfully col- lected; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered against him in any court, for any internal revenue taxes collected by him, with the cost and expenses of suit; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of any thing done in the due performance of his official duty, and shall make report to Congress at the beginning of each regular session of Congress of all transactions under this section.' " 476 This provision of law was first enacted July 13, 1866 (14 Stat, at Large,p. Ill), and as above set forth is, so far as concerns the ques- tion here considered, the same as when first enacted. It thus appears from the language of the act that had the complainants paid the tax under protest at the time it was demanded, they could have recovered judgment against the collector for all damages they sustained, if the collection was premature and they were thereby damaged. City of Philadelphia v. Collector, 5 Wall. 720, 731 (decided Dec. 1866); Moore v. Miller, 5 Court of App. Dist. Col. 413, 429. And the following decisions disclose that they would have been entitled to interest on the damages sustained down to the entry of final judgment (Schellv. Cochran, 107 U. S. 625; Kinney v. Conant, 166 Fed. 720), and that, upon a certificate of probable cause by the court, under Section 989 of the Revised Statutes, the liability of the Government to pay the judgment would attach. United States v. Sherman, 98 U. S. 565; Erskine v. Van Arsdale, 15 Wall. 75; National Volunteer Home v. Parrish, 229 U. S. 494, 496; Sage v. United States, 250 U. S. 33, 37; Smietanka v. Indiana Steel Co. (decided October 24, 1921)— U. S. — . The fact that interest on the judgment, after it becomes final, as defined in Schell v. Cochran, supra, does not run against the Government (it being presumed that the Government is always ready and able to pay), has never been regarded as rendering the remedy at law inadequate. 477 We are therefore of the opinion that the complainants have failed to show that they would have had no remedy at law. On the con- trary, it would seem that they would have had a legal remedy by which they might have been reimbursed for all damages sustained, in case it should be found that the defendant was not authorized to demand and enforce the collection of the tax within the 180 days after it became due, and that the court below was without authority to grant the injunction, irrespective of the inhibition contained in Section 3224 of the Revised Statutes. 478- In view of the conclusion reached, we do not feel called upon to decide whether Section 3224 imposes upon a court of equity any greater restraint as to enjoining the assessment and collection of a tax than it would properly be called upon to exercise had the statute not been en- acted. The remedy at law is regarded as exclusive and, in the absence of extraordinary circumstances such as would warrant the interposition of a court of equity, has always been held to be exclusive. 479 In United States v. Pacific R. R., 4 Dill. 66, 70, Mr. Justice Miller, sitting as Circuit Justice for the Eastern District of Missouri, in speaking of the legal remedy afforded by Section 3220 of the Revised Statutes, said: Copyright 1922, by The Corporation Trust Company. WAR TAX 138 SERVICE 3-30-22. ESTATE TAXES REGULATIONS, ETC.— 1922. "And we have said over and over again in our courts that that was a complete and exclusive system of correctional justice in regard to the collec- tion of taxes unjustly assessed; that it was the only system, and by that ruling we abide. There can be no such thing as obstructing and objecting to the payment, as in the case of adjusting the accounts of individuals." 480 It would seem, however, that the inhibition of Section 3224 applies to all assessments or collections of internal revenue taxes made or attempted to be made under color of office by internal revenue officers charged with general jurisdiction over the assessment and collection of such taxes, and that, if the Commissioner of Internal Revenue, in assessing a tax, or the collector, in collecting it, acts under color of his office, Section 3224 applies, and that no suit to restrain the assessment or collection of the tax can be maintained. 481 In Dodge v. Osborn, 240 U. S. 118, Chief Justice White, in speaking of Sections 3220 and 3224, said: "The plain purpose and scope of the sections are thus stated in Snyder v. Marks, 109 U. S. 189, 193- 194, a suit brought to enjoin the collection of a revenue tax on tobacco: " 'The inhibition of Rev. Stat., s. 3224, applies to all assessments of taxes, made under color of their offices, by internal revenue officers charged with general jurisdiction of the subject of assessing taxes against tobacco manu- facturers. The remedy of a suit to recover back the tax after it is paid is provided by statute, and a suit to restrain its collection is forbidden. The remedy so given is exclusive, and no other remedy can be substituted for it. . . . Cheatham v. United States, 92 U. S. 85, 88; and again in State Rail- road Tax Cases, 92 U. S. 575, 613, it was said by this court, that the system prescribed by the United States in regard to both customs duties and internal revenue taxes, of stringent measures, not judicial, to collect them, with appeals to specified tribunals, and suits to recover back moneys illegally exacted was a system of corrective justice intended to be complete, and enacted under the right belonging to the Government to prescribe the conditions on which it would subject itself to the judgment of the courts in the collection of its revenues. In the exercise of that right, it declares, by s. 3224, that its officers shall not be enjoined from collecting a tax claimed to have been unjustly assessed, when those officers, in the course of general jurisdiction over the subject-matter in question, have made the assignment (assessment) and claim that it is valid.' " 482 In Dodge v. Osborn, it was held that it was "no longer open to question that a suit may not be brought to enjoin the assessment or collec- tion of a tax because of the alleged unconstitutionality of the statute imposing it;" that averments that unless the tax were enjoined many suits by other persons would be brought for recovery of the taxes paid by them and that the taxes assessed would be a lien upon the plaintiff's property constituting a cloud thereon, were wholly inadequate to sustain jurisdiction; and that the statute plainly forbids the enjoining of a tax "unless by some extraordi- nary and entirely exceptional circumstance its provisions are not applicable." 483 No question is raised in this case as to the authority of the Com- missioner to assess the tax or as to the legality of the tax which he assessed. It is claimed, however, that the defendant, in undertaking to collect the tax, was acting without color of authority; that his acts were purely ministerial and in no way involved the exercise of discretion. 484 By Section 1305, Title XIII of the Act of 1919, it is provided: Copyright 1922, by The Corporation Trust Company. WAR TAX 139 SERVICE 3-30-22. ESTATE TAXES REGULATIONS, ETC. — 1922. "Sec. 1305. That all administrative, special or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person liable to any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe." 485 By Section 404 — Title IV of the Act of 1919 — it is provided: "Sec. 404. . . . The Commissioner shall make all assessments of the tax under the authority of existing administrative, special and general pro- visions of law relating to the assessment and collection of taxes." 486 By Section 3182 of the Revised Statutes it is provided: "Sec. 3182. The Commissioner of Internal Revenue is hereby authorized and required to make the inquiries, determinations, and assessments of all taxes and penalties imposed by this Title, or accruing under any former internal-revenue act, where such taxes have not been duly paid by stamp at the time and in the manner provided by law, and shall certify a list of such assessments when made to the proper collectors respectively, who shall proceed to collect and account for the taxes and penalties so certified, etc." 487 And Sections 3183, 3184 and 3187 provide: "Sec. 3183. It shall be the duty of the collectors, or their deputies, in their respective districts, and they are authorized to collect all the taxes im- posed by law, however the same may be designated, etc." "Sec. 3184. Where it is not otherwise provided, the collector shall in person or by deputy, within ten clays after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of busi- ness, or to be sent by mail, stating the amount of such taxes and demanding payment thereof. If such person does not pay the taxes, within ten days after the service or the sending by mail of such notice, it shall be the duty of the collector or his deputy to collect the said taxes with a penalty of five per centum additional upon the amount of taxes, and interest at the rate of one per centum a month." "Sec. 3187. If any person liable to pay any taxes neglects or refuses to pay the same within ten days after notice and demand, it shall be lawful for the collector or his deputy to collect the said taxes, with five per centum additional thereto, and interest as aforesaid, by distraint and sale, in the manner hereafter provided, of the goods, chattels, or effects, including stocks, securities, and evidences of debt, of the person delinquent as aforesaid, etc." 488 By Section 1307, — Title XIII of the Act of 1919— it is provided: "Sec. 1307. That in all cases where the method of collecting the tax imposed by this Act is not specifically provided in this Act, the tax shall be collected in such manner as the Commissioner, with the approval of the Secretary, may prescribe, etc." 489 See Art. 116 [1[298] of the Regulations for remedies prescribed for collection of tax. 490 These provisions of law vested the Commissioner of Internal Revenue with authority to assess the tax in question and to certify the same in his list to the defendant for collection, whose duty it was to proceed and collect the tax in accordance with his precept. The Commissioner in issuing his list to the defendant for the collection of the tax necessarily determined that the tax was due and payable, that no postponement of the time of pay- Copyright 1922, by The Corporation Trust Company. WAR TAX 140 SERVICE S-30-22. (2) 4-7-22. (3) 4-14-22. ESTATE TAXES REGULATIONS, ETC. — 1922. rnent had been granted, and that the defendant should proceed forthwith to collect it. It appears by Article 90 [1J223] of the Rules and Regulations issued by the Commissioner, with the approval of the Secretary of the Treasury, construing Section 406, that the estate tax is due and payable one year from the date of death, and by Article 93 [^[268] that the time of pay- ment is to be extended only in case the Commissioner finds that payment of the tax one year from the date of death would impose undue hardship upon the estate. It cannot therefore be well claimed that the defendant, in proceeding under his precept and demanding payment of the tax, was not acting under color of authority or of his office, the Commissioner of Internal R.evenue having, in the exercise of his general jurisdiction and with the approval of the Secretary of the Treasury, determined that the tax was due and payable at the end of one year from the death of the decedent and issued his list or precept for its collection. Moore v. Miller, supra, 430. 491 If, under Section 406 and the Regulations, the tax is due and payable at the expiration of a year from death, where no postponement has been granted, then the provisions of Sections 406 and 408 are entirely con- sistent with one another and there is nothing in either section incompatible with action by the collector, upon receipt of the list, in forthwith demanding payment of the tax under Section 3184, and, if it is not paid, issuing a dis- traint warrant and enforcing collection by distraint under Section 3187. 492 Indeed it is quite probable that the correct interpretation of Section 406 is that the tax is due and collectible one year after decedent's death, in the absence of a postponement of the time of collection for cause shown; that if no postponement from the due-date is procured, payment is demandable forthwith, with the right to invoke the usual remedies for its collection; that if a postponement is obtained for 180 days and the tax is paid on or before the expiration of that time, no interest charge is to be made; that, if the tax is not paid on or before the expiration of the postponed period of 180 days, then interest for the 180 days is to be added to the tax, and, under Section 408, the collector is thereupon to proceed to collect the tax and avail himself of the usual remedies, unless the time of payment is further delayed or extended by the Commissioner; that Section 408 by requiring the collector, if the tax has not been paid within the 180 days after it is due, to then proceed to collect it under the provisions of general law, etc., unless there is reasonable cause for further delay, recognizes there has been a previous delay in its collec- tion and that it was for cause, the cause provided for in Section 406; and that Section 408 is not in conflict with Section 406 as to time of collection but supplementary thereto and in harmony therewith. We do not, however, find it necessary to construe the law. 493 The only case called to our attention in which a court has granted an injunction restraining federal officials in the collection of a tax, since Section 3224 was enacted in 1867, is Frayser & Co. v. Russell, 3 Hughes, 227. But an examination of that case discloses that what the collector was asserting to be a tax was not a tax; that the collector had attempted to assess the tax himself, whereas, under Section 3371 of the Revised Statutes it was made the duty of the Commissioner of Internal Revenue to make the assess- ment and certify the same to the collector. As the Commissioner of Internal Revenue had not assessed the tax and certified it to the collector, the latter had neither a tax to collect nor color of authority for its collection. 494 The decree of the District Court is reversed, and the case is remanded to that court with directions to enter a decree of dismissal, with costs in this court and the court below to the appellant. Copyright 1922, by The Corporation Trust Company. WAR TAX 141 SERVICE 4-7-22. (2) 4-14-22. ESTATE TAXES REGULATIONS, ETC. — 1922. (T. D. 3319.) 495 Bequest or devise in lieu of dower : Decision of Court: Act of Sep- 107 tember 8, 1916.— Constitutionality of Act: Title II, Act of September 8, 1916, imposing an estate tax, is constitutional. Decision of the United States Supreme Court in New York Trust Co. v. Eisner, 41 Sup. Ct. 506 H[390], held controlling. Deduction; State Transfer Tax Not Deductible as a Charge Against the Estate: The New York State Transfer Tax is not a charge that affects "the estate as a whole." It diminishes each legacy bequeathed by decedent, and is therefore not "a charge against the estate 1 ' and may not be deducted from the gross estate under the provisions of Section 203 of the Revenue Act of 1916. Decision of the United States Supreme Court in New York Trust Co. v. Eisner, 41 Sup. Ct. 506 [1f390], held controlling. Gross Estate; Bequest or Devise in Lieu of Dower: If a widow accepts a provision made in lieu of dower, the value of the property thus bequeathed or devised must be included in the gross estate, as defined in Section 203 of the Revenue Act of 1916, and the amount so included may not be diminished by deducting the value of the widow's dower in decedent's realty. 496 (The appended decision [syllabus only] of the United States District Court for the Southern District of New York, in the case of Title Guarantee & Trust Company and Minnie W. Teets, as Executors of the Last Will and Testament of Joseph W. Teets, deceased, v. Edwards, Collector, the syllabus [1f495] of which appears above is published not as a ruling of the Treasury Department, but for the information of internal revenue officers and others concerned.) (T. D. 3319, April 5, 1922.) (Decision.) (Revenue Act of 1916.) S^&te and municipal bonds held by decedent to be included in determining value of gross estate for purposes of the tax. Supreme Court of the United States. Mary Louise Greiner, Executrix, etc., \ J n Error to the District Court Plaintiff in Error, / of the United States for thc vs ) C. G. Lewellyn, Collector of Internal ( Western District of Penns yl- Revenue. / vania. [April 10, 1922.] Mr. Justice Brandeis delivered the opinion of the Court. 497 This action was brought in the federal court for Western Penn- 425 sylvania against the Collector of Internal Revenue to recover part of an amount assessed as estate tax under the Act of September 8. 1916, c. 463, Title II, 39 Stat. 756, 777, and paid by the plaintiff as executrix of the estate of Kate B. Kingsley. In determining the net value of the estate upon the transfer of which the tax was imposed, the Collector had included bonds issued by political subdivisions of the State of Pennsylvania. The executrix claimed that to include these municipal bonds was' in effect to tax them — which the Federal Government is under the Constitution Copyright 1922, by The Corporation Trust Company. WAR TAX 142 SERVICE 4-14-22. (2) 5-3-22. ESTATE TAXES REGULATIONS, ETC. — 1922. without power to do. Pollock v. Farmers' 1 Loan & Trust Co., 157 U. S. 429, 583, 654; 158 U. S. 601, 618, 693. The District Court overruled this claim and entered judgment for defendant. The case comes here on writ of error under Section 238 of the Judicial Code. Whether Congress has power to require that state and municipal bonds held by a decedent be included for the purpose of determining the net value on which the estate tax is imposed is the sole question presented for decision. 498 That the Federal Government has power to tax die transmission of legacies was settled by Knowlton v. Moore, 178 U. S. 41; and that it has the power to tax the transfer of the net assets of a decedent's estate was settled by New York Trust Co. v. Eisner, 256 U. S. 345 [1f390]. The latter case has established also that the estate tax imposed by the Act of 1916, like the earlier legacy or succession tax, is a duty or excise, and not a direct tax like that on income from municipal bonds. Pollock v. Farmers' Loan y Trust Co., supra. A State may impose a legacy tax on a bequest to the United States, United States v. Perkins, 163 U. S. 625, or on a bequest which consists wholly of United States bonds, Plummer v. Coler, 178 U. S. 115; Orr v. Gilman, 183 U. S. 278 [see 1fl73]. Likewise the Federal Govern- ment may impose a succession tax upon a bequest to a municipal corporation of a State, Snyder v. Bettman, 190 U. S. 249, or may, in determining the amount for which the estate tax is assessable, under die Act of 1916, include sums required to be paid to a State as inheritance tax, for the estate tax is the antithesis of a direct tax, New York Trust Co. v. Eisner, supra. Munici- pal bonds of a State stand in this respect in no different position from money payable to it. The transfer upon death is taxable, whatsoever the character of the property transferred and to whomsoever the transfer is made. It follows that in determining the amount of decedent's net estate municipal bonds were properly included. Affirmed. {Decision.) (Revenue Act of 1916) The text of the 1916 Act is not to be construed as applying to transfers in contemplation of death, etc., completed before the passage of the Act. Supreme Court of the United States. In Error to the United States Circuit Court of Appeals for the Sixth Circuit. Victor E. Shwab, Executor of the last will and testament of Augusta j. Dickel, Deceased, Plaintiff in Error, ton -sew fmb ,h> 1 1 ••••.;#£.»;.; ••, n ,U i..- Emanuel J. Doyle, United States Col- lector of Internal Revenue for the Fourth Collection District of Michi- gan. [May I, 1922.| Air. justice McKknna delivered the opinion of the Court. 499 Augusta Dickel by a deed dated April 21, 1915, assigned and delivered 10 to the Detroit Trust Company, stocks, bonds or securities of the 109 declared value of $1,000,000- —with all their unmatured coupons, 427 and die proceeds to be derived therefrom, both principal and income, in trust to invest and reinvest and to pay the net income for life to Copyright 1922, by The Corporation Trust Company. WAR TAX 143 SERVICE \ 6-3-22. ESTATE TAXES REGULATIONS, ETC. — 1922. Victor E. Shwab or on his written order. After his death the net income was directed to be paid to six beneficiaries, his children. A power of delegating and selling or exchanging all securities was given to Shwab, and of reinw ->t ment. During the life of Shwab the net income was to be paid to him or his order. After his death the trust was to continue during the lives of the beneficiaries and the net income was to be paid to them during their rcspeci un- lives in equal shares. 500 There were other rights and powers given to plaintiff and the bene- ficiaries not necessary to mention. 501 The trust deed was accepted by the Detroit Trust Con panv on or before June 3, 1915. 602 Augusta Dickel died September 16, 1916, possessed of an estate of $800,000. Seven days before her death Congress passed an act entitled, "Estate Tax Act," 39 Stat. 777-780. The Act provided that accord- ing to certain percentages of the value of the net estate, a tax was to be im- posed upon the transfer of the net estate of every decedent dying after the passage of the Act, "to the extent of any interest therein of which the de- cedent has at any time made a transfer, or with respect to which he has created a trust, in contemplation of or intended to take effect in possession or enjoy- ment at or after his death, except in case of a bona fide sale for a fair con- sideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a considera- tion, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title: . . ." 503 Under the assumption that the Act was applicable to the deed made by Augusta Dickel to the Detroit Trust Company a tax was assessed and exacted from plaintiff in error (here called plaintiff) in the sum of $56,548.41. Plaintiff paid it under protest and then to recover it brought this action in the District Court of the United States for the Western District of Michigan, Southern Division. 504 A jury being impaneled to try the case, the plaintiff presented his contentions in requests for charges. These were, (1) to find for plaintiff. (2) Upon refusal of the court .to so charge but not otherwise, that the deed of Mrs. Dickel to the Detroit Trust. Company took effect more than a year before the enactment of the Act of September 8, 1916, that is, took effect immediately, not in possession or enjoyment at or after the death of Mrs. Dickel. (3) The words "in contemplation of death" do not refer to that general expectation of death which every mortal entertains, but rather the apprehension which arises from some existing condition of body or some impending peril. (4) If Mrs. Dickel when she made the trust deed was not in that apprehension arising from that condition of body or of an ffrtpeiiding peril, it was not made within the meaning of the Act of Congress. (5) Mrs. Dickel having made the deed before the Act of Congress was passed, her purpose was not to defeat or evade the Federal Revenue haw. 505 There were other requests for instructions to the jury not material to be considered except that the Act of Congress was not retrospective in character and, therefore, did not impose a tax on the deed from Mrs. Dickel to the Trust Company. And that if it could be considered to have that character and effect, it would be unconstitutional and void as a denial of due process of law, and the taking of private property for public use Copyright 1922, by The Corporation Trust Company. WAR TAX 144 SERVICE 6-3-22. ESTATE TAXES REGULATIONS, ETC. — 1922. without just compensation, contrary to the Fourteenth Amendment of the Constitution of the United States. 506 The court ruled against all of the requests so far as the court con- sidered them as presenting questions of law, but considered that whether the trust deed was made in contemplation of death was a question for the jury and submitted it to them, with aiding and defining explanations, and concluded by declaring, "the whole question is the question whether the transfer was made in contemplation of death; that is all there is to it." 607 The verdict of the jury was in favor of the defendant, upon which judgment was duly entered. It was affirmed by the Circuit Court of Appeals (269 Fed. 321), to the action of which this writ of error is directed. 508 Plaintiff urges against the judgment of the Circuit Court of Appeals all of the contentions presented in his requests made to the District Court for instructions to the jury, but so diverse and extensive consideration is only necessary if the Act of Congress be of retrospective operation. To that proposition we shall, therefore, address our attention. 509 The initial admonition is that laws are not to be considered as apply- ing to cases which arose before their passage unless that intention be clearly declared. 1 Kent. 455; Eidman v. Martinez, 184 U. S. 578; White v. United States, 191 U. S. 545; Gould v. Gould, 245 U. S. 151; Story, Const, Sec. 1398. The comment of Story is, "restrospective laws are, indeed, gen- erally unjust; and, as has been forcibly said, nefther accord with sound legislation nor with the fundamental principles of the social compact." 510 There is absolute prohibition against them when their purpose is punitive; they then being denominated ex post facto laws. It is the sense of the situation that that which impels prohibition in such case exacts clearness of declaration when burdens are imposed upon completed and remote transactions, or consequences given to them of which there could have been no foresight or contemplation when they were designed and con- summated. 61 1 The Act of September 8, 1916, is within the condemnation. 512 There is certainly in it no declaration of retroactivity, "clear, strong and imperative," which is the condition expressed in United States v. Heth, 3 Cranch 398, 413; also United States v. Burr, 159 U. S. 78, 82-83. 513 If the absence of such determining declaration leaves to the statute a double sense, it is the command of the cases, that that which rejects retroactive operation must be selected. 514 The circumstances of this case impel to such selection. If retro- activity be accepted, what shall mark its limit? The Circuit Court of Appeals found the interrogation not troublesome. It said, "Congress would, we think, scarcely be impressed with a practical likelihood that a transfer made many years before a grantor's death (say twenty-five years, to use plaintiff's suggestion) would be judicially found to be made in contem- plation of death under the legal definition applicable thereto, and without the aid of the two years prima facie provision." In other words, the sense of courts and juries, good or otherwise, might, against the words of the statute, and against what might be the evidence in the case, unhelped by the presumption declared, fix the years of its retrospect. This would seem to make the difficulty or ease of proof a substitute for the condition which the statute makes necessary to the imposition of the tax, that is, the disposition with which the transfer is made; and certainly whether that disposition exist at an instant before death or years before death, it is a condition of the tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 145 SERVICE 5-3-22. ESTATE TAXES REGULATIONS, ETC.— 1922. 615 The construction of the Government is more tenable though more unrestrained. It accepted in bold consistency, at the oral argument, the challenge of twenty-five years, and a ruling of the Commissioner of Internal Revenue, in bolder confidence, extends the statute to "transfers of any kind made in contemplation of death at any time whatsoever (italics ours) prior to September 8, 1916." The sole test in the opinion of that officer is "the date of the death of the decedent." He fixes no period to the retrospect he declares, but reserves, if he be taken at his word, the transfers of all times to the demands of revenue. In this there is much to allure an admin- istrative officer. Indeed, its simplicity attracts anyone. It removes puzzle from construction and perplexity and pertinence on account of the distance of death from the transfer, risking no chances of courts or juries, in repug- nance or revolt, taking liberties with the Act to relieve from its exactions to the demands of revenue. 516 If Congress, however, had the purpose assigned by the Commis- sioner it should have declared it; when it had that purpose it did declare it. In the Revenue Act of 1918 it reenacted Section 202 of the Act of September 8, 1916, and provided that the transfer or trust should be taxed whether "made or created before or after the passage of" the Act. And we cannot accept the explanation that this was an elucidation of the Act of 1916, and not an addition to it, as averred by defendant, but regard the Act of 1918 rather as' a declaration of a new purpose; not the explanation of an old one. But granting the contention of the defendant has plausibility, it is to be remembered that we are dealing with a tax measure and whatever doubts exist must be resolved against it. 617 This we have seen is the declaration of the cases and this the basis of our decision, that is, has determined our judgment against the retroactive operation of the statute. There are adverse considerations and the Government has urged them all. To enter into a detail of them or of the cases cited to sustain them and of those cited to oppose them, either directly or in tendency, and the examples of the States for and against them, would extend this opinion to repellent length. We need only say that we have given careful consideration to the opposing argument and cases, and a careful study of the text of the Act of Congress, and have resolved that it should be not construed to apply to transactions completed when the Act became a law. And this, we repeat, is in accord with principle and authority. It is the proclamation of both that a statute should not be given a retrospective operation unless its words make that imperative and this cannot be said of the words of the Act of September 8, 1916. Judgment reversed. Copyright 1922, by The Corporation Trust Company. WAR TAX 146 SERVICE 6-8-22. ESTATE TAXES REGULATIONS, ETC.— 1922. In Error to the District Court of the United States for the Northern District of Cal- ifornia. (Decision.) (Revenue Act of 1916.) The text of the 1916 Act is not to be construed as applying to transfers intended to take effect in possession or enjoyment at or after death, etc., which transfers were completed before the passage of the Act. Supreme Court of the United States. Union Trust Company of San Francisco and Albert Lachman, as Executors of the last will and testament of Henriette S. Lach- man, deceased, Plaintiffs in Error, vs. Justus S. Wardell, United States Collector of Internal Revenue for the First District of California, and John L. Flynn, United States Collector of Internal Revenue for the First District of California. [May 1, 1922.] Mr. Justice McKenna delivered the opinion of the Court. 518 This case was argued at the same time and submitted with No. 200, 10 Shzuab v. Doyle, just decided [1J499]. It involves, as that case did, 110 the Estate Tax Act of September 8, 1916, and its different facts 427 illustrate and aid the principle upon which that case was decided. 619 Plaintiffs in error are executors of the last will and testament of Henriette S. Lachman, deceased. They were also parties to a trust deed made by her during her lifetime. They sued defendant in error Wardell, he then being United States Collector of Internal Revenue for the First District of California to recover the sum of $4,545.50 that being the amount of a tax assessed against the estate of Henriette S. Lachman, upon the value of 4,985 shares of stock transferred in trust by Henriette S. Lachman to trustees upon the assumption that the Act of Congress of September 8, 1916 was applicable to the trust. S20 The following is a summary of the facts stated narratively. On May 31, 1901, Henriette S. Lachman was the owner of 7,475 shares of capital stock of the S. & H. Lachman Estate, a corporation. On that date she executed and delivered to Albert Lachman and Henry Lachman, her sons, the following instrument: "Almeda, Cal., May 31, 1901. "To Albert Lachman and Henry Lachman, my sons: "This is to certify that I have delivered to you seven thousand four hundred and seventy-five (7,475) shares of the capital stock of the S. & LI. Lachman Estate, represented by certificates, numbers eleven (11), twelve (12) and thirteen (13) respectively, however, upon the following trust: "To pay to me during my lifetime, all the income earned and derived therefrom, and, upon my death, to deliver two thousand four hundred and ninety (2,490 )shares, respectively by certificates number eleven (11) unto Henry Lachman, thenceforth for his absolute property; two thousand four hundred and ninety-five (2,495) shares, represented by certificate number thirteen (13) unto Albert Lachman, thenceforth for his absolute property; and yourselves, to-wit, Albert and Flenry Lachman, to hold two thousand Copyright 1922, by The Corporation Trust Company. WAR TAX 147 SERVICE / 5-3-22. ESTATE TAXES REGULATIONS, ETC. — 1922. four hundred and ninety (2,490) shares, represented by certificate number twelve (12) upon my death, in trust paying the income derived therefrom unto my daughter, Rebecca, wife of Leo Metzger, and upon the death of my said daughter, the income and earnings derived from said two thousand four hundred and ninety (2,490) shares shall be held, or expended, by you, accord- ing to your judgment, for the benefit of my grandchildren, the children of my said daughter, Rebecca Metzger, and upon the youngest of said children attaining the age of majority, all the then surviving children of my said daughter, Rebecca Metzger, shall be immediately entitled to said two thou- sand four hundred and ninety (2,490) shares in equal proportions. Henriette Lachman." 52 1 The requirements'of the deed were performed upon the contingencies occurring for which it provided. 522 On November 14, 1916, Henriette S. Lachman died, being then a resident of Alameda County, California, leaving an estate of the value of $302,963.64, which included 2,490 shares of the stock that passed to her upon the death of her husband and 25 shares of stock in a business that had been conducted by her husband but did not include the transfer of the 4,985 shares included in the trust deed. 523 The will was duly probated and the tax under the Act of September 8, 1916, was paid on the property which passed under her will, but no tax was paid on the 4,985 shares transferred 15 years before by the trust deed. 524 The Commissioner having ruled that those shares were subject to a tax, assessed against them the sum of $4,545.50. It was paid under protest and this action was brought for its recovery. 525 Wardell demurred to the complaint on the ground that it did not state facts sufficient to constitute a cause of action against him. The demurrer was sustained and judgment entered dismissing the complaint. 526 Stating the contention of the plaintiffs, the court said it was that "the act should not be construed as to include transfers made prior to its passage, and that if it be so construed the act is unconstitutional." The court observed that "both of these questions were determined adversely to the plaintiffs by the Circuit Court of Appeals for the Eighth Circuit in Shwab, Executor v. Doyle, not yet reported." And said further, "In that case the transfer was made in contemplation of death, whereas in the present case the transfer was intended to take effect in possession or enjoyment at or after death, but manifestly the same rule of construction will apply to both provisions, and the same rule of constitutional validity." 527 The court, while apparently relying on Shzvab v. Doyle, declared that it entertained "no doubt that the act was intended to operate retrospectively, and a contrary construction could only be justified on the principle that such a construction would render the act utl£6MtftMBft]ix. a ' 528 The same contentions are made against and for t he ruling of the court as were made in Shzvab v. Doyle. It is not necessary to repeat them. They are, with but verbal variations, the same as in Sh;rab v. Doyle, and the Commissioner so considering, submits this case upon his brief in that. 529 We have there stated them and passed judgment upon that which we think determines the case, that is, the retroactivity of the Act of September 8, 1916. The facts in this case fortify the reasoning in that. In this case the Act is given operation against an instrument executed 15 year* before the passage of the Act. Copyright 1922, by The Corporation Trust Co)npafiy. WAR TAX 148 SERVICE 5-3-22. ESTATE TAXES REGULATIONS, ETC. — 1922. 630 The record exhibits proceedings that should be noticed. The de- murrer of Wardell was sustained to the complaint, and a judgment of dismissal entered January 13, 1921. 531 On February 2, 1921, plaintiffs gave notice of a motion to substitute John S. Flynn as defendant in the place and stead of Wardell in so far as the action was against Wardell in his official capacity, and to permit it to be continued and prosecuted against him so far as it was against him personally. 53 2 The grounds of the motion were stated to be that he had resigned and Flynn had been appointed his successor and was then the acting Collector. 533 On February 7, 1921, the motion was granted. The order of the court recited the resignation of Wardell and the succession of Flynn. And it being uncertain as to whether this was a proper case for the substitu- tion of Flynn or was one which should proceed against Wardell, and it ap- pearing to the court on motion of plaintiffs that it was necessary for the survivor to obtain a settlement of the questions involved, it was ordered that so far as the action was against Wardell in his official capacity, it might be sustained against Flynn as his successor, and that so far as it was against Wardell personally, it should be continued against him. And it was ordered that the action should thereafter proceed against Flynn and Wardell without further pleadings or process. 534 On February 9, 1921, Flynn filed an appearance by attorneys which recited that he had been substituted in the place of Wardell in so far as the action was against Wardell in his official capacity, and thereby appeared in the action as such defendant. 535 It will be observed that there was no resistance to the motion of substitution of Flynn nor exception by him, and that he almost immediately appeared in the action in compliance with the order of the court. The subsequent proceedings were directed as much against him as against Wardell, the bond upon the writ of error running to both. 53 6 However, this Court decided in Smietanka, Collector v. Indiana Steel Company, October 24th of this term, that a suit may not be brought against a Collector of Internal Revenue for the recovery of a tax, in the col- lection and disbursement of which, such officer had no agency. We think the bringing of Flynn into the case was error. Therefore, upon the return of the case to the District Court, he shall be permitted to set up the defense of non-liability, if he be so advised, and, if he set up the defense, it shall be ruled as sufficient for the reasons we have given. judgment reversed and cause remanded for further proceedings in accordance with this opinion. Copyright 1922, by The Corporation Trust Company. WAR TAX 149 SERVICE / 5-3-22. ESTATE TAXES REGULATIONS, ETC. — 1922. (Decision.) (Revenue Act of 1916.) The text of the 1916 Act is not to be construed as applying to transfers in contemplation of death, etc., completed before the passage of the Act. Supreme Court of the United States. In Error to the District Court of the United States for the Northern District of California. Harriet J;. Levy, Pauline Jacobs and Adeline Salinger, Plaintiffs in Error, vs. Justus S. Wardell, United States Collector of Internal Revenue for the First District of California, and John L. Flynn, United States Collector of Internal Revenue for the First District of California. [May 1, 1922.] Mr. Justice McKenna delivered the opinion of the Court. 53 7 The case was determined in the court below upon demurrer to the 10 complaint. The complaint alleged that on the 19th day of December, 108 1902, and for sometime prior thereto, Henriette Levy was the owner 427 of 22,014 shares of the capital stock of the Levy Estate Company, a corporation. On that date she conveyed to the plaintiffs Harriet L. Lev}-, Pauline Jacobs and Adeline Salinger, each 5,000 shares of that stock. On the 14th day of January, 1903, she conveyed to these plaintiffs 2,660 shares each. 538 On the 17th day of January, 1907, she and the plaintiffs entered into an agreement, which recited errors made in the issue of the stock, and agreed that the number of shares to which each was entitled was as follows: to Henriette Levy 10 shares, to Harriet L. Levy 7,328 shares, to Pauline Jacobs 7,338 shares, to Adeline Salinger 7,337 shares and to Ruth Salinger 1 share. 539 On the same date the agreement was carried out by the board of directors of the company, and on that date Henriette Levy conveyed her 10 shares to Harriet L. Levy. 540 The transfers of the stock to plaintiffs were complete and there were no agreements or stipulations by which Henriette Levy would be entitled to a return of the stock except that the plaintiffs promised and agreed to pay to her the dividends accruing thereon during her lifetime, she, however, retaining no testamentary disposition or any legal right whatsoever over the stock or any of it, or any right of revocation. 541 Llenriette Levy at the time of the transfers was in good health and made them to get rid of the care and worry of business and to vest in plaintiffs definite and irrevocable present rights of ownership in the stock, and the transfers were not in contemplation of, or intended to take effect in possession or enjoyment at or after her death. 542 She died on the 15th day of December, 1916, being at that time, and at the time of the transfers, a resident of Alameda County, California. Plaintiffs are her surviving children and were at such time, and arc now, residents of the State. 543 She left no property or estate or assets whatever, and consequently, there was no estate to administer, nor any estate upon which any Copyright 1922, by The Corporation Trust Company. WAR TAX 150 SERVICE 5-3-22. ESTATE TAXES REGULATIONS, ETC. — 1922. tax could be levied. Notwithstanding the facts, the Commissioner of Internal Revenue of the United States, assuming to act under the provisions of the Act of September 8, 1916, attempted to levy and assess a tax in the sum of $12,460.84, and demanded and threatened to enforce payment of the same. In consequence thereof the plaintiffs paid the tax. Subsequently they de- manded a refund of the tax which demand was refused. 544 At the time of the transfers there was no law of the State of California imposing any transfer or inheritance tax, nor was there a law of the United States to that effect, and all of the transfers were intended to take effect in possession and enjoyment upon their date. The Act of Congress, therefore, should not be construed to be retroactive, and if so construed, was in violation of the Constitution of the United States in that it would take the property of plaintiffs without due process of law in violation of the Fifth Amendment, and would not be, besides, a transfer tax or an indirect tax but. would be a direct tax thereon in violation of Article 1, Section 9, subdivision 4 of the Constitution of the United States because not laid in proper relation to census or enumeration as therein provided. 545 Judgment was prayed for the sum of $12,460.84 with interest from the 26th day of December, 1917. 546] Wardell filed a demurrer to the complaint which was sustained, and the action dismissed. To that judgment this writ of error is directed. For the reasons stated in Shwab v. Doyle [1f499], we think the judgment was erroneous. 647 There was a proceeding in the case to which we must give attention. The judgment of dismissal was entered January 20, 1921. On February 14, 1921, an order of the court was made and entered which recited the resignation of Wardell as Collector and the appointment of John L. Flynn as Collector, and as doubts existed as to whether the case was proper for the substitution of Flynn as successor of Wardell, it was ordered that so far as the action was against Wardell in his official capacity, the same might be maintained against Flynn, and that so far as it was against Wardell personally, it might be continued against him personally without further pleadings or process. 648 On February 15, 1921, Flynn enteredjhis appearance which, after reciting the fact of his substitution as defendant in place of Wardell, in so far as the action was against Wardell in his official capacity, declared that he, Flynn, appeared in the "action as such defendant." 549 It will be observed that there was no resistance by Flynn to his substitution and the subsequent proceedings were directed as much against him # as against Wardell, the bond upon the writ of error running to both. As we have said, however, in Union Trust Company et al. v. Wardell and Flynn (No. 236) [1(518], this Court decided in Smietanka, Collector v. Indiana Steel Company, October 24th of this term, that an action could not be maintained against a Collector of Internal Revenue for the recovery of a tax in the collection and disbursement of which he had no agency. 560 This was Flynn's situation and bringing him into the case was error. Therefore, upon return of the case to the District Court he shall be permitted to set up the defense of non-liability, if so advised, and, if he set up the defense, it shall be ruled as sufficient for the reasons we have given. Judgment reversed and cause remanded for further proceedings in accordance with this opinion. Copyright 1922, by The Corporation Trust Company. WAR TAX 151 SERVICE 6-3-22. ESTATE TAXES REGULATIONS, ETC.— 1922. (Decision.) (Revenue Acts of 1916-1917.) The text of the 1916 Act is not to be construed as applying to transfers in contemplation of death, etc., completed before the passage of the Act. Supreme Court of the United States. John C. Knox, as surviving executor of the last will and testament of Jonas B. Kissam, de- In Error to the United ceased, et al., Plaintiffs in Error, States Circuit Court of vs. > Appeals for the Second Richard J. McElligott, as late Collector of Circuit. Internal Revenue for the Third District of * New*j York. [May I, 1922.] Mr. Justice McKenna delivered the opinion of the Court. 551 This case involves the same principles and contentions passed on in 10 Nos. 200 [1f499], 236 [*1518] and 303 [1f537]. It, as they, is an action 108 to recover a tax ($11,819.74) assessed by the Commissioner of 427 Internal Revenue as an additional estate tax on the estate of Jonas B. Kissam, deceased, under the Act of September 8, 1916, as amended in 1917. It, the action, was brought in the United States District Court for the Southern District of New York. 552 The complaint was a voluminous paper and contained at least four causes of action. As to the first, consisting of twenty-two para- graphs, Elligott filed a demurrer. Plaintiff made a motion for judgment on the pleadings. The motion was granted and a final judgment was awarded against "defendant on the merits for the relief prayed for in the first cause of action set forth" in the complaint. 553 The judgment was reversed by the Circuit Court of Appeals, 275 Fed. 546. 554 The following four paragraphs are a summary of the allegations of the complaint stated narratively: 555 In 1912 the decedent, Jonas B. Kissam, was the owner of certain bonds and mortgages and corporate bonds. In that year he con- veyed the property to the plaintiff in error, John C. Knox who, shortly thereafter, reconveyed the same to Kissam and his wife Cornelia B. Kissam. as joint tenants. All of the parties resided in the State of New York. 556 In 1917 Kissam died leaving Mrs. Kissam surviving him. She was made one of the executors of the will as well as sole beneficiary thereunder. 557 On December 7, 1917, she as executrix and Knox as executor, made a return of the Federal Estate Tax on the entire estate of Jonas B. Kissam. They included in the return the value of one-half of the jointly owned property which was owned and enjoyed by decedent, but did not include the value of the one-half of the jointly owned property which had been owned and enjoyed by Mrs. Kissam since the creating of the joint estates in July and August of 1912. 558 A tax of $5,354.14 based upon the return was paid by the plaintiffs in error. On May 9, 1919, the Commissioner of Internal Revenue added to the estate the one-half interest of the value of the estate and assessed Copyright 1922, by The Corporal io-i T rust Company. WAR TAX 152 SERVICE 6-9-M. (2) 5-10-22. ESTATE TAXES REGULATIONS, ETC. — 1922. as a tax in addition to that which was paid, the sum of $13,668.60. The additional tax was paid under protest and to recover it is the purpose of the action. 559 The Circuit Court of Appeals stating the contention of the executors said, that "they claimed that the assessment was void as to the half of the joint property which vested in Cornelia [Mrs. Kissam] before the passage of the Act of September 8, 1916, as amended, and also that the Act itself was unconstitutional as a direct tax upon property without apportion- ment among the several States as required by Article 1, Section 9, Sub- division 4, of the Constitution." 560 But this contention was the alternative of the contention which plaintiffs in error also made, that the Act of September 8, 1916, as amended, was not intended to have retrospective operation. And this was the decision of the District Court, the court saying, "It is true section 201 provides that the tax is imposed upon the transfer of the net estate of 'every decedent dying after the passage of this Act'; but the assumption must be that this relates to estates thereafter created and not to then existing property." And the court added "At the time the statute was passed Cornelia Kissam's interest belonged to her." The court further observed, "From the structure of the Act to say that the measure of the tax is the extent of the interest of both joint tenants is, in effect, to say that a tax will be laid on the interest of Cornelia in respect of which Jonas had in his lifetime no longer either title or control." The court rejected that conclusion and denied to the Acts of Congress retroactive operation. To this the Circuit Court of Appeals was opposed and reversed the judgment based upon it. 561 It will be observed, therefore, that this case involves the same ques- tion as that decided in Shwab v. Doyle [11499], and on the authority of that case the judgment of the Circuit Court of Appeals is reversed and the cause remanded for further proceedings in accordance with this opinion. So ordered. (T. D. 3324.) Decision of U. S. District Court: 1916 Act. {Prior to U. S. Supreme Court Decisions of May 1, 1922.) [Syllabus only, 1f563 to If 566.] 562 The decision of the United States District Court for the District of 10 Minnesota, in the case of Clara B. Congdon, Walter B. Congdon, 110 Edward C. Congdon, and Marjorie C. Dudley (formerly Marjorie 427 Congdon), as Executors of the last will and testament of Chester A. 518 Congdon, deceased, v. Margaret C. Lynch, as Executrix of the last will and testament of Edward J. Lynch, deceased, Collector of Internal Revenue for the District of Minnesota, substituted in place of Edward J. Lynch, as Collector of Internal Revenue for the District of Minnesota, Deceased, the syllabus of which appears below is published, not as a ruling of the Treasury Department, but for the information of internal revenue officers and others concerned. (T. D. 3324, May 6, 1922.) 663 1. Constitutionality of Act. — Title II, Act of September 8, 1916, imposing an estate tax, is constitutional. Decision of the United States Supreme Court in New York Trust Co. v. Eisner, 41 Sup. Ct. 506, [1f390], held controlling. Copyright 1922, by The Corporation Trust Company. WAR TAX 153 SERVICE 6-10-22. ESTATE TAXES REGULATIONS, ETC. — 1922. 564 2. Estate tax — Retroactivity.— Section 202(b) of the Revenue Act of 1916 is retroactive, and applies to a trust executed prior to the passage of the Act, to take effect in possession or enjoyment at or after the death of the donor, who dies after the passage of the Act. 565 3. Trusts to Take Effect in Possession or Enjoyment at or After Donors Death — Powers Reserved to Donor Evidence of Intention. — On August 3, 1916, decedent placed certain securities in trust by an in- strument in writing appointing trustees who accepted the trust and dis- tributed the income to the beneficiaries named. Decedent did not change the terms of the trust prior to his death on November 21, 1916. The trust did not expressly provide that it was to take effect in possession or enjoy- ment at or after the donor's death. The donor reserved neither income, a life estate, nor the right to revoke, but did reserve: (1) the right to change the beneficiaries and their respective interests, and the income therefrom; (2) the right to change the trustees and the number of the trustees, (the trustees being the donor, his wife, and his children); (3) the right to modify the period of the trust; (4) the right to change the disposition of the trust fund at the expiration of the trust period; (5) the right to compel the trustees to pay out of the income or principal of the trust premiums on any insur- ance policies on the donor's life, which were payable to any beneficiary or to the other trustees and the beneficiaries; (6) the right to terminate the trust at any time within five years — the property then to revert to the donor; (7) the power to prevent the sale, disposition, pledge, or incum- brance of certain specified securities, his written consent being requisite; (8) the right in case the trust should end during the donor's life to secure the reversion to the donor. Held, that the management, control, and dis- position retained by the donor was complete, except that he could not make himself a beneficiary of the trust and under certain circumstances could not secure the reversion to himself; until his death, when the reserved rights would cease, the trust could not take full effect in complete possession or in complete enjoyment, and there could be "no element of finality" about the trust. Although donor did not reserve a life estate in himself or in a third person during his life, he did reserve the power to defeat the substantial rights of the beneficiaries and as far as the beneficiaries were concerned, the reserved rights were tantamount to a power of revocation. In conclu- sion the court held that the trust was intended to take possession in effect or enjoyment at or after the death of the donor and was within the provi- sions of Section 202(b) of the Revenue Act of 1916. The trust property was, therefore, properly included in the gross estate. 566 4. Net Estate — Deduction of State Inheritance and Succession Taxes. — Sums paid as inheritance or succession taxes in the states of Arizona, Michigan, Minnesota, New York and Washington; may not be deducted from the gross estate as charges against the estate, under the pro- visions of Section 203 of the Revenue Act of 1916. Decision of United States Supreme Court in New York Trust Co. v. Eisner, 41 Sup. Ct. 506 ft390j, held controlling. (Syllabus referred to in 1J562.) Copyright 1922, by The Corporation Trust Company. WAR TAX 154 SERVICE ESTATE TAXES REGULATIONS, ETC. —1922. (T. D. 3325.) 567 [This Treasury Decision consists of a reprint of the opinion in Nichols ^467 vs. Gaston which is reproduced in full herein beginning at 1[467. — The Corporation Trust Company.] (T. D. 3326.) 568 [This Treasury Decision consists of a reprint of the opinion in Greiner 497 vs. Lewellyn, which is reproduced in full herein beginning at ^[497. — The Corporation Trust Company.] {Decision.) (Revenue Act of 1918.) May 16, 1922. The tax being due and payable one year after decedents death, in- junctive relief against its collection by distraint within the 180 day period thereafter will not be granted, there being ample remedy at law to redress any alleged injury consequent on enforced payment prior to the expiration of one year and 180 days. United States Circuit Court of Appeals for the Fip>.st Circuit. Frank A. Page, Individually and as Collector of Internal Revenue, Defendant, Appellant, v. Frank L. Polk Et Al., Executors, Plaintiffs, Appellees. Appeal from the District Court of the United States for the District of Rhode Island. 569 Bingham, J. — This is an appeal from a final decree of the District 223 Court for Rhode Island [1[355 herein] in a suit in equity brought by 225 Frank L. Polk and the United States Trust Company of New York, 315 Executors of the Estate of Josephine Brooks, against Frank A. Page individually and as Collector of Internal Revenue for the District of Rhode Island, restraining the latter from collecting a tax assessed against the estate. 570 The complainants are citizens of New|York and the defendant is a citizen of Rhode Island. Josephine Brooks died August 17, 1920. The complainants duly filed their return setting forth the value of the estate, and the Commissioner of Internal Revenue assessed thereon a tax of $245,787.67, under Title IV of the Revenue Act of February 24, 1919 (Stat, at Large, p. 1096). i The jurisdiction of the District Court, as a federal court, is involved on the ground of diverse citizenship and that the amount involved exceeds Copyright 1922, by The Corporation Trust Company. WAR TAX 155 SERVICE ESTATE TAXES REGULATIONS, ETC.- -1922. five thousand dollars exclusive of interest and costs; also on the ground that the suit is one arising under the internal revenue laws of the United States. 571 There is no controversy as to the legality or amount of the tax as- sessed against the estate. The complainants contend that under Section 408 of the Act of 1919, they are given a year and 180 days after their testatrix's death in which to pay the tax, even though the Commissioner of Internal Revenue had not extended the time of payment under Section 406 for 180 days after its due date, and that the defendant was not authorized to enforce its collection by distraint or otherwise until after the expiration of 180 days; that in violation of this right, the defendant, pretending to act in his capacity as collector, on the 28th day of September, 1921, and before the 180 days had expired, notified the con plainants that, unless the tax was paid within ten days, he should proceed to collect the same, with costs, by seizure and sale of property; that under Section 408 of the Act of 1919 the collector is prevented from collecting the tax by distraint or otherwise within 180 days; and that the threatened seizure, if carried out, would have been unauthorized and an act not done by him in his official capacity or with color of law. They further contend and allege in their bill that if, to avoid such threatened dis- traint, they at this time paid the tax, they would be remediless in law, as they had the privilege, under Section 406, of paying the tax at any time down to February 13, 1922, without interest. It was also alleged in the bill that the payment of the tax at the time of the con-mencement of the suit rather than on February 13, 1922, would subject the estate to loss of interest on the money during the interim in excess of five thousand dollars, and would subject the estate to the difficulty of converting the assets into cash for immediate pay- ment of a large sum of money. , But it appears in the final decree that it was stipulated in open court that the coir plainants had, at the time of the com- mencement of the suit and at the time of entering the decree, assets in their hands sufficient to meet the tax, and that the loss which they would have sustained by the payment would have been the interest on the tax, unless they were able to recover it back from, the United States. 572 It was decreed that the payment of the tax was "not required by law or compellable by distraint until one year and 180 days after the death of Josephine Brooks, which occurred on the seventeenth day of August, 1920"; that payment of the tax "at the time of the filing of the original bill herein, instead of in February, 1922 . . ., would have subjected the estate ... to loss of interest on the money so paid during the interim amounting to a sum in excess of $5,000; and that if, to avoid the threatened distraint, the plaintiffs should themselves pay such tax prior to February 13, 1922, they would be remediless in the law." It was further decreed that the defendant, his agents and servants, be permanently restrained "from making or attempting to make any seizure, distress or distraint of the property of the complainants . . . until the expiration of the thirteenth day of February, 1922 (but no longer)," and "that the complainants recover of the defendant, Frank A. Page individually, the sum of $46.54, their costs and disbursements herein duly taxed." 573 The bill of complaint was filed October 4, 1921. The final decree was entered December 27, 1921. A petition for appeal and assign- ment of errors was filed January 27, 1922, and on that day the appeal was allowed and citation issued returnable to this court February 24, 1922, the service of which was accepted January 27, 1922. The record was filed in this court February 9, 1922. Copyright 1922, by I lie Corporation Trust Company. WAR TAX 156 SERVICE 6-26-22. (2) 6-9-22. (3) 8-4-22. ESTATE TAXES REGULATIONS, ETC. — 1922. 574 On February 10, 1922, the 180 days having nearly elapsed, the com- plainants paid the Collector of Internal Revenue the tax in question. When the case came on for hearing in this court the appellees (com- plainants) moved to affirm the decree or dismiss the appeal on the ground that, the tax having been paid, the questions presented by the appeal were academic. The appellant objected and now contends that the case should be considered on its merits and the decree reversed on the authority of our decision of March 21, 1922, in Nichols v. Gaston et al., Executors H[467, herein]; that no other course can properly be taken as costs were awarded against him in the court below, which he has paid. 675 Costs having been decreed against the appellant from which he would be relieved if the decree should be reversed, we think the case must be considered on its merits. Matter of Application of Martin v. W. J. Johnston Co., 128 N. Y. 605. 676 The facts in this case, so far as they relate to the right of the appellees to restrain the appellant from collecting the tax, differ in no respect from those considered by us in Nichols v. Gaston et al., Executors, supra, in which it was held that the injunction was improperly issued. We see no occasion for receding from the views there expressed and are of the opinion that the appellees' motion should be denied, the decree of the District Court reversed, and costs awarded the appellant in this court and in the court below. The decree of the District Court is reversed and the case is remanded to that court with directions to enter a decree dismissing the bill, with costs to the appellant in this court and in the District Court. (T. D. 3338.) 677 [This Treasury Decision consists of a reprint of the opinion in Union 518 Trust Company, et al., executors vs. Wardell, collector, which is re- produced in full beginning at ^[518. — The Corporation Trust Com- pany.] (T. D. 3339.) 678 [This Treasury Decision consists of a reprint of the opinion in Shwab, 499 executor, vs. Doyle, collector, which is reproduced in full beginning at 1J499. — The Corporation Trust Company.] (T. D. 3348.) 578a [This Treasury Decision consists of a reprint of the opinion in Page 569 vs. Polk, which is reproduced in full beginning at ^[569. — The Cor- poration Trust Company.] Copyright 1922, by The Corporation Trust Company. WAR TAX 157 SERVICE 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC. — 1922. REGULATIONS 63 (1922 EDITION) [Promulgated July 27, 1922.] Relating to ESTATE TAX Under the REVENUE ACT OF 1921 Complete index beginning on page 207. These regulations apply to the estates of decedents dying after the effective date of Title IV of the Revenue Act of 1921 [i. e. after 3.55 P. M., Washington time, November 23, 1921]. Estate Tax Regulations No. 37 (revised January, 1921) [page 33, herein] remain in full force and effect, subject to such modifications and changes therein as are specified in Article 106, infra [^776]. TABLE OF CONTENTS. (The section numbers refer to the statute, and the article numbers to the regulations.) Paragraph Section 400. Definitions 416 Section 401. Description of tax 421 Article 1. The various statutes 579 2. Transfers reached 580 3. Neither a property nor an inheritance tax 581 4. Description of taxable estates 582 5. Definition of "resident" and "nonresident" 583 6. Manner of determining liability 587 7. Rates of tax 588 8. Computation of tax 590 9. Exempt estates 593 10. Exemption must be proved 597 Section 402. Gross estate 424 Section 402. (a) General. 425 Article 11. Character of interests included 601 12. Specific property to be included 604 13. Value 608 14. Rules for the valuation of property 609 (1) Real estate 609 (2) Stocks and bonds 610 (3) Interest in business 614 (4) Notes, secured and unsecured 615 (5) Cash on hand or on deposit 616 (6) Patents, trade-marks, and copyrights 617 (7) Accounts receivable, claims, judgments, etc 618 (8) Other property 619 (9) Household and personal effects — General provisions 620 (a) When value is less than $2,000 621 (b) When value is more than $2,000 625 (c) Appraisers and basis of appraisals 627 15. Valuation of annuities, and of life and remainder interests 629 Section 402. (b) Dower and curtesy 426 Article 16. Dower and curtesy 641 Section 402. (c) Transfers by decedent in his lifetime 427 Article 17. Nature and time of transfer 642 18. Transfers in contemplation of death — Nature of transfer 643 19. Transfers intended to take effect at or after death — General 646 20. Reservation of income 647 21. Power of revocation or control 649 22. Valuation of property transferred 650 Copyright 1922, by The Corporation Trust Company. WAR TAX 158 SERVICE 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC.— 1922. Paragraph Section 402. (d) Property held jointly 428 Article 23. Property held jointly or as tenants by the entirety 651 24. Taxable portion 653 Section 402. (e) Property passing under power of appointment 429 Article 25. General rules 656 26. Powers exercised before and after February 24, 1919 659 Section 402. (f) Insurance 430 Article 27. Taxable insurance 660 28. Insurance in favor of the estate 661 29. Insurance receivable by other beneficiaries 662 30. Effective date of insurance provisions 663 31. Valuation of insurance 664 Section 403. Deductions 431 Section 403. (a) Deductions — Estates of residents 432 Section 403. (a) (1) General 433 Article 32. Deduction of claims, expenses, etc 665 33. Effect of court decree 666 34. Funeral expenses 667 35. Administration expenses 668 36. Executor's commissions 669 37. Attorney's fees 673 38. Miscellaneous administration expenses 676 39. Claims against the estate 677 40. Taxes 678 41. Unpaid mortgages 681 42. Losses from casualty or theft 682 43. Support of dependents 683 Section 403. (a) (2) Property previously taxed 434 Article 44. Deduction of the value of transfers taxed within five years 684 45. Property originally received 688 46. Property acquired in exchange 689 Section 403. (a) (3) Transfers for public, charitable, etc., uses 435 Article 47. Transfers for public, charitable, religious, etc., uses 691 48. Religious, charitable, scientific, and educational corporations 694 49. Proof required 696 50. Conditional bequests 697 51. Effective date 699 Section 403. (a) (4) Specific exemption 436 Article 52. Specific exemption 700 Section 403. (b) Estates of nonresidents 437 Article 53. Situs of property of nonresident decedents 701 Section 403. (b) (1) (2) (3) Deductions 438, 439, 440 Article 54. Net estate 703 55. Deduction of claims, expenses, etc 704 56. Deduction of value of transfers taxed within five years 706 57. Deduction of value of transfers for public, charitable, religious, etc., uses. 707 58. Determination of net estate 708 59. Payment of tax 711 Section 404. Preliminary notice 446 Article 60. When notice required 712 61. Notice by executor or administrator 713 62. Notice by others than duly qualified executor or administrator 714 63. Exemption claimed on account of military service; notice required.. . . 715 64. Preliminary notice; estates of nonresidents 716 65. Transfer agents' notice; estates of nonresidents 717 66. Transfer of stocks and bonds of nonresident decedents; how made.. . . 719 Section 404. The return 446 Article 67. When return required — Date of filing 721 68. Persons liable for return 722 69. Preparation of return 723 70. Supplemental data 724 71. Procedure where no return has been made 725 72. Investigation of returns 726 73. Return of estates of nonresidents ;. . 729 74. Estates of nonresidents — Supplemental data 730 Copyright 1922, by The Corporation Trust Company. WAR TAX 159 SERVICE \ 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC.— 1922. Section 404. The return. — Concluded. Paragraph Article 75. Returns confidential j 732 76. Disclosure to persons having material interest 733 77. Attorneys must have authorization 734 Section 405. Revised statutes, Sec. 3176. Return by collector or Commissioner. . 448, 8071 Article 78. Return by collector or Commissioner 735 Section 406. Payment of tax and interest 449 Section 407. Adjustment of tax — Interest. 45 1 Article 79. Payment of tax; general 736 80. Payment by bonds or uncertified check 739 81. The executor shall pay the tax 741 82. Extension of time for payment , 742 83. Interest on tax. 744 Section 408. Collection of tax 454 Article 84. Remedy not exclusive 747 Section 408. Reimbursement 455 Article 85. Right to reimbursement not enforcible by Commissioner 748 Section 409. Lien — Remedy against transferee and insurance beneficiary 456 Section 407. Discharge of executor from personal liability 453 Article 86. Property subject to lien. 749 87. Pvdease of lien 752 Section 410. Revised Statutes, Sec. 3176. Penalties 458, 8073 Article 88. Nature of penalties 755 89. Penalties for false or fraudulent notice or return 757 90. Penalty for failure to file notice or return 758 91. Penalty for failure to exhibit records or property 759 Revised Statutes, Sees. 3220, 322S, 3228. Claims for abatement and refund 8023, 8047, 8057 Article 92. Kinds of relief 760 93. Claim for abatement 761 94. Accrual of interest as affected by abatement claim 762 95. Limitation of time to file claim for abatement of additional tax 763 96. Claim for refund 764 97. Payment of claims and interest ' 765 Revised Statutes, Sees. 3229, 5292, 5293. Power to compromise or remit penalties preceding 767 Article 98. Power to compromise or remit 767 Revised Statutes, Sec. 3467. Personal liability of executor preceding 768 Article 99. Extent of liability 768 Sections 1308, 1310. Examination of records and taking of testimony 8002-3 Article 100. Securing evidence — Taking testimony 769 101. Power to compel compliance 770 Sections 1300, 1307. Remedies for collection 8000-1 Article 102. Remedies for collection of tax 771 103. Executor's duty to keep records 772 104. Executor's duty to render statements 773 Section 411. Estates administered in the United States Court for China 460 Section 1400. Scope of repeal 463 Article 105. Scope of repeal 775 106. Promulgation of regulations and amendments to Regulations 37 (1918 Act).... 776 List of the several divisions and of locations of offices of internal revenue agents in charge 777 579 Article 1. The various statutes. — The Federal estate tax was first 416 imposed by the Act of September 8, 1916. This law was amended by the Act of March 3, 1917 (Title III), and the Act of October 3, 1917 (Title IX). These two statutes increased the rate of tax. The Revenue Act of 1918 (Title IV), which became effective 6.55 p. m., Washington, D. C. time, February 24, 1919, reduced the rates applicable to the smaller net estates as compared with those of Title IX of the Revenue Act of 1917, and contained a number of provisions not found in any of the prior acts. The Revenue Copyright 1922, by The Corporation Trust Company. WAR TAX 160 SERVICE 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC.— 1922. Act of 1921 (Title IV) became effective at 3.55 p. m., Washington, D. C. time, November 23, 1921. It re-enacts without change the rates of Title IV of the Revenue Act of 1918, supplants all prior acts as to the estates of de- cedents dying after the effective date thereof, embodies numerous changes, but continues many of the provisions of the earlier acts. It is herein referred to as "the statute." References to other statutes are specific. 580 Art. 2. Transfers reached. — The statute subjects to tax transfers by will and under intestate laws, and also transfers made by the decedent in his lifetime, when made in contemplation of death or intended to take effect in possession or enjoyment at or after his death, excepting, however, bona fide sales for a fair consideration in money or money's worth. Transfers of certain other property interests are also included. 531 Art. 3. Neither a property nor an inheritance tax. — The Federal estate tax is imposed upon the transfer of the net estate of every person dying after September 8, 1916, determined in the manner prescribed by the applicable law. (See Art. 1.) The tax is not laid upon the property, but upon its transfer from the decedent to others. The subject of tax is the transfer of the entire net estate, not any particular legacy, devise, or distributive share, and the relationship of the beneficiary to the decedent has no bearing upon the question of liability, or the extent thereof. The transfer of property is taxable, although it escheats to the State for lack of heirs. ESTATES SUBJECT TO TAX. 582 Art. 4. Description of taxable estates. — The tax is imposed upon 421 the transfer of the net estate. The term "net estate" has a distinct meaning in the statute, signifying the difference between the total value of the gross estate and the total of the authorized deductions. One of the deductions authorized in the estate of a resident decedent is the specific sum of $50,000, and consequently there is no net estate where the gross estate does not exceed that amount. No such deduction is authorized in the estate of a nonresident decedent. (See Arts. 53 to 58, inclusive.) 583 Art. 5. Definition of "resident" and "nonresident." — The statute 432 provides (paragraph (5) of section 2) that the term "United States," 437 when used in a geographical sense, includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia. 584 A resident is one who, at the time of his death, had his domicile in the United States; or one who was a citizen of the United States at time of death and with respect to whose property any probate or adminis- tration proceedings are had in the United States Court for China. (See Sec. 411.) A missionary who, at the time of death, was serving as such under a foreign missionary board of any religious denomination in the United States, will be presumed to have died a resident of the United States, if domiciled therein at the time of his or her commission and departure for such service, and not a nonresident merely by reason of his or her intention to permanently remain in such service. (See Sec. 403(b).) Subject to the foregoing ex- ceptions, and the presumption applying in the case of such missionaries, all other persons are nonresidents. 585 Except as stated above, and in section 400 of the statute in respect to the exemption accorded on account of military or naval service Copyright 1922, by The Corporation Trust Company. WAR TAX 161 SERVICE \ 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC. — 1922. in the late war, the statute takes no account of the citizenship of the decedent, but prescribes different rules for the estates of residents and nonresidents. 686 A citizen of the United States is a nonresident if his domicile is in Porto Rico, the Philippine Islands, or other foreign country, whereas a citizen of a foreign country is a resident if his domicile is in the United States. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal. DETERMINATION OF TAX LIABILITY. 587 Art. 6. Manner of determining liability. — The first step in the de- 421 termination of tax liability is to ascertain the total value of the decedent's gross estate. (See Arts. 11 to 31, inclusive; also Art. 53.) The second step is to subtract from this value the total deductions authorized in order to arrive at the value of the net estate. (See Arts. 32 to 52, inclusive, as to estates of residents; and Arts. 54 to 58, inclusive, as to estates of non- residents.) The third step is to obtain the sum of certain percentages of successive portions of the net estate, as provided by the applicable taxing act. (See Arts. 7 and 8.) 588*' Art. 7. Rates of tax. — The Revenue Act of 1916, the amendment |thereto of March 3, 1917, the Revenue Act of 1917, and the Revenue Act of 1918, each imposed different rates of tax. The rates imposed by the Revenue Act of 1921 are the same as those prescribed in the Revenue Act of 1918. In each act the rates contained therein are applicable to the estates of decedents dying on or after the effective date thereof, and prior to the effective date of the next succeeding act. A table of the several rates is given below: Rates of estate tax. Blocks of net estate. Act of 1916 (effective Sept. 9, 1916). 2 Amend- ment of Mar. 3, 1917 (effective Mar. 3, 1917). 3 Act of 1917 (effective Oct. 4, 1917). 4 Acts of of 1918 and 1921 (For • effective dates, see below.) Exceeding Not exceed- ing Amount of block. Per cent. Per cent. Per cent. P* cent. $50,000 $50,000 1 1* 2 1 $50,000 150.000 100,000 2 4 2 150,000 250,000 100,000 3 6 3 260,000 450,000 200.000 4 8 4 450,000 750,000 300,000 5 10 6 (750.000 1,000,000 250,000 6 P 10 8 1,000,000 1,500,000 500,000 6 12 10 1,500,000 2,000,000 500,000 6 9 12 12 2,000,000 3,000,000 1.000,000 7 ioh 14 14 3,000,000 4,000,000 1,000,000 8 12 16 16 4,000,000 5,000,000 1,000.000 9 13X 18 18 5,000,000 6,000,000 1.000.000 10 15 20 20 6,000,000 7,000,000 1,000,000 10 15 20 20 7,000,000 8,000,000 1,000,000 10 15 20 20 8,000,000 9,000.000 1,000.000 10 15 22 22 9,000,000 10,000,000 1.000,000 10 15 22 22 10,000,000 10 15 25 25 Copyright 1922, by The Corporation Trust Company. WAR TAX 162 SERVICE «-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC. — 1922. 589 The rates prescribed by the different acts, as set forth above, apply to the estates of decedents dying within the following dates: Column 1, Revenue Act of 1916, effective Sept. 9, 1916, to Mar. 2, 1917, inclusive. Column 2, amendment of Mar. 3, 1917, effective Mar. 3, 1917, to Oct. 3, 1917, inclusive. Column 3, Revenue Act of 1917, effective Oct. 4, 1917, to 6.55 p. m., Washington, D. C, time, Feb. 24, 1919, inclusive. Column 4, Revenue Act of 1918, effective 6.55 p. m. Feb. 24, 1919, to 3.55 p. m., Nov. 23, 1921 (Washington, 1). C, time), on which last named hour and date the revenue Act of 1921, became effective. 590 Art. 8. Computation of tax. — For the purpose of computing the tax, the net estate is divisible into blocks, each block being taxed at a different and increasing rate. The preceding table gives the amount of the various blocks and the applicable rate of tax under each of the taxing acts. For example, the tax upon the net estate of $1,240,000 of a decedent dying on March 1, 1919, is computed as follows: Amount of first block $50,000 at 1 per cent $500 Amount of second block 100,000 at 2 per cent 2,000 59 1 There is subjoined a table for ascertaining the tax without the detailed computation given above. An illustration of its use is as follows: The net estate of a decedent dying March 1, 1919, amounts to $1,240,000. By reference to the table it will be seen that the last complete block preceding this amount is $1,000,000, and that the total tax computed on a million dollars under the rates in force amounts to $51,500. Upon the remainder of the net estate, $240,000, the tax is computed at the rate set out in the next following line, or at 10 per cent. The tax on this amount is consequently $24,000. The following result is thus obtained: Total tax on $1,000,000 = $5 1,500 Tax on 240,000= 24,000 Totals $1,240,000 $75,500 Amount of third block. . Amount of fourth block Amount of fifth block.. Amount of sixth block. Remainder 100,000 at 3 per cent 3,000 200,000 at 4 per cent 8,000 300,000 at 6 per cent 18,000 250,000 at 8 per cent 20,000 240,000 at 10 per cent 24,000 Total net estate 1,240,000 Total tax 75,500 Copyright 1922, by The Corporation Trust Company. WAR TAX 163 SERVICE 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC.— 1922. 592 a o o sb. 24, 1919 of 191S Total. oooooooooooocooo oooooocooooooooo HMiOOOOO^^^DtcOOO r-l rl CO T}< CD 00 q0 HHrHrtHINNNNMM > r a) dj^ Total. OOOOOOOOOOOOOOOO OOOOOOOCOOOOOOOO qqqqqqqqqqqqqqqq ,-* id i-T t>T t-J c>* H HClH^^ONMiO»lflOK) 'co - - 3 Mar. 2 incl X X 3-3* £ s ^HCO'«i , -C35©0(NCO"5"3>0>n»Ol'> Sept. 9, 1916, to Mar 2, 1917 inclusive (Revenue Act of 1916) Total. OOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOO lOciOifliOOOOOCCOOCOC <-0!^"5'<*<'<*'Tt<^'^-«*< •-I'-iCMCOTflQCDl^OO Tax. OOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOO wqqqqflqqqqqqqqqq to oo io (no odd do o ddo HrtMKMJOOOOOOO Rate (per cent) . HNCC^lCHOtoeNOOOOCOCOO 3 ° 5 S < OOOOOOOOOOOOOOOO OOOOOOOOOOOOOOOO qqqqqqqqqqqqqqqq ©*©"o~©"©*©©* o*c"o* ©*o*o"©*o*©* I0OOOOU2OO0OOCOOOO (ShhWDNICiOCOOCOOCO Net estate 1 Not Ex- ceeding — < -'oooo©o c:>c=lCCC>C!C; co c .o o o © q© qqqqqqqqq © aaocSoO^ 0©©©OC©0 I- cn ^ b- © iqqqqqqc qqq ,-" h f commencing suit thereon; and, with the advice and consent of the said Secretary and the recommendation of the Attorney General, he may compromise any such case u [\ r 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 Rev- enue, or of the officer acting as such, with his reasons therefor, with a statement of the amount of tax assessed, the amount of additional tax or penalty imposed by law in con- sequence 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. Revised Statutes, Sec. 5292 (Comp. Sts., 1916, Sec. 10,130). Whenever any person who shall have incurred any fine, penalty, or forfeiture, or disability * * * shall refer his petition to the judge of the district in which such fine, penalty, or forfeiture, or dis- ability has accrued, truly and particularly setting forth the circumstances of his case, and shall pray that the same may be mitigated or remitted, the judge shall inquire, in a summary manner, into the circumstances of the case; first causing reasonable notice to be given to the person claiming such fine, penalty, or forfeiture, and to the attorney of the United States for such district, that each may have an opportunity of showing cause against the mitigation or remission thereof; and shall cause the facts appearing upon such inquiry to be stated and annexed to the petition, and direct their transmission to the Secretary of the Treasury. The Secretary shall thereupon have power to mitigate or remit such fine, forfeiture, or penalty, or remove such disability, or any part thereof, if, in his opinion, the same was incurred without willful negligence, or any intention of fraud in the person in- curring the same; and to direct the prosecution if any has been instituted for the recovery thereof, to cease and be discontinued, upon such terms or conditions as he may deem reasonable and just. Revised Statutes, Sec. 5293 (Comp. Sts., 1916, Sec. 10,131). The Secretary of the Treasury is authorized to prescribe such rules and modes of proceeding to ascertain the facts upon which an application for remission of a fine, penalty, or forfeiture, is founded, as he deems proper, and, upon ascertaining them, to remit the fine, penalty, or forfeiture, if in his opinion it was incurred without willful negligence or fraud, in either of the fol- lowing cases: First. If the fine, penalty, or forfeiture was imposed under authority of any revenue law, and the amount does not exceed $1,000. * * * 767 Art. 98. Power to compromise or remit. — The Commissioner, with 8059 the advice and consent of the Secretary of the Treasury, may com- promise any civil or criminal case arising under the internal-revenue laws instead of commencing suit thereon, and with the advice and consent of the Secretary, and upon the recommendation of the Attorney-General, may compromise any such case after suit thereon has been commenced by the United States. Accordingly, the power to compromise extends to (a) both civil and criminal cases; (b) cases whether before or after suit; and (c) both taxes and penalties, except that taxes legally due from a solvent taxpayer may not be compromised. Refunds can not be made of accepted offers in compromise in cases where it is subsequently ascertained that no violation of law was involved. Where a fine, penalty, or forfeiture, not exceeding $1,000, is incurred without willful negligence or fraud, it may be remitted by the Secretary of the Treasury; and he may mitigate or remit other fines, penalties, forfeitures, and disabilities where the court has inquired into the matter and made findings. PERSONAL LIABILITY OF EXECUTOR. Revised Statutes, Sec. 3467 (Comp. Sts., 1916, Sec. 6373). Every executor, admin- istrator, or assignee, or other person, who pays any debts due by the person or estate from [for] whom or for which he acts, before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate for the debts so due toj.the United States, or for so much thereof as may remain due and unpaid. Copyright 1922, by The Corporation Trust Company. WAR TAX 203 SERVICE 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC. — 1922. 768 Art. 99. Extent of liability. — The executor is personally liable for 449 the payment of the estate tax to the amount of the full value of the assets of the estate which have at any time come into his hands. Where no executor or administrator has been appointed, every person in actual or constructive possession of any property of the decedent is liable for the tax as an executor to the value of such property, except as limited by Article 87 in the case of transferees, trustees and insurance beneficiaries. EXAMINATION OF RECORDS AND TAKING OF TESTIMONY. 769 Art. 100. Securing evidence— Taking testimony. — In order to ascer- 8002 tain the correctness of a return, or to make a return where none 8003 has been made, the Commissioner has power to require the attend- ance, and to take the testimony, of the person rendering the return^ or any officer or employee of such person, or any other person having knowl- edge in the premises. Such persons may be required to produce any relevant book, paper, or other record. This power may be exercised by any revenue agent or inspector designated for the purpose. 770 Art. 101. Power to compel compliance. — Where any person is sum- moned to appear and testify, or to produce books, papers, or other data, the District Court of the United States for the district in which such person resides has power to compel the giving of the testimony, or the production of the books, papers, or data, and to issue any appropriate process, writ, or order. REMEDIES FOR COLLECTION. 771 Art, 102. Remedies for collection of tax. — The provisions of the 8000 statute quoted above apply to the estate tax law; and three remedies. 8001 are thus provided for the collection of the tax: (1) Collection by distraint. — The collector may issue warrant of distraint authorizing the seizure and sale of any or all of the assets of the estate. (See R. S., Sees. 3187 et seq.; Comp. Sts., 1916, Sec. 5909 et seq.) (2) Collection by suit to subject the property to sale. — The collector may com- mence in any court of the United States appropriate proceedings, in the name of the United States, to subject the property of the decedent to sale under the judgment or decree of the court. (3) Collection by suit for personal liability. — The personal liability of the executor, of the transferee or trustee of property transferred in contemplation of or intended to take effect in possession or enjoyment at or after dececent's death, and of the beneficiary of life insurance, may be enforced by any appropriate action. 772 Art. 103. Executor's duty to keep records. — It is the duty of the executor to keep such records as the Commissioner may require. Executors are required to keep such complete and detailed records of the affairs of the estate as will enable the Commissioner to determine accurately the amount of the tax liability. 773 Art. 104. Executor's duty to render statements. — It is the duty of the executor not only to make the formal return, but also to render any other sworn statement which the Commissioner may require for the purpose of determining whether a tax liability exists. Copyright 1922, by The Corporation Trust Company. WAR TAX 204 SERVICE 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC. — 1922. ESTATES ADMINISTERED IN THE UNITED STATES COURT FOR CHINA. 7 74 [Repeats the law merely. — Sec. 411, H460-462.] SCOPE OF REPEAL. 775 Art. 105. Scope of repeal. — The Revenue Act of 1921 retains in force the provisions of Title IV of the Revenue Act of 1918 for the assess- ment and collection of all taxes accruing thereunder, and for the imposition and collection of all penalties which have accrued or may accrue in relation to any such taxes. 776 Art. 106. Promulgation of regulations. — In pursuance of the statute, 116 the foregoing regulations are hereby made and promulgated, and all 145 rulings inconsistent herewith are hereby revoked. These regu- 201 lations apply to all pending estate tax cases except where a par- 207a ticular question is governed by a specific provision of the earlier statutes differing from the Revenue Act of 1921, in which cases the provisions of the applicable statute control and Regulations 37 (revised January, 1921) [beginning on page 33 herein] remain in full force and effect, subject to the following changes: Article 47 [1fl45] is amended to read as follows: The unpaid principal of mortgages on property of the decedent, whether the property be situated within or without the United States, including interest accrued to the date of death, is deductible. Articles 29 [1)116], 71 [1f20l], and 76-A [If 207 A] are revoked. D. H. BLAIR, Commissioner of Internal Revenue. Approved Jul)' 27, 1922. [Released for publication August 7, 1922.] A. W. MELLON, Secretary of the Treasury. u-I4 Copyright 1922, by The Corporation Trust Company WAR f AX 205 SERVICE 8-4-22. Regulations 63. ESTATE TAXES REGULATIONS, ETC.— 1922. 777 LIST OF THE SEVERAL DIVISIONS AND LOCATIONS OF OFFICES OF INTERNAL REVENUE AGENTS IN CHARGE. (Communications should be addressed: United States Internal Revenue Agent in Charge, » ■' *.«• * j . * • * ■ ■ • • • • • City. State. Name of division. Atlanta Baltimore. . . Boston Buffalo Chicago Cincinnati. . Cleveland. . . Columbia. . . Denver Detroit Greensboro. Honolulu. . . Huntington. Indianapolis Louisville. . . Milwaukee. . Nashville. . . Newark New Haven. New Orleans New York. . Oklahoma Omaha Philadelphia. . , Pittsburgh.. . . Portland Richmond St. Louis St. Paul.. Salt Lake City San Antonio. . San Francisco. Seattle Springfield.. . . Wichita Territory embraced. Location of office. Florida and Georgia Delaware, District of Columbia, Maryland. Maine, Massachusetts, New Hamp- shire, and Vermont. Twenty-first and twenty-eighth col- lection districts of New York. First collection district of Illinois.. . First and eleventh collection districts of Ohio. Tenth and eighteenth collection dis- tricts of Ohio. South Carolina Arizona, Colorado, New Mexico, and Wyoming. Michigan North Carolina Hawaii West Virginia Indiana . . . Kentucky Wisconsin Alabama and Tennessee New Jersey Rhode Island, Connecticut, and fourteenth collection district, New York (except Westchester County, and the twenty-third and twenty- fourth wards of New York City). Louisiana and Mississippi First and second collection districts of New York, Westchester County and twenty-third and twenty- fourth wards of New York City being part of the fourteenth collec- tion district of New York. Arkansas and Oklahoma Iowa and Nebraska First and twelfth collection districts of Pennsylvania. Twenty-third collection district of Pennsylvania. Oregon Virginia Missouri Minnesota, North Dakota and South Dakota. Idaho, Montana, and Utah Texas California and Nevada Washington and Alaska ... . Eighth collection district of Illinois. . Kansas Atlanta, Ga. Baltimore, Md. Boston, Mass. Buffalo, N. Y. Chicago, 111. Cincinnati, Ohio. Cleveland, Ohio. Columbia, S. C. Denver, Colo. Detroit, Mich. Greensboro, N. C. Honolulu, Hawaii. Huntington, W. Ya. Indianapolis, Ind. Louisville, Ky. Milwaukee, Wis. Nashville, Tenn. Newark, N. J. New Haven, Conn. New Orleans, La. New York City. Oklahoma, Okla. Omaha, Nebr. Philadelphia, Pa. Pittsburgh, Pa. Portland, Oreg. Richmond, Va. St. Louis, Mo. St. Paul, Minn. Salt Lake City, Utah. San Antonio, Tex. San Francisco, Calif. Seattle, Wash. Springfield, 111. Wichita, Kans. Copyright 1922, by The Corporation Trust Company. WAR TAX 206 SERVICE 8-4-22. ESTATE TAX INDEX. -REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. (See page 158 for an analytical Table of Contents of the Regulations.) Government index, the references having been changed to paragraph numbers. Abatement, claim for. . 760 Accountants, fees of — deductibility. .676 Accounts, valuation of. .618 Additional tax: Abatement, claim for. . 760 Determination of. . 726 Discharge from personal liability. . 726 Interest on. . 744 Lien of. . 749 Payment of. . 736 Personal liability for. .741, 768 Adjustment of tax. .726 Administration expenses, definition of. .676 Administrator {see Section 400 and Executor) Ad valorem penalty. . 755 Advance payment, no discount because of. . 736 Advancement, not necessarily taxable. .645 Agent, transfer, nonresident estate, when to give notice of. .717 Alaska, included in the term "United States". .583 Allies {see Associated nation). .593 Animals, loss of during administration. .682 Annuity: Created in connection with a transfer. .647 Included in gross estate. .601 Valuation of. .629 Annuity insurance, valuation of. . 664 Antiques. . 626 Appointment, property passing under power of. .656, 659 Appraisal: Assets of business. .614 Household and personal effects. .620 Other property. .619 Appraisers: Expert required. .614, 619, 620, 627 Fees of — deductibility. .676 Army Nurse Corps, female. .593 Artistic value, articles of. . 626 Assessment of estate tax. .669, 673, 725, 735, 761 Assignee, personal liability of. . 768 Assignment of insurance policy. .660 Associated nation, United States citizen serving in force of. .593 Attendance, power to require. . 769, 770 Attorney, power of. . 734, 764 Attorney's fees when deductible. .668, 673 Auctioneers, fees of — deductibility. . 676 Bank deposits, amount to be included in gross estate. .616 Bankers {see Nonresident estates). .716 Beneficial interest, person holding, when required to make return: Nonresident estates. .729 Resident estates. . 722 Beneficial ownership of decedent in his lifetime. .601 Beneficial societies, fraternal, death benefits paid by. .660 Copyright 1922, by The Corporation Trust Company. WAR TAX 207 SERVICE 8-4-22. ESTATE TAX INDEX. — REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Beneficiary: Estate previously taxed, decedent a- — of. . 684 See also, Nonresident estates. . 706 Insurance. .660-664 Insurance, legally bound to use proceeds for payment of taxes or charges against estate. . 661 Liability of. .748, 749, 768 Benefits, death. .660 Bequests: Conditional — when deductible. . 697 See also Nonresident estates. . 707 In lieu of dower or like interest. .641 In lieu of executor's commission. .671 Public or charitable. .691-699, 707 Betterments to property transferred. .650 Bonds: All, whether Federal, State, or municipal, and whether or not containing a tax-free covenant. . 605 Estates of nonresidents. .701, 717, 719 Of United States, payment of tax with. . 739 Valuation of. .610 Books: And records, production of. . 769, 770 Valuation of. . 621 Bric-a-brac. . 621 Broker's fee, deductibility of. .676 Brokers in possession of securities or funds of nonresident decedent. .716 Burial expenses, deductibility of charge for. .667 Business, valuation of interest in. .614 Caring for property of the estate, expense of. . 676 Cash on hand or on deposit, valuation of. .616 Casualty, losses from. .682 See also Nonresident estates. . 705 Cemetery lot, inclusion in gross estate. .605 Charges against the estate, life insurance to provide for payment of. .661 Charitable bequests. .691-699, 707 Checks: Outstanding at date of death. .609 Payment of tax with. . 740 China — estate of United States citizen probated in United States Court for China. .584 See also Section 411. .460 Citizen of United States — estate of, probated in United States Court for China. .584 See also Section 411. .460 Citizen of the United States who served in the war against Germany. .593, 597 Citizenship not test of residence. . 585 Claims: Held by decedent. .604 Valuation of. .618 Claims against estate-, deduction of. .677, 705 See also. .613 Claims for abatement or refund. .760 Clerk hire, deductibility. . 676 Close corporation, valuation of stock in. .610 Coast Guard, re service in — exemption. .593 Collection of tax. .747, 771 Commissions: See also Nonresident estates. . 705 Administrator's, executor's, trustee's. .669 Broker's. . 676 Compromise of penalties or disputed tax. .767 Computation of tax. .587, 590 See also Nonresident estates. . 708 Copyright 1922, by The Corporation Trust Company. WAR TAX 208 SERVICE 8-4-22. ESTATE TAX INDEX. — REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Conditional charitable, etc., bequests. .697 See also Nonresident estates. . 707 Conditional deduction of attorney's, administrator's, or executor's fees. .669, 673 Constructive possession, person in. .714, 729, 741, 768 See also Nonresident estates. .711, 716, 722 Contemplation of death: Exercise of power of appointment in. . 656 Transfer in. .642, 643, 650 Contingent liabilty, deduction of. .665 Contingent remainder. .601, 629 Contribution, by persons liable for the tax, to the person paying. . 748 Contribution to purchase price of property held jointly or as tenants by the entirety .653 Control of corpus or income of property transferred — effect of reservation of. .649 Copyrights, valuation of. .617 Corporation, nonresident estate, when to give notice of. .717 Court costs, deduction of. .676 See also Nonresident estates. . 705 Court decree, effect of, as fixing amounts deductible. .666 Crops, valuation of growing. .619 Curtesy. . 641 Custodians of property of nonresident decedents. .716 Data, supplemental, to be furnished in behalf of the estate. . 724, 730 Date for filing: Return. .721, 729 Preliminary notice. .713, 714, 716, 717 Death benefits, taxable as insurance. .660 Death: Contemplation of. .643 Transfer in contemplation of. .642, 643, 650 Transfer intended to take effect in possession or enjovment at or after death. .642, 646-650 Value at date of, of property transferred. .650 Debtor of decedent: Insolvency of. .615 Personal liability of. . 769 Debts of decedent. . 665 See also Nonresident estates. .705 Decree, court, effect of, as fixing amounts deductible. .666 Deductions: Estates of nonresidents. .582, 703-708 Estates of residents. .582, 665-700 Delinquency — penalties. .755, 758 Dependents, support of. .683 Depreciation after date of death. .608, 682 Determination of net estate. .582, 587 See also Nonresident estates. . 705, 708 Determination of tax. .587, 736 See also Nonresident estates. . 703, 708 Devise for public, charitable, religious, etc., uses. .691 Devise in lieu of dower or like interest. .641 Discharge: From personal liability for tax. .728 Of lien for tax. .751 Discount, none allowed on tax. . 736 Disease: Contracted in line of duty. .593 Loss from, when deductible. . 682 Distraint, collection of tax by. .771 Distributing estate, expenses of. .676 See also Nonresident estates. . 705 Distribution of property, restrictions on. .620 District of Columbia — included in term "United States". .583 See also. .691 Copyright 1922, by The Corporation Trust Company. WAR TAX 209 SERVICE 8-4-22. ESTATE TAX INDEX.— REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Dividends: Notice of nonresident decedent. .717 When to be included in gross estate. .606 Domestic corporations, stock in, part of estate of nonresident. .701 Domestic insurance company, insurance in, not a part of estate of nonresident. .701 Domicile. .583, 712 Donee of power of appointment. .656 Dower. . 641 Due date: Interest on tax from. .744 Of tax. .736 Educational uses, transfers for. .694 See also Nonresident estates. . 707 Effective dates of various statutes. .579, 588 Election to take under will: See Dower; Curtesy. .641 See Executor's commission. .669 See Attorney's fee. .673 Election under insurance policy. .664 Enhancement of value subsequent to death. .608 Enhancement of value of property transferred. .650 Engravings. . 626 Equitable {see Beneficial ownership). . 601 Escheated property, transfer taxable. .581 Estate, insurance in favor of. .660, 661 Estate of decedent, what constitutes. .601 Estate tax, character of — not a property or legacy tax. .581 Estates, by the entirety, joint, life, remainder and in reversion. .629, 651, 653 Etchings. .626 Exchange, property acquired by — of property previously taxed. . 689 See also Nonresident estates. . 706 Ex dividend — stock selling. . 606 Executor: Commissions. . 668, 669 See also Nonresident estates. . 705 Defined. .714 See also Nonresident estates. .716 Discharge from personal liability. . 726 Expense of holding property as trustee, by — not an administration expense. . 668 Failure. See Penalties. Final accounting, receipt for payment of tax, entitles him to credit. . 736 Foreign, directing transfer of securities. .717 Insurance receivable by. .660, 661 Legacy to, in lieu of commissions. .671 Penalties. .725, 755, 759 Personal liability of. .711, 725, 741, 768, 771 Reimbursement by certain persons. .748 Result of investigation — informed of. . 727 Should reserve sufficient assets to satisfy any additional tax. .738 Executor's duties: Furnish copies. .724 Give preliminary notice. .713 See also Nonresident estates. .716 Keep records. . 772 Pay the tax. . 741 See also Nonresident estates. .711 Render statements. .773 Reserve sufficient assets to satisfy additional tax. . 738 Retain all documents and vouchers. .723 Exempt estates: Less than $50,000, in case of doubt, file notice. .712 Military, etc., exemption. .593, 597, 715 Exemption, $40,000 of life insurance. .660, 662 Copyright 1922, by Thi Corporation Trust Company. WAR TAX 210 SERVICE 8-4-22. ESTATE TAX INDEX. — REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Exemption for military, etc., service, how claimed. .597, 715 Exemption, specific. 582, 700 None in nonresident estates. .582, 703 Expectation of death. .643 Expenses deductible. .665-676 See also Nonresident estates. . 705 Extension of time for return. .721 Extension of time for payment of tax. .742, 744 Farm machinery. .619 Federal bonds: Payment of tax with. . 739 Transfer of taxable. .605 Federal taxes upon income. .680, 728 Fees, deductible. .668, 676 Fiduciary, when to give preliminary notice. .714, 716 Fires, losses from. .682 Foreign country: Citizen of, may be a resident. .584 Decedent a resident of. See Nonresident estates. Inventory filed in connection with proceedings in. . 730 Foreign military force, decedent who served with. . 593, 597 Fraternal beneficial societies, death benefits paid by. .660 Fraud in return, effect of. .744, 757 Funeral expense. . 665, 666, 667 Furniture, valuation of. . 620 General power of appointment. .656 Germany, war against. .593 Gift: Joint tenancy or tenancy by the entirety. .653 When taxable. . 642-650, 653 Gross estate. .582, 601, 701, 703 Lien for tax on. . 749 Hawaii, included in the term "United States". . 583 Heirs: Property passing directly to. .604 When none, transfer by escheat to State is taxable. .581 See also Liability. Household effects, valuation and distribution of. .620 Husband and wife. See Dower; Curtesy; Joint interests; Tenancy by the entirety; Pre- viously taxed property. Income of property transferred, reservation of, in favor of grantor or of another. .647, 691 Income tax, Federal. . 680, 728 Inheritance tax, estate tax is not an. .581 Insurance: Life. . 660-664 Losses compensated by. .682 Interest accrued at time of death — whether then payable or not. . 605 Interest on: Bank account. . 616 Bonds. .605 Estate tax. . 742, 744, 762, 765 Mortgages against estate. .681, 776 Mortgages owned by estate. .605 Notes owned by estate. .605, 615 Refund. . 766 Internal revenue agents in charge, list of offices of. .777 Inventory, of nonresident estate — power to require. .730 Investigation of returns. .726, 736 Jewelry, valuation of. .620 Joint account in bank. .651 Copyright 1922, by The Corporation Trust Company. WAR TAX 211 SERVICE 8-4-22. ESTATE TAX INDEX.- -REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. oint interests. .651, 653 udgments in favor of decedent's estate. .618 udgments of local court — effect on deductions. .666 Legacy, estate tax is not upon any particular. .581 Legacy for public, charitable, religious, etc., uses. .691-699 Legacy in lieu of commissions. .666 Legal interest — person holding, when required to make return: Nonresident estates. .729 Resident estates. .722 Liability: Contingent, deduction of. . 665 Personal — of administrator, assignee, beneficiary, person in possession, transferee, trustee. .711, 725, 748, 768, 771 Liberty bonds: Payment of tax with. . 739 Transfer of taxable. .605 Lien for the tax: Property subject to. . 749 Release of lien. . 752 Life estates. .601, 629, 656 Life insurance, when taxable. .660-664 Line of duty, service in military forces. .593 Litigation to determine respective shares of beneficiaries. . 673 Live stock, valuation of. .619 Lodge, death benefits paid by. .660 Losses during administration. .665, 682 Machinery, farm. .619 Marine Corps, service in. . 593 Mausoleum. . 667 Military service — exemption because of. .597 Military forces of United States or of an associated nation — exemption because of service in. .593, 597 Miscellaneous administration expenses. .665, 668, 676 Missionary, residence of. .583 m See also 403 (b). .444^ Mitigation of fines, penalties, or forfeitures. .767 Modified articles of Regulations No. 37. . 776 Money due nonresident decedents, situs of. .701 Money in joint account. .651, 653 Money on deposit. .616 Monument, deduction for. .667 Mortgage owned by decedent. .615 Mortgage, deduction of. .681, 704, 776 Municipal bonds, transfer of, taxable. .605 Naval forces of United States or of an associated nation. . 593 Net estate: Estates of residents. .581, 582, 587, 665-700 See Deductions. See also Estates of nonresidents. . 703 Nonresident estates (see, generally, titles under general index): Administrator shall pay the tax. .711, 741 Agents of nonresident decedent. .716 Bankers. .716 Beneficial interest, person holding, when required to make return .72^ Bonds — Interest accrued prior to death. .717 Situs of. . 701 Tax free. . 605 Transfer after notice. .719 Deductions. . 703 See also specific titles under Deductions. Defined. .583 Copyright 1922, by Tk* Corporation Trust Compn.y. WAR TAX 212 SERVICE 8-4-22. ESTATE TAX INDEX.— REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Nonresident estates — Concluded. Executor shall — Give notice. .713, 716 Pay the tax. .711, 741 Information concerning, requirement of. . 730 Insurance in domestic company — not part of gross estate. . 701 Moneys due from domestic debtors — when part of gross estate. .701 Moneys on deposit. .701 Net estate — how determined. . 703 Notice. .716-719 Payment of tax. . 711 Personal property — when included in gross estate. .701 Person holding beneficial interest, when required to make return. . 729 Possession, persons in actual or constructive. .716 Presumption. .583 Property in the United States. .604, 701, 716 Real property in the United States. .604, 716 Real property outside the United States. . 604, 704 Return. . 704, 729 Specific exemption — none. .582, 703 Stock in domestic corporation. .701 Tax confined to estate in United States. . 703 Notes of United States, payment of tax with. .739 Notes, valuation of. .615 Notice, preliminary. .712-719 Failure to file. . 758 False or fraudulent. . 757 Nurse — exempt estates. .593 Offices — list of Internal Revenue. .777 Oriental rugs, valuation of. .625 Paintings, valuation of. .625 Partner, decedent's interest as. .614 Patents, valuation of. .617 Payment of tax: By certain bonds or notes of United States. . 739 By uncertified check. .740 Executor shall make. .741 Extension of time for. . 742 See also Nonresident estates. .711 Proceedings to enforce. .771 Receipt for. . 736 Settlement of executor's accounts — receipt entitles to credit. . 736 Shown due by return — effect of. .744 Time of. . 736 Penalties: Abatement. . 761 Ad valorem. . 755 Avoid, in case of doubt. . 723 Compromise. . 767 For delinquency. . 755, 758 For failure to exhibit records. .759 For failure to file notice or return. .758 For failure to furnish copies of documents, upon request. .724 For false and fraudulent notice or return. . 757 Nature of. . 755 Refund of. . 764, 765 Remission of. . 767 Return not in good faith. .744, 757 Person in actual or constructive possession — when must file return: * Nonresident estates, .729 Resident estates. .122 Personal effects, valuation and distribution of. .620 Copyright 1922, by The Corporation Trust Company. WAR TAX 213 SERVICE 8-4-22. ESTATE TAX INDEX.— REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Personal liability — persons subject to — administrator, assignee, beneficiary, executor, per- son in possession, transferee, trustee. .711, 725, 748, 768, 771 Personal property, inclusion and valuation of. .601, 629, 651, 653 See also Nonresident estates. .701 Philippine Islands, not included in term "United States". .583 Policy of life insurance. . 660-664 Porto Rico, not included in term "United States". .583 Power of appointment, property passing under. .656, 659 Power of attorney. . 764 Preliminary notice. .712-719 Failure to file. .758 False or fraudulent. .757 Present worth of annuities and future interests. .629 Presumptions: Assessment of estate tax correct. .761 Consent decree. .666 Property held jointly or as tenants by the entirety. . 653 Residence. . 584 Taxability of transfers, if not rebutted (the value of transfers must be returned).. 643 Two years of death, transfer within. . 644 When tax upon personal property becomes a personal obligation. .679 Previously taxed property. . 684-689 See also Nonresident estates. . 706 Prints, common. .621 Privileged character of return and other records. . 732, 733 Proceeds of life insurance subject to lien for tax. . 750 Promulgation of regulations. . 776 Property previously taxed. . 684-689 See also Nonresident estates. . 706 Property transferred — inclusion in gross estate. . 642-650 Property, valuation of. .608-629, 650 Protest, payment of tax under. .765 Rates of tax (sec. 401). .588, 590 Real property (generally). .601, 604, 609 Assessment for local taxation not determinative of value. . 609 Devisee, taking directly. . 604 Entirety, estate by. .651, 653 Jointly owned property. .651, 653 Heirs taking directly. .604 Life estate. .601, 629 Mortgaged, full value to be returned. .681 Mortgage on. .681, 705, 776 Outside the United States. .604, 681, 705-707 Taxes on. . 678 Valuation. . 609 Rebuttal of presumption of taxability of transfers. .643 Receipts granted upon payment of tax. . 736 Records: Executor, duty to keep. . 772 Exhibit, penalty for failure to. . 759 Production of. . 769, 770 Refunds, claims for. . 760, 764, 765 Registrar, nonresident estate — when to give notice. .717 Regulations No. 37, modified, revoked and superseded articles of. .776 Reimbursement for tax paid. .748 Release of lien. . 752 Relief from excessive assessment or collection. . 760 Remainder interest. .601, 629 Remainder, interest in reversion or. .601, 629 Remedies for collection. .771 Remission of penalties. .767 Rents, accrued at time of death — whether then payable or not. .604 Repeal of revenue act of 1918, scope of. .775 Copyright 1922, by' Tin Corporation : Trust Company. WAR TAX 214 SERVICE 8-4-22. ESTATE TAX INDEX. — REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Transfers made by decedent in his lifetime — Concluded. Interest transferred by decedent. .650 Liability, persons subject to tax. .741, 748, 749, 768 771 Lien for tax. . 749 Persons liable for tax on. .741, 748, 749, 768, 771 Property subject to lien for tax. . 749 Reimbursement of executor for tax paid on. . 748 Situs of property transferred by nonresident. .701 Time of. . 642 Transferee — Personal liability of. .741, 748, 749, 768, 771 Reimbursement of executor by, for tax paid on transfer . 748 Trust, property held in. .649, 701 Trustee, personal liability of. .752, 768 Valuation of property transferred. .642-647, 650 Transfers previously taxed. .684 See also Nonresident estates. . 706 Trust company, money deposited with and payable to survivor. .6^1 Trustee, suit to enforce personal liability of. .771 See also Transfers made by decedent in his lifetime; Personal liability. Trustee's commissions, not deductible. .672 Uncertain liability, deduction of. . 665 United States: Mortgages on property outside — death before Act 1921. .776 Use of term denned. . 583 See also Section 403b and section 411. .444, 460 Use, personal, of nonincome bearing property, valuation of. .635 Valuation, Rules for. . 609, 629 Life insurance. . 664 Previously taxed property. . 684 Transfers, property in certain. . 642-650 Value at the time of death. .608 See also Life insurance and transfers; Valuation. Vases, valuation of. . 626 Verification of return. . 726, 736, 769, 770 Vested remainder. .601, 629 Vouchers, duty of executor to furnish copies and retain. .723, 724 Waiver of personal inspection of household and personal effects by officer of Bureau . .620 War, World. .593 Warehouse companies, duties in connection with nonresident estates. .716 Widow. See Dower; Support of dependents; Joint interests; Previously taxed property; Tenants by the entirety. Will: Creating joint tenancy or tenancy by the entirety. . 653 Duplicate certified copies, to be filed with return. .696, 723 See also Nonresident estates. . 730 Election to take under. .641, 669, 673 Exercise of power of appointment by. .656 Notes or other claims canceled by. . 605 Property acquired under and previously taxed. .684 See also Nonresident estates. . 706 Transfer by, for public and similar uses. .691, 697 See also Nonresident estates. . 707 Transfers by, taxable. . 580 World War, service in. .593= Worthless notes, value of. .615]|'i Copyright 1922, by The Corporation Trust Company. WAR TAX 217 SERVICE C-9-22. (2) 8-4-22. ESTATE TAXES REGULATIONS, ETC. 1922. TREASURY DKIM.RTMK.Vr Form 71*— K»v)*«i March, IM2 NOTICE BY TRANSFER AGENTS — ESTATE OF NONRESIDEN' This notice must ba filed in duplicate. (Observe instructions on revert* tide J Name of decedent. Date of death.... Place of death if known . Residence Commissioner ok Internal Revenue, Estate Tax Division, Treasury Department, Washington, D. C. The undesigned, pursuant to the requirements of section 404 of the Revenue Act of hereby gives notice that on the day of . , 19 , a communication was received from _ : , aeting-in the capacity of , , _., whose address is _ , directing the transfer to , whose add reaa is , the stock* or bond* listed below of the _ Company ta corporation orgaui/.ed in l lie United States i, owned by the above-named decedent at time of death. Number. j Description. Ia<* value. < Attut'h ^Cltetiuif it moa- spate in required. J The names and addresses. of the legal representative* oi the decedent a estate, in so far us known or shown by the records of Uua company, arei Namt Address. Executor or ( Iu United States adminiHtmtor| 0utei ck U nited States [In United States _ -. Attorneys^ lOutside United States. . — . The undersigned has information that property owned by the decedent at the time of death was in the possession of others as shown below: A r uv/i* of possessor. Address, Description. I heheuy CERTIFY tliat I have carefullv read the instructions on the reverse -i0,000, and the approximate values of the various classes of property comprising the gross estate at date of death were as follows: Real estate .-. . •- m - $ _ Stocks and bond9 ... i ..^. i ^...v^,f^..,..i.. t ^..«_ T _ Miscellaneous personality - ! . ' — 1™.: I Property transferred (see Instructions 5 (<")) . Property owned jointly _ - ~ „ Life insurance for benefit of estate _ - „ Other Ufa Insurance. — - - (Estimated values mil be accepted.) Tcta! L That the names and addresses of the legal representatives cf the estate .and their attorneys insofar as >sc*n to me at<= Name, Address, Executor- Administrators I heels v cEBiir? that I ha-ve carefully read the Instruction? en *b p rc**rs* *H* of ihlo form nnd tti.it nil »bc pta'cmcntc- mane r?ln are corrcrt fo the heat of my lrnowledse and belief, 3 COT* Signature... , , - - tyrelgnatton Address (Rw PKregrnph 2 of InftrucUnos no barfc.) [Obverse of Form 704.] [For the use of this Form 704 see ^"7 1 3.] &0&rrighi ISt&i. by i he corfvfasion J rust €»tk#kn$ •W 4 F. T a X lo. 3 ' i E^R V I & h S-10-22. ESTATE TAXES REGULATIONS, ETC. — 1 922. INSTRUCTIONS 1. Estates subject to notice. — This notice must be liled for tlio estates of all resident decedents where In any case the value of the gross estate, as defined by the law, exceeds $50,000. 2. Persons required to file notice. — Where an executor or administrator has been appointed by court decree, he must fde the notice, which must contain a statement of the value of all the property constituting the gross estate of the decedent. Except as hereinafter mentioned, all persons having actual or constructive possession of any property of the decedent at the time of his death must file this notice. This requirement applies to agents, bankers, brokers, custodians, debtors, factors, fiduciaries, guardians, joint owners, partners, safe-deposit companies, trustees, warehouse companies, and all other persons having possession of property of the decedent. Such persons are relieved of the duty of filing notice only where the executor or adminis- trator has, within the time prescribed, filed a notice including the property in the possession of such persons. In case of doubt, the notice should be tiled. The notice may be executed by one executor or administrator. 3. Time for filin'j notice. — An executor or administrator, appointed by court decree, must file the notice within two months after his qualification. Persons having actual or constructive possession of the property of the decedent, when required to file notice, must file the same within two months after the decedenfs death. 4. Place of filing. — This notice must be filed with the Collector of Internal Revenue for the distric t in which the decedent had his domicile at time of death. 5. Gross estate. — The gross estate as defined by section -102 of the Revenue Act of 1921-, approved November 23, 1921, includes— («) Property which after decedent's death is subject to payment of charges, to expenses of admin- istration, and to distribution as a part of bis estate, (o) Interest of surviving spouse, as dower, curtesy, or estate in lieu thereof* (c) Property transferred or placed in trust in contemplation of, or intended to take effect in posses- sion or enjoyment a1 or after death. (cZ) Property held joiutly or as tenants in the entirety. (c) Property passing under a general power of appointment exercised by decedent. (/') (1) Insurance payable to a decedent's estate, hi* personal representatives, or t<> any person for the benefit of the estate. (2) Insurance payable to beneficiaries, other than 1 1"' estate, in evcoss of $10,000. 6. Lien.- The las is a Hen for ten years upon the entire gross estate, except such part of it as is used for the payment of charges against the estate and expenses of its administration allowed by any court having jurisdiction. 7 Penalties — The penalty for knowingly making any false statement in this notice is a fine not to exceed ?r>,000, or imprisonment, or both. Penalty for failure to tile notice as required is a flue not to exceed $r>00. and cost of suit. 8. Delinquency. — In the event of failnrc to file this notice within the two months prescribed by law. a detailed explanation under oath should accompany notice when Bled. : ' IRevnre'of Form 704. J {^■{■ynght ItoUj fal Ike L-Jiporst ,o>t l"ru>l ft$U$t0]k 8-17-22. (2) 9-25-22. ESTATE TAXES REGULATIONS, ETC.— 1922. (T. D. 3383) 7 87 Receipt of Liberty Bonds, Victory Notes, and Treasury Notes for 231 Estate or Inheritance Taxes— The appended [If 788] department 236 circular, issued under date of June 30, 1922, with reference to receipt 265 of Treasury notes of the United States in payment of Federal estate and inheritance taxes, is published for the information of internal- revenue officers and others concerned. This circular supplements Depart- ment Circular No. 225, dated January 31, 1921 (T. D. 3144) [1[265]. (T. D. 3383, signed by Commissioner D. H. Blair^and dated August 9, 1922.) 788 1. The provisions of Department Circular No. f 225, dated January 31, 1921, prescribing regulations governing the receipt of Liberty bonds and Victory "notes for Federal estate or inheritance taxes are hereby extended and made applicable to Treasury notes of the United States now or hereafter issued under authority of Section 18 of the Second Liberty Bond Act, as amended and supplemented, bearing interest at a higher rate than 4 per centum per annum, and any such Treasury notes shall accordingly be receivable by the United States at par and accrued interest in payment of any estate or inheritance taxes imposed by the United States, under or by virtue of any present or future law, upon the same terms and conditions as provided in said Department Circular No. 225, dated January 31, 1921, with respect to the acceptance of Liberty bonds and Victory notes bearing interest at a higher rate than 4 per centum per annum. 789 2. The issues of Treasury notes at this date outstanding, bearing interest at a higher rate than 4 per centum per annum, are: Description Date of Issue Short Title (a) 5% per cent notes, payable June 15, 1924 June 15, 1921 Sept. 15, 1921 Feb. 1, 1922 Mar. 15, 1922 June 15, 1922 Series A-1924 Series B-1924 Series A-1925 Series A-1926 Series B-1925 790 3. For the calculation of accrued interest on the current coupons of Treasury notes tendered in payment of estate or inheritance taxes under this circular, the method outlined in Exhibit B ft[26 1-262] to Depart- ment Circular No. 225, dated January 31, 1921, should be followed. Interest tables at the various rates borne by Treasury notes may be obtained from the Treasury Department, Division of Loans and Currency, Washington. The interest tables appropriate for use in connection with the issues of Treasury notes at present outstanding are as follows: Form General 1017, for Series A-1924 (interest dates June 15 and December 15). Form General 1016, for Series B-1924 (interest dates March 15 and September 15). Form L. & C. 369, for Series A-1925 ? prior to September 15, 1922 (interest during this period is on annual 365-day basis). Form L. & C. 435, for Series A-1925 subsequent to September 15, 1922 (interest dates March 15 and September 15). Form L. & C. 435, for Series A-1926 (interest dates March 15 and September 15), 791 Interest tables or decimals for computing interest as may be re- quired for other or future issues may be obtained from the Treasury Department, 1 Division of Loans and Currency, Washington, upon request. (Extension of Department CirculafJNo. 225, signedjbyf Secretary r A. W. Mellon, da ted; June 30, 1922iand;appended to T. D. 3383.) Copyright 1922, by The Corporation Trust Company. WAR TAX 225 SERVICE 9-25-22. ESTATE TAXES REGULATIONS, ETC.— -1922. (T. D. 3384.) 79 2 [Regulations 63 (1922 Edition) are further designated as T. D. 579 3384. — The Corporation Trust Company.] 79 3 No certificate releasing lien (waiver) required before transfer of 282 stock of a foreign corporation standing in the name of a nonresident 752 decedent. — Referring to 60-day notice, on Form 705, filed for the estate of' — - , deceased September 29, 1921, by the Guaranty Trust Company of New York, you are advised that the stock of the British American Tobacco Company may be transferred without a waiver from this office, as this is not stock of a corporation organized within the United States, and such stock is not taxable as a part of the decedent's gross estate in the United States. (Letter to Solomon Hanford, New York, N. Y., signed by Deputy Commissioner AIcKenzic Moss, and dated September 11, 1922.) Copyright 1')22 . by The Corporation Trust ( ompany. WAR TAX 226 SERVICK 8-7-22. ESTATE TAX. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Estate Tax Laws. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference T. D. Subject Paragraph 1918 Law Provisions 1 Reg. 37 Regulations under 1918 law (revision of January 21, 1921) as amended and supplemented to December 20, 1921. 40 Regulations 37 (1918 Act) further amended 776 Special "Substantial payment" as a prerequisite to granting of extention of time for payment of estate tax. (August 25, 1921.) 309 Special Interest on unpaid tax. (August 25, 1921.) 310 Special 60-day notice and payment of insurance by insurance companies, the insurance not being part of the decedent's gross estate. (March 12, 1921.) 313 Decision Polk vs. Page. U. S. District Court decision, 1918 Act. Tax not due and payable until one year and 180 days after decedent's death, and hence the right to collect by distraint within that period is denied. The statutory inhibition against suit for restrain- ing the collection of a tax has no application in the case of a tax not yet due and payable. (November 17, 1921.) 315, 465 3138 Community property in the eight states having com- munity property laws. (March 3, 1921.) 356 Decision N. Y. Trust Company vs. Eisner. United States Supreme Court decision, 1916 Act. New York transfer taxes, and other inheritance, succession and legacy taxes are not deductible in the deter- mination of net estate subject to Federal estate tax. (May 16, 1921.) 390 Decision U. S. vs. Field. U. S. Supreme Court decision, 1916 Act as amended. Property passing under general power of appointment. (February 28, 1921.). . . 396 The matters listed above are indexed. (See index following page 124.) The regulations, rulings, etc., listed below, are those issued during 1922. 1 92 1 Law Provisions 416 Reg. 63 Regulations 63.— 1921 Act. Comprehensive regulations relating to the Revenue Act of 1921, fully indexed beginning on page 207, and with complete table of contents beginning on page 158 579 Decision Polk vs. Page. U. S. District Court decision, 1921 Act. On the assessment and collection of taxes accrued under the 1918 Act. (December 21, 1921.) 465 3267 (This Treasury Decision reproduces the U. S. Supreme Court Decision in N. Y. Trust Co. vs. Eisner, ^[390 herein.) Decision' Nichols vs. Gaston. U. S. Circuit Court of Appeals decision, 1918 Act. The tax being due and pay- able one year after decedent's death, injunctive relief against its collection by distraint within the 180 day period thereafter will not be granted (March 21, 1922.) 467 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Estate Tax Supplementary Page 1. In blank at present. WAR TAX SERVICE te Tax Supplementary Pa 9-25-22. ESTATE TAX. — RUNNING TABLE OF CONTENTS.— Continued. Rulings, Regulations, Opinions and Decisions under the Estate Tax Laws. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph 3319 Title Guarantee and Trust Co. (Teets) vs. Edwards. U. S. District Court Decision. Bequest or devise in lieu of dower (April 5, 1922) 495 Decision Greiner vs. Lewellyn, U. S. Supreme Court. Value of State and municipal bonds to be included in value of gross estate (April 10, 1922) 497 Decisions (1) Shwab vs. Doyle 499 (2) Union Trust Co. vs. Wardell 518 (3) Levy vs. Wardell 537 (4) Knox vs. McElligott 551 (1), (2), (3), and (4). The text of the 1916 Act is not to be construed as applying to transfers in contemplation of death, etc., completed before the passage of the Act. (U. S. Supreme Court, May 1, 1922.) 3324 Congdon vs. Lynch. U. S. District Court decision, 1916 Act. The 1916 Act is retroactive, apply- ing to trusts created prior to the passage of the Act to take effect in possession or enjoyment at or after the trustor's death. (T. D. dated May 8, 1922.) 562 3325 Reprint of Nichols vs. Gaston opinion (1[467, herein). . 567 3326 Reprint of Greiner vs. Lewellyn opinion (H497, herein) . 568 Decision Page vs. Polk, reversing Polk vs. Page, ^[315 q. v. above (C. C. of A., 1st Circuit, May 16, 1922) 569 3338 Reprint of Union Trust Company vs. Wardell opinion (H5 18 herein) (< 577 3339 Reprint of Shwab vs. Doyle opinion (1f499 herein) .... 578 3348 Reprint of Page vs. Polk opinion (^f 569 herein) 578a Reg. 63 Regulations 63. — 1921 Act. Complete regulations re- lating to the Revenue Act of 1921, fully indexed beginning on page 207, and with complete table of contents beginning on page 158 579 Reg. 37 Regulations 37— 1918 Act. Amended 776 Decision Slocum et al., executors (Sage estate) vs. Edwards. — Deductible amount of charitable bequests out of residual estate out of which State succession and Federal estate taxes are paid (June 20, 1922) 778 3383 Department Circular 225 extended and made applicable to receipt of Treasury Notes for Estate Taxes (August 9, 1922). .. 787 3384 Treasury Decision designation for Regulations 63 (1922 Edition) beginning on page 158 792 Special No certificate releasing lien (waiver) required before transfer of stock of a foreign corporation standing in the name of a nonresident decedent (Sept. 11, 1922) 793 Insert this page immediately before the yellow guide card * 'Excess Profits Tax." Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Estate Tax Supplementary Page 3. 1-2-22. For the excess-profits tax law for 1921 see page 401. V WAR-PROFITS AND EXCESS-PROFITS TAXES. As the occasions will be many during 1922 when the necessity will arise to refer to the exact language of the excess-profits tax provisions of the Revenue Act of 1918, and to the official regulations and rulings based specifically thereon, we republish these herein. Moreover it will be borne in mind, at least pending the promulgation by the Government of the regulations relating specifically to the law imposing an excess-profits tax for 1921, that there are no essential differences whatsoever between the two laws (other than the grouping of domestic corporations entitled to the benefits of Section 262, *;1083, with foreign corporations). The provisions of the Revenue Act of 1918 relating to the excess-profits tax, and the formal regulations bearing thereon, are reproduced on the pages immediately following. The caption to each page shows distinctly that the 1918 Act is involved. The provisions of the Revenue Act of 1921 relating to the excess-profits tax for 1921 are reproduced beginning on page 401, following the Supple- mentary Bulletin Rulings. There too will be found the formal regulations relating specifically to the 1921 Act, as well as current Treasury Decisions, etc., etc. Copyriglit 1922, by The Corporation Trust Company, WAR TAX SERVICE Excess-Profits Tax Fore-Page. 1-2-22. For the excess-profits tax law for 1921 see page 401. WAR-PROFITS AND EXCESS-PROFITS TAXES. As the occasions will be many during 1922 when the necessity will arise to refer to the exact language of the excess-profits tax provisions of the Revenue Act of 1918, and to the official regulations and rulings based specifically thereon, we republish these herein. Moreover it will be borne in mind, at least pending the promulgation by the Government of the regulations relating specifically to the law imposing an excess-profits tax for 1921, that there are no essential differences whatsoever between the two laws (other than the grouping of domestic corporations entitled to the benefits of Section 262, TJ1083, with foreign corporations). The provisions of the Revenue Act of 1918 relating to the excess-profits tax, and the formal regulations bearing thereon, are reproduced on the pages immediately following. The caption to each page shows distinctly that the 1918 Act is involved. The provisions of the Revenue Act of 1921 relating to the excess-profits tax for 1921 are reproduced beginning on page 401, following the Supple- mentary Bulletin Rulings. There too will be found the formal regulations relating specifically to the 1921 Act, as well as current Treasury Decisions, etc., etc. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess-Profits Tax Fore-Page. 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX FOR 1918, 1919, and 1920. BEING TITLE III OF THE REVENUE ACT OF 1918. [For the law imposing a war-profits and excess-profits tax for the calendar year 1921 see beginning on page 40 1, immediately following the Supplementary Bulletin Rulings.] [The captions and other matters in [brackets] are ours.] TITLE III.— WAR-PROFITS AND EXCESS-PROFITS TAX REVENUE ACT OF 1918. PART I.— General Definitions. 500 Sec. 300 [of the Revenue Act of 1918 of which this Title is a 597 part]. That when used in this title the terms [see definitions below] "taxable year," "fiscal year," "personal service corpora- tion," "paid or accrued," and "dividends" shall have the same meaning as provided for the purposes of income tax in sections 200 and 201. The first taxable year for the purposes of this title shall be the same as the first taxable year for the purposes of the income tax under Title II. fyt* b -sift* :mlfc>?:tr--4prrw ^nsbfrib!' , myp 9fb JjffHl ; (b) .JPOfr j*2 80S [Definitions of terms, extracted from Titles I and II.] ["Taxable year" and "Fiscal year".] 601 The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term "fiscal year" means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1918, shall be the calendar year 1918 or any fiscal year ending during the calendar year 1918 ; Copyright 1922, by The Corporation Trust Company. WAR TAX 301 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT. ["Personal Service Corporation".] 602 The term "personal service corporation" means a corporation 656 whose income is to be ascribed primarily to the activities of the, principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any for- eign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a Govern- ment contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive; ["Government Contracts."] 503 The term "Government contract" means (a) a contract 605 made with the United States, or with any department, bureau, officer, commission, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a contractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States. The term "Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive" when applied to a contract of the kind referred to in clause (a) of this paragraph, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or may become enforceable by reason of subsequent validation in pursuance of law; ["Paid or incurred" and "Paid or accrued".] 504 The term "paid," for the purposes of the deductions and credits under this title, means "paid or accrued" or "paid or incurred," and the terms "paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212. [Dividends.] 605 Sec. 201. (a) That the term "dividend" when used in this title (except in paragraph (10) of subdivision (a) of section 234) means (1) any distribution made by a corporation, other than a personal service corporation, to its shareholders or members, whether in cash or in other property [or in stock of the corpo- ration], out of its earnings or profits accumulated since Febru- ary 28, 1913, or (2) any such distribution made by a personal service corporation out of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918. 608 (b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distribution made in the year lb 18 or any C0Pyright 1922, by The Corporation Trust Company. WAR TAX 302 SERVICE WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT. year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or, in the case of a personal service corporation, from the most recently accu- mulated earnings or profits; but any earnings or profits accu- mulated prior to March 1, 1913, may be distributed in stock divi- dends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been dis- tributed. 507 (c) [A dividend paid in stock of the corporation shall be con- sidered income to the amount of the earnings or profits dis- tributed.] Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. 508 [ (d) If any stock dividend (1) is received by a taxpayer be- tween January 1 and November 1, 1918, both dates inclusive, or (2) is during such period bona fide authorized or declared, and entered on the books of the corporation, and is received by a taxpayer after November 1, 1918, and before the expiration of thirty days after passage of this Act, then such dividend shall, in the manner provided in section 206, be taxed to the recipient at the rates prescribed by law for the years in which the corpora- tion accumulated the earnings or profits from which such divi- dend was paid, but the dividend shall be deemed to have been paid from the most recently accumulated earnings or profits.] 509 (e) Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years ; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumu- lated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the account- ing period within which the distribution was made shall be paid from the most recently accumulated earnings or profits. PART II.— -Imposition of Tax. 510 Sec. 301. (a) That in lieu of the tax imposed by Title II 598 of the Revenue Act of 1917, but in addition to the other taxes 602 imposed by this Act, there shall be levied, collected, and paid for the taxable year 1918 upon the net income of every corpo- ration a tax equal to the sum of the following: First Bracket. 30 per centum of the amount of the net income in excess of the 5 11 excess-profits credit (determined under section 312) and not in excess of 20 per centum of the invested capital ; Second Bracket. 512 ^5 P er centum °f tne amount of the net income in excess of 20 per centum of the invested capital ; Copyright 1922, by The Corporation Trust Company, WAR TAX 303 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX LAW. — 1918 ACT. Third Bracket. 513 The sum, if any, by which 80 per centum of the amount of the net income in excess of the war-profits credit (determined under section 311) exceeds the amount of the tax computed under the first and second brackets, 514 (b) For the taxable year 1919 and each taxable year thereafter 603 there shall be levied, collected, and paid upon the net income of every corporation (except corporations taxable under subdi- vision (c) of this section) a tax equal to the sum of the following: First Bracket. 515 20 per centum of the amount of the net income in excess of the excess-profits credit (determined under section 312) and not in excess of 20 per centum of the invested capital; Second Bracket. 516 40 per centum of the amount of the net income in excess of 20 per centum of the invested capital. 517 (c) For the taxable year 1919 and each taxable year thereafter 604 there shall be levied, collected, and paid upon the net income of 626 every corporation which derives in such year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, a tax equal to the sum of the following: 518 (1) Such a portion of a tax computed at the rates specified in subdivision (a) as the part of the net income attributable to such Government contract or contracts bears to the entire net income. In computing such tax the excess-profits credit and the war-profits credit applicable to the taxable year shall be used; 519 (2) Such a portion of a tax computed at the rates specified in subdivision (b) as the part of the net income not attributable to such Government contract or contracts bears to the entire net income. 620 For the purpose of determining the part of the net income 607 attributable to such Government contract or contracts, the proper apportionment and allocation of the deductions with respect to gross income derived from such Government contract or contracts and from other sources, respectively, shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary. 621 (d) In any case where the full amount of the excess-profit 621 credit is not allowed under the first bracket of subdivision (a) or (b), by reason of the fact that such credit is in excess of 20 per centum of the invested capital, the part not so allowed shall be deducted from the amount in the second bracket. 522 (e) For the purposes of the Act approved March 21, 1918, entitled "An Act to provide for the operation of transportation systems while under Federal control, for the just compensation of their owners, and for other purposes," the tax imposed by this title shall be treated as levied by an Act in amendment of Title II of the Revenue Act of 1917. Copyright 1922, by The Corporation Trust Company. war'tax 304 SERVICE WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT. [Maximum Tax Limitation.] 623 Sec. 302. That the tax imposed by subdivision (a) of section 639 301 shall in no case be more than 30 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 80 per centum of the amount of the net income in excess of $20,000; the tax imposed by subdivision (b) of section 301 shall in no case be more than 20 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 40 per centum of the amount of the net income in excess of $20,000; and the above limitations shall apply to the taxes computed under subdivisions (a) and (b) of section 301, respec- tively, when used in subdivision (c) of that section. Nothing in this section shall be construed in such manner as to increase the tax imposed by section 301. [Partial Personal Service Corporations.] 624 Sec. 303. That if part of the net income of a corporation is 645 derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting- not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of "personal service corporations [fl 502]", then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed (allowing in such computation only the same proportionate part of the credits authorized in sections 311 and 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part is of such first part : Provided, That the tax upon such second part shall in no case be less than 20 per centum thereof, unless the tax upon the entire net income, if computed without benefit of this section, would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, without reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to the limitations provided in section 302. [Exempt Corporations.] 625 Sec. 304. (a) That the corporations enumerated in section 231 666 [1T667] shall, to the extent that they are exempt from income tax under Title IT, be exempt from taxation under this title. 626 (b) Any corporation whose net income for the taxable year is 666 less than $3,000 shall be exempt from taxation under this title. 527 (c) In the case of any corporation engaged in the mining 682 of gold, the portion of the net income derived from the mining of gold shall be exempt from the tax imposed by this title, and the tax on the remaining portion of the net income shall be the proportion of a tax computed without the benefit of this sub- Copyright 1922, by The Corporation Trust Company. WAR TAX 305 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT. division which such remaining portion of the net income bears to the entire net income. [Specific Exemption in relation to tax for less than 12 months.] 528 Sec. 305. That if a tax is computed under this title for a 634 period of less than twelve months, the specific exemption of 684 $3,000, wherever referred to in this title, shall be reduced to an amount which is the same proportion of $3,000 as the number of months in the period is of twelve months. PART III.— Credits. 529 Sec. 310. That as used in this title the term "prewar period" 68 5 means the calendar years 1911, 1912, and 1913, or, if a corpora- tion was not in existence during the whole of such period, then as many of such years during the whole of which the corporation was in existence. [The War-Profits Credit.] 630 Sec. 311. (a) That the war-profits credit shall consist of the 686 sum of : 531 (1) A specific exemption of $3,000; and 532 (2) An amount equal to the average net income of the corpo- ration for the prewar period, plus or minus, as the case may be, 10 per centum of the difference between the average invested capital for the prewar period and the invested capital for the taxable year. If the tax is computed for a period of less than 634 twelve months such amount shall be reduced to the same pro- portion thereof as the number of months in the period is of twelve months. [No income for the prewar period.] 533 (b) If the corporation had no net income for the prewar period, 688 or ^ the amount computed under paragraph (2) of subdivision (a) is less than 10 per centum of its invested capital for the taxable year, then the war-profits credit shall be the sum of: 534 (1) A specific exemption of $3,000; and 535 (2) An amount equal to 10 per centum of the invested capital for the taxable year. [Not in existence in Prewar Period.] 636 (c) If the corporation was not in existence during the whole 690 of at least one calendar year during the prewar period, then, ex- cept as provided in subdivision (d), the war-profits credit shall be the sum of : 637 (1) A specific exemption of $3,000; and 638 (2) An amount equal to the same percentage of the invested 694 capital of the taxpayer for the taxable year as the average per- centage of net income to invested capital, for the prewar period, of corporations engaged in a trade or business of the same gen- eral class as that conducted by the taxpayer; but such amount Copyright 1922, by The Corporation T rust Company. WAR TAX 306 SERVICE 12 WAR-PROFITS AND FXCESS-PROFITS TAX LAW.— 1918 ACT. shall in no case be less than 10 per centum of the invested capital of the taxpayer for the taxable year. Such average percentage shall be determined by the Commissioner on the basis of data contained in returns made under Title II of the Revenue Act of 1917, and the average known as the median shall be used. If such average percentage has not been determined and published at least 30 days prior to the time when the return of the taxpayer is due, then for purposes of such return 10 per centum shall be used in lieu thereof; but such average percentage when deter- mined shall be used for the purposes of section 250 [payment of the tax] in determining the correct amount of the tax. 539 (d) The war-profits credit shall be determined in the manner 722 provided in subdivision (b) instead of in the manner provided in subdivision (c), in the case of any corporation which was not in existence during the whole of at least one calendar year during the prewar period, if (1) a majority of its stock at any time dur- ing the taxable year is owned or controlled, directly or indi- rectly, by a corporation which was in existence during the whole of at least one calendar year during the prewar period, or if (2) 50 per centum or more of its gross income (as computed under section 233 for income tax purposes) consists of gains, profits, commissions, or other income, derived from a government con- tract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. 540 (e) A foreign corporation shall not be entitled to a specific exemption of $3,000. [See Sec. 327, fl56S, and Sec. 328, ff570, of the law.] [The Excess-Profits Credit.] 541 Sec. 312. That the excess-profits credit shall consist of a 724 specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year. 542 A foreign corporation shall not be entitled to the specific exemption of $3,000. [See Sec. 327, p6S, and Sec. 328, p70 f of the law.] PART IV.— Net Income. 543 Sec. 320. (a) That for the purpose of this title the net income 725 of a corporation shall be ascertained and returned — 544 (1) For the calendar years 1911 and 1912 upon the same basis and in the same manner as provided in section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, except that taxes imposed by such section and paid by the corporation within the year shall be included ; 545 (2) For the calendar year 1913 upon the same basis and in the same manner as provided in Section II of the Act entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," approved October 3, 1913, except that taxes imposed by section 38 of such Act of August 5, 1909. and paid by the corporation within the year shall be Copyright 1922, by The Corporation Trust Company. WAR TAX 307 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX LAW. — 1918 ACT. included, and except that the amounts received by it as dividends upon the stock or from the net earnings of other corporations subject to the tax imposed by Section II of such Act of Octo- ber 3, 1913, shall be deducted; and 646 (3) For the taxable year upon the same basis and in the same manner as provided for income tax purposes in Title II of this Act. 647 (b) The average net income for the prewar period shall be 687 determined by dividing the number of years within that period during the whole of which the corporation was in existence into the sum of the net income for such years, even though there may have been no net income for one or more of such years. PART V.— Invested Capital. [Definitions.] 548 Sec. 325. (a) That as used in this title — 549 The term "intangible property" means patents, copyrights, 738 secret processes and formulae, good will, trade-marks, trade- brands, franchises, and other like property; 550 The term "tangible property" means stocks, bonds, notes, and 738 other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property; 651 The term "borrowed capital" means money or other property 739 borrowed, whether represented by bonds, notes, open accounts, or otherwise; 652 The term "inadmissible assets" means stocks, bonds, and other 743 obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income, but where the income derived from such assets con- sists in part of gain or profit derived from the sale or other disposition thereof, or where all or part of the interest derived from such assets is in effect included in the net income because of the limitation on the deduction of interest under paragraph (2) of subdivision (a) of section 234, a corresponding part of the capital invested in such assets shall not be deemed to be inadmissible assets ; 653 The term "admissible assets" means all assets other than inad- 750 missible assets, valued in accordance with the provisions of sub- division (a) of section 326. section 330, and section 331. 664 (b) For the purposes of this title, the par value of stock or shares shall, in the case of stock or shares issued at a nominal value or having no par value, be deemed to be the fair market value as of the date or dates of issue of such stock or shares [Computing "Invested Capital."] 566 Sec. 326. (a) That as used in this title the term "invested 751 capital" for any year means (except as provided in subdivisions 820 (b) and (c) of this section) : 666 (1) Actual cash bona fide paid in for stock or shares ; 753 815 Copyright 1922, by The Corporation Trust Company, WAR TAX 308 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. — 1918 ACT. 557 (2) Actual cash value of tangible property, other than cash, 754 bona fide paid in for stock or shares, at the time of such pay- ment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus : Provided, That the Commissioner shall keep a record of all cases in which tangible property is included in invested capital at a value in excess of the stock or shares issued therefor, containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, the value of the tangible property at the time paid in, the par value of the stock or shares specifically issued therefor, and the amount included under this paragraph as paid-in surplus. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257; 558 (3) Paid-in or earned surplus and undivided profits; not in- 760 eluding surplus and undivided profits earned during the year; 810 559 (4) Intangible property bona fide paid in for stock or shares 804 prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, which- ever is lowest; 560 W Intangible property bona fide paid in for stock or shares 804 on or after March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: Provided, That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the begin- ning of the taxable year; but 561 i (b) As used in this title the term "invested capital" does not 739 include borrowed capital. 662 (c) There shall be deducted from invested capital as above 805 defined a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of admissible and inadmissible assets held during the taxable year. 563 ■ (d) The invested capital for any period shall be the average 634 invested capital for such period, but in the case of a corpora- 806 tion making a return for a fractional part of a year, it shall (except for the purpose of paragraph (2) of subdivision (a) of section 31X1 be the same fractional part of such average invested capital. Copyright 1922, by The Corporation Trust Company* WAR TAX 309 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX LAW. — 1918 ACT. 664 The average invested capital for the prewar period shall 687 be determined by dividing the number of years within that period during the whole of which the corporation was in existence into the sum of the average invested capital for such years. [Special cases subject to special tax.] 565 Sec. 327. That in the following cases the tax shall be deter- 831 mined as provided in section 328 : 566 (a) Where the Commissioner is unable to determine the in- vested capital as provided in section 326 ; 667 (b) In the case of a foreign corporation [see^830 and fl852] ; 668 (c) Where a mixed aggregate of tangible property and in- 756 tangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively ; 669 (d) Where upon application by the corporation the Commis- 831 sioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal condi- tions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall no- apply to any case (1) in which the tax (computed without bene- fit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal in- vested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commis- sions, or other income, derived on a cost-plus basis from a Gov- ernment contract or contracts made between April 6. 1917. and November 11, 1918. both dates inclusive. [The special tax applicable to the special cases. 1 670 Sec. 328. (a) In the cases specified in section 327 the tax shall 832 be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corpora- tions engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. In the case of a foreign corporation the tax shall be computed without deducting- the specific exemption of $3,000 either for the taxpayer or the representative corpora- tions. [ 671 In computing: the tax under this section the Commissioner 832 shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under section 326' and which are. as nearly as may be. similarly circum- stanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amoun* Copyright 1922, by The Corporation Trust Company. WAR TAX 310 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT and rate of war profits or excess profits, and all other relevant facts and circumstances. 672 (b) For the purposes of subdivision (a) the ratios between 832 the average tax and the average net income of representative corporations shall be determined by the Commissioner in accord- ance with regulations prescribed by him with the approval of the Secretary. 673 In cases in which the tax is to be computed under this section, •33 if the tax as computed without the benefit of this section is less than 50 per centum of the net income of the taxpayer, the install- ments shall in the first instance be computed upon the basis of such tax ; but if the tax so computed is 50 per centum or more of the net income, the installments shall in the first instance be computed upon the basis of a tax equal to 50 per centum of the net income. In any case, the actual ratio when ascertained shall be used in determining the correct amount of the tax. If the correct amount of the tax when determined exceeds 50 per centum of the net income, any excess of the correct installments over the amounts actually paid shall on notice and demand be paid together with interest at the rate of x / 2 of 1 per centum per month on such excess from the time the installment was due. 674 (c) The Commissioner shall keep a record of all cases in 852 which the tax is determined in the manner prescribed in sub- division (a), containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, and. the amount of invested capital as determined under such subdivision. The Commissioner shall furnish a copy of such record and other detailed informa- tion with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained iu section 257 [contents of returns not to be disclosed]. PART VI.— Reorganizations. [Reorganizations after January 1, 1911.] 675 Sec. 330. That in the case of the reorganization, consolida- 837 tion, or change of ownership after January 1, 1911, of a trade or business now carried on by a corporation, the corporation shall for the purposes of this title be deemed to have been in existence prior to that date, and the net income and invested capital of such predecessor trade or business for all or any part of the prewar period prior to the organization of the corporation now carrying on such trade or business shall be deemed to have been the net income and invested capital of such corporation. 676 If such predecessor trade or business was carried on by a 838 partnership or individual the net income for the prewar period shall, under regulations prescribed by the Commissioner with the approval of the Secretary, be ascertained and returned as nearly as may be upon the same basis and in the same manner as provided for corporations in Title II, including a reasonable deduction for salary or compensation to each partner or the individual for personal services actually rendered. Copyright 1922, by The Corporation Trust Company: WAR TAX 311 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. — 1918 ACT. [Incorporating prior to July 1, 1919, business of an individual or of a partnership.] 577^ In the case of the organization as a corporation before July 1, 839 * 1919, of any trade or business in which capital is a material in- come-producing factor and which was previously owned by a partnership or individual, the net income of such trade or busi- ness from January 1, 1918, to the date of such reorganization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1918, and the undistributed profits or earnings of such trade or business shall not be sub- ject to the surtax imposed in section 211, but amounts distributed on or after January 1, 1918, from the earnings of such trade or business shall be taxed to the recipients as dividends, and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business: Provided, That this paragraph shall not apply to any trade or business the net income of which for the taxable year 1918 was less than 20 per centum of its invested capital for such year: Provided further, That any taxpayer who takes advantage of this para- graph shall pay the tax imposed by section 1000 of this Act [j[3000] and by the first subdivision of section 407 of the Rev- enue Act of 1916, as if such taxpayer had been a corporation on and after January 1, 1918, with a capital stock having no par value. 678 If any asset of the trade or business in existence both during the 140 taxable year and any prewar year is included in the invested capital for the taxable year but is not included in the invested capital for such prewar year, or is valued on a different basis in computing the invested capital for the taxable year and such prewar year, respectively, then under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary such readjustments shall be made as are necessary to place the computation of the invested capital for such prewar year on the basis employed in determining the invested capital for the taxable year. [Reorganizations after March 3, 1917.] 679 Sec. 331. In the case of the reorganization, consolidation, or g^j change of ownership of a trade or business, or change of owner- ship of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset trans- ferred or received from the previous owner shall, for the pur- pose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) Copyright 1922, by The Corporation Trust Company.. WAR TAX 312 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT. with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation. PART VII.— Miscellaneous. [Returns on fiscal year basis.] 580 Sec. 335. (a) That if a corporation (other than a personal 842 service corporation) makes return for a fiscal year beginning in 1917 and ending in 1918, the tax for the first taxable year under this title shall be the sum of : (1) the same proportion of a tax for the entire period computed under Title II of the Revenue Act of 1917 which the portion of such period falling within the cal- endar year 1917 is of the entire period, and (2) the same propor- tion of a tax for the entire period computed under this title at the rates specified in subdivision (a) of section 301 which the por- tion of such period falling within the calendar year 1918 is of the entire period. 58 1 Any amount heretofore or hereafter paid on account of the 84* tax imposed for such fiscal year by Title II of the Revenue Act of 1917 shall be credited toward the payment of the tax imposed for such fiscal year by this title, and if the amount so paid exceeds the amount of the tax imposed by this title, the excess shall be credited or refunded to the corporation in accordance with the provisions of section 252. 582 (b) If a corporation makes return for a fiscal year beginning 843 in 1918 and ending in 1919, the tax for such fiscal year under this title shall be the sum of: (1) the same proportion of a tax for the entire period computed under subdivision (a) of section 301 which the portion of such period falling within the calendar year 1918 is of the entire period, and (2) the same proportion of a tax for the entire period computed under subdivision (b) or (c) of section 301 which the portion of such period falling within the calendar year 1919 is of the entire period. 583 (c) If a partnership or a personal service corporation makes 842 return for a fiscal year beginning in 1917 and ending in 1918, it shall pay the same proportion of a tax for the entire period com- puted under Title II of the Revenue Act of 1917 which the por- tion of such period falling within the calendar year 1917 is of the entire period. 584 Any tax paid by a partnership or personal service corporation for any period beginning on or after January 1, 1918, shall be immediately refunded to the partnership or corporation as a tax erroneously or illegally collected. [Returns and payment of taxes.] 585 Sec. 336. That every corporation, not exempt under section 304, 849 shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, in the same manner, and subject to the same conditions, as is provided in the case of returns Copyright 1922, by Th* Corporation Trust Company. WAR TAX 313 f SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT. and payment of income tax by corporations for the purposes of Title II, and all the provisions of that title not inapplicable, including penalties, are hereby made applicable to the taxes imposed by this title. [Sale of mines, oil or gas wells.] 686 Sec. 337. That in the case of a bona fide sale of mines, oil or 853 gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or explora- tion and discovery work done by the taxpayer, the portion of the tax imposed by this title attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest. [Consolidated Returns.] 687 Sec. 240 [of Title II of the Revenue Act of 1918, of which 734 the War-Profits and Excess-Profits Tax is Title III], (a) That 821 corporations which are affiliated within the meaning of this sec- tion shall, under regulations to be prescribed by the Commis- sioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the taxes thereunder shall be com- puted and determined upon the basis of such return: Provided, That there shall be taken out of such consolidated net income and invested capital, the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income and the remainder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capital and net income. 533 In any case in which a tax is assessed upon the basis of a 723 consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. There shall be allowed in computing the income tax only one specific credit of $2,000 (as provided in section 236) ; in computing the war-profits credit (as provided in section 311) only one specific exemption of $3,000; and in computing the excess-profits credit (as provided in section 312) only one specific exemption of $3,000. 689 (b) For the purpose of this section two or more domestic cor- 822 porations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more cor- porations is owned or controlled by the same interests. Copyright 1922, by The Corporation Trust Company. WAR TAX 314 SERVICE 1-2-2? WAR-PROFITS AND EXCESS-PROFITS TAX LAW.— 1918 ACT. 690 ic) For the purposes of section 238 a domestic corporation which owns a majority of the voting stock of a foreign corpora- tion shall be deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not includ- ing taxes accrued) by such foreign corporation during the tax- able year to any foreign country or to any possession of the United States upon income derived from sources without the United States, which the amount of any dividends (not deducti- ble under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: Provided, That in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year. 691 to 595 Blank. 696 ForH596 see page 318. Copyright 1922, by Tht Corporation Trust Company, WAR TAX 315 SERVICE 1 2-^2 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. OFFICIAL RULINGS, REGULATIONS, OPINIONS, AND DECISIONS UNDER THE WAR-PROFITS AND EXCESS-PROFITS TAX LAW— 1918 ACT Including All of Regulations 45, Revised, Part II-B, 1920 Edition, As amended Relating specifically to The War-Profits and Excess-Profits Tax Law— 1918 Act, Together with Numerous explanatory special rulings. REGULATIONS 45, PART II-B Rev., (1920 Edition), promulgated January 28, 1921, As amended. CONTENTS (The section numbers refer to the statute and the article numbers to the]regulations.l Paragraph Section 300. General definitions 500 to 509 Article 701. War profits and excess profits tax 597 Section 301 . Imposition of tax 510 Article 711. Imposition of tax 598 712. Computation of tax for 1918 602 713. Computation of tax for years after 1918 60S 714. Computation of tax on income from Government contracts 604 715. Allocation of net income to particular source 607 716. Illustration of computation of tax 608 717. Illustration of computation where no tax under third bracket 618 718. Illustration of computation where excess profits credit not ex- hausted under first bracket 621 719. Illustration of computation where net income derived from Govern- ment contract 626 720. Illustration of computation where return for period of less than 12 months 634 Section 302. Limitation of tax 523 Article 731. Short form of computation of limitation 639 732. Limitation when return for fractional part of year 643 733. Illustration of computation of limitation 644 Section 303. Tax when partly personal service business 524 Article 741. Aooortionment of invested capital and net income 645 742. Computation of tax upon net income 646 743. Illustration of computation of tax where partly personal service business 648 Section 304. Exemptions 525 Article 751. Corporations exempt from tax 666 752. Net income exempt from tax 682 753. Illustration of computation of tax where net income from gold mining 683 Section 305. Apportionment of specific exemption. 528 Article 761. Apportionment of specific exemption 684 Section 310. Prewar period 529 Article 771. Prewar period 685 Section 311. War profits credit 530 Article 781. War profits credit ; 686 782. War profits credit where meager prewar net income 688 783. War profits credit where no prewar period 690 784. War profits credit where no prewar period in special circumstances 722 785. War profits credit in the case of affiliated corporations 723 Copyright 1922, by Tht Corporation Trust Company. WAR TAX 316 SERVICE 2-22. (2) 7-18-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. Paragraph Section 312. Excess profits credit 541 Article 791. Excess profits credit 724 Section 320. Net income 543 Article 301. Net income 723 802. Prewar net income of affiliated corporations 734 Section 325. Terms relating to invested capital 548 Article 811. Intangible and tangible property 738 812. Borrowed capital: securities 739 813. Borrowed capita!: amounts left in business 740 814. Borrowed capital: other illustrations 742 815. Inadmissible assets 743 816. Inadmissible assets: government bonds 748 817. Inadmissible assets: partial exception 749 818. Admissible assets 750 Section 326. Invested capital 555 Article 831. Meaning of invested capital 751 832. Cash paid in: bonus^ stock 753 833. Tangible property paid in: evidences of indebtedness 754 834. Tangible property paid in: inadmissible assets 755 835. Tangible pioperty paid in: mixture of tangible and intangible property 756 S36. Tangible property paid in: value in excess of par value of stock ... 757; A, 1288 837. Surplus and undivided profits: paid-in surplus 760 838. Surplus and undivided profits: earned surplus 761 839. Surplus and undivided profits: allowance for depletion and depre- ciation. 762 840. Surplus and undivided profits: additions to surplus account 764 841. Surplus and undivided profits: limitation of addition* to surplus account 769 842. Surplus and undivided profits: property paid in and subsequently written off 773 843. Surplus and undivided profits: patents 776 844. Surplus and undivided profits: reserve for depreciation or depletion 778 845. Surplus and undivided profits: reserve for income and excess profits taxes 782 845a. Surplus and undivided profits: Reserve for 1918 income and excess profit taxes of corporations having a fiscal year 783 846. Surplus and undivided profits: insurance on officers 787 847. Surplus and undivided profits: property taken for debt or in exchange 788 848. Surplus and undivided profits: discount on sale of bonds 790 849. Surplus and undivided profits: miscellaneous 791 850. Surplus and undivided profits: current profits 803 851. Intangible property paid in 804 852. Percentage of inadmissible assets 805 853. Changes in invested capital during year 806 854. Computation of average invested capital 807 855. Invested capital for full year or less 808 856. Illustration of return for fractional part ot year 809 857. Method of determining available net income 810 858. Effect of ordinary dividend 813 859. Effect of stock dividend 814 860. Impairment of capital 815 861. Surrender of stock 816 862. Purchase cf stock 817 863. Invested capital and other measures of capital 820 864. Affiliated corporations: invested capital 821 865. Affiliated corporations: intangible property paid in 823 866. Affiliated corporations: inadmissible assets 825 867. Affiliated corporations: stock of subsidiary acquired for cash 826 868. Affiliated corporations: stock of subsidiary acquired for itock 827 869. Affiliated corporations: invested capital for prewar period 828 870. Insurance companiei 829 871. Foreign corporations 830 Section 327. Special cases 563 Article 901. Treatment of special cases 831 Copyrighi 1922, by The Corporation Trust Company. WAR TAX 317 SERVICE 1-2-22. (2) 7-18-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. Section 328. Computation of tax in special cases 570 Article 911. Computation of tax in special cases 832 912. Determination of first installment of lax in special cases 833 913. Determination of first installment of tax in the case of foreign corporations 834 914. Payment of tax in special cases 835 Section 330. Reorganizations — 575 Article 931. Scope of reorganizations 837 932. Net income and invested capital of predecessor partnership or individual 838 933. Election to be taxed as corporation 839 934. Adjustment for asset differently valued in prewar invested capital 840 Section 331. Valuation of assets upon reorganization 579 Article 941. Valuation of asset upon change of ownership 841 Section 335. Fiscal years ending in 1918 or 1919 580 Article 951. Fiscal year with different rates 842 952. Fiscal year of corporation ending in 1918 843 953. Deductions and credits in the case of fiscal year ending in 1918. . . S44 954. Fiscal year of corporation ending in 1919 845 955. Illustration of computation of tax for fiscal year 846 Section 336. Returns .' 585 Article 961. Returns 849 962. Returns in special cases 852 Section 337. Sale of mineral deposits 585 Article 971. Tax on sale of mineral deposits 853 972. Illustration of computation of tax where sale of mineral deposits. 858 596 Important Comment. — Appended to each paragraph or unit of paragraphs in the compilation, beginning at 1f597 below, is a citation showing the official source and date. Without exception the Articles of Regulations 45, Revised, referring specifically to the excess-profits tax law, that is, the 7-hundred (701), the 8-hundred (801) and the 9-hundred (901) series, are printed in regular numerical order. Thus any particular Article may be located without difficulty. The fact that there are missing Article numbers (as Art. 702 to 710) in the 7-, 8-, and 9-hundred series, indicates with certainty that on December 15, 1921, there were no Articles bearing such missing number designations. Attention is called to the purely supple- mentary Bureau Rulings, reproduced hereinafter in full, as originally issued by the Government, on the pages following immediately after the blue excess-profits tax index. The reader is earnestly cautioned to read the foreword to these Bureau Rulings. GENERAL DEFINITIONS. §3C0 697 Art. 701. War Profits and Excess Profits Tax.— The war profits 500 and excess profits tax, like the income tax, is a tax upon net income. It applies only to corporations. See section 301 of the statute and articles 711-720 ffi598]. The terms "taxable year," "fiscal year," "personal service corporation," "paid or accrued," and "dividends," and in general all other terms used in connection with the income tax, have here the same meaning as provided for the purposes of the income tax. See sections 1, 200, and 201 and articles 1501-1510, 1523-1533 and 1541-1549 [for terms, beginning at 1f50l, and 1[8099]. For other terms see sections 310 [1529] and 325 [1555] and articles 771 [1685] and 811-818 [beginning at 1738]. (Art. 701, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 318 SERVICE 1-2-22. §301. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1Q18 ACT. IMPOSITION OF TAX. §301 598 Art. 711. Imposition of tax. — The tax is imposed upon the net 510 income of every corporation, domestic or foreign, except personal service corporations and certain other classes of corporations. See section "304 of the statute and articles 751-753 [for exempt corporations, 1f666]. Special provisions of the statute deal with corporations deriving net income from Government contracts (see section 1 [1f503 for law and If 604 for regulations]), transportation corporations (see article 504 [11599 below]), corporations partly partaking of the nature of personal service corporations (see section 303 [1[524 for law and If 645 for regulations;]), corporations engaged in the mining of gold (see section 304 [1f527 for law and 1f682 for regulations]), foreign and abnormal corporations (see section 327 [H565 for law and 1J831 for regulations]), reorganized and consolidated corporations (see sections 330 and 331 [1f575 to 1f579 for law and If 837 for regulations]), corporations making their returns upon the basis of a fiscal year (see section 335 [1f580 for law and If 842 for regulations]), and corporations which have sold mines or oil or gas wells (see section 337 [1f586 for law and 1f853 for regulations]). For the requirements as to rendering returns see section 336 [1f585 for law, and 1f849 for regulations] (Art. 711, Reg. 45, Rev., Jan. 28, 1921.) 599 to 601 Blank. 602 Art. 712. Computation of war-profits and excess-profits tax for 1918. 514 — For the taxable year 1918, (a) if the net income, as denned in sec- tion 320 (a) (3) of the statute, is not in excess of 20 per cent of the invested capital, as defined in section 326, then under the first bracket the tax is 30 per cent of the amount of the net income in excess of the excess profits credit, as defined in section 312, and the second bracket is not applic- able, (b) If the net income is in excess of 20 per cent of the invested capital, then under the first bracket the tax is 30 per cent of the excess of an amount of net income equal to 20 per cent of the invested capital over the excess profits credit, and under the second bracket the tax is 65 per cent of the amount of the remaining net income less any excess profits credit not ex- hausted under the first bracket, (c) If the tax under (a) or the aggregate tax under (b) equals or exceeds 80 per cent of the amount of the net income in excess of the war profits credit, as defined in section 311, then the tax under (a) or (b) is the amount of the tax payable. But if such tax is less than such 80 per cent, then the tax payable is 80 per cent of the amount of the net income in excess of the war profits credit. But see section 302 and articles 731-733 [for maximum limitation of tax beginning at 1f639]. (Art. 712, Reg. 45, Rev., Jan. 28, 1921.) 603 Art. 713. Computation of excess-profits tax for 1919 and thereafter. 510 — For the taxable year 1919 and subsequent years, (a) if the net income, as defined in section 320 (a) (3) [1f546] of the statute, is not in excess of 20 per cent of the invested capital, as defined in section 326 [1f555], then under the first bracket the tax payable is 20 per cent of the amount of the net income in excess of the excess profits credit, as defined in section 312 [1f541], and the second bracket is not applicable, (b) If the net income is in excess of 20 per cent of the invested capital, then under the first bracket the tax is 20 per cent of the excess of an amount of net income equal Copyright 1922, by The Corporation Trust Company. WAR TAX 319 SERVICE 1-2-22. §301. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. to 20 per cent of the invested capital over the excess profits credit, and under the second bracket the tax is 40 per cent of the amount of the remaining net income less any excess profits credit not exhausted under the first bracket. The sum of the taxes computed under the two brackets is the tax payable. But see the following article [for war-profits tax for 1919 and subsequent taxable years in certain instances, ^[604] and section 302 [for maximum limitation of tax: law ^[523 and regulations 1T641]. (Art. 713, Reg. 45. Rev., Jan. 28, 1921.) 604 Art. 714. Computation of tax on income from Government con- 517 tracts. — In the case of a corporation which derives in any taxable year after 1918 a net income of more than $10,000 from any Govern- ment contracts made after April 5, 1917, and before November 12, 1918, the tax shall be such a proportion of a tax computed at the rates for 1918 as the portion of the net income attributable to the Government contracts bears to the entire net income, plus such a proportion of a tax computed at the rates for 1919 as the amount of the remaining net income bears to the entire net income. In computing such taxes, however, the excess profits credit and the war profits credit applicable to the taxable year shall be used. [For example of computation of tax see 11626.] But see section 302 of the statute [for maximum tax limitation, 1f523; regulations 1f639]. The part of the net income attributable to such Government contracts shall be determined in accordance with the following article. See also section 1 [law 1f503] and article 1510. (Art. 714, Reg. 45, Rev., Jan. 28, 1921.) 605 and 606 Blank. 607 Art. 715. Allocation of Net Income to Particular Source. — When- 520 ever it is necessary to determine the portion of the net income de- rived from or attributable to a particular source, the corporation shall allocate to the gross income derived from such source, and to the gross income derived from each other source, the expenses, losses, and other deductions properly appertaining thereto, and shall apply any general expenses, losses, and deductions (which can not properly be otherwise ap- portioned) ratably to the gross income from all sources. The gross income derived from a particular source, less the deductions properly appertaining thereto and less its proportion of any general deductions, shall be the net income derived from such source. The corporation shall submit with its return a statement fully explaining the manner in which such expenses, losses, and deductions were allocated or distributed. (Art. 715, Reg. 45, Rev., Jan. 28, 1921.) 608 Art. 716. Illustration of Computation of Tax. — A corporation has an average prewar invested capital of $50,000, an average prewar net income of $10,000, an invested capital for 1918 of $100,000, a net income for 1918 of $40,000, an invested capital for 1919 of $110,000, and a net income of $50,000. 609 (1) For 1918 the excess profits credit is a specific exemption of $3,000, plus 8 per cent of the invested capital (i. e., 8 per cent of $100,000) or $8,000, making a total of $11,000. See section 312 of the statute and article 791 [for excess profits credit, H724]. The war profits Copyright 1922, by Tht Corporation Trust Company. WAR TAX 320 SERVICE 1-2-22. §301. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. credit is a specific exemption of $3,000, plus the average prewar net income or $10,000, plus or minus 10 per cent of the difference between the average prewar invested capital and the invested capital for 1918. In this case it is plus, because the invested capital for 1918 is greater than the average prewar invested capital. The amount added is 10 per cent of the difference between $100,000 and $50,000, i. e., 10 per cent of $50,000, or $5,000, making a total war profits credit of $18,000. See section 311 and article 781 [for war profits credit, 1f686]. 610 First bracket. — The amount or portion of the net income ($40,000) in excess of the excess profits credit ($11,000) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $100,000) or $20, 000 is $9,000. The tax computed under this bracket is 30 per cent of this amount (i. e.„ 30 per cent of $9,000) or $2,700. 611 Second bracket. — The amount or portion of the net income ($40,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $100,000) or $20,000 is $20,000. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $20,000) or $13,000. 612 Third bracket. — Eighty per cent of the amount or portion of the net income in excess of the war profits credit (i. e., 80 per cent of the amount by which $40,000 exceeds $18,000, or $22,000) is $17,600. The amount of the tax computed under the first and second brackets ($2,700 plus $13,000) is $15,700. The tax computed under this bracket is the amount by which $17,600 exceeds $15,700, or $1,900. 613 Total tax. — The total tax for 1918 is the sum of the taxes computed under the three brackets (i, e., $2,700 plus $13,000 plus $1,900) or $17,600. 614 (2) For 1919 the excess profits credit is a specific exemption of $3,000 plus 8 per cent of the invested capital (i. e., 8 per cent of $110,000) or $8,800, a total of $11,800. See section 312 and article 791 [for excess profits credit, 1(724]. 615 First bracket. —-The amount or portion of the net income ($50,000) in excess of the excess profits credit ($11,800) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000) or $22,000 is $10,200. The tax computed under this bracket is 20 per cent of this amount (i. e., 20 per cent of $10,200) or $2,040. 6 1 6 Second bracket. — The amount or portion of the net income ($50,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000) or $22,000 is $28,000. The tax computed under this bracket is 40 per cent of this amount (i. e., 40 per cent of $28,000) or $1 1,200. 617 Total tax. — The total tax for 1919 is the sum of the taxes computed under the two brackets (i. e., $2,040 plus $11,200) or $13,240. (Art. 716, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 321 SERVICE 1-2-22. §301. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. 618 Art. 717. Illustration of computation where no tax under third bracket. — If the corporation used as an illustration in Article 716 [1f608] had an average prewar net income of $20,000 instead of $10,000, the excess profits credit and the tax for 1918 computed under the first and second brackets would be the same, but the war profits credit and the tax computed under the third bracket would not be the same. The war profits credit would be a specific exemption of $3,000 plus the average prewar net income, or $20,000, plus 10 per cent of $50,000 (the difference in invested invested capital) or $5,000, making a total war profits credit of $28,000 619 Third bracket. — Eighty per cent of the amount of the net income in excess of the war profits credit (i. e., 80 per cent of the amount by which $40,000 exceeds $28,000 or 80 per cent of $12,000) is $9,600. The amount of the tax computed under the first and second brackets ($2,700 plus $13,000) is $15,700, There is accordingly no tax under the third bracket, as $9,600 does not exceed $15,700. 620 Total tax. — The total tax for 1918 is the sum of the taxes computed under the three brackets (i. e., $2,700 plus $13,000 plus nothing) or $15,700. The total tax for 1919 would, of course, be the same as in article 716 [1f608]. (Art. 717, Reg. 45, Rev., Jan. 28, 1921.) 621 Art. 718. Illustration of Computation where Excess Profits Credit 521 not Exhausted under First Bracket.— A corporation has an average prewar invested capital of $20,000, an average prewar net income of $7,000, and invested capital and net income for 1918 of the same amounts, respectively. The excess profits credit is a specific exemption of $3,000 plus 8 per cent of the invested capital (i. e., 8 per cent of $20,000) or $1,600, a total of $4,600. The war profits credit is a specific exemption of $3,000 plus the average prewar net income of $7,000, a total of $10,000. There is nothing further to be added or deducted in this case, as there is no differ- ence between the average invested capital for the prewar period and the invested capital for the taxable year. 622 First bracket. — The excess profits credit ($4,600) exceeds 20 per cent of the invested capital (20 per cent of $20,000) or $4,000, and there is no amount taxable under this bracket. 623 Second bracket. — The portion of the net income ($7,000) in excess of 20 per cent of the invested capital (20 per cent of $20,000) or $4,000 is $3,000. In this case, however, the full amount of the excess profits credit could not be allowed under the first bracket, so that the $3,000 which would ordinarily be taxable under this bracket is reduced by the amount of the excess profits credit not allowed under the first bracket ($600), leaving only $2,400 taxable under this bracket. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $2,400) or $1,560. 624 Third bracket. — The war profits credit ($10,000) exceeds the net income ($7,000), so that there is no tax under this bracket. 625 Total tax. — The total tax for 1918 would be the sum of the taxes computed under the three brackets (i. e., nothing plus $1,560 plus nothing) or $1,560, were it not that section 302 [^523] provides that the Copyright 1922, by The Corporation Trust Company. WAR TAX 322 SERVICE 1-2-21. §301. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. maximum tax shall not in this case exceed $1,200. See articles 731-733 [for maximum tax limitation, 1f639). The total tax for 1918 is therefore $1,200. (Art. 718, Reg. 45, Rev., Jan. 28, 1921.) 626 Art. 719. Illustration of Computation where Net Income Derived 517 from Government Contract. — If in the case of the corporation used as an illustration in article 716 tf[608] the $50,000 net income for 1919 includes $20,000 of net income from Government contracts, the tax for that year would be the sum of the amounts computed under clauses (1) and (2) of section 301 (c) of the statute [1f517]. 627 (1) Under clause (1) the excess profits credit is $11,800, the same as under clause (2). The war profits credit is a specific exemption of $3,000, plus the average prewar net income, or $10,000, plus 10 per cent of $60,000 (the difference in invested capital) or $6,000, making a total war profits credit of $19,000. 628 First bracket. — The amount or portion of the net income ($50,000) in excess of the excess profits credit ($11,800) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000), or $22,000, is $10,200. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of $10,200) or $3,060. 629 Second bracket. — The amount or portion of the net income ($50,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000) or $22,000, is $28,000. The tax computed under this bracket is 65 per cent of this amount (65 per cent of $28,000) or $18,200. 630 Third bracket. — Eighty per cent of the amount of the net income in excess of the war profits credit (i. e., 80 per cent of the amount by which $50,000 exceeds $19,000, or $31,000) is $24,800. The amount of the tax computed under the first and second brackets ($3,060 plus $18,200) is $21,260. The tax computed under this bracket is the amount by which $24,800 exceeds $21,260, or $3,540. 631 The portion of the tax computed under clause (1) is the same proportion of the total amount computed under the above brackets at the rates for 1918 (i. e., $3,060 plus $18,200 plus $3,540) or $24,800, as the part of the net income attributable to Government contracts ($20,000) is of the entire net income ($50,000). This portion of the tax is therefore 2/5 of $24,800, or $9,920. 632 (2) The portion of the tax computed under clause (2) is the same proportion of the total amount computed at the rates for 1919 or $13,240 (for the details see illustration for 1919 under article 716) as the part of the net income not attributable to Government contracts ($30,000) is of the entire net income ($50,000). This portion of the tax is therefore 3/5 of $13,240 or $7,944. 633 (3) The total tax for the year 1919 is the sum of the amounts com- puted under paragraphs (1) and (2) above ($9,920 plus $7,944) or $17,864. (Art. 719, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 323 SERVICE 1-2-22. §301. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. 634 Art. 720. Illustration of computation where return for period of less than 12 months. — A corporation which has reported on the basis of the fiscal year ending March 31, 1918, later changes to a calendar year basis and files a return covering the 9 months from April 1, 1918, to Decem- ber 31, 1918. It had an average prewar capital of $50,000, an average pre- war net income of $3,500, an invested capital for the 9 months ending Decem- ber 31, 1918, of $120,000, and a net income for such period of $50,000. It should be noted that this is a somewhat different method of arriving at the same result which would be reached under a literal application of sections 305, 311 (a) (2) and 326 (d) of the statute. The excess profits credit is com- puted by adding the specific exemption of $3,000 to 8 per cent of the full invested capital of $120,000, or $9,600, a total of $12,600, and taking 9/12 of this result, or $9,450, as the excess profits credit. The war profits credit is computed by adding the specific exemption of $3,000 to 10 per cent of the full invested capital of $120,000, or $12,000, a total of $15,000, and taking 9/12 of this result, or $11,250, as the war profits credit. The war profits credit is computed in this case under section 311 (b), because the amount computed under section 311 (a) (2) is less than 10 per cent of the invested capital. The amount computed under section 311 (a) (2) would be the sum of the average prewar net income, or $3,500, plus 10 per cent of the amount by which the full invested capital of $120,000 actually used during the taxable period exceeds the average prewar invested capital of $50,000 (i.e., 10 per cent of $70,000), or $7,000, a total of $10,500. This amount is less than 10 per cent of the full invested capital for the taxabel year as computed under section 311 (b). 635 First bracket. — The amount or portion of the net income ($50,000) in excess of the excess profits credit ($9,450) and not in excess of 9/12 of 20 per cent of the invested capital (i. e., 9/12 of 20 per cent of $120,000), or $18,000, is $8,550. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of $8,550), or $2 ; 565. 636 Second bracket. — The amount or portion of the net income ($50,000) in excess of 9/12 of 20 per cent of the invested capital (i. e., 9/12 of 20 per cent of $120,000), or $18,000, is $32,000. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $32,000), or $20,800. 637 Third bracket. — 80 per cent of the amount or portion of the net income in excess of the war profits credit (i. e., 80 per cent of the amount by which $50,000 exceeds $11,250, or $38,750), is $31,000. The amount of the tax computed under the first and second brackets ($2,565 plus $20,800) is $23,365. The tax computed under this bracket is the amount by which $31,000 exceeds $23,365, or $7,635. 638 Total tax. — Th;> total tax will be the sum of the taxes computed under the three brackets (i.e., $2,565 plus $20,800 plus $7,635) or $31,000. (Art. 720, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 324 SERVICE 1 2 22 §303. "WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. , LIMITATION OF TAX. §302 639 Art. 731. Short Form of Computation of Limitation.— In any case 523 where the net income is at least $20,000 the computation under sec- tion 302 of the statute ffl523] may be shortened as follows : 640 (1) The tax imposed by subdivision (a) of section 301 shall not exceed $5,100, plus 80 per cent of the amount of the net income | in excess of $20,000; and 641 (2) The tax imposed by subdivision (b) of section 301 shall not exceed $3,400, plus 40 per cent of the amount of the net income in excess of $20,000. 642 Where the net income is less than $20,000 the tax shall not exceed | 30 per cent or 20 per cent, as the case may be, of the amount of the net income in excess of $3,000. (Art. 731, Reg. 45, Rev., Jan. 28, 1921.) 643 Art. 732. Limitation when return for fractional part of year — When a return is rendered for a fractional part of a year the limitation shall be computed in the same manner as if the period covered by the return were a full taxable year. (Art. 732, Reg. 45, Rev., Jan. 28, 1921, as amended by T. D. 3245, Nov. 14, 1921.) 644 Art. 733. Illustration of computation of limitation of tax.— If T in the illustration used in Article 720 the invested capital had been | $100,000 and the net income $80,000, the tax computed under Section 301 (a) of the statute would be $56,200. Section 302 provides, however, that the tax under Section 301 (a) shall not be more than 30 per cent of the net income in excess of $3,000 and not in excess of $20,000 plus 80 per cent of the net income in excess of $20,000. The tax at the 30 per cent rate will be $5,100 (Art. 731) and the balance of the tax will be 80 per cent of $60,000 (the net income in excess of $20,000), or $48,000. The total tax will therefore be $5,100 plus $48,000 or $53,100. The tax under Section 301 (a), amounting to $56,200, will accordingly be reduced to $53,100. (Art. 733 ; Reg. 45, Rev., Jan. 28, 1921, as amended by T. D. 3245, Nov. 14, 1921.) » TAX WHEN PARTLY [PERSONAL SERVICE BUSINESS. §303 64 s Art. 741. Apportioument of Invested Capital and Net Income. — 524 For the purpose of determining whether or not a corporation partly, partaking of the nature of a personal service corporation is within the scope of section 303 ["[[524] of the statute and also for the purpose of establishing the basis for the computation of the tax, the corporation shall | apportion or allocate its invested capital between each trade or business or branch thereof as nearly as may be in accordance with the actual facts, and shall submit with its return an explanatory statement setting forth the manner in which the apportionment of the invested capital employed in the production of each part of its net income has been determined. There must be assigned to any personal service trade or business or branch thereof an amount of invested capital at least as great as that , which would ordinarily be employed by a personal service corporation of similar size and standing for the payment of salaries and office ex- Copyright 1922, by The Corporation Trust Company. WAR TAX 325 SERVICE 1-2-22. §303. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. pensesj maintenance of library and equipment, credit advances to client!, etc. For the method of determining the portion of the net income de- rived from each trade or business or branch thereof see article 715 [^[607]. For the definition of "personal service corporation" see [law 1f502 and] articles 1523-1532. (Art. 741, Reg. 45, Rev., Jan. 28, 1921.) 646 Art. 742. Computation of tax upon net income when partly personal service corporation. — (1) The tax upon the non-personal service part of the net income is computed upon the basis of (a) such part of the entire average net income for the prewar period as was derived from the same trade or business or branch thereof; (b) such part of the entire average invested capital for the prewar period as was employed in the production of the part of the net income for that period determined under (a); (c) such part of the entire invested capital for the taxable year as has been employed in the production of the net income upon which the tax is being computed; and (d) the same proportion of the specif! • exemption as the proportion which the part of the net income upon which the tax is being computed is of the entire net income. If the corporation was in existence during the prewar period, but did not conduct this trade or business or branch thereof during that period, the war profits credit shall be computed as provided in section 311 (b) of the statute [1|533]. 647 (2) The tax upon the personal service part of the net income is the same percentage thereof as the tax computed under (I) is of the non-personal service part of the net income. The tax under this para- graph shall in no case be less than 20 per cent of the personal service part of the entire net income, unless the tax upon the entire net income if computed in the ordinary way would be less than 20 per cent of such -entire net income. In that event, and in any case in which the amount of the total tax as computed under this article is the same as or greater than the tax as computed in the ordinary way, the tax shall be computed under section 301 [1f5l0] of the statute. See section 302 [law ^523] and articles 711-720 [for discussion on the imposition of the tax, beginning at *[598] and 731-733 [for maximum limitation of the tax, <|639]. (Art. 742, Reg. 45, Rev., Jan. 28, 1921.) 648 Art. 743. Illustration of Computation of Tax Where Partly Personal Service Business. — A corporation is engaged in contracting and construction work (a non-personal service business in which the employment of capital is necessary) and also renders consulting engineering service (a per- sonal service business which if constituting its sole business would bring it with- in the class of personal service corporations). It has an average prewar invested capital of £50,000 (of which $38,000 was used in contracting work and $12,000 in engineering); an average prewar net income of $52,000 (of which $12,000 was derived from contracting and $40,000 from engi- neering); an invested capital for 1918 of $100,000 (of which $8 1,000 is used in contracting and $19,000 in engineering); and a net income for 1918 of $90,000 (of which $30,000 is derived from contracting and $60,000 from engineering). 649 (1) In computing the tax upon the first or non-personal service part of the net income (i. e., $30,000 derived from contracting) the specific exemption is $1,000 (i. e., the same proportion of $3,000 which Copyright 1922, by The Corporation Trust Company. WAR TAX 326 SERVICF 1-2-22. §304. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. $30,000 is of the entire net income of $90,000). The excess profits credit is a specific exemption of $1,000, plus 8 per cent of the invested capital used in contracting (i. e., 8 per cent of $81,000) or $6,480, a total of $7,480. The war profits credit is a specific exemption of $1,000, plus the average prewar net income derived from contracting or $12,000, plus 10 per cent of $43,000 (the difference in invested capital used in contracting) or $4,300, making a total of $17,300. S50 First bracket. — The amount of the net income derived from con- tracting ($30,000) in excess of the excess profits credit ($7,480) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $81,000) or $16,200 is $8,720. The tax under this bracket is 30 per cent of this amount (i. e., 30 per cent of $8,720) or $2,616. 651 Second bracket. — The amount of the net income derived from con- tracting ($30,000) in excess of 20 per cent of the invested capital used in contracting (i. e., 20 per cent of $81,000) or $16,200 is $13,800. The tax computed under this bracket is 65 per cent of this amount (65 per cent of $13,800) or $8,970. 652 Third bracket. — Eighty per cent of the amount of the net income derived from contracting in excess of the war profits credit (i. e., 80 per cent of the amount by which $30,000 exceeds $17,300 or 80 per cent of $12,700) is $10,160. The amount of the tax computed under the first and second brackets ($2,616 plus $8,970) is $11,586. There is no tax under this bracket, as $10,160 does not exceed $11,586. 653 Tax. — The tax upon the first portion of the net income (i. e., $30,000 derived from contracting) is the sum of the taxes computed under the three brackets (i. e., $2,616 plus $8,970 plus nothing) or $11,586. This is 38.62 per cent of $30,000 of the net income from contracting. 654 (2) The tax upon the second or personal service part of the net income (i. e., $60,000 derived from engineering) is the same per- centage of such part of the net income (i. e., 38.62 per cent of $60,000) or $23,172 655 (3) The total tax is the sum of $11,586 (the tax upon the first part of the net income derived from contracting) and $23,172 (the tax upon the second part of the net income derived from engineering) or $34,758. (Art. 743, Reg. 45, Rev., Jan. 28, 1921.) 656 to 665 Blank. EXEMPTIONS. §304 666 Art. 751. Corporations exempt from tax. — A corporation whose 525 net income for a full taxable year of twelve months is less than $3,000 is exempt from the tax. [For return requirements in such cases see ^[85 1 .] If the taxable period is less than twelve months the cor- poration is exempt from the tax if its net income for the period is less than the same proportion of $3,000 as the number of months in the period is of twelve months, any fractional part of a month being counted as^the numberpf days Copyright 1922, by The Corporation Trust Company. WAR TAX 327 SERVICE 1-2-22. $304. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. in such part of a month divided by 30. Certain classes of corporations, includ- ing personal service corporations, named in section 231 [1J667 below] of the statute are also exempt. See articles 511-522 [for discussion of exemption of certain corporations, 1J667 below, from liability to income tax]. [See 1[913.] (Art. 751, Reg. 45, Rev., Jan. 28, 1921.) 667 Sec. 231 [of the Revenue Act of 1918, as in effect prior to January 1, 1921]. That the following organizations shall be exempt from tax- ation under this title — (1) Labor, agricultural, or horticultural organizations; (2) Mutual savings banks not having a capital stock represented by shares; (3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents; (4) Domestic building and loan associations and cooperative banks without capital stock organized and operated for mutual purposes and without profit; (5) Cemetery companies owned and operated exclusively for the benefit of their members; m -.Ztm »■ (6) Corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; (7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual; (8) Civic leagues or organizations not organized for profit but operated exclu- sively for the promotion of social welfare; (9) Clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member; (10) Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone com- panies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses; (11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; (12) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title; (13) Federal land banks and national farm-loan associations as provided in section 26 of the Act approved July 17, 1916, entitled "An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes"; (14) Personal service corporations. 668 to 681 Blank. Copyright 1922, by The Corporation Trust Company. WAR TAX 328 SERVICE 1-2-22. §310 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. -1918 ACT. 682 Art. 752. Net Income Exempt from Tax. — If a corporation is en- 52? gaged in the mining of gold, the portion of its net income derived from that source is exempt from tax. The tax on the remaining portion of its net income is the proportion of the tax that would have Deen payable, had the entire net income been derived from other sources than the mining of gold, which such remaining portion of the net income bears to the entire net income. For the method of determining the net income derived from the mining of gold see article 71 5 [1|607]. (Art. 752, Reg. 45, Rev., Jan. 28, 1921.) 683 Art. 753. Illustration of Computation of Tax where Net Income from Gold Mining. — In the case of the corporation used as an illus- tration in article 716 [^[608] let it be assumed that it is engaged in the mining both of gold and of other rare metals; that the Commissioner finds under article 71 5 [1J607] that $35,000 of its gross income is properly attributable to the mining of gold ; and that $20,000 of the deductions allowed are properly applicable to the gross income from that source. The portion of the net income attributable to the mining of gold and exempt from tax would be $15,000. The remaining portion of the net income is $25,000 and the tax thereon is the same proportion of the tax computed on the entire net income without the benefit of the exemption (i. e., a tax of $17,600) which the remain- ing portion of the net income ($25,000) bears to the entire net income ($40,000). The tax will therefore be % of the tax of $17,600 computed without the benefit of the exemption, or $11,000. (Art. 753, Reg. 45, Rev., Jan. 28, 1921.) APPORTIONMENT OF SPECIFIC EXEMPTION. §305 S84 Art. 761. Apportionment of Specific Exemption. — The specific ex- 528 emption of $3,000 is apportioned only in the case where a return is made covering a period of less than twelve months. In such a case the specific exemption is the same proportion of $3,000 as the number of months in the period is of twelve months, any fractional part of a month being counted as the number of days in such part of a month divided by 30. Thus, in the case of a corporation organized May 12, 1918, and making a return for the period ending December 31, 1918, the exemption is $1,916.67, that is, the same proportion of $3,000 as 7 20/30 months is of 12 months. This provision is inapplicable where the return is made for a full fiscal year beginning prior to January 1, 1918, and ending after that date, even though the income for such fiscal year is not subject to full taxation under the present statute'. (Art. 761, Reg. 45, Rev., Jan. 28, 1921.) PREWAR PERIOD. §310 685 Art. 771. Prewar Period. — The prewar period in the case of each 529 corporation covers so many of the calendar years 1911, 1912 and 1913 during the whole of which it, or a predecessor trade or busi- ness, was in existence. See section 330 [law ^[5 75] of the statute and articles 931-934 [for certain reorganizations, beginning at If 83 7]. If a new enter- prise was launched in corporate form in June, 1912, its prewar period would accordingly be the calendar year 1913. The prewar period when mentioned without reference to any particular corporation means the calendar years 1911, 1912 and 1913. (Art. 771, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 329 SERVICE 1-2-22. H U/IA ^TIIOHh §311. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. WAR PROFITS CREDIT. §311 686 Art. 781. War Profits Credit. — Ordinarily the war profits credit 530 consists of the sum of the specific exemption of $3,000 and an amount equal to the average net income of the corporation for the prewar period, plus 10 per cent of the excess of the invested capital for the taxable year over the average invested capital for the prewar period, or minus 10 per cent of the excess of the average invested capital for the prewar period over the invested capital for the taxable year. If a return is made for a period of less than twelve months, the amount equal to the average net income for the prewar period plus or minus 10 per cent of the difference between the average invested capital for the prewar period and the invested capital for the taxable year shall be reduced to the same proportion thereof as the number of months in the period is of twelve months. See section 305 [law 11528] of the statute and article 761 [for apportionment of specific exemption 1f684]. If at the time a return is made the net income for the prewar period or the difference between the average invested capital for the prewar period and the invested capital for the taxable year can not be determined, the war profits credit shall be computed in the first instance as provided in the following article [11688]. If either of these amounts can not eventually be determined, the war profits credit shall be finally deter- mined as provided in the following article [lf688]. See also section 327 [for special cases subject to special tax: law \\565 and regulations TI831] and articles 716-720, 743 and 901 [for illustrations of computation of tax, begin- ning at H608; 1f648, ^[831]. (Art. 781, Reg. 45, Rev., Jan. 28, 1921.) 687 Manner of determining average prewar profits and invested capital. 547 — Reference is made to your letter of March 8, 1 9l 9, relative to 564 average net income and invested capital as computed under the Revenue Acts of 1 91 7 and 1 91 8. ^Assuming in each case a full prewar existence, the computation is similar under both Acts. The average invested capital for the prewar period is one-third of the sum of the invested capital determined for each of the prewar years as provided in the respective Acts. IIThe average net income for the prewar period is one-third of the total net income for the prewar years as provided in the respective Acts If any of the prewar years showed a net loss, such net loss may not be offset against the net income of the other years in determining the average net income. (Letter to Richard H. Hart, Denver, Col., signed by J. H. Callan. Assistant to the Commissioner, and dated March 24, 1 91 9.) 688 Art. 782. War profits credit where meager prewar net income.— 533 If a corporation had no net income for the prewar period, or if the war profits credit as ordinarily computed (exclusive of the specific exemption of $3,000) is less than 10 per cent of its invested capital for the taxable year, then the war profits credit consists of the sum of the specific exemption of $3,000 and an amount equal to 10 per cent cf the corpora- tion's invested capital for the taxable year. See article 720 [for illustration, lf634]. (Art. 782; Reg. 45, Rev., Jan. 28, 1921.) 689 Acceptance of $3,000 plus 10% of invested capital for taxable year as war-profits credit. — Read *,852. 690 Art. 783. War Profits Credit where no Prewar Period.— If a cor- 536 poration had no prewar period, then the war profits credit consists of the sum of the specific exemption of $3,000 and an amount equal to the same percentage of the invested capital for the taxable year as the aver- CoPy right 1922, by The Corporation Trust Company. WAR TAX 330 SERVICE 1-2-22. §311. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. age percentage of net income to invested capital for the prewar period of orporations engaged in a trade or business of the same general class as that conducted by the taxpayer, but not less than 10 per cent of its invested capital for the taxable year. The war profits credit shall be computed in the first instance on the basis of 10 per cent of the invested capital, and when the average percentage of corporations engaged in the same general class of trade or business has been determined [see \\69l] the amount of the tax will if necessary be recomputed. See section 250 of the statute and articles 1001 [for credit, refund, or additional assessment on recomputa- tion] and 784 [for war-profits credit where no prewar period in special cir- cumstances, H722]. (Art. 783, Reg. 45, Rev., Jan. 28, 1921.) 69 1 The Average Percentages known as the Median. — Reference is made 538 to your letter of April 4, 1919, with respect to the application of Section 3ll (c) of the Revenue Act of 1 9l 8 to the returns of corpora- tions entitled to the benefit thereof. 692 In reply you are advised that the average percentages applicable to the invested capital of corporations coming within Section 311 (c) of the Revenue Act of 1918 are being worked out by this office, but it is not likely that such average percentages will be ready for use prior to the extended date for filing the complete tax returns for the taxable year 1918. [For the average percentages, i. e., the "median," see ^694.] Therefore, it will be necessary to file such returns and compute the war profits credit on the basis of 10% of the invested capital of the taxpayer for the taxable year as provided by the 1918 Act. 693 Any adjustments shown to be necessary upon determination and application of the average percentages, as noted above, will be made as soon as practicable thereafter, (Letter to The Corporation Trust Company, signed bv Acting Deputy Commissioner P. S. Talbert, and dated May 15, 1919.) 694 The median: Average percentages of pre-war income to pre-war 538 invested capital of general classes of corporations, grouped as to trades or businesses, as provided for in Section 311 (c) (2), Revenue Act of 1918. — Section 311 of the Revenue Act of 1918 provides that a corpora- tion which was not in existence during the whole of at least one calendar year during the pre-war period, md therefore received no income during the pre-war period, shall be allowed a specific exemption of $3,000 and "an amount equal to the same percentage of the invested capital of the taxpayer for the taxable year as the average percentage of net income to invested capital, for the pre-war period, of corporations engaged in trade or business of the same general class as that conducted by the taxpayer; but such amount shall in no case be less than 10 per centum of the invested capital of the taxpayer for the taxable year. Such average percentage shall be determined by the Commissioner on the basis of data contained in returns made under Title II of the Revenue Act of 1917, and the average known as the median shall be used." 695 In pursuance of this requirement of the iaw the accompanying table of medians has been compiled and will be used in complying with Section 250 (b), which provides, "As soon as practicable after the return is filed, the Commissioner shall examine it. If it then appears that the correct amount of the tax is greater or less than that shown in the return, the installments shall be recomputed. If the amount already paid exceeds Copyright 1922, by The Corporation Trust Company. WAR TAX 331 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. that which should have been paid on the basis of the installments as re- computed, the excess so paid shall be credited against the subsequent in- stallments; and if the amount already paid exceeds the correct amount of the tax, the excess shall be credited or refunded to the taxpayer in accord- ance with the provisions of Section 252." 696 Inasmuch as the examination of all returns filed will not be com- pleted by the due date of the last installment of 1918 taxes, it is suggested that the taxpayers entitled to credit, based on the appropriate median shown in the accompanying tables, may recompute their tax using a war profits credit based on such median, and file claim for abatement [Form 47, page 1611] for as much of the last installment of the outstanding assessment as the total tax assessed exceeds the tax so recomputed. In any case where the amount already paid exceeds the amount due, with the benefit of the median, claim for refund should also be filed on Form 46 [page 1609]. [See f 715.1 697 Contents of "The Median"— Bulletin D. INDUSTRIAL GROUPS. RAW MATERIALS. Paragraph Agriculture and Dependent Pursuits 698 Mining 699 MANUFACTURING. Chemical Manufacturing and Allied Industries 700 Foods and Food Preparations , 701 Iron and Steel Industries 702 Leather and Leather Goods Industries 703 Liquors and Beverages 704 Lumber and Woodworking Industries 705 Metal and Metallurgical Extractions 706 Paper Manufacturing, Printing, Bookbinding, Publishing 707 Stone, Clay, and Glass Industries 708 Textile Industries 709 Special Manufacturing Industries 710 FINANCIAL. Banks, Insurance Companies, Brokerage Institutions 71 J COMMON CARRIERS AND PUBLIC UTILITIES 712 TRADING AND MISCELLANEOUS 713 SCHEDULE OF AVERAGE PERCENTAGES. 698 Agriculture and Dependent Pursuits. Subdivisions. Average percentages. Per Cent. 1. Cotton Ginning 11.73 2. Cotton Growing Not over 10. 3. Dairying and Dependent Pursuits, including Butter, Cheese, and Condensed Milk " " 10. 4. Fisheries " " 10. 5. Florists, Nurserymen and Seedmen " " 10. 6. Forestry and Forestal Pursuits, Naval Stores, Charcoal Burning and Grinding 13. 7. Fruit and Vegetable Growing, including Vineyards, Orchards and Trucking 10. Copyright 1922, by The Corporation Trust Company. WAR TAX 332 SERVICE I#2-22. §311- WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. Subdivisions. Average percentages. Per cent. 8. Grain Growing Not over 10. 9. Poultry Raising and Products ; " " 10. 10. Mixed Farming, including Stock Breeding, Stock Raising and General Animal Husbandry. Agricul- tural Pursuits not elsewhere specified " " 10. 699 Mining. 1. Cinnabar Not over 10. 2. Clay " " 10. 3. Coal, Anthracite " " 10. 4. Coal, Bituminous " " 10. 5. Copper " " 10. 6. Gravel and Sand " " 10. 7. Gypsum 11.81 8. Iron Not over 10. 9. Lead and Zinc " " 10. 10. Limestone " " 10. 11. Natural Gas " " 10. 12. Petroleum " " 10. 13. Phosphate " " 10. 14. Pipe Lines 17.24 15. Salt Not over 10. 16. Silver, Complex Ores " " 10. 17. Talc and Soapstone " " 10. 700 Chemical Manufacturing and Allied Industries. Per Cent 1. Baking Powder, Yeast 14.14 2. Blacking, Bluing, Whiting, Stains and Dressing, Dyestuffs, Ex- tracts and Coloring Materials, Inks (Printing and Writing), Paints and Varnishes 11.44 3. Celluloid and Products Not over 10. 4. Cleansing and Polishing Preparations, Soaps and Washing Compounds 10.56 5. Crude Chemicals, including Leading Acids, Fertilizers, etc .Not over 10. 6. Druggists' Preparations, including Perfumery, Cosmetics and Patent Medicine Compounds 10.98 7. Oils, Vegetable and Animal, including Seed Cake Not over 10. 8. Petroleum Refining, Products and By-Products 11.27 9. Chemicals, not elsewhere specified. Not over 10. 70! Manufacturing Foods and Food Preparations. II Bread and other Bakery Products, not including Confectionery 11.26 2. Canning, Preserving and Evaporating — Fruits, Vegetables, Fish, Oysters and Shrimps 10.67 3. Chocolate and Cocoa Products, Candy and Confec- tionery Not over 10. 4. Coffee-Roasting, Grinding Spices, and Coffee Substitutes 10.87 5. Flavoring Extracts, Syrups and Cordials used in Bott- ling Industries Not over 10. Copyright 1922, by The Corporation Trust Company, WAR TAX 333 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. Manufacturing foods and food preparations. — Concluded. Subdivisions. Average percentages. Per Cent. 6. Flour, Feed and Grist Mills Not over 10. 7. Meat Packing, Packing-House Products and By- products fi " 10. 8. Oleomargarine and other Butter and Lard Substitutes, including both Animal and Vegetable 12.45 9. Pickling Establishments Not over 10. 10. Rice Mills, Cleaning and Polishing, not including Rice Flour " " 10. 11. Special Package Foods, such as Cornstarch, Macaroni, Tapioca. etc., Breakfast Foods and other Cereal Products 10 79 12. Sugar — Beet, including Refining, Molasses Recovery Not over 10. 13. Sugar — Cane, including Molasses and Syrup in Bulk. . " " 10. 14. Syrups and Molasses — Glucose and others, including Maple " " 10. 15. Vinegar and Cider " " 10. 16. Food Preparations, not elsewhere specified 10.83 702 Iron and Steel Industries. Per Cent. 1. Agricultural Implements Not over 10. 2. Automobiles and Auto Parts, including Bicycles and Motorcycles and parts. Motor Trucks and Motor Truck parts " " 10. 3. Blast Furnace Products...... " " 10. 4. Boilers, Evaporating Pans, Oil Tanks and Silos " " 10. 5. Bolts and Nuts, including Washers and Rivets " " 10. 6. Engines— Steam, Gas and Oil " " 10. 7. Forging and Foundry Products, including Castings, Car Wheels and Stoves " " 10. 8. Hardware, Special and General " " 10. 9. Heating, Cooling and Ventilating Apparatus, including Furnaces (no stoves), Refrigerating Plants, Dust Collecting Systems " " 10. 10. Machinery — Electrical and other Electrical Apparatus. " " 10. 11. Machinery— Excavating. Cars and Tools " " 10. 12. Machinery — Hoisting, Cranes, Derricks and Conveyors " " 10. 13. Machinery— Humidifying, Air Moistening and Air Conditioning " " 10. 14. Machinery— Laundry " " 10. 15. Machinery— Mill, neither Textile nor Woodworking. .. . " " 10. 16. Machinery— Mining " " 10 17. Machinery — Printing and Duplicating " " 10. 18. Machinery— Saw Mill Not over 10. 19. Machinery — Textile, also Parts 10.42 20. Machinery — Woodworking Not over 10. 21. Machines— Adding and Calculating " " 10. 22. Machines— Check-writing, Slot, Testing, Vending, Weighing, including Addressopraphs, Balances, Scales, Registering Devices, and Watchman's Clocks " " 10. 23. Machines— Sewing " " 10. Copyright 1922, by The Corporation Trust Company. WAR TAX 334 SERVICE ^W/R-PKCFITS AWD FXCFSS-PE0F1TS TAX PFGILATICNS. - 1918 ACT.'' Iron and Steel Industries. — Concluded. Subdivisions. Average percentages. Per Cent. 24. Meters— Gas, Water, etc Not over 10. 25. Plumbing Supplies, including Gas and Water Appar- atus, Porcelain Wares for Kitchen and Laundry. ..." " 10. 26. Pumps " " 10. 27. Railway Equipment, including Locomotives, Street Railway, Mining and Industrial Cars " " 10. 28. Safes and Vaults " " 10. 29. Shipbuilding " " 10. 30. Steel Plants and Rolling Mill Products, including Tin and Terne Plate Mill Products, Iron and Steel Chains, Steel Doors and Shutters " " 10. 31. Structural Steel " " 10. 32. Tin Cans and Tin Ware # " " 10. 33. Tools— Farm, Garden, Machine, Mechanics, Mining, Lumbering, Railroad Track Repairing, including Bench Lathes, Shears and Saws " " 10 34. Tractors — Farm and Highway " " 10. 35. Typewriters and Typesetting Machinery " " 10. 36. Wire Cables, Fences, Springs, Nails and Spikes 10.24 37. Iron and Steel Products not elsewhere specified Not over 10. 703 Leather and Leather Goods Industries. Per Cent. 1. Boots and Shoes 10.94 2. Leather Manufacture 10.69 3. Leather Substitutes 11.82 4. Leather Articles other than Boots and Shoes Not over 10. J 04 Liquors and Beverages Per Cent 1. Bottling of Liquors and Soft Drinks as distinct from Manufacturing Not over 10. 2. Distillers of Whiskies and Spirits, Refining and Recti- fying of Liquors and Beverages " " 10. 3. Malt Liquors (Brewers) M " 10. 4. Wines........ " " 10. 5. Non-Intoxicating Beverages — Coca-Cola and other Special Drinks, Mineral, Soda, and Aerated Waters, including Bottled Tonic Drinks, Soft Drinks, Spring Waters, Malting Grains. All others not elsewhere specified " " 10. 705 Lumber and Woodworking Industries. Per Cent. 1. Box Boards, Baskets, Cases Not over 10. 2. Caskets, Coffins, Burial Cases of Wood, not including Steel or Concrete " " 10. V Furniture, all Classes, including Veneering, Chair Seating " " 10. Copyright 1922, by The Corporation Trust Company. WAR TAX 335 SERVICE L-2-22, §311. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT, Lumber and Woodworking Industries — Concluded Subdivisions. Average Percentages. Per Cent. Mills — Shingle, Lath Not over 10. 5. Paper Pulp and Pulp Board. 6. Planing Mills, Flooring, Sash, Doors, Partitions and Interior Work Generally 7. Ready-Made Houses 8. Silos and Silo Materials, Cooperage Stock, Tanks, not including Steel or Concrete 9. Timbering, Logging and Saw Mill Operations 10. Wagons and Buggies 11. Wood Fibres, Leatheroid, Wood Composition in other Commodities 12. Woodworking Industries, not elsewhere specified 70S Metal and Metallurgical Extractions. 1. Brass, Bronze, Copper and Aluminum Products Not over 2. Clocks, Watches, Chronometers " " 3. Cooking Utensils (other than Copper), Granite Goods, etc 4. Cutlery, Scissors, Razors 5. Galvanized Materials, Spouting, Gutters, Metal Roofing......... 6. Gas and Electric Fixtures 7. Jewelry 8. Lamps and Accessories 9. Lead Products 10. Needles, Pins, Metal Hair Pins, and Pen Points 11. 12. 10. 10. 10. 10. 10. 10. 10. 10. Per Cent 10. 10. 10. 10. 10. 10. 10. 10. 10. 15.54 10. 13. 14. 15. Plate Ware, Electroplate, etc Not over Professional and Scientific Instruments, including Dental Supplies, and Optical Goods, Surgical and Hospital Appliances, Photographic Apparatus and Materials 10.50 Silverware and Goldware, other than Jewelry Not over Smelting and Refining — Copper, Lead, Zinc, etc " " Metal and Metallurgical Industries, not elsewhere, specified " " 3 T 10. 10. 10. 707 Paper Manufacturing, Printing, Bookbinding, Publishing. Per Cent. 1. Blank Paper Not over 10. 2. Book and Job Printing, Lithographing, including Bank Note and Bond Printing, Labels, Tags and Decora- tive Paper " " 10. 3. Book Binding and Blank Book Making " " 10. 4. Cardboard, Box Materials, and Box Manufacturer 10.48 5. Envelopes 10.28 6. Paper Utensils Not over 10. 7. Photo-Engraving and Printing Processes " " 10. ^Printing Materials " 44 10. Copyright 1922, by Tht Corporation Trust Company. WAR TAX 336 SERVICE 1-2-22. §311 WAR-PROFITS AND EXCESS-PROFITS TAX RE GUL ATION S . — 1 918 ACT. Paper Manufacturing, Printing, Bookbinding, Publishing — Concluded. Average Percentages. Subdivisions. Per Cent. 9. Publishing Newspapers and other Periodicals Not over 10. 10. Type Founding, Stereotyping and Electrotyping 13.17 11. Wall Paper Not over 10. 12. Wrapping Paper. " " 10. 13. Paper and Printing, not elsewhere specified " " 10. 7 08 Stone, Clay and Glass Industries. Per Cent. 1. Abrasive Products, including Emery Wheels, Sand- paper and Corundum 12.72 2. Building Brick Sewer and Drainage Pipe, Fire Brick, Furnace Linings, Pottery, Terra-Cotta, Crucibles, Tiling, Laundry Tubs, Refractories and Earthen- ware Not over 10. 3. Cement # " " 10. 4. Concrete Construction, including Artificial Stone " " 10. 5. Glassware, including Household, Hotel, and Bar-room Supplies, X-Ray Tubes, Thermos Bottles, Mirrors, Refractors, Illuminating Glass, etc " " 10. 6. Glass—Window, Wire and Skylight " " 10. 7. Lime and Plaster " " 10. 8. Monuments; Tombstones, Burial Vaults " " 10. 9. Porcelain Goods and Ceramic Products, not elsewhere •01 specified " " 10. 709 Textile Industries. Per Cent. 1. Awnings, Tents, Tarpaulins, etc 11.88 2. Bags and Bagging — Cotton and Burlap 17.34 3. Batting Mills Not over 10. 4. Carpets and Rugs, including Cotton, Wool and Grass.. . " " 10. 5. Clothing — Men's Overcoats, Suits, etc It " 10. 6. Clothing — Ladies', Coats, Suits and Dresses " " 10. 7. Clothing — Miscellaneous. Uniforms, Furriers, Regalia, Belts, Garters, etc " " 10. 8. Corsets and Brassiers " " 19.90 9. Cotton Converters, Dyers, Finishers, Mercerizers Bleachers and Prints " " 10. 10. Cotton Duck 11.90 11. Cotton Goods Manufacturing — Colored, Fancy, Grey, Brown, Print Cloth and Sheeting Not over 10. 12. Cotton Laces, Curtains, Quilts, Embroideries " " 10. 13. Cotton Spinning — Fine Yarns 10.17 14. Cotton Spinning — Medium and Coarse Yarns Not over 10. 15. Dyers of Furs 11.97 16. Hats, Caps, Scarfs and other Headwear and Neckwear Not over 10. 17. Hosiery and Knit Goods, including Knitted and Fabric Underwear " " 10. 18. Millinery and Millinery Goods " " 10. 19. Rope and Cordaee " " 10 Copyright 1922, by The Corporation Trust Company. WAR TAX 337 SERVICE WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 AC?!' 1 ' Textile Industries. — Concluded. Subdivisions. Average Percentages. Per Cent. 20. Shirts, Collars and Cuffs " " 10. 21. Silk-Dyeing and Finishing 12.10 22. Silk Manufacturing — Broad Not over 10. 23. Silk Manufacturing — Ribbons, Woven Labels " " 10. 24. Silk— Spinning " " 10. 25. Silk— Throwing . > " " 10. 26. Thread, Tapes and Braids, Cotton and Silk " " 10. 27. Towels, Damask, Handkerchiefs (Cotton and Linen) ..." " 10. 28. Upholstery Cloth and Trimmings (Cotton and Wool).. . " " 10. 29. Waste — Cotton and Wool, Linters and Oakum 11. 30. Wool and Worsted — Dyeing and Finishing Not over 10. 31. Wool and Worsted — Spinning and Combing " " 10. 32. Wool and Worsted Weaving " " 10. 33. Textile Manufacturing, not elsewhere specified 10. 7 ! o Special Manufacturing Industries. 1. Ammunition, Explosives and Fireworks 11.28 2. Artificial Flowers Not over 10. 3. Artificial Limbs " " 10. 4. Asbestos Wares, Magnesia, Material for Insulation 16.88 5. Bedding, Mattresses and Undertakers' Supplies Not over 10. 6. Brooms and Brushes " " 10. 7. Buttons, Beads, Rosaries " " 10. 8. Coke " " 10. 9. Combs — Bone, Ivory, etc " " 10. 10. Dairymen's, Poultrymen's and Apiarist's Supplies " " 10. 11. Fire Extinguishers, including Mechanical and Chemical Apparatus, Automatic Sprinklers, Fire Trucks " " 10. 12. Hair Goods " " 10. 13. Hand Stamps— Rubber, Metal, etc " " 10. 14. House Furnishing Goods, Screen Doors and Windows, Window Shades " " 10. 15. Ice " " 10. 16. Jewelry and Instrument Cases i " " 10. 17. Models and Patterns (not including Paper Patterns), Molds " " 10. 18. Mucilage and Paste 11.23 19. Phonographs and all other Musical Instruments and Parts (not including Pianos, Organs and Parts) 11.53 20. Pianos, Organs and Parts Not over 10. 21. Roofing Materials other than Metal " " 10. 22. Rubber— Boots, Shoes and Clothing " " 10. 23. Rubber — Tires, Belting, Hose, Tubing, including non- Metalic Conduits " " 10. 24. Rubber Goods, not elsewhere specified " " 10. 25. Shipbuilding — Wooden Craft of all kinds 10.15 26. Signs and Advertising Novelties 14.45 27. Small Metal Specialties Not over 10. 28. Soda Fountain Apparatus, Siphons 15.20 Copyright 1922, by Thf Corporation Trust Company. WAR TAX 338 SERVICE L-2-22. Saw.. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. Special manufacturing industries. — Concluded. Subdivisions. Average Percentages. Per Cent. 29. Sporting and Athletic Goods (including Pleasure Boats, but not Yachts), Amusement Appliances Not over 10. 30. Stationery Goods, School Supplies, Office System Supplies 10.36 31. Stencil, Dye Sinking, Seals Not over 10. 32. Tobacco 12.87 33. Toys, Children's Tools and Vehicles, including Baby Carriages, Carts, Games and Christmas Novelties Not over 10. 34. Umbrellas and Canes . " " 10. 35. Washing Machines and Clothes Wringers 12.22 36. Windmills Not over 10. 37. Special Products, not elsewhere specified " " 10. FINANCIAL. 71 1 Banks, Insurance Companies, Brokerage Institut ons. 1. Banking — International Not 2. Banking— Private, Money Lenders and Pawnbrokers 3. Banking — Saving 4. Banking — State and National 5. Banking — Trust Companies 6. Banking and Financial Operations, not elsewhere specified 7. Building and Loan Associations 8. Burglar Alarm Systems 9. Holding Companies, Incorporated Estates, Trusts, Investment Concerns Insurance Brokers Insurance — Fidelity and Surety Insurance — Fire, Mutual Insurance — Fire, Stock Insurance— Life, Mutual Insurance — Life, Stock Insurance — Marine Insurance — Casualty, Mutual Insurance — Casualty, Stock Insurance — Title and Abstract Insurance — not elsewhere specified 21. Safe Deposit Vaults 22. Stock Brokers and 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Dealers in Securities on Com- mission Per over Cent. 10. 10. 10. 10. 10. 10. 10. 10. 10. 10. 10. 10. 10. 10. 10 10. 10. 10. 10. 10. 10. 10. 7 12 Common Carriers and Public Utilities. Per Cent 1. Cold Storage and Ice Not over 10. 2. Cotton Compressors and Cotton Storage " " 10. 3. Gas Companies, Illuminating and Fuel " " 10. 4. Grain Elevators " " 10. 5. Irrigation Water Works " " 10. Copyright 1922, by The Corporation Trust Company. WAR TAX 339 SERVICE 1-2-22. §311. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. Common Carriers'and Public Utilities — Concluded. Subdivisions. Average Percentages. Per Cent. 6. Light and Power, including Water and Electric, Hydro- electric Lighting Not over 10. 7. Market Houses— Public " " 10. 8. Railways — Electric, City, Suburban and Interurban. . . . " " 10. 9. Railway Express Companies 13.89 10. Railways — Steam Not over 10. 11. Steamships-— Local, River, Lake, Coastwise and Ocean Lines " " 10. 12. Stock Yards # ; " " 10. 13. Tank Car Companies, Refrigerator, Ventilator, and Live Stock Cars " " 10. 14. Telephone and Telegraph Companies " " 10. 15. Warehouses and Storage, other than Cotton Storage, Wharves, Forwarding, Teaming, Stevedoring, Local Express " " 10. 16. Water Filtration, Distribution for Domestic Use " " 10 17. Common Carriers and Public Utilities, not elsewhere specified; Toll bridge, Bridge Companies, Ferry. Turnpike, United Press Association, Passenger Bus Line, Canals, etc " g 10. 713 Trading and Miscellaneous. Per Cent 1. Brokers — Freight, Grain, Merchandise, Real Estate and Ship, Purchasing and Selling Agents, Manufac- turer's Agents, Exporters and Importers (Com- mission only), Automobiles, Sales of Metals Not over 10. 2. Garages and Livery Stables " " 10. 3. Jobbers — Merchandise, General and Special " " 10. 4. Merchant Tailoring, Needlework, etc 17.14 5. Merchants — Retail Not over 10. 6. Merchants— Wholesale 10.45 7. Real Estate Operators and Promoters Not over 10. 8. Trading Concerns not elsewhere specified V " 10. 9. Amusements, Theatres, Moving Picture Shows, County Fairs, Race Tracks and Clubs " " 10. 10. Barbers, Bathhouses, etc " " 10. 11. Consulting Engineers, Appraisers, Accountants, Ad- justers, Architects, Chemists, Assayers and Metal- lurgists " k ' 10. 12. Contractors, Building Construction, Street Paving, Machine Installation, etc " " 10. 13. Decorators and Interior Designing " " 10. 14. Hospitals, Sanitariums, etc " " 10. 15. Hotels " " 10. 16. Laundries, Dry Cleaning, Dyeing, etc " " 10. 17. Photographs and Art Portraits 19.66 18. Restaurants Not over 10. 19. Schools, Colleges, etc " " 10. 20. Undertakers " " 10. Copyright 1922, by The Corporation Trust Company: WAR TAX 340 SERVICE 1-2-22. §311. • WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. Trading and Miscellaneous. — Concluded. Subdivisions. Average Percentage. Per Cent. 21. Miscellaneous Concerns, not elsewhere specified, in- cluding Typewriter Exchange, Type-setting, Ad- vertising Services, Commercial Agencies and De- tective Agencies " " 10 7 1 4 Chart— Showing the Average Percentages of Net Income to Invest- ed Capital for the Prewar Period, and the Number of Industrial Groups of the Same Class of Business Under Each Median. Medians or average percentages of net income to invested capital. Industry Total number of £ S id under ler 12% ier 13%. er 14%. er 15%. er 16%. er 17%. er 18%. u 9 si © S3 industrial divisions. pun pi 3^ o (3 3 a 3 tJ a id und id und id und pun pi pun pt pun pi § 1 OS el a cf 3 5 2 a o Over CO to & to 00 & Agriculture and depend- 10 17 8 1 1 IT? 1 "!' 15 1 1 Financial: Banks, insur- ance companies, brok- erage institutions. Common carriers and 22 22 17 37 16 1 Iron and steel 35 2 Chemical manufactur- ing and allied indus- 9 4 2 2 1 Manufacturing foods and food products . . Leather ^ and leather goods industries 16 10 4 1 1 4 1 2 1 Liquors and beverages . Metal and metallurgical 5 5 15 13 1 1 Paper manufacturing, printing, bookbinding publishing 13 10 2 1 Special manufacturing industries 37 9 27 8 2 3 2 1 1 1 Stone, clay and glass industries 1 Textile industries 33 25 1 4 1 1 1 Lumbering and wood- working industries. . . Trading and miscellan- 12 12 21 18 1 1 1 Total 277 229 17 13 5 3 2 2 1 8 2 715 Comment: The foregoing, 1J694 to H714, is a reprint of the "median'*" and foreword prepared by the Bureau of Internal Revenue, and released for publication November 24, 1919, This is designated as "Bulletin, D." — The Corporation Trust Company. 71 e to 721 Blank. Copyright 1922, by The Corporation Trust Company, WAR TAX 341 SERVICE 1-2-22. §320. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. 7 22 Art. 784. War Profits Credit where no Prewar Period in Special 539 Circumstances. — If a corporation had no prewar period, but (a) if a majority of its stock at any time during the taxable year was owned or controlled by a corporation which was in existence during the whole of at least one calendar year during the prewar period, or (b) if 50 per cent or more of its gross income consisted of income derived from Govern- ment contracts made after April 5, 1917, and before November 12, 1918. then the war profits credit is to be determined as provided in article 782 [1(688 instead of in the manner provided in article 783 [^[690]. See section 1 of the statute [law 1|503] and article 1510 [for definition of government contract]. (Art. 784, Reg. 45, Rev., Jan. 28, 1921.) 723 Art. 785. War Profits credit in the case of affiliated corporations. —In the case of affiliated corporations making a consolidated return only one specific exemption of $3,000 is allowed. See also sections 240 [for specific exemption in case of consolidated returns, H588] and 305 of the statute [law 1)528] and article 761 [regulations H684, for apportionment of specific exemption]. (Art. 785, Reg. 45, Rev., Jan. 28, 1921.) EXCESS PROFITS CREDIT. §312 724 Art. 791. Excess Profits Credit. — The excess profits credit con- 541 sists of the specific exemption of $3,000 plus an amount equal to 8 per cent of the invested capital for the taxable year. In the case of affiliated corporations making a consolidated return only one specific exemp- tion of $3,000 is allowed. See also sections 240 [for specific exemption in case of consolidated returns, 1[588] and 305 of the statute [law 1f528, and regulations 1f684 for apportionment of specific exemption] and articles 716-720, 743, and 761 [for illustrations, beginning at ^[608, <[648, and 1[684]. (Art. 791, Reg. 45, Rev., Jan. 28, 1921.) NET INCOME. §320 725 Art. 801. Net Income. — The net income of a corporation for the 543 purpose of the imposition of the war profits and excess profits tax is the same net income [see 1[726 below] as determined for the purpose of the income tax. See section 232 of the statute and article 531. For the prewar period, however, the net income of a corporation is to be ascertained in the case of the calendar years 1911 and 1912 as provided in section 38 of the Act of August 5, 1909, and in the case of the calendar year 1913 as provided in section II of the Act of October 3, 1913, except that in either case the amount of any taxes imposed by section 38 of the Act of August 5, 1909, and paid within the year in question should be included and that in the case of the calendar year 1913 any dividends received from other corporations taxed under section II of the Act of October 3, 1913,\should be deducted. (Art. 801, Reg. 45, Rev., Jan. 28, 1921.) 726 Interest on Liberty Bonds and Victory Notes, and on War Finance Corporation Bonds— [Sec. 213 (b) (4) of the Revenue Act of 1918 reads in part as follows:] — "In the case of obligations of the United States issued after September 1, 1 91 7, and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under Copyright 1922, by The Corporation Trust Company.' WAR TAX 342 SERVICE 1-2-22. §320. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. this title [Income Tax] and under Title III [excess-profits tax]." [Sec. 236 (a) of the Revenue Act of 1918 provides that for the purpose of the income tax imposed on corporations, there shall be allowed as a credit], "( a ) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is included in gross income under section 233 [which section refers back to Sec. 213, quoted above];" [furthermore the Acts authorizing the issue of Liberty bonds and War Finance Corporation bonds, and the Act authorizing the issue of Liberty notes (considering the series elected by the Secretary of the Treasury under the authority given to him by the Act itself), exempts the interest from such bonds and notes from income tax in the case of corporations; therefore all interest on all Government obligations and interest on War Finance Corpora- tion bonds is free of income tax to corporations. The extent to which such interest was exempt for excess-profits tax purposes prior to January 1, 1921, is shown below.] 727 Tax exemptions of Liberty Bonds and Victory Notes Prior to January 1, 1921. — The appended circular, issued under date of April 23, 1919 [as amended became Art. 80 (a), Reg. 45, Rev., Jan. 28, 1921, 11728], with refer- ence to the tax exemptions of Liberty Bonds and Victory Notes, is published for the information of internal-revenue officers and others concerned. (T. D. 2836, May 7, 1919.) 728 Tax exemptions of Liberty Bonds and Victory Notes. — Liberty bonds and Victory notes issued under authority of the acts of Congress approved April 24, 1917, September 24, 1917, April 4, 1918, July 9, 1918, September 24, 1918, and March 3, 1919, are entitled, respectively, to the exemptions from taxation set forth in said acts, from which the statements in this article are summarized, and to which they are subject. I. 4 per cent and 434 per cent bonds are exempt from all Federal, State and local taxation, except (a) estate or inheritance taxes and (b) Federal income surtaxes and profits taxes, as follows: 1. First Liberty loan converted 4 per cent bonds of 1932-1947 (first 4s). 2. First Liberty loan converted 4J4 per cent bonds of 1932-1947 (first 434s, issue of May 9, 1918). 3. First Liberty loan second con- verted 434 per cent, bonds of 1932-1947 (first 434s, issue of October 24, 1918). 4. Second Liberty loan 4 per cent. bonds of 1927-1942 (second 4s). 5. Second Liberty loan converted 4J4 per cent bonds of 1927-1942 (sec- ond 43^s). 6. Third Liberty loan 434 per cent. bonds of 1928 (third 4^s). 7. Fourth Liberty loan 4)4 per cent. bonds of 1933-1938 (fourth 434s). 8. Victory Liberty loan 4% per cent. convertible gold 'notes of 1922- 1923 (4% per cent Victory notes). Copyright 1922, by Tht Corporation Trust Company: WAR TAX 343 SERVICE are exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority, ex- cept (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as sur- taxes, and excess-profits and war- profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or cor- porations. ! 1-2-22. §320. $ WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. The exemptions in the tabulation that follows, apply to periods prior^to January 1, 1921. For exemptions applying on and after January 1, 1921, see If 1089. [For periods prior to Jan. 1, 1921.] II. 4 per cent and 4J4 per cent Liberty bonds (but not 4% per cent Victory notes) treasury certificates, and war savings certificates are entitled to certain limited exemptions from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war- profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations, in respect to the interest on principal amounts thereof, as follows: (a) $5,000 in the aggregate of first 4s, first 4}4s (issues of May 9 and October 24, 1918), second 4s and 434s, third 434s, fourth 434s, Treasury certificates, and war-savings certificates. (b) 30,000 of first 4j4s (issue of October 24, 1918, only), until the expiration of two years after the termination of the war. (c) 30,000 of fourth 4J4s, until the expiration of two years after the termina- tion of the war. (d) 30,000 in the aggregate of first 4s, first 434s (issues of May 9 and October 24, 1918), second 4s and 434s, third 4J4s, and fourth 434s, as to the interest received on and after January 1, 1919, until the expiration of five years after the termination of the war. (e) 45,000 in the aggregate of first 4s, first 4j4s (issue of May 9, 1918, only), second 4s and 4J4 S , an d third 434 s ? as to the interest received after January 1, 1918, until the expiration of two years after the termin- ation of the war; this exemption conditional on original subscrip- tion to, and continued holding at the date of the tax return of two-thirds as many bonds of the fourth Liberty loan. (f) 20,000 in the aggregate of first 4s, first 434s (issues of May 9, and October 24, 1918), second 4s and 434s, third 434s, and fourth 434s, as to the interest received on and after January 1, 1919; this exemption conditional upon original subscription to, and continued holding at the date of the tax return of one-third as many notes of the Vic- tory Liberty loan, and extending through the life of such notes of the Victory Liberty loan. 160,000 total possible exemptions from Federal income surtaxes and profits taxes, subject to conditions above summarized. III. 3j^ per cent bonds and 3% P er cent notes are exempt from all Federal, State, and local taxation, except estate or inheritance taxes, as follows: First Liberty loan Are exempt, both as to principal and interest, from all taxation (except estate or inheritance taxes) now oi hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority. 2. Zyf such of the several corporations included in the consolidation for the Copyright 1922, by The Corporation Trust Company: WAR TAX 345 SERVICE 1-2-22. . §320. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. taxable year as were affiliated during the prewar period, plus the aggregate of the average net income for each of the corporations not affiliated during the prewar period which were in existence during all of the prewar period or during at least one full year within the prewar period. The net income of a subsidiary corporation organized during the prewar period by an existing corporation shall also be included. See also sections 240 and 330 of the statute and articles 631-638 and 931-934 [for "Reorganizations," beginning at 11837]. (Art. 802, Reg. 45, Rev., Jan. 28, 1921.) [For average prewar income see law 1f547 and 1f687.] 735j Liberty Bond interest exemption, consolidated returns, bonds all being owned by parent corporation. — Receipt is acknowledged of your letter of March 25, 1919, in which you state that the Com- pany is affiliated with various subsidiaries in which the Company owns all the stock directly or owns the stock of the company which does own all the stock of such affiliated company. The Company has on hand an investment in Liberty Bonds amounting to $2,345,000 of the second, third and fourth issues. ^[You inquire if the Company may apportion the Liberty Bonds held by it among its several subsidiaries in order to determine the total exemption allowable for purposes of a con- solidated return. 1fln reply you are advised that in cases of consolidated returns, affiliated corporations are treated as if they were one corporation and the tax is based upon the consolidated income and the consolidated invested capital of these corporations. Whether the parent company owns the bonds or apportions them among its subsidiaries, makes no difference in the amount of exemption allowable in cases where consolidated returns are required, as such exemption is based upon the consolidated condition. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 5, 1919.) 736 Liberty Bond interest exemption, consolidated returns, bonds being owned by each of the affiliated corporations. — Reference is made to your letter dated April 22, 1919, in which you question the validity of a ruling in connection with exemptions to which several affiliated cor- porations included in a consolidated return are entitled on account of their ownership of various issues of Liberty Bonds appearing in a letter from Acting Commissioner J. H. Callan dated April 16, 1919, to The Corporation Trust Company and printed in the War Tax Service, 1919, to the effect that: "Whether each of the subsidiary companies owns the bonds or whether the parent company, or any one of the companies alone, owns the exempt bonds makes no difference in the amount of exemption allowable in cases where consolidated returns are required, as such exemptions are based upon the consolidated condition." 737 Upon further consideration this office rules that each of several affiliated corporations included in a consolidated return under Section 240 of the Revenue Act of 1918 is entitled to the same full benefits under the exemption provisions of the several Liberty Bond Acts to which it would be entitled if not affiliated. (Letter to one of our subscribers, signed # by Commissioner Daniel C. Roper, and dated May 21, 1919.) Copyright 1922, by The Corporation Trust Company. WAR TAX 346 SERVICE .2-2° §325. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. TERMS RELATING TO INVESTED CAPITAL. §325 738 Art. 811. Intangible and Tangible Property— Intangible prop- 549 erty includes patents and good will and other like property. Tan- 550 gible property includes all property other than intangible property. Most contracts are intangible property and in the absence of a specific ruling by the Commissioner to the contrary should be so regarded for the purpose "of making returns. A contract may be treated as tangible property only after the submisssion of a full statement as to its exact nature, showing to the satisfaction of the Commissioner that it relates to rights in tangible property to such an extent that its value arises chiefly therefrom^ Asso- ciated Press, United Press, and similar franchises, and subscription lists and mailing lists, are intangible property. (Art. 811, Reg. 45, Rev., Jan. 28, 1921.) 739 Art. 812. Borrowed Capital: Securities. — Any interest in a cor- 551 poration represented by bonds, debentures, or other securities, Jby 561 whatever name called, including so-called preferred stock, if with respect to the payment of either interest or principal it ranks with or prior to the interest of the general creditors, is borrowed capital and cannot be included in computing invested capital. Any such preferred stock may, however, be so included if it is deferred with respect to the pay- ment of both interest and principal to the interest of the general creditors. (Art. 812, Reg. 45, Rev., Jan. 28, 1921.) 740 Art. 813. Borrowed Capital: Amounts Left in Business. — Whether 551 a given amount paid into or left in the business of a corporation con- 561 stitutes borrowed capital or paid-in surplus is largely a question of fact. Thus, indebtedness to stockholders actually cancelled and left in the business would ordinarily constitute paid-in surplus, while amounts left in the business representing salaries of officers in excess of their actual withdrawals, or deposit accounts in favor of partners in a partnership suc- ceeded by the corporation, will be considered paid-in surplus or. borrowed capital according to the facts of the particular case. The general principle is that if interest is paid or is to be paid on any such amount, or if the stock- holder's or officer's right to repayment of such amount ranks with or before that of the general creditors, the amount so left with the corporation must be considered as borrowed capital and be so treated in computing invested capital. (Art. 813, Reg. 45, Rev., Jan. 28, 1921.) 7 4 1 Interest-bearing one-year loan to corporation by stockholder although all other creditors are preferred, is not "Invested Capital." — Principal stockholder of X. Corporation loans $35,000 to Corporation for one year. In order to protect credit of Corporation, agreement is signed that lender shall be deferred to all other creditors, lender to receive one per cent additional interest in consideration. Can this $35,000 be included in "invested capital" in nature of preferred stock, the interest not being deducted as expense t (Answer.) Your telegram April second. Question answered in negative. (Telegram of inquiry from Bernhard Knollenberg, Richmond, Indiana, and the reply thereto signed by Commissioner Daniel C. Roper, and dated April 4, 1919.) Copyright 1922, by Tk* Corporation Trust Company; WAR TAX 347 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.- 1918 ACT? 25 ' 742 Art. 814. Borrowed Capital: Other Illustrations.— Items such as 651 deposits or amounts due to other banks shown in the balance sheet 561 of a bank, unexpired subscriptions shown in the balance sheet of a publishing concern, etc., are deemed liabilities and can not be in- 1921 ) m C ° mpUtmg invested capital. (Art.^ 814, Reg. 45, Rev., Jan. 28, 743 Art. 815. Inadmissible assets.— Stocks, bonds and other obliga- 552 tions (other than obligations of the United States), the dividends ; or inte rest from which are not required to be included in computing net income, are inadmissible assets even though no such dividends or interest have been actually paid or received during the taxable year. The failure to pay or to receive dividends or interest does not change the status of such securities as^ inadmissible assets. A corporation cannot by including the in- come from inadmissible assets as taxable income create the right to have such assets considered admissible assets. (Art. 815, Reg. 45, Rev., Jan. 28, 744 Federal Reserve Bank Stock held to be an inadmissible asset- Reference is made to office letter to you dated March 11, 1919, in qreply to your letter of February 25, 1919. ^Through an oversight an erron- 'eous ruling was made in the above mentioned office letter, relative to Federal Reserve Bank Stock, in connection with invested capital. IfFederal Reserve Bank Stock, held by a member bank, is held to be an inadmissible asset in determining invested capital for excess profits tax purposes. This ruling will supersede the ruling in Office letter of March 11, 1919. (Letter to The Chase National Bank, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated March 13, 1919.) 745 War Finance Corporation Bonds as admissible and inadmissible assets. — Bonds of the War Finance Corporation, the principal of which does not exceed $5,000, are inadmissible assets. Bonds of the War Finance Corporation, the principal of which exceeds $5,000 are admissible assets. This ruling was issued by the Bureau of Internal Revenue today in response to numerous inquiries as to whether such bonds are admissible or inadmissible assets. 746 "Inadmissible assets" is a term used in the Revenue Act of 1918 to indicate certain assets of a corporation which may not be included in calculating its invested capital. 747 War Finance Corporation bonds are issued under the authority of the Act of April 5, 1918, which provides that the interest on the amount of such bonds, the principal of which does not exceed $5,000 shall be exempt from normal taxes, surtaxes, excess profits and war profits taxes, and that the interest received by a taxpayer, independent of the amount of his holdings, is exempt from normal Federal tax. (Official announcement by the Bureau of Internal Revenue, April 5, 1919.) 748 Art. 816. Inadmissible Assets: Government Bonds. — Obligations 552 of a State or Territory or any municipal or other political subdivision thereof, of the District of Columbia, or of any possession of the United States, and Federal farm loan bonds, not being obligations of the United States within the meaning of the statute, are inadmissible assets. See Section 213(b) of the Statute and Articles 74-82. (Art. 816, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 348 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. 749 Art. 817. Inadmissible Assets: Partial Exception. — (a) Where the 552 income derived froin inadmissible assets consists in part of profit from the disposition thereof, or (b) where all or a part of the interest derived from such assets is in effect included in net income because the interest paid on indebtedness incurred or continued to purchase or carry such assets may not be deducted from gross income, in either case a corres- ponding part of the capital invested in such assets shall be deemed an ad- missible asset. This article applies separately to each issue or class of inad- missible securities held by a corporation. For example, it may hold A com- pany stock costing $100,000 and B company stock costing $200,000- During the year it receives $8,000 in dividends from A company and $5,000 from B company, and on September 30 sells part of its B company stock at a profit of $3,000. For the period from January 1 to September 30, $75,000 of its holdings of B company stock became admissible. After September 30 its remaining holdings of B company stock are inadmissible, but the proceeds of the sale are admissible unless invested in inadmissibles. See articles 852 [for percentage of inadmissible assets, 1f805] and 854 [for computation of average invested capital, 11807]. (Art. 817, Reg. 45, Rev., Jan. 28, 1921.) 750 Art. 818. Admissible Assets. — Admissible assets include all assets 553 other than inadmissible assets. Organization expenses and deferred charges against future income are admissible assets. For all pur- poses of computing invested capital admissible assets must be valued in accordance with the provisions of sections 326 [1[555], 330 [1f575], and 331 [1[579] of the statute and the articles thereunde - . Thus, for example, in- tangible property paid in for stock or shares is an admissible asset, but it cannot be valued at an amount in excess of that at which it may be included in computing invested capital under paragraphs (4) f*H559] and (5) [*|560] of section 326(a). (Art. 818, Reg. 45, Rev., Jan. 28, 1921.) INVESTED CAPITAL. §326 751 Art. 831. Meaning of Invested Capital. — Invested capital within 555 the meaning of the statute is the capital actually paid in to the cor- poration by the stockholders, including the surplus and undivided profits, and is not based upon the present net worth of the assets, as shown by an appraisal or in any other manner. The basis or starting point in the computation of invested capital is found in the amount of cash and other property paid in, the valuation at which such other property may be included being determined in accordance with the statute and the regulations. The computation does not stop, however, w T ith such original entries or amounts, but also takes into account the surplus and undivided profits of prior years left in the business. The invested capital of a corporation includes, generally speaking, (a) the cash paid in for stock, (b) the tangible property paid in for stock, (c) the surplus and undivided profits, and (d) the intangible property paid in for stock (to a limited amount), less, however, the same proportion of such aggregate sum as the amount of inadmissible assets bears to the amount of the admissible assets and the inadmissible assets held during the taxable year. Invested capital does not included borrowed capital. See section 325 of the statute and articles 811-818 [for terms relating to invested capital, beginning at 11738]. The fair market value of the assets as of March 1 , 1913, has no bearing on invested capital. (Art. 831, Reg. 45, Rev., Jan. 28, 1921.) [See 1f865 and 1(889.] Copyright 1922, by The Corporation Trust Company. WAR TAX 349 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. 762 Original issue stock sold at par on commission in relation to invested capital. — [Comment: The special ruling which appeared here, under the above heading, in the 1920 Service, was superseded by a special ruling which was reproduced at ^[870 in that Service. Such later ruling, holding that reasonable commissions or other forms of compensation law- fully paid by a corporation for sale of its capital stock are not to be deducted in computing invested capital, appears as 11-19-391: T. B. R. 40 under Section 326, Article 831, in the subjoined supplement containing the Bureau Rulings. — The Corporation Trust Company.] 763 Art. 832. Cash paid in: Bonus stock. — Capital stock issued as a 556 bonus in connection with the sale of a corporation's bonds may not be included in invested capital unless the corporation proves to the satisfaction of the Commissioner that such stock bonus enabled the corporation to secure a higher price for the bonds than it could otherwise have secured. Wherever this fact is established such stock shall be in- cluded in computing invested capital to the extent of the difference be- tween the selling price of the bonds and the price at which they could have been sold if issued without such stock bonus. The excess of the face value of such bonds over the price at which they could have been sold if issued without the stock bonus is deemed discount and is subject to amortization. See Article 39. (Art. 832, Reg. 45, Rev., Jan. 28, 1921.) 764 Art. 833. Tangible Property Paid in: Evidences of Indebtedness. 557 — Enforcible notes or other evidences of indebtedness, either interest- bearing or non-interest bearing, of the subscriber received by a corporation upon a subscription for stock may be considered as tangible property in computing its invested capital to the extent of the actual cash value of such notes or other evidences of indebtedness at the time when paid in, but only (a) if such notes or evidences of indebtedness could under the laws of the jurisdiction in which the corporation was organized legally be received in payment for stock, and (b) if they were actually received by the corporation as absolute, and not as conditional, payment in whole or in part of the stock subscription. (Art. 833, Reg. 45, Rev., Jan. 28, 1921.) 755 Art. 834. Tangible Property Paid in: Inadmissible Assets.— 557 Stocks, bonds and other obligations (other than obligations of the United States), the dividends or interest from which are not in- cluded in computing net income, when bona fide paid in for stock or shares may like other tangible property be included in computing the invested capital of the corporation at their actual cash value when paid in. For the purpose of the reduction required in articles 852 [*[805] and 854 [?807] however, account must be taken of such assets in the same manner as of any other inadmissible assets. (Art. 834, Reg. 45, Rev., Jan. 28, 1921.) 756 Art. 835. Tangible Property Paid in: Mixture of Tangible and In- 557 tangible Property. — Where stock or shares and bonds or other obligations have been issued for a mixed aggregate of tangible and intangible property, it will be presumed in the absence of satisfactory evidence to the contrary that the bonds were issued for tangible property and that^tht stock was issued for the balance of the tangible property, if Copyright 1922, by The Corporation Trust Company. WAR TAX 350 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. any, and for the intangible property. Where stock or shares have been issued for a mixed aggregate of tangible and intangible property and certain liabilities have been assumed in connection with the transaction, it will be presumed that such liabilities are to be charged against the tangible property and the intangible property in the order named, unless it is shown by evidence satis- factory to the Commissioner that this presumption is not in accordance with the facts. See further section 327 (c) [law 1(568] of the statute [and regulations H831]. (Art. 835, Reg. 45, Rev., Jan. 28, 1921.) 757 Art. 836. Tangible Property Paid in : Value in Excess of Par Value 557 of Stock. — Evidence offered to support a claim for a paid-in surplus must be as of the date of the payment, and may consist among other things of (a) an appraisal of the property by disinterested authorities made on or about the date of the transaction; (b) certification of the assessed value in the case of real estate; and (c) proof of a market price in excess of the par value of the stock or shares. The additional value allowed in any case is confined to the value definitely known or accurately ascertainable at the time of the payment. No claim will be allowed for a paid-in surplus in a case in which the additional value has been developed or ascertained subse- quently to the date on which the property was paid in to the corporation, or in respect of property which the stockholders or their agents on or shortly before the date of such payment acquired at a bargain price, as for instance, at a receiver's sale. Generally, allowable claims under this article will arise out of transactions in which there has been no substantial change of beneficial interest in the property paid in to the corporation, and in all cases the proof of value must be clear and explicit. (Art. 836, Reg. 45, Rev., Jan. 28, 1921.) 758 Tangible property paid in: Value in excess of par value of stock. — Reference is made to your letter of March 3, 1919, in regard to the Coal Company, , Kentucky, and it is noted that you desire a ruling as to the following facts: Mr. secured a lease on a coal mine near , Kentucky. It appeared that from the development and geographical condition of the country that the amount of coal this mine would produce would not exceed 500,000 tons. The Coal Company was organized with a capital stock of $75,000 and the lease secured by Mr. was transferred to the corporation. Subsequent developments have proven that the mine will produce approxi- mately 2,000,000 tons of coal. At the time of organization, the company was capitalized on the basis of the value of the coal known to be contained in the property. The company, therefore, desires to include in invested capital the increase in value of the property due to the discovery of the extraordinary large deposits of coal. In this connection your attention is called to Art. 836 [1(757] of Reg. No. 45. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, dated March 11, 1919.) 759 Depreciation of tangible property, added to invested capital "as paid-in surplus, to be reflected in adjustment of earned surplus or undivided profits. — Reference is made to your letter of March 18th, relative to paid-in surplus representing value of property in excess of the consideration paid therefor, fin reply you are informed that paid-in surplus representing tangible property need not be reduced by reason of depreciation of the property in question. All adjustments necessary on account of in- adequate or excessive depreciation si ould be made in connection^with^earned Copyright 1922, by Tk* Corporation Trust Company. WAR TAX 35 1 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. surplus or undivided profits. ^Therefore, if a corporation is properly entitled to add to its invested capital in the form of paid-in surplus an amount re- presenting excess in value of property, over the consideration paid therefor, either under Article 63 of Regulations No. 41, relative to the Revenue Act of 1917, pr under Articles 836 [1J757] and 837 [1f760] of Regulations No. 45, relative to the Revenue Act of 1918, such paid-in surplus need not be reduced on account of depreciation of the property on which the excess value is claimed. Kit should be borne in mind, however, that while paid-in surplus as indicated above, need not be reduced on account of depreciation, such adjustment must be made in earned surplus or undivided profits, and the computation must be based not on the cash paid or stock issued for the property but on its actual value at the time acquired for the purpose of com- puting the allowable addition to paid-in surplus. (Letter to Leslie, Banks &^Company, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated April 14, 1919.) 760 Art. 837. Surplus and Undivided Profits: Paid-in Surplus. — 558 Where it is shown by evidence satisfactory to the Commissioner that tangible property has been paid in by a stockholder to a cor- poration as a gift or at a value definitely known or accurately ascertain- able as of the date of such payment clearly and substantially in excess of the cash or other consideration paid by the corporation therefor, then the amount of the excess shall be deemed to be paid-in surplus. Substantially the same kind of evidence will be required under this article as under article 836 [1f757], See further article 813 [for amounts left in business by stock- holders, as invested capital or borrowed capital, 1(740]. (Art. 837, Reg. 45, Rev., Jan. 28, 1921.) 761 Art. 838. Surplus and Undivided Profits: Earned Surplus. — Only 558 true earned surplus and undivided profits can be included in the computation of invested capital, and if for any reason the books do not properly reflect the true surplus such adjustments must be made as are necessary in order to arrive at the correct amount. In the computation of earned surplus and undivided profits full recognition must first be given to all expenses incurred and losses sustained from the original organization of the corporation down to the taxable year, including among such expenses and losses reasonable allowances for depreciation, obsolescence, or depletion of property (irrespective of the manner in which such property was originally acquired), and for the amortization of any discount on its bonds. There can, of course, be no earned surplus or undivided profits until any deficit or impair- ment of paid-in capital due to depletion, depreciation, expense, losses, or any other cause has been made good. Where adequate evidence is presented that the amounts written off or deducted in previous returns of net income are in the aggregate incorrect or unreasonable, adjustments must be made, and, if'not barred by the statute of limitations, the taxpayer will be allowed a refund in respect of any taxes overpaid in prior years, or in the case of an underpayment of taxes will be additionally assessed. (Art. 838, Reg. 45, Rev., Jan. 28, 1921.) 762 Art. 839. Surplus and Undivided Profits: Allowance for Depletion 558 and Depreciation. — Depletion, like depreciation, must be recog- nized in all cases in which it occurs. Depletion attaches to each unit of mineral or other property removed, and the denial of a deduction Copyright 1922, by The Corporation Trust Company. WAR TAX 352 SERVICE 1-2-22. §32e. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. in computing net income under the Act of August 5, 1909. or the limitation upon the amount of the deduction allowed under the Act of October 3, 1913, does not relieve the corporation of its obligation to make proper provision for depletion of its property in computing its surplus and undivided profits. Adjustments in respect of depreciation or depletion in prior years will be made or permitted only upon the basis of affirmative evidence that as at the begin- ning of the taxable year the amount of depreciation or depletion written oE in prior years was insufficient or excessive, as the case may be. Where deduc- tions for depreciation or depletion have either on the books of the corporation or in its returns of net income been included in the past in expense or other accounts, rather than specifically as depreciation or depletion, or where capital expenditures have been charged to expense in lieu of depreciation or depletion, a statement indicating the extent to which this practice has been carried should accompany the return. (Art. 839, Reg. 45, Rev., Jan. 28, 1921.) [In connection with the foregoing read at If 877.] 763 Allowance for amortization under the Munitions Manufacturer's Tax Law will not affect computation of invested capital for taxable year 1918. — Reference is made to your letter in which you request a ruling on behalf of your client, with regard to whether amounts deducted as allow- ances for amortization on munitions tax returns for 1916 and 1917 should be included in the computation of invested capital for 1918, or should be made the subject of adjustments in the nature of deductions from invested capital. Tfln reply you are advised that the Munition Manufacturer's tax was laid "upon the entire net profits actually received or accrued," from the sale or disposition of specific munitions, and it was provided in Section 302 "That in computing net profits under the provisions of this title, for the purpose of the tax there shall be allowed as deductions from the gross amount received or accrued for the taxable year from the sale or disposition of such articles manufactured within the United States, the following items: * * * (f) A reasonable allowance according to the conditions peculiar to each concern, for amortization of the values of building and machinery, account being taken of the exceptional depreciation of special plants." 5flt is ap- parent from this language that the amortization allowance in question was authorized for the purpose of computing "net profits," not net "income." The right to make a deduction for amortization in computing net income for the income tax did not exist and was repeatedly denied by the Bureau prior to the passage of the Revenue Act of 1918. It is to be noted further that the taxes imposed by Title II of the Revenue Act of 1917 and Title III of the Revenue Act of 1918 were explicitly laid upon "net income," and were in a variety of ways impressed with the stamp and character of an income rather than a munition manufacturer's tax. They are in no sense mere continu- ations or expansions of the tax imposed by Title III of the Revenue Act of 1916. It follows, therefore, that the deduction for amortization under the Munition Manufacturer's Tax law was not allowed for income tax purposes and should not now be permitted to affect the surplus or any other element entering into the "invested capital" employed for purposes of the war- profits and excess-profits taxes. ^fThis conclusion is supported by the char- acter of the amortization allowance in question. It was in many respects quite dissimilar from the depreciation and depletion allowances. It was not based upon the fact that plant and equipment acquired in the year 1916 or earlier for the manufacture of munitions, actually depreciated in use or market value during the taxable year 1916. There was in general no such depreci- ation in value or impairment of useful life. Account was taken "of the Copyright 1922, by The Corporation Trust Company. WAR TAX 353 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. exceptional depreciation of special plants" but the principal allowance was "for the amortization of the values of buildings and machinery," whether those values increased or decreased in the immediate future. The principal amortization allowance looked to the establishment of a special fund to re- coup exceptional war costs when war uses had ceased; it did not imply that there had been or would be any immediate impairment of physical assets, iuch as is covered by the depletion allowance, or any immediate exhaustion, wear, tear or obsolescence in excess of the amount covered by the deprecia- tion allowance. It was, as stated, a special allowance peculiar to this tax, designed possibly to moderate the (then) exceptionally high rates, of the Munition Manufacturer's Tax. ^Reference has been made in this con- nection to the wording of Section 214 (a) (9) and Section 234 (a) (8) authoriz- ing a deduction for amortization under the Revenue Act of 1918; but upon careful examination these paragraphs are found to have no bearing upon the present case. \lt is held, therefore, that the amount deducted as an allow- ance for amortization under the Munitions Manufacturer's Tax Law will not affect the computation of invested capital for the taxable year 1918. (Letter to a subscriber, signed by Commissioner Daniel C. Roper, and dated August 13, 1919.) 764 Art. 840. Surplus and Undivided Profits: Additions to Surplus 558 Account. — A corporation's books of account will be presumed to show the facts. If it claims that its capital or surplus account is under- stated the burden of proof will rest upon it. Additions to such accounts will be accepted to the following extent: 765 (1) Excessive depreciation heretofore charged off on property still owned and in use, if it is now shown by satisfactory proof to have been excessive and such excess is substantial in amount, whether or not dis- allowed by the Commissioner as a deduction from net income, may be restored to the surplus account. No such amount shall be restored, however, unless it is shown that adequate depreciation has been deducted upon all other property of the corporation still in use, nor in any case in which such amount has been allowed as a deduction for amortization under section 234 (a) (8) of the statute, or in which the cost of the property has been recovered through being included in the price of goods or services, as for example, in the case of patterns, dies, plates, special tools, etc., or under a munition contract with a foreign government. 766 (2) Amounts which have been expended before January 1, 1917, for the acquisition of plant, equipment, tools, patterns, furniture, fixtures, or like tangible property, having a useful life extending substantially beyond the year in which the expenditure was made, and which have been charged as current expense, may (less proper deductions for depreciation or obsolescence) be added to the surplus account when such assets are still owned and in active use by the corporation during the taxable year. Special tools, patterns, and similar assets shall not be assigned any value if their cost has been recovered through having been included in the price of goods. If their cost has not been so recovered and they are held for only occasional use, they shall not be assigned a value in excess of the fair value based upon the earnings actually arising from their current use, and in no case shall such value be more than the cost less depreciation. Assets of this kind not in current use shall not be valued at more than their nominal or scrap value. 767 (3) Amounts which have been expended in the past for intangible property of any kind can be restored to capital or surplus account only to the extent that the corporation specifically paid such amounts for Copyright 1922, by The Corporation Trust Company. WAR TAX 354 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. the intangible property as such. For provisions relating to patents see article 843. 768] (4) Adjustments necessary to correct other errors found in the books of account may be made. But see the following article. (Art. 840, Reg. 45, Rev., Jan. 28, 1921.) 769 Art. 841. Surplus and Undivided Profits: Limitation of Additions 558 to Surplus Account. — Additions to surplus which a corporation may desire to make under the preceding article fall broadly into two classes : 770 (1) To correct returns of net income for prior years in which actual errors have been made, as for example where excessive depreciation has been deducted, additions to plant and equipment or other capital charges have been charged off as an expense, inventories have been taken upon a wrong basis of valuation, etc 771 (2) To reinstate in surplus deductions from income which are as a matter of good accounting to some extent optional, such as experi- mental expenses, patent litigation, development of good will through advertis- ing or otherwise, etc. ]See 1J926.] 772 Adjustments falling in class (1) will be permitted for all years whether before or after March 1, 1913, provided amended returns of net in- come are filed for each year in which an erroneous return has been made. Due consideration will be given to the assessment of penalties in any case in which a fraudulent return has been made. Adjustments falling in class (2) cannot be permitted, as in such cases it is considered that the corporation has exercised a binding option in deducting such expenses from income. An election of this sort which was made concurrently with the transaction cannot now be revised, and amended returns in respect thereof cannot be accepted. The corporation shall submit whh its return a statement of the additions proposed, specifying the kinds and amounts of property involved, the years in which the expenditures were made, and the method followed in distinguishing between capital outlays and current expenses, and showing that adequate provision has been made for depreciation, obsolescence and depletion of such of the assets affected by the additions as are subject to recognized depreciation, obsolescence or depletion. In any case in which there is an operating deficit amounts restored must first be set off against the deficit and only the excess can be actually included in the computation of invested capital (Art. 841, Reg. 45, Rev., Jan. 28, 1921.) [See U"926j 773 Art. 842. Surplus and Undivided Profits: Property Paid in and Subsequently Written off. — Where tangible or intangible property has been paid in to a corporation for stock or shares or as paid-in surplus and has subsequently been in whole or in part written off the books, the amount so written off may upon evidence satisfactory to the Commissioner be restored to the capita! or surplus account subject to the following limita- tions : 774 (1) The amount restored must be reduced by a proper deduction for any depreciation, obsolescence, or depletion; and 775 (2) The aggregate amount included in computing invested capital on account of such property shall not exceed the amount which might have been included if such property had not been written off. (Art. 842, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 355 SERVICE 1-2-22. §326. WAR-PROFITS AND FXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. 776 Art. 843. Surplus and Undivided Profits: Patents. — From the 558 standpoint of assets a patent, or more particularly a group of patents, is closely analogous to good will. Their value is contingent upon and measured by their earning power. While patents have a definite life, there is a common tendency to extend that life by improvements upon the original, and in a successful business the patent value merges more or less completely into a trade name or other form of good will. Therefore, while deductions in respect to the depreciation of patents based upon a normal life period of seventeen years are allowable in computing net income for the purpose of the income tax, such deductions are not obligatory, but are optional with each taxpayer. Where since January 1, 1909, a corporation has exercised that option to its own benefit in computing its taxable net income the amount so deducted can not now be restored in computing invested capital. Where, however, the cost of patents has been charged against surplus or otherwise disposed of in such a manner as not to benefit the corporation in computing its taxable net income since January 1, 1909, any amount so written off may be restored in computing invested capital, if it be shown to the satisfaction of the Commissioner that the amount so written off repre- sented a mere book entry ascribable to a conservative policy of manage- ment or accounting and did not represent a realized shrinkage in the value of such assets. Any amount so restored may not be written off by way of deductions from taxable net income in any subsequent year or years. Where a corporation has charged to current expenses the cost of developing or protecting patents, no amount in respect thereof expended since January 1, 1909, can be restored in computing invested capital. In respect of expendi- tures made before January 1, 1909, a corporation now seeking to restore them must be prepared to show to the satisfaction of the Commissioner that all such items are proper capital expenditures. It can not be said that the correct computation of surplus and undivided profits necessarily requires a deduction in respect of the expiration of patents. It follows, therefore, that where a corporation in the exercise of its option has not written down the cost of patents, it is not ordinarily necessary to reduce the surplus and un- divided profits in computing invested capital, whether the patents have been acquired for stock or shares or for cash or other tangible property. Due consideration will be given to the facts in any case in which this rule seems obviously unreasonable. See article 167. (Art. 843, Reg. 45, Rev., Jan. 28, 1921.) 777 Blank. 778 Art. 844. Surplus and Undivided Profits : Reserve for Depreciation 558 or Depletion. — If any reserves for depreciation or for depletion are included in the surplus account it should be analyzed so as to separate such reserves and leave only real surplus. Reserves for depreciation or depletion can not be included in the computation of invested capital, except to the following extent: 779 (1) Excessive depletion or depreciation included therein and which if charged oft could be restored under article 840 [1j764] may be included in the computation of invested capital; and 780 (2) Where depreciation or depletion is computed on the value as of March 1, 1913, or as of any subsequent date, the proportion of depreciation or depletion representing the realization of appreciation of Copyright 1922, by The Corporation Trust Company. WAR TAX 356 SERVICE 1 2 22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.- -1918 ACT. value at March L 1913, or such subsequent date, may if undistributed and used or employed in the business be treated as surplus and included in the computation of invested capital. 781 For the purpose of computing invested capital depreciation or depletion computed on the value as of March 1, 1913, or as of any subsequent date shall, if such value exceeded cost, be deemed a pro rata realization of cost and appreciation and be apportioned accordingly. Ex- cept as above provided value appreciation (even though evidenced by an appraisal) which has not been actually realized and in respect of amounts accrued since March 1, 1913, reported as income for the purpose of the income tax, can not be included in the computation of invested capital, and if already reflected in the surplus account it must be deducted therefrom. (Art. 844, Reg. 45, Rev., Jan. 28, 1921.) 78a Art. 845. Surplus and Undivided Profits: Reserve for Income and 558 Excess Profits Taxes. — For the purpose of computing invested capi- tal federal income and war profits and excess profits taxes are deemed to have been paid out of the net income of the taxable year for which they are levied. It is immaterial, therefore, whether reserves for the payment of such taxes for the preceding year have been set up or not, or if set up whether such taxes when paid have actually been charged against such reserves. Amounts payable on account of such taxes for the preceding year may be included in the computation of invested capital only until such taxes become due and payable. A deduction from the invested capital as of the beginning of the taxable year must therefore be made for such taxes or any installment thereof, averaged for the proportionate part of the taxable year after date when the tax or the installment is due and payable Where as a result of an audit by the Commissioner, or the acceptance of an amended return, or for any other reason, the amount of any such tax for the preceding year is subsequently changed, a corresponding adjust- ment will be made in the invested capital for the taxable year upon the same basis as if the corrected amount of the tax for the preceding year had been used in the original computation of the invested capital for the taxable year. (Art. 845, Reg. 45, Rev., Jan. 28, 1921.) 783 Art. 845 (a). Surplus and undivided profits: Reserve for 1918 income and excess profits taxes of corporations having a fiscal year. — In case of corporations having a fiscal year, the Federal income and profits taxes for the taxable year 1918 shall, for the purpose of computing invested capital for the taxable year 1919 be deemed to become due and payable as follows: (a) As to such amounts as became due and payable prior to February 25, 1919, under the provisions of Section 14 (a), Revenue Act of 1916, such law shall govern; (b) in all other respects the provisions of Section 250 of the Revenue Act of 1918 shall govern except that the installments which would become due prior to February 25, 1919, shall be deemed to become due and payable on that date; (c) Any amounts which became due and payable under said Section 14 (a) prior to February 25 shall, so far as possible, be deemed to cancel earlier installments payable under said section 250. For example, a corporation whose fiscal year ended August 31, 1918, is assessed a total income and profits tax under the 1917 law of $250,000 and an additional tax under the 1918 law of $110,000. The total tax of $360,000 would, for the purpose of computing invested capital, be deemed to become due and payable as follows: February 12, 1919, Copyright 1922, by Tht Corporation Trust Company, WAR TAX . ; 357 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.- 1918 ACT. $250,000; May 15, 1919, $20,000; August 15, 1919, $90,000. If, assuming the same taxes, the fiscal year ended September 30, 1918, the total tax would for the purpose of computing invested capital, be deemed to become due and payable as follows: February 25, 1919, $90,000; March 15, 1919, $90,000; June 15, 1919, $90,000; September 15, 1919, $90,000. The provisions of this article apply solely for the purpose of computing invested capital and do not affect the provisions of T. D. 2797 in regard to the time and manner of paying taxes where corporations have filed returns for fiscal years ending in 1918. (Art. 845 (a), Reg. 45, Rev., Jan. 28, 1921.) 784 Blank. 785 Installment due-and-payable dates govern in apportioning reserves for taxes for invested capital purposes. — "Tfln the preparation of 1919 corporation tax returns we would like to know if we will be permitted in the computation of invested capital under schedule "H," Form 1120, to compute our taxes as having been paid in quarterly installments, or, will we be forced to deduct from invested capital the full amount of taxes paid on the date remitted to the collector?" 786 In reply you are advised that the date when the 1918 taxes were actually paid has no bearing on the computation of the invested capital of the corporation for the year 1919, inasmuch as the controlling factor is the date when such taxes were "due and payable," and not the date when they were actually paid. In other words, the amount of each installment of the tax for 1918 will remain a part of tiie invested capital for 1919 until such installment is due and payable, and when such install- ment is due, an adjustment should be made in the nature of a deduction from invested capital under Schedule H (d), on page 5, of Form 1120-A. (Letter to Simon Bros., Ltd., Alexandria, La., signed by P. S. Talbert, Acting Assistant to the Commissioner, by C. R. Trobridge, Acting Head of Divi- sion, and dated September 22, 1919, made available through the courtesy of Cox and Flournoy, Alexandria, La.) 787 Art. 846. Surplus and undivided profits: Insurance on officers. — 558 Where insurance is carried by the corporation on the life of an officer or employee, the policy may be included as an admissible asset and reflected in the surplus account at the cash surrender value as of the begin- ning of the taxable year. The whole amount of premiums paid on such insurance can not be included in surplus, but the surplus will be considered as increased as of the beginning of each taxable year by the amount added to the cash surrender value of the policy. (Art. 846, Reg. 45, Rev., Jan. 28, 1921.) 788 Art. 847. Surplus and undivided profits: Property taken for debt 558 or in exchange. — Real or personal property taken by a corporation in payment or satisfaction of a debt, or property received in exchange for other property, will be an admissible asset at its fair market value upon receipt. The profit or loss, if any, resulting from the transaction will not be reflected in invested capital until the succeeding taxable year. But see as^to the foreclosure of a mortgage article 153. See also section 202 of the statute and articles 1561-1570. (Art. 847, Reg. 45, Rev., Jan 28, 1921.) 789 Blank. Copyright 1922, by The Corporation T rust Company. WAR TAX 358 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. 700 Art. 848. Surplus and undivided profits : Discount on sale of bonds. 558 — Discount allowed on the sale of bonds is in effect an advance on account of interest, so that the effective rate of interest in such a case is equal to the sum of the nominal rate plus the rate necessary to amortize the discount over the life of the bonds. Where, under incorrect accounting practices, the discount on bonds has been charged to a property account or otherwise carried as an asset, and is so reflected in the surplus account, it is necessary in computing invested capital to make an adjustment in respect of such discount. See article 563. (Art. 848, Reg. 45, Rev., Jan. 28, 1921.) 781 Art. 849. Surplus and undivided profits: Miscellaneous.— Only 558 the amount of discount which has actually been reported by a bank in a prior year as taxable income and credited to surplus account may be included in surplus as of the beginning of the taxable year. For the treatment of surplus arising out of sales on the installment plan see articles 42-46, and from compensation for property lost, damaged, or con- demned, see articles 49 and 50. (Art. 849, Reg. 45, Rev., Jan. 28, 1921.) 792 to 302 Blank. 803 Art. 850. Surplus and Undivided Profits: Current Profits.— Profits 558 earned during any year can not be included in the computation of invested capital for that year, even though during the year such profits are set up as surplus on the books or assumed to be distributed in the form of stock dividends. If a dividend is declared and paid during any year out of the profits of that year and the stockholders pay back into the corporation all or a substantial part of the amount of such dividends, the amount so paid back can not be included in the computation of invested capital unless the corporation shows by evidence satisfactory to the Commis- sioner that the dividends were paid in good faith and without any understand- ing, express or implied, that thev were to be paid back. (Art. 850, Reg. 45, Rev., Jan. 28, 1921.) 804 Art. 851. Intangible Property Paid In. — The actual cash value of 559 intangible property paid in for stock or shares must be determined 560 in the light of the facts in each case. Among the factors to be con- s : dered are (a) the earnings attributable to such intangible assets while in the hands of the predecessor owner; (b) the earnings of the cor- poration attributable to the intangible assets after the date of their acquisi- tion; (c) representative sales of the stock of the corporation at or about the date of the acquisition of the intangible assets; and (d) any cash offers for the purchase of the business, including the intangible property, at or about the time of its acquisition. A corporation claiming a value for intangible property paid in for stock or shares should file with its return a full state- ment of the facts relating to such valuation. See also article 835 [for mix- ture of tangible and intangible property paid in, If 756]. (Art. 851, Reg. 45, Rev., Jan. 28, 1921.) 805 Art. 852. Percentage of Inadmissible Assets. — For the purpose of 562 ascertaining the deductible percentage the amount of inadmissible assets held during the year may ordinarily be determined by dividing by two the sum of the amount of such assets held at the beginning of the year and the amount held at the end of the year. The total amount of ad- Copyright 1922, by The Corporation Trust Company. WAR TAX 359 SERVICE 1-2-22. §32fi WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. missibleand in admissible assets held during the year may ordinarily be de- termined by dividing by two the sum of the amount of such assets held at the beginning of the year and the amount at the end of the year. If at any time a substantial change has taken place either in the amount of inadmissible assets or in the total amount of admissible and inadmiss'ble assets, the effect of such change shall be averaged exactly from the date on which it occurred. In any case where the Commissioner finds that either amount determined as above provided does not substantially reflect the aver- age situation throughout the year, and that the amount of each kind of as- sets held on a given day of each month throughout the year or at more fre- quent regular intervals can be determined, the amount of inadmissible assets and the amount of both kinds of assets held during the year shall be de- termined by averaging the amounts held at such several times. In making the computations under this article the valuation at which each asset is carried shall be adjusted in accordance with the provisions of the statute and of the regulations relating to the valuation of assets for the purpose of computing invested capital, including in such adjustment the amount of reserves for depreciation, depletion, amortization and other reserves which represent the valuation of assets. It is immaterial whether any asset was acquired out of invested capital or out of profits earned during the year or borrowed capital. (Art. 852, Reg. 45, Rev., Jan. 28, 1921.) 806 Art. 853. Changes in Invested Capital During Year. — The invested 563 capital as of the beginning of any period of one year or less should be adjusted by an appropriate addition or deduction for each change in invested capital during the period. The amount so added or deducted in each case is the amount of the change averaged for the time remaining in the period during which it is in effect. The fraction used in finding such average is the number of days remaining in the period (including the day on which the change occurs) over the number of days in the period. Thus if a return is made for the calendar year ending December 31, 1918, and if $100,000 of additional capital was paid in on February 17, 1918, this addi- tion to invested capital is in effect for 318 days, and the amount to be added to the invested capital as of the beginning of the year would be 318/365 of $100,000, or $87,123.29. If $50,000 of this amount was withdrawn cn October 31, 1918, the amount to be deducted would be 62/365 of $50,000, or $8,493.15. (Art. 853, Reg. 45, Rev., Jan. 28, 1921.) 807 Art. 854. Computation of Average Invested Capital. — For the pur- pose of computing invested capital for any period of one year or less each corporation shall add together its paid-in capital and its paid-in or earned surplus and undivided profits (under whatever name it may be called) as shown by its books at the beginning of the period. The total so obtained shall be adjusted (a) for any property paid in, or for any asset reflected in surplus and undivided profits, which is not carried on the books at the valuation prescribed by the statute or by the regulations, and (b) for any changes in paid-in capital or in paid-in or earned surplus and undivided profits (not including surplus and undivided profits earned during the period) occurring during the period, averaged for the time for which such changes are effective. See article 853 [for changes in invested capital during year, ^[806]. The total so obtained and adjusted is the average invested capital for the period, unless the corporation at any time during the period held any Copyright 1922, by Tht Corporation Trust Company: WAR TAX 360 SERVICE 1-2-22. 5326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1913 ACT. inadmissible assets, in which case such total must be reduced by a percentage thereof equal to the percentage which the amount of inadmissible assets held during the period is of the total amount of admissible and inadmissible assets held during the period. See article 852 [1(805]. The invested capital for any year during the prewar period is determined in the same manner as for the taxable year. The invested capital can not be determined by adding the amounts of the assets of a corporation. |.(Art. 854. Reg. 45, Rev., Jan. 28, 1921.) 808 Art. 855. Invested Capital for Full Year or Less. — In the case of a corporation making a return for a full year of 12 months, its in- vested capital for the year is the average invested capital for the year. In the case of a corporation making a return for a fractional part of a year, its invested capital for such period is the same fractional part of the average invested capital for such period, except that for the purpose of section 311 (a) (2) [computation of war-profits credit, 1(532] of the statute it is the full average invested capital for the period. In computing the tax under a return for a fractional part of a period the same purpose may sometimes be more readily effected by using the full average invested capital and taking a fractional part of the result, as in schedule III of form 1120, used for 1918. In schedule IV of the same form, however, the fractional part of the full average invested capital for the period should be used. See articles 720 [for illustration of computation, 1(634] and 853 [for changes in invested capital during year, 1(806]. (Art. 855, Reg. 45, Rev., Jan. 28, 1921.) 809 Art. 856. Illustration of Invested Capital for Fractional Part of Year. — A corporation was organized July 1, 1918, and makes a return for the six months ending December 31, 1918. The invested capital consists of $100,000 paid in on July 1 and $100,000 paid in on October 1. The average invested capital for such period would be $100,000 plus 92/184 (not 92/365) of $100,000, or $50,000, a total of $150,000. The invested capital for the period for the purpose of the tax would, however, be 6/12 of $150,000, or $75,000. But see section 311 (a) (2) of the statute [for computation of war- profits credit, 1(532]. (Art. 856, Reg. 45, Rev., Jan. 28, 1921.) 810 Art. 857. Method of Determining Available Net Income. — 558 Whether at the time of any payment made during the taxable year there is sufficient income of the taxable year available for such pay- ment, or whether the surplus or undivided profits as of the beginning of the taxable year must be reduced by the amount of such payment shall be determined according to the following principles: 811 (1) The aggregate amount of earnings of the taxable year avail- able for all purposes up to any given date will be determined upon the basis of the same proportion of the net income for the taxable year (as finally determined for the purpose of income and war profits and excess profits taxes) as the part of the year already elapsed is of the entire year (determined in the manner provided in article 853 [1(806]), unless the cor- poration shows from its books or other records that a greater proportion of its earnings for the year was available on such date. 812 (2) The aggregate amount available will be deemed to be applied for the following purposes in the order in which they are stated: (a) accrued federal income and war profits and excess profits taxes for the Copyright 1922, by The Corporation Trust Company. WAR TAX 361 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. taxable year (see article 845 [1J782]), and (b) dividends paid after the expira- tion of the first sixty days of the taxable year (see section 201 of the statute [law 1|505] and article 1541 [Income Tax Service]) and other corporate pur- poses, including the purchase of outstanding stock of the corporation pre- viously issued (see article 862 [1|817]). In any case where the above computa- tion would be indeterminate because of the effect of the provisions of this article upon the invested capital for the year, the amount of such invested capital for the purpose of this computation may be deemed to be the invested capital as of the beginning of the taxable year, plus any additional capital paid in during such year and minus any specific withdrawal or liquidation of capital during such year. (Art. 857, Reg. 45, Rev., Jan. 28, 1921.) 813 Art. 858. Effect of Ordinary Dividend, — A dividend other than a 558 stock dividend affects tfre computation of invested capital from the date when the dividend is payable and not from the date when it is declared, except that where no date is set for its payment the date when declared will be considered also the date when payable for the purpose of this article. For the purpose of computing invested capital a dividend paid after the expiration of the first sixty days of the taxable year will be deemed to be paid out of the net income of the taxable year to the extent of the net income available for such purpose on the date when it is payable. See article 857. [1[810]. The surplus and undivided profits as of the beginning of the tax- able year will be reduced as of the date when the dividend is payable by the entire amount of any dividend paid during the first sixty days of the taxable year and by the amount of any other dividend in excess of the current net income available for its payment. In the case of a dividend paid during the first sixty days of a taxable year which exceeds in amount the surplus and undivided profits as of the beginning of the taxable year the excess will be deemed to be paid out of earnings of the taxable year available at the date when the dividend is payable, and to the extent that such earnings are insuf- ficient it will be deemed to be a liquidation of paid-in capital or surplus. From the date when any dividend is payable the amount which the several stockholders are entitled to receive will be treated as if actually paid to them, whether or not it is so paid in fact, and the surplus and undivided profits, either of the taxable year or of the preceding years, will in accordance with the foregoing provisions be deemed to be reduced as of that date by the full amount of the dividend. Amounts paid to stockholders in anticipation of dividends, or amounts withdrawn by stockholders in excess of dividends declared, will in computing invested capital have the same effect as if actually paid as dividends. See also article 813 [for amounts left in business by stock- holders, 1f740], and see generally section 201 [for dividends, ^[505] and articles 1541-1549 [for taxable status of dividends generally]. (Art. 858, Reg. 45, Rev., Jan. 28, 1921.) 814 Art. 859. Effect of Stock Dividend. — Neither the payment nor the receipt of a true stockjiividend has any effect upon the amount of invested capital. Such items^as appraised value of good /will, appreciation in value a of real estate or other tangible property, etc., although carried to surplus and distributed as stock dividends, can not in this manner be capit- alized and included in computing invested capital. If a corporation has paid a stock dividend in excess of its true surplus, it can not be deemed to have any greater invested capital than could have been computed had Copyright 1922, by Tim Corporation Trust Company. WAR TAX 362 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. no such stock dividend been paid. (Art. 859. Reg. 45, Rev., Jan. 28, 1921.) [See 1f889.] 815 Art. 860. Impairment of Capital. — Capital or surplus actually paid 556 in is not required to be reduced because of an impairment of capital in the nature of an operating deficit, except where there has been directly or indirectly a liquidation or return of their investment to the stock- holders, in which case full effect must be given to any liquidation of the original capital. (Art. 860, Reg. 45, Rev., Jan. 28, 1921.) 816 Art. 861. Surrender of Stock. — Where stock which has originally 556 been issued or exchanged by the corporation for property (tangible or intangible) is returned to the corporation as a gift or for a con- sideration substantially less than its par value, the stock so returned shall not be treated as a part of the stock issued or exchanged for such property. The proceeds derived in cash or its equivalent from the resale of the stock so returned shall, however, be included in computing invested capital. See article 542. (Art. 861, Reg. 45, Rev., Jan. 28, 1921.) 8 1 7 Art. 862. Purchase of Stock. — Where a corporation either di- 556 rectly or indirectly, as for example through a trustee, has prior to the taxable year bought its own stock, either for the purpose of retirement or of holding it in the treasury or for other purposes, the entire cost of such stock must be deducted from the aggregate invested capital as of the beginning of the taxable year, if such deduction has not already been made. Where such stock is purchased during the taxable year a deduction from the invested capital as of the beginning of the taxable year and effective from the date of such purchase is required only to the extent that such stock has not been purchased out of the undivided profits of the taxable year. See article 857 [for method of determining available net income, H810J. The full amount derived in cash or its equivalent from the resale of such stock may be included in the invested capital from the date of such resale, unless such stock had been purchased out of earnings of the taxable year. See article 542. (Art. 862, Reg. 45, Rev., Jan. 28, 1921.) 818 and 819 Blank. 820 Art. 863. Invested Capital and other Measures of Capital. — (a) The invested capital as here defined may differ from the capital as shown on the books of the corporation. In such event no changes should be made in the books themselves. The corporation should, however, in all cases keep a permanent record of the adjustments which are made in computing invested capital, (b) Section 1000 of the statute imposes a tax on the fair value of the capital stock of corporations [Capital Stock Tax, 1J3000 herein]. As in the case of the war profits and excess profits tax the invested capital is based upon the actual investment of the stockholders in the corporation, irrespective of the present value of its assets, and in the case of the capital stock tax the fair value looks to the present value of the corporation's assets, irrespective of the amount of the investment of the stockholders therein, the amount determined as the fair value of the capital stock for the purpose of the capital stock tax can have no bearing upon the determination of in- vested capital. See also article 1561 [or articles 831, ^1 75 1, for statement that "the fair market value of the assets as of March 1, 1913, has no bearing on invested capital"]. (Art 863, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 363 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. 821 Art. 864. Affiliated corporations: Invested capital. — The invested 587 capital of affiliated corporations, as denned in section 240 (b) of the statute [law Tf589] and article 633 for the taxable year is the invested capital of the entire group treated as one unit operated under a common control. As a first step in the computation a consolidated balance sheet should be prepared in accordance with standard accounting practices, which will reflect the actual assets and liabilities of the affiliated group. In preparing such a balance sheet all intercompany items, such as inter- company notes and accounts receivable and payable, should be eliminated from the assets and the liabilities, respectively, and proper adjustments should be made in respect of intercompany profits or losses reflected in in- ventories which at the beginning or end of the taxable year contain mer- chandise exchanged between the corporations included in the affiliated group at prices above or below cost to the producing or original owner corporation. Such consolidated balance sheet will then show (a) the capital stock of the parent or principal company in the hands of the public; (b) the consolidated surplus belonging to the stockholders of the parent or principal company; and (c) the capital stock, if any, r of. subsidiary companies of which substan- tially all the capital stock is not owned or controlled^by the parent or prin- cipal company, together with the surplus, if any, belonging to such minority interest. In computing consolidated invested capital the starting point is furnished by the total of the amounts shown under (a), (b), and (c) above. This total must be increased or diminished by any adjustments required to be made under the provisions of sections 325, 326, 330, and 331 of the statute and articles 811-818, 831-869, 931-934, and 941 of the regulations, except as otherwise provided in articles 865-868. (Art. 864, Reg. 45, Rev., Jan. 28, 1921.) 822 Blank. 823 Art. 865. Affiliated Corporations: Intangible Property Paid In. — 587 (1) In respect of corporations whose affiliation is in the nature of parent and subsidiary companies : {a) in the case of intangible prop- erty bona fide paid in for stock or shares prior to March 3, 1917, there may be included in invested capital an amount not exceeding the actual cash value of such property at the time paid in, or the par value of the stock or shares issued therefor, or in the aggregate 25 per cent of the par value of the total stock or shares of the consolidation outstanding on March 3, 1917 (determined as indicated in items (a) and (c) in article 864 [ , ,f821]), or in the aggregate 25 per cent of the par value of the total stock or shares shown on the consolidated balance sheet, being the amount of the capital stock included in items (a) and (c) in article 864 [1|821] at the beginning of the taxable year, whichever is lowest; and (b) in the case of intangible property bona fide paid in for stock or shares on or after March 3, 1917, there may be included in invested capital an amount not exceeding the actual cash value of such property at the time paid in, or the par value of the stock or shares issued therefor, or in the aggregate 25 per cent of the par value of the total stock or shares shown by the consolidated balance sheet, being the amount of the capital stock included in items (a) and (c) in article 864 [1j82l] outstanding at the beginning of the taxable year, whichever is lowest, (c) When intangible property has been acquired in part before and in part after March 3, 1917, the amounts shall be ascertained, respectively, under (a) and (b) above and in the aggregate shall in no case exceed 25 per cent of the par value of the total stock or shares outstanding at the beginning of the taxable year Copyright 1922, by The Corporation Trust Company. WAR TAX 364 SERVICE 1-2-22. §326. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. 1918 ACT. shown in the consolidated balance sheet, being the amount of the capital stock included in items (a) and (c) in article 864 [1182 1]. 824 (2) In respect of corporations affiliated by reason of stock ownership 587 or control by the same interests, the limitations set forth in paragraphs . (4) [1|559] and (5) [H560] of subdivision (a) of section 326 of the statute shall be applied to each corporation separately and the aggregate of the intangible property, so valued, shall be included in invested capital in the consolidated return. In respect of each of the affiliated corporations the aggregate of the amounts ascertained under the provisions of paragraphs (4) [1|559] and (5) [U560] shall in no case exceed 25 per cent of the outstanding capital stock of such corporation at the beginning of the taxable year. (Art. 865, Reg. 45, Rev., Jan. 28, 1921.) 825 Art. 866. Affiliated Corporations: Inadmissible Assets.— Where 587 adjustment is required in respect of inadmissible assets in accord- ance with the provisions of subdivision (c) [H562] of section 326 of the statute, such adjustment shall be made on the basis of the consolidated balance sheet with due regard to the adjustments and eliminations set forth in articles 864 [H821] and 865 [1[823] and to the provisions of articles 815- 818 [beginning at 1(743]. (Art. 866, Reg. 45, Rev., Jan. 28, 1921.) 826 Art. 867. Affiliated Corporations: Stock of Subsidiary Acquired 587 for Cash. — When all or substantially all of the stock of a subsidiary corporation was acquired for cash, the cash so paid shall be the basis to be used in determining the value of the property acquired. (Art. 867, Reg. 45, Rev., Jan. 28, 1921.) 827 Art. 868. Affiliated Corporations : Stock of Subsidiary Acquired for 587 Stock. — Where stock of a subsidiary company was acquired with the stock of the parent company, the amount to be included in the con- solidated invested capital in respect of the company acquired shall be com- puted in the same manner as if the net tangible assets and the intangible assets had been acquired instead of the stock. If in accordance with such acquisition a paid-in surplus is claimed, such claim shall be subject to the provisions of article 837 [1[760]. (Art. 868, Reg. 45, Rev., Jan. 28, 1921.) 828 Art. 869. Affiliated Corporations: Invested Capital for Prewar 587 Period. — The invested capital of affiliated corporations for the pre- war period shall be computed on the same basis as the invested capital for the taxable year, except that where any one or more of the corporations included in the consolidation for the taxable year were in existence during the prewar period, but were not then affiliated as herein defined, then the average consolidated invested capital for the prewar period shall be the average invested capital of the corporations which were affiliated in the pre- war period plus the aggregate of the average invested capital for each of the several corporations which were not affiliated during the prewar period. Full recognition, however, must be given to the provisions of section 330 of the statute [H575], particularly the last paragraph thereof [1J578], and of articles 931-934 [beginning at 1(837: all having to do with reorganizations]. (Art. 869, Reg. 45, Rev., Jan. 28, 1921.) 829 Art. 870. Insurance Companies. — The reserve funds of life insurance 551 companies, the net additions to which are deductible from gross in- 561 come under the provisions of Section 234 of the statute, can^not be included in computing invested capital. The like reserve funds of Copyright 1922, by Tht Corporation Trust Company: WAR TAX 365 SERVICE 1-2-21. §328. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1913 ACT. insurance companies, other than life insurance companies, may be included in computing invested capital. See Sections 325 and 326 (a) (3) and (b) and Articles 569 and 814 [If 742]. (Art. 870, Reg. 45, Rev., Jan. 28, 1921, as amended by T. D. 3153, April 9, 1921.) 830 Art. 871. Foreign Corporations.— Inasmuch as the war profits and 565 excess profits tax in the case of a foreign corporation is not based on 567 the invested capital of the corporation, but is computed in accord- ance with section 328 of the statute [See < t |832], the provisions of section 326 [law ^555] and of articles 831-870 [having to do with invested capital, beginning at %75l] have no application to foreign corporations. For the same reason, when rendering a return of income on form 1 120 for a foreign corporation, no entry of invested capital should be made thereon. See article 962 [for returns by foreign corporations, ^[852]. (Art. 871, Reg. 45, Rev., Jan. 28, 1921.) SPECIAL CASES. §327 831 Art. 901. Treatment of special cases. — In the cases specified in 565 section 327 [1(565] of the statute the tax will be specially determined under the provisions of section 328 [*|570], but the tax will not ordin- arily be computed under section 328 merely because the corporation's form or manner of organization, or the limitations imposed by section 326 [invested capital, 1f555], result in a greater tax than would otherwise be payable. A corporation which comes within the provisions of subdivision (d) H|569 of section 327 may make application for assessment under the provisions of section 328, which application shall be attached to its return in the form of a statement setting forth in full: (a) the reasons why the tax should be so determined; (b) the facts upon which such reasons are based; (c) an exact description of each trade or business or important branch of a trade or business carried on by it; (d) a statement of the invested capital and net income for each year since the beginning of the prewar period; and {e) a statement showing the amount of gains, profits, commissions, or other income derived on a cost-plus basis from Government contracts" made after April 5, 1917, and before November 12, 1 91 8, and showing the per cent which such income is of the total income of the corporation. See section 1 and article 15 10 [for definition of Government contract, law *j503] and section 326 [*|555j and articles 831-871 [beginning at 1f751, all ha vine to do with invested capital]. (Art. 901, Reg. 45, Rev., Jan. 28, 1921.) COMPUTATION OF TAX IN SPECIAL CASES. *328 832 Art. 911. Computation of tax in special cases. — In the cases specified 570 in section 327 [1f565] of the statute the tax is to be computed by comparison with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are engaged in a like or similar trade or business and similarly circumstanced. The provisions of section 328 [^f 570] do not permit the determination of a general average for any trade or business. In each case which comes under the provisions of section 327 the Commissioner will determine, as nearly as may be, the group or class of corporations with which the corporation should be compared and the amount which bears the same ratio to the net income Copyright 1922, by The Corporation Trust Company WAR TAX 366 SERVICE 1-2-22. §328. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. of the corporation (in excess of the specific exemption of $3,000) for the tax- able year as the average tax of such representative corporations bears to their average net income (in excess of the specific exemption of $3,000) for such year. The comparison will take account of similarity with respect to gross income, net income, profit per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances. (Art. 911, Reg. 45, Rev., Jan. 28, 1921.) 833 Art. 912. Determination of first installment of tax in special cases. I 573 — In the case of any corporation, other than a foreign corporation, where absolutely no data are available for the determination of in- vested capital for the taxable year, the installments of the tax shall in the first instance be determined upon the basis of a war profits and excess profits tax equal to 50% of the net income, except that for 1919 and subse- quent taxable years, in the case of any corporation other than a foreign corpo- ration, such installments shall be determined upon the basis of an excess profits tax equal to 20% of the net income in excess of $3,000.00, but not in excess of $20,000.00, plus 40% of the net income in excess of $20,000.00. In any other case under Section 328 of the statute other than the case of a foreign corporation, but including a case where the invested capital for the taxable year cannot be accurately determined, but where a minimum amount of in- vested capital, as to which there is no question, can be determined, the installments shall in the first instance be determined upon the basis of a war profits and excess profits tax computed by using the minimum invested capital, the tax in any such case not to exceed an amount equal to 50% of the net income, and for 1919 and subsequent taxable years not to exceed 20% of the net income in excess of $3,000.00, but not in excess of $20,000.00, plus 40% of the net income in excess of $20,000.00. [See If 861.] (Art. 912, Reg. 45, Rev., Jan. 28, 1921, as. amended by T. D. 3235, Oct. 6, 1921.) 834 Art. 913. Determination of first installment of tax in the case of foreign corporation. — In the case of a foreign corporation the install- ments of the tax shall in the first instance be determined upon the basis of a war profits and excess profits tax computed by using its invested capital for the taxable year 1917, such tax for any taxable year not to exceed an amount equal to 50% of the net income, and for 1919 and subsequent taxable years not to exceed 20% of the net income not in excess of $20,000.00, plus 40% of the net income in excess of $20,000.00. For the purpose of this Article the invested capital for 1917 shall be adjusted for any subsequent changes in its amount due to cash or property paid in or withdrawn or to surplus or un- divided profits of prior years retained in the business and properly attributable to its business within the United States. If the tax for 1917 was determined under Section 210 of the Revenue Act of 1917, the constructive capital which would result in a tax equivalent to the tax determined under that section shall be used. In the case of a foreign corporation which was organized subsequent to the taxable year 1917, or which had no income from sources within the United States during 1917, the installments of the tax shall in the first instance be determined upon the basis of a war profits and excess profits tax equal to 50% of the net income, except that for 1919 and subsequent taxable years such installments shall be determined upon the basis of an excess profits tax equal to 20% of the net income not in excess of $20 000.00, plus 40% of the net income in excess of $20,000.00. (Art. 913, Reg. 45, Rev., Jan. 28, 1921, as amended by T. D. 3235, Oct. 6, 1921.) Copyright 1922, by Tht Corporation Trust Company. WAR TAX 367 SERVICE 1-2-22. §330. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.- 1918 ACT. 835 Art. 914. Payment of tax in special cases. — In any case falling 573 under the last two articles the installments shall be paid upon the basis therein provided until the Commissioner notifies the corpora- tion of the amount of tax computed under section 328. The installments shall then be recomputed upon the basis of a war profits and excess profits tax of such amount, and if the amount already paid is less than the amount which would have already become due if the installments had originally been com- puted upon that basis, the additional amount shall be due and payable ten days after notice and demand from the collector. (Art. 914, Reg. 45, Rev., Jan. 28, 1921.) 836 Blank. REORGANIZATIONS. §330 837 Art. 931. Scope of Reorganizations. — The first two paragraphs of 575 section 330 [1)575 and H576J of the statute relate only to the prewar period and not to the invested capital or net income for the taxable year. Under their provisions in the case of a reorganization, consolidation or change of ownership, the corporation is regarded as having been in exist- ence prior to the date of such reorganization, consolidation or change in ownership, and the net income and invested capital of the predecessor trade or business for all or any part of the prewar period prior to the organization of the present corporation are deemed to have been the net income and invested capital of such corporation. (Art. 931, Reg. 45, Rev., Jan. 28, 1921.) 838 Art. 932. Net Income and Invested Capital of Predecessor Part- 576 nership or Individual. — If the predecessor trade or business was carried on by a partnership or individual, the corporation shall make its return of the net income and invested capital of such trade or business as nearly as may be in the same manner as if such trade or business had been carried on by a corporation. It shall submit with its return a state- ment setting forth (a) the manner in which such trade or business was carried on and (b) the points, if any, in which the provisions of the statute and of the regulations are not fully applicable to the determination of the net income or invested capital of the predecessor trade or business for the prewar period. In no case shall the deduction from gross income for salary or compensation for personal services exceed the salaries or compensation customarily paid at that time by corporations or partnerships of similar size and standing engaged in similar trades or businesses for similar services under like respon- sibilities. (Art. 932, Reg. 45, Rev., Jan. 28, 1921.) 839 Art. 933. Election to be Taxed as Corporation. — A business enter- 577 prise (a) which is organized as a corporation before July 1, 1919, (b) in which capital is and has been a material income-producing fac- tor, and (c) which was previously owned by a partnership or individual, may elect to be taxed as a corporation on its net income from January 1, 1918, to the date of organization of the corporation. In. such event the corporation shall be treated as if in existence since January 1, 1918, for the purposes of the income tax, the war profits and excess profits tax, and the capital stock tax. The adoption of any other date than January 1, 1918, for such purpose is not permissible. But this option is not extended to a business enterprise with a net income for the taxable year 1918 less Copyright 1922, by Tht Corporation Trust Company. WAR TAX 368 SERVICE 1 2 22. §335. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. 1918 ACT. than 20 per cent of its invested capital. (Art. 933, Reg. 45, Rev., Jan. 28, 1921.) 840 Art. 934. Adjustment for Asset Differently Valued in Prewar In- 578 vested Capital.— In any case in which as a result of a reorganiza- tion or for any other reason any asset in existence both during the taxable year and any prewar year is included in computing the invested capital for the taxable year, but is not included in computing the invested capital for such prewar year, or is valued on a different basis in computing the invested capital for the two years, the difference resulting therefrom shall not be included in determining the difference 10 per cent of which is added to or deducted from the war profits credit under section 311 (a) (2) of the statute f1f532]. In any such case the corporation shall make the readjustment required by the statute, and shall submit with its return a full statement of the difference in such valuations and of the facts which give rise to such difference. See also section 331 [law ^[579] and article 941 [regula- tions 11841. for reorganizations after March 3, 191 7.] (Art. 934, Reg. 45, Rev., Jan. 28, 1921.) VALUATION OF ASSETS UPON REORGANIZATION. §331 841 Art. 941. Valuation of Asset upon Change of Ownership. — Where 579 a business is reorganized, consolidated or transferred, or property is transferred, after March 3, 1917, and an interest or control of fifty per cent or greater in such business or property remains in the same persons or any of them, then for the purpose of determining invested capital each asset so tranferred is valued (a) at an amount representing its actual cash value, subject to the limitations imposed by section 326, but. not exceeding its allowable value, for invested capital purposes, in the possession of the previous owner, if a corporation, or, if not a corporation, (b) at its cost to such previous owner, with proper adjustments for losses and improvements. This provision is accordingly concerned with the computation of invested capital for the taxable year, while section 330 of the statute is chiefly con- cerned with the determination of invested capital for the prewar period. See articles 931 [for reorganizations after January 1, 1911, ^837], 932 [for net income and invested capital of predecessor partnership or individual, ^838] and 1561-1570 [for basis for determining gain or loss in connection with the sale, exchange or other disposition of property]. (Art. 941, Reg. 45, Rev., as amended by T. D. 3259, Dec. 7, 1921.) FISCAL YEARS ENDING IN 1918 OR 1919. §335 842 Art. 951. Fiscal year with different rates. — Section 335 [^580] of 580 the statute applies to the war profits and excess profits tax. For 583 provisions with respect to the income tax see section 205 of the statute and articles 1621-1625. Subdivision (a), which deals with fiscal years beginning in 1917 and ending in 1918, and subdivision (b) which dea s with fiscal years beginning in 1918 and ending in 1919, apply to cor- porations other than personal service corporations. Subdivision (c), which deals with fiscal years beginning in 1917 and ending in 1918, applies to part- nerships and to personal service corporations. See as to partnerships articles 321-327 and as to personal service corporations articles 328-335. See also Copyright 1922, by Th* Corporation Trust Company. WAR TAX 369 SERVICE 1-2-22. §33f». WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. section 252 of the statute and articles 1034-1036. Partnerships and personal service corporations having fiscal years beginning in 1918 and ending in 1919 are not subject to the war profits and excess profits tax. (Art. 951, Reg. 45, Rev., Jan. 28, 1921.) 843 Art. 952. Fiscal Year of Corporation Ending in 1918. — The method 580 provided for computing the tax for a fiscal year beginning in 1917 and ending in 1918 is as follows: (a) the tax attributable to the calendar year 1917 is found by computing the income of the taxpayer and the tax thereon in accordance with Title II of the Revenue Act of 1917 as if the fiscal year was the calendar year 1917, and determining the propor- tion of such tax which the number of months falling within the calendar year 1917 is of the number of months in the entire period; (b) the tax attributable to the calendar year 1918 is found by computing the income of the taxpayer and the tax thereon in accordance with the present statute as if the fiscal year was the calendar year 1918, and determining the proportion of such tax which the number of months falling within the calendar year is of the number of months in the entire period; and (c) the tax for the fiscal year is found by adding the tax attributable to the calendar year 1917 and. the tax attributable to the calendar year 1918. (Art. 952, Reg. 45, Rev., Jan. 28, 1921.) 844 Art. 953. Deductions and Credits in the Case of Fiscal Year Ending 581 in 1918. — Net losses deductible from net income of the fiscal year under the provisions of section 204 of the statute shall be deductible in computing the tax attributable to the calendar year 1917 as well as in computing trie tax attributable to the calendar year 1918. See articles 1601-1603. Amounts previously paid by the taxpayer on account of the excess profits tax for its fiscal year ending in 1918 shall be credited towards the payment of the war profits and excess profits tax imposed for such fiscal year by the present statute. Any excess shall be credited or refunded in accordance with the provisions of section 252 of the statute. For credits for foreign taxes see section 238 of the statute and article 611. (Art. 953, Reg. 45, Rev., Jan. 28, 1921.) 845 Art. 954. Fiscal Year of Corporation Ending in 1919. — The method 582 provided for computing the tax for a fiscal year beginning in 1918 and ending in 1919 is as follows: (a) the tax attributable to the calendar year 1918 is found by computing the income of the taxpayer and the tax thereon in accordance with the statute as if the fiscal year was the calendar year 1918, and determining the proportion of such tax which the number of months falling within the calendar year 1918 is of the number of months in the entire period; (b) the tax attributable to the calendar year 1919 is found by computing the income of the taxpayer and the tax thereon in accordance with the statute as if the fiscal year was the calendar year 1919, and determining the proportion of such tax which the number of months falling within the calendar year 1919 is of the number of months in the entire period; and (c) the tax for the fiscal year is found by adding the tax attri- butable to the calendar year 1918 and the tax attributable to the calendar year 1919. For credits for foreign taxes see section 238 of the statute and article 611. (Art. 954, Reg. 45, Rev., Jan. 28, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 370 SERVICE 1-2-22. §336. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. 84 s Art. 955. Illustration of Computation of Tax for Fiscal Year. — A corporation makes its return on the basis of a fiscal year ending March 31. It had an average prewar invested capital of $50,000 and an average prewar net income of $3,500. For the fiscal year ending March 31, 1918, its invested capital and net income are $100,000 and $75,000, respectively, as computed under Title II of the Revenue Act of 1917, and $125,000 and $70,000, respectively, as computed under the present statute. Such a difference in these amounts as computed under the two acts may readily occur where, for example, a corporation is allowed under the present statute a deduction for interest, amortization, etc., which it was not allowed under the Revenue Act of 1917, or where, under the present statute, it is allowed a greater amount of invested capital on account of intangible property paid in for stock or shares than allowed under the Revenue Act of 1917. For the fiscal year ending March 31, 1919, its invested capital and net income are $125,000 and $60,000, respectively. 847 (1) A war excess profits tax for the year ending March 31, 1918, as computed under the provisions of Title II of the Revenue Act of 1917, and upon the basis of an invested capital of $100,000 and a net income of $75,000 as computed under that Act, is $32,800. For the details of this computation see illustration (1) under article 16 of Regulations 41. A war profits and excess profits tax for the entire period as computed under subdivision (a) of section 301 of the present statute, and upon the basis of an invested capital of $125,000 and a net income of $70,000 as computed under the statute, is $43,600. Section 335 provides that the tax for this period is the sum of 9/12 of the tax of $32,800 as computed under the Revenue Act of 1917, or $24,600, plus 3/12 of the tax of $43,600 as computed under the present statute, or $10,900, making a total war excess profits tax for the fiscal year ending March 31, 1918, of $35,500. 848 (2) A war profits and excess profits tax for the year ending March 31, 1919, as computed under subdivision (a) of section 301 of the statute is $35,600. A war profits and excess profits tax for the entire period as computed under subdivision (b) of section 301 is $16,400 Section 335 provides that the tax for this period is the sum of 9/12 of the tax of $35,600, as computed under subdivision (a) of section 301, or $26,700, plus 3/12 of the tax of $16,400, as computed under subdivision (b) of section 301, or $4,100, making a total war profits and excess profits tax for the fiscal year ending March 31, 1919, of $30,800. (Art. 955, Reg. 45, Rev., Jan. 28, 1921.) RETURNS. §336 849 Art. 961. Returns. — Every corporation, domestic or foreign, not 585 exempt under section 304 [1f525] of the statute and article 751 [^[ 666] shall make a return for the purpose of the war profits and excess profits tax on form 1120. The return shall be made and the tax shall be paid as provided in the case of a return for and payment of the income tax by corporations. See generally Parts IIA and III of the regulations, and par- ticularly sections 239, 240, 241, 250 and 253 of the statute and the articles thereunder. (Art. 961, Reg. 45, Rev., Jan. 28, 1921.) 850 Blank. 851 Corporation with no taxable income not required to fill out profits- tax schedules on Form 1120. — Reference is made to the following telegram of March 19, 1919: Copyright 1922, by The Corporation Trust Company. WAR TAX 371 SERVICE 1-2-22. 5337. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. "Where computation shows that a corporation has no taxable net income must it go to expense of preparing and filling out the schedules relating to excess profits war profits on Form 1120? Is an- swer any different if the return is a consolidated return? Kindly- wire reply." In reply you are advised that corporations which have no taxable in- come for the year are required to fill out only Schedules A and B [A, K, and L, for 1920] and the Schedules in support thereof, on their (separate or consolidated) corporate income tax returns (Form 1120), and are not re- quired to furnish the other information called for on these returns. (Let- ter to Van Vorst, Marshall and Smith, New York, N. Y., signed by J. H. Callan, Assistant to the Commissioner, and dated March 24, 1919.) 852 Art. 962. Returns in special cases. — Where a corporation computes its war profits credit upon the basis of the sum of (a) the specific exemption and (b) an amount equal to 10 per cent of the invested capital for the taxable year, the items on form 1120 which relate solely to the net income or to the invested capital for the prewar period need not be filled in. Where a corporation enters on its return a war profits and excess profits tax equal to the amount of the maximum tax determined under section 302 [1(523] of the statute, the items on form 1120 which relate solely to the net income for the prewar period and the items which relate to the invested capital for the prewar period and for the taxable year need not be filled in. Likewise in the case of a foreign corporation the same items may be disre- garded, except that balance sheets as of the beginning and the end of the taxable year for the entire business of the corporation both within and with- out the United States shall be submitted. See article 871 [for foreign corpora- tions, 11830]. The Commissioner may at any time specifically call for all or any part of the information which under this article is not required to be entered on the return. In any case, however, where a claim is made under sections 327 [1(565] and 328 [1f570] of the statute, other than in the case of a foreign corporation, the corporation should fill out all items of the return so far as possible and submit a statement explaining why it is impracticable to fill out the entire return. (Art. 962, Reg. 45, Rev., Jan. 28, 1921.) SALE OF MINERAL DEPOSITS. §337 853 Art. 971. Tax on Sale of Mineral Deposits. — In the case of a sale 586 of mines, oil or gas wells, or any interest therein, as described in article 13 [thirteen], the portion of the war profits and excess profits tax attributable to such a sale shall not exceed 20 per cent of the selling price. To determine the application of this provision to a particular case the cor- poration should compute the war profits and excess profits tax in the ordinary way upon its net income, including its net income from any such sale. The proportion of the total tax indicated by the ratio which the taxpayer's net income from the sale of the property, computed as prescribed in article 715, bears to its total net income is the portion of the tax attributable to such sale, and if it exceeds 20 per cent of the selling price of the property such portion of the tax shall be reduced to that amount. See articles 219, 220, 220(a\ and 221. (Art. 971, Reg. 45, Rev., Jan. 28, 1921.) 854 to 857 Blank. Copyright 1922, by Tht Corporation Trust Company. WAR TAX 372 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. 858 Art. 972. Illustration of Computation of Tax Where Sale of Mineral Deposits. — In the case of the corporation used as an illustration in article 716, let it be assumed that its gross income for 1918 included $15,000 derived from a bona fide sale of an oil well, the principal value of which had been demonstrated by exploration and discovery work done by the corpora- tion, and that the Commissioner finds under article 715 that only $800 of the deductions allowed are properly applicable to the gross income derived from the sale. The portion of the net income attributable to the sale would be $14,200, which is 35.5 per cent of the entire net income of $40,000, and the portion of the tax for that year attributable to the sale will be 35.5 |jer cent of the entire tax of $17,600, or $6,248. But this portion of the tax can not exceed 20 per cent of the selling price ($15,000) and is accordingly reduced to $3,000. The total tax will be $11,352 (the portion of the tax not affected) plus $3,000, or $14,352 (instead of $17,600). (Art. 972/Reg. 45, Rev., Jan. 28, 1921.) §1309 859 Promulgation of Regulations No. 45, Revised. — In pursuance of the statute [see 1(860] the foregoing regulations are hereby made and promulgated and all rulings inconsistent herewith are hereby revoked. Art. 1800, Reg. 45, Rev., Jan. 28, 1921.) 860 Sec. 1309 [of the Revenue Act of 1918]. That the Commissioner, with the approval of the Secretary, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act. 861 Estimate of amount of excess payment on account of any expected 833 but undetermined relief under Section 328 for prior year not to be credited against first installment of tax for succeeding year which tax is to be computed in first instance without regard to former claim. — Reference is made to your letter of March 8, 1921, relative to cor- poration returns to be filed for 1920 under the provisions of Sections 327 and 328 of the Revenue Act of 1918. 862 You state that it is your understanding that in filing returns for 1920 under the above-mentioned sections, claim for credit may be applied against the amount of the first installment of tax due thereon to the extent that it is estimated the amount of tax paid was in excess of the amount due as computed under the provisions of Section 328. You inquire as to a justi- fiable percentage of tax on income for 1919 to be used as the basis for a claim for credit against the first installment of the tax for 1920. 863 In reply your attention is invited to Section 328(a) which provides in part that "In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business bears to their average net income (in excess of the specific exemption of $3,000) for such year." The special relief afforded by Sections 327 and 328 is based upon the merits of the individual case, and the provisions of Section 328 to not permit the determination of a general average for any trade or business. 864 Claim for credit may not under any circumstances be applied against taxes due until the Bureau has definitely determined that the amount of the claim is actually in excess of the amount of taxes due on the previous Copyright 1922, by The Corporation Trust Company, WAR TAX 373 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. return. Until complete audit comparatives are available for use in computing under Section 328 the taxes due on 1919 returns, the exact amount of tax due thereon can not be determined, and, consequently, claims for credit in the amounts believed to be in excess of tax due for the previous year may not be applied against the amount of the first installment of the 1920 taxes. (Letter to The Corporation Trust Company, signed by Commissioner Wm. M. Williams, and dated March 23, 1921.) 865 Use of appreciated or inflated values in determining invested capital 555 shown in income and excess profits tax returns for 191? and subse- 751 quent years. — An examination of income and excess profits tax returns for 1917 and subsequent years has disclosed that many tax- payers have used appreciated and inflated values in determining invested capital shown in such returns contrary to Section 207 of the Revenue Act of 1917 and Section 326 of the Revenue Act of 1918. 866 This office has held consistently that the use of appreciated or in- flated values in determining invested capital is not permissible and this ruling has been sustained by the United States Supreme Court in the case of the La Belle Iron Works v. The United States (41 Sup. Ct. 528; T. D. 3051 ffl889 herein]). 867 All taxpayers who, in the preparation of their income and excess profits tax returns for 1917 and subsequent years, have used appre- ciated or inflated values in determining the amount of their invested capital are required to file with the Collector of Internal Revenue within 90 days from date of this decision amended returns* for each of such years, in which the invested capital shall be computed strictly in accordance with the law and regulations and without the use of appreciated or inflated values. It is not required that such amended returns shall include the figures shown in the original returns which are unaffected by this decision. Only such figures as are necessary to show the correct values used in the computation of invested capital and such totals as are necessary to a redetermination of the tax need be shown. Payment of the additional tax shown to be due on such amended returns must also be made at the time the returns are filed. 868 Failure to file amended returns within the time specified will subject taxpayers to the penalties provided for in Section 3176 [^[8071], United States Revised Statutes, as amended. (T. D. 3220, signed by Commissioner D. H. Blair, and dated August 26, 1921.) *Amended returns required though no further tax due. See O. D. 1131 (Ruling No, 29, at Sec. 326. Art. 831.-20, in Supplementary Bulletin Rulings, post.) 869 Interpretation of T. D. 3220 requiring amended returns in cases where appreciated or inflated values have been used in determining amount of invested capital under the Revenue Act of 1917 and 1918. — 1. Attention is directed to T. D. 3220 [1J865] dated August 26, 1921, in which amended income and excess profits tax returns are required for 1917 and sub- sequent years in cases where appreciated or inflated values have been used in determining the amount of invested capital. This decision was based on the decision of the United States Supreme Court in the case of the La Belle Iron Works v. The United States (41 Sup. Ct. 528) ffi889]. Copyright 1922, by The Corporation Trust Company. WAR TAX 374 SERVICE 1-2-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. 870 2. Numerous inquiries have reached this office in regard to the mean- ing of that Treasury Decision and it is possible that the Collectors of Internal Revenue will be asked whether certain cases fall within its provisions. It should be clearly understood that the purpose of that Treasury Decision was to have amended returns filed and tax paid to the Government in cases where returns were filed contrary to the regulations, Section 207 of the Revenue Act of 1917 and Section 326 of the Revenue Act of 1918. 871 3. It was the intention that the tax due the Government as the result of the use of appreciated values should be paid into the Treasury im- mediately rather than waiting until the returns are finally reached in the regular course of audit. The fact that a field investigation has been made or that the return is in the process of audit in the Bureau is not sufficient to waive the filing of amended returns. Where the taxpayer has received a letter from the Bureau notifying him of an additional assessment as the result of the elimination from his original return of such appreciated or inflated values, it will not be necessary to file amended returns referred to in that decision. In each case where a taxpayer in your district is in doubt as to whether amended returns should be filed a complete statement of facts should be submitted to this office for a ruling. 872 4. It is possible that certain taxpayers, on account of unusual condi- tions, can not comply with the provisions of T. D. 3220 and file their returns by November 24, the due date of the amended returns under that decision. If, prior to November 24, 1921, conditions seem to warrant, the Bureau will give consideration to the question of a supplemental Treasury Decision extending the due date beyond November 24, 1921, for the filing of amended returns required by that decision. [See ^[875 .] 873 5. Collectors of Internal Revenue are not authorized to grant any extension of time in this respect and taxpayers should be so advised. You will, therefore, refer to this office all cases which require special consider- ation. 874 You are requested to acknowledge receipt of this mimeograph. (IT. Mim. Coll. No. 2848, signed by Commissioner D. H. Blair, and dated October 19, 1921.) 875 Extension of time for filing amended returns required by Treasury Decision 3220 in cases in which appreciated or inflated values have been used in determining invested capital. — Under the provisions of Treasury Decision 3220 [11865], approved August 26, 1921, all tax- payers who, in the preparation of their income and profits tax returns for 1917 and subsequent years, have used appreciated or inflated values in determining the amount of their invested capital, are required to file amended returns within ninety days from the date of that decision and make pay- ment of the additional tax shown to be due. 876 In view of the fact that many taxpayers are unable to complete their returns by November 24, 1921, the last date under which amended returns may be filed, as provided by Treasury Decision 3220, an extension of time up to and including January 15, 1922, is hereby granted within which to file such amended returns and make payment of the additional tax due. (T. D. 3243, signed by Commissioner D. H. Blair, and dated November 14, 1921.) Copyright 1922, by The Corporation Trust Company. WARTAX £ 375 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. Adjustments in surplus and undivided profits account because of alleged failure to charge off depreciation. MEMORANDUM NO. 106. COMMITTEE ON APPEALS AND REVIEW. February 26, 1921. Mr. Commissioner: (For Mr. Newton) 877 The Committee is in receipt of a request for advice relative to the 762 practice of field agents in reducing earned surplus by deductions for depreciation where none had been claimed in the past, or where a lower rate has been claimed than is ordinarily allowable with respect to the depreciable assets in question. 873 It is the judgment of the Commitee that there is no warrant for reducing earned surplus because of alleged failure to charge off sufficient depreciation in the past, unless the depreciable assets of the cor- poration are valued on its books at the beginning of the taxable year at an amount in excess of their actual value at that time. This is particularly true where the corporation in prior years earned positive income from which larger deductions for depreciation might have been taken, if in the opinion of the officers and directors of the corporation such larger charges had been justified. Nothing herein is to be construed as precluding the Income Tax Unit from adjusting depreciation, either by way of increase or decrease, •where there is at hand affirmative evidence that as at the beginning of a taxable year the amount of depreciation written off in prior years was in- sufficient or excessive. The correct attitude of the Bureau and the proper conduct of its field agents, in particular, are plainly set forth in that part of Art. 839 of Reg. 45, which reads: "Adjustments in respect of depreciation or depletion in prior years will be made or permitted only upon the basis of affirmative evi- dence that as at the beginning of the taxable year the amount of depreciation or depletion written off in prior years was insufficient or excessive, as the case may be." (Signed) N. T. Johnson, Chairman, Committee on Appeals and Review. Noted: (Signed) Carl A. Mapes, Solicitor of Internal Revenue. Accepted for the guidance of the Income Tax Unit: (Signed) M. F. West, Acting Commissioner of Internal Revenue 879 Adjustments in surplus and undivided profits account because of 762 alleged failure to charge off depreciation. — Specific inquiry has been made as to the meaning of the words "actual value" as used in Committee on Appeals and Review memorandum No. 106 [^[877]. For the purposes of taxation depreciation is based upon cost. Accordingly, the words "actual value" mean "sound value", which is "original cost" (or value as of March 1, 1913, if applicable), including additions and better- ments charged to capital account, less depreciation sustained. 880j Article 161, Regulations 45 (1920 edition) defines the proper allow- ance for depreciation as "that amount which should be set aside for the taxable year in accordance with a consistent plan by which the aggregate of such amounts for the useful life of the property in the business Copyright 1922, by The Corporation Trust Company* WAR TAX 376 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. — 1918 ACT. will suffice, with the salvage value, at the end of such useful life to provide in place of the property its cost, or its value as of March 1, 1913, if acquired by the taxpayer before that date." 881 It follows from this definition that any action on the part of a par- ticular taxpayer which extends the useful life of a depreciable asset beyond the normal or usual term, and any circumstance which serves to increase the salvage value of a depreciable asset, operates to justify a reduc- tion in the normal rate of depreciation. The depreciation of an asset is arrested where it is maintained at a high standard of efficiency either by the exercise of unusual care in its use or by unusual maintenance expenditures. 882 Invested capital, as defined in the Excess Profits Tax Law, is a statutory concept and is composed of two elements: (a) original contribution, and (b) earnings of the corporation available for distribution but not distributed and not dissipated by subsequent operating losses. The exhaustion of this capital through use, wear and tear has, for the purpose of computing invested capital, the same effect as an operating loss and unless this loss is properly taken care of out of earnings in one way or another, earned surplus must be adjusted in accordance with the provisions of the regulations. There are two ways of taking care of this loss out of income. One is by charging ordinary repairs directly to expense and setting up a depreciation reserve against which are properly chargeable all renewals and replacements; the other is where renewals and replacements, as well as repairs, have been charged directly against gross income. Either way has the effect of reducing the amount added during the year Unearned surplus. Consequently, the mere fact that no depreciation, or a minimum depreciation, has been charged as such, is not sufficient reason for reducing the earned surplus, where renewals and replacements sufficient to care for the decrease in value of capital assets have been charged directly to expense, or where for any of the other reasons hereinbefore suggested less than the normal rate of depreciation is properly chargeable. When a taxpayer makes this claim there are two methods of verifying it. One is by determining the plant efficiency and the other is by determining the value of the capital assets remaining. From an administrative standpoint the latter is probably more practical even though it may be said that the former is more accurate. 883 Many cases have been brought to the attention of the Committee where corporations have been in existence for a long period of years, some of which corporations have been in existence several times the ordinary estimated life of the depreciable assets, and yet those assets are today in first-class condition and worth the figure at which they are carried on the books, although no depreciation has been charged as such and no additions to capital account have been made. In such cases it is obvious that depre- ciation has been adequately cared for by charges to expense, although it frequently happens that it is impossible at this late date to segregate and specify such charges and there is no warrant in the law or the regula- tions for requiring the depreciable assets in such cases to be written down below the figure at which they are carried on the books, since to do so is to reduce earned surplus twice, once through the original charge to expense (whether proper or improper), and again through an arbitrary depreciation charge required by the Bureau to be set up against earned surplus for the purpose of computing invested capital. 884 The controlling rule in this matter is found in that part of Article 839 of Regulations 45, which reads: "Adjustments in respect of de- preciation or depletion in prior years will be made or permitted only upon the Copyright 1922, by The Corporation Trust Company: WAR TAX 377 SERVICE 1-2-22 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS.— 1918 ACT. basis of affirmative evidence that as at the beginning of the taxable year the amount of depreciation or depletion written off in prior years was in- sufficient or excessive, as the case may be." Mere failure in prior years to have written off on the books the maximum or ordinary rate of depreciation, is not in itself "affirmatize evidence" There is no warrant for reducing earned surplus because of alleged failure to charge off sufficient depreciation in the past, unless the depreciable assets of the corporation are valued on its books at the beginning of the taxable year at an amount in excess of their sound value at that time. (Statement by the Committee on Appeals and Review, signed by N. T. Johnson, Chairman, and dated July 6, 1921 (released for publication July 15, 1921). Noted by Carl A. Mapes, Solicitor of Internal Revenue.) 885 Adjustments in surplus and undivided profits account because of 762 alleged failure to charge off depreciation. — Reference is made to Committee on Appeals and Review Memorandum 106 [*|877] and explanatory memorandum of the Committee dated July 6, 1921 [879]. 886 The attention of the Commissioner's office has been called to the fact that Article 839 [If 762] of Regulations 45 as interpreted by Committee Memorandum 106 and the memorandum of July sixth, has not been properly followed. 887 When the Regulation (Article 839 of Regulations 45) was being drafted it was the intention of the draftsmen that a corporate surplus account was not to be disturbed lightly and that no change should be made in it either by the Government or by the taxpayer except upon adequate evidence that the surplus account was incorrect. It was the view of the draftsmen that unless the taxpayer could show a state of error, the Govern- ment should deny a claim for an increase in the surplus shown by the tax- payer's books; conversely, before a deduction could be made from the taxpayer's surplus account, the Government must show that such an adjust- ment is necessary to correct the account. The view was also held that such proof must be in the form of affirmative evidence — that it could not rest upon mere assertion of the working out of the theoretical formula. 888 It is my opinion that no doubt ever should have existed as to the correct interpretation of Article 839. A taxpayer's corporate surplus should not be reduced by the arbitrary adjustment of depreciation and depletion for past years. Surplus accounts should, however, always be care- fully scrutinized and checked up for the purpose of preventing the inclusion therein of appreciated values of property. In case of doubt in such case the burden should be cast upon the taxpayer to prove that no appreciative values were included in the surplus. A presumption should always exist that a tax- payer's books of account reflect actual facts. The burden of proof is upon any one who attempts to impugn the correctness of the books of account — upon the Government if it seeks to reduce its surplus account by charging off depreciation and depletion which have not been claimed by the taxpayer and upon the taxpayer where he claims that too much depreciation and depletion have been charged off in prior years. (Memorandum, signed by Commissioner D. H. Blair, and dated November 1, 1921.) Copyright 1922, by The Corporation Trust Company* WAR TAX 378 SERVICE 1-2-22. EXCESS-PROFITS TAX. — SUPREME COURT DECISION. (Decision.) Revenue Act of 1917. The excess of actual value of property over its cost in cash, subsequently capitalized, a stock dividend being declared, all prior to inci- dence of tax, is not to be included as invested capital either as paid- in surplus, or, because of the stock dividend involving the sur- render and cancellation of the original stock, on account of "the actual cash value of tangible property paid in other than cash, for stock.'' — The Act is constitutional. Supreme Court of the United States. La Belle Iron Works, Appellant,) vs. \ Appeal from the Court of Claims. The United States. j (41 Sup. Ct. 528) Mr. Justice Pitney delivered the opinion of the Court. 889 The Court of Claims dismissed appellant's petition which claimed 555 a refund of $1,081,184.61, alleged to have been erroneously assessed 751 and exacted as an "excess profits tax" under Title II of the Revenue Act of 1917 (Act of October 3, 1917, Ch. 63, 40 Stat. 300, 302, et seq.). The case involves the construction and application of those provisions by which the deduction from income, for the purposes of the tax, is measured by the "invested capital" of the taxpayer; and a question is raised as to the constitutionality of the Act as construed and applied. 890 Title I of the Act imposed "War Income Taxes" upon individuals and corporations in addition to those imposed by Act of September 8, 1916 (Ch. 463, 39 Stat. 756). Title II provided for the levying of "War Excess Profits Taxes" upon corporations, partnerships, and individuals. As applied to domestic corporations, the scheme of this Title was that, after providing for a deduction from income (sec. 203, p. 304) equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period (the years 1911, 1912, and 1913) was of the invested capital for that period, but not less than 7 nor more than 9 per cent., plus $3,000, it imposed (sec. 201, p. 303), in addition to other taxes, a graduated tax upon the net income beyond the deduction, commencing with 20 per centum of such net income above the deduction but not above 15 per centum of the invested capital for the taxable year, and running as high as 60 per centum of the net income in excess of 33 per centum of such capital. It applied to "all trades or businesses," with exceptions not now material (p. 303). 891 What should be deemed "invested capital" was defined by sec. 207 (p. 306), which, so far as pertinent, is set forth in the margin.* *Sec. 207. That as used in this title, the term "invested capital" for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly. As used in this title "invested capital" does not include stocks, bonds (other than obli- gations of the United States), or other assets, the income from which is not subject to the tax imposed by this title, nor money or other property borrowed, and means, subject to the above limitations: (a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corpora- Copyright 1922, by The Corporation Trust Company. WAR TAX 379 SERVICE EXCESS-PROFITS TAX— SUPREME COURT DECISION. 892 The case was decided upon a demurrer to the petition, in which the facts were stated as follows: Appellant is a domestic corporation and, prior to the year 1904, acquired ore lands for which it paid the sum of $190,000. Between that time and the year 1912 extensive explorations and developments were carried on (the cost of which is not stated), and it was proved that the lands contained large bodies of ore and had an actual cash value not less than $10,105,400; and at all times during the years 1912 to 1917, inclusive, their actual cash value was not less than the sum last men- tioned. In the year 1912 the company increased the valuation of said lands upon its books by adding thereto the sum of $10,000,000, which it carried to surplus, and thereupon, in the same year, declared a stock dividend in the sum of $9,915,400, representing the increase in value of the ore lands. Theretofore appellant's capital stock had consisted of shares issued, all of one class, having a par value of $9,915,400. The declaration of the stock dividend was carried out by the surrender to the company of all the out- standing stock, and its cancellation, and the exchange of one share of new common and one share of new preferred stock for each share of the original stock. 893 In returning its annual net income for the year 1917 the company stated its invested capital to be $26,322,904.14, in which was included the sum of $10,105,400 as representing the value of its ore lands. The Com- missioner of Internal Revenue caused a reassessment to be made, based upon a reduction of the invested capital to $16,407,507.14; the difference ($9,915,- 400) being the increase in the value of the ore lands already mentioned. The result was an additional tax of $1,081,184.61, which, having been paid, was made the subject of a claim for refund; and this having been considered and rejected by the Commissioner, there followed a suit in the Court of Claims, with the result already mentioned. 894 Appellant's contentions, in brief, are, first, that the increased value of the ore lands, placed upon the company's books in 1912, ought to be included in invested capital under sec. 207 (a) (3), as "paid m or earned surplus and undivided profits." Second, that within the meaning of clause (2), which provides that invested capital shall include "the actual cash value lion or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of un- divided profits earned during the taxable year: Provided, That (a) the actual cash value of patents and copyrights paid in for stock or shares in such corporation or partnership, at the time of such payment, shall be included as invested capital, but not to exceed the par value of such stock or shares at the time of such payment, and (b) the good will, trade- marks, trade brands, the franchise of a corporation or partnership, or other intangible property, shall be included as invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will, trade-marks, trade brands, franchise of a corporation or partnership, or other intangible property, bona fide purchased, prior to March third, nineteen hundred and seventeen, for and with interests or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hundred and seventeen), in an amount not to exceed, on March third, nineteen hundred and seventeen, twenty per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corporation, shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the par value of such stock; * * * Copyright 1922, by The Corporation Trust Company. WAR TAX 380 SERVICE 1-2-22. EXCESS-PROFITS TAX.— SUPREME COURT DECISION. of tangible property paid in other than cash, for stock or shares in such cor- poration," the stock of the company issued in 1912, consisting of $9,915,400 of preferred stock and an equal amount of common, was fully paid for: either (a) by the tangible assets, including the ore properties at their increased value, or (b) by the surrender of all the certificates representing the old common stock, which, it is said, had an actual cash value equal to double its par. And, third, that the construction put upon the Act by the Treasury Department, based as it is said not upon value but upon the single feature of cost, disregarding the time of acquisition, would render the Act unconsti- tutional as a deprivation of property without due process under the Fifth Amendment, because so arbitrary as to amount in effect to confiscation; and hence that this construction must be avoided. 895 Reading the entire language of Section 207 in the light of the cir- cumstances that surrounded the passage of the Act, we think its meaning as to "invested capital" is entirely clear. The great war in Europe had been in progress since the year 1914, and the manufacture and export of war supplies and other material for the belligerent powers had stimulated many lines of trade and business in this country, resulting in large profits as compared with the period before the war, and as compared with ordinary returns upon the capital embarked. The United States had become directly involved in the conflict in the Spring of 1917, necessitating heavy increases in taxation; at the same time manufactures and trade of every description were rendered even more active, and in certain lines more profitable, than before, so that the unusual gains derived therefrom formed a natural subject for special taxation. 896 On the eve of our entry, and in order to provide a "Special Pre- paredness Fund" for army, navy, and fortification purposes, an Act (March 3, 1917; Ch. 159, 39 Stat. 1000) was passed, which, in Title II, provided for an excess profits tax on corporations and partnerships equal to 8 per centum of the amount by which their net income exceeded $5,000 plus 8 per centum of the "actual capital invested"; and, in sec. 202 (p. 1001), defined this term to mean "(1) actual cash paid in, (2) the actual cash value, at the time of payment, of assets other than cash paid in, and (3) paid in or earned surplus and undivided profits used or employed in the business," but not to include money or other property borrowed. 897 The Revenue Act of October 3, 1917, passed after we had become engaged in the war, took the place of the Act of March 3, and em- bodied a "War Excess Profits Tax," with higher percentages imposed upon the income in excess of deductions and a more particular definition of terms. A scrutiny of the particular provisions of Section 207 shows that it was the dominant purpose of Congress to place the peculiar burden of this tax upon the income of trades and businesses exceeding what was deemed a normally reasonable return upon the capital actually embarked. But if such capital were to be computed according to appreciated market values based upon the estimates of interested parties (on whose returns perforce the Govern- ment must in great part rely), exaggerations would be at a premium, correc- tions difficult, and the tax easily evaded. Section 207 shows that Congress was fully alive to this and designedly adopted a term — "invested capital" — and a definition of it, that would measurably guard against inflated valuations. The word "invested" in itself imports a restrictive qualification. When speaking of the capital of a business corporation or partnership, such as the Act deals with, "to invest" imports a laying out of money, or money's worth, either an an individual in acquiring an interest in the concern with a view Copyright 1922, by The Corporation Trust Company. WAR TAX 381 SERVICE 1-2-22. EXCESS-PROFITS TAX. — SUPREME COURT DECISION. to obtaining income or profit from the conduct of its business, or by the concern itself in acquiring something of permanent use in the business; in either case involving a conversion of wealth from one form into another suitable for employment in the making of the hoped-for gains. See Webster's New Internat. Diet., "Invest", 8; Century Diet., "invest", 7; Standard Diet., "invest", 1. 898 In order to adhere to this restricted meaning and avoid exaggerated valuations, the draftsman of the Act resorted to the test of including nothing but money, or money's worth, actually contributed or converted in exchange for shares of the capital stock, or actually acquired through the business activities of the corporation or partnership (involving again a conversion) and coming in ab extra, by way of increase over the original capital stock. How consistently this was carried out becomes evident as the section is examined in detail. Cash paid in, and tangible property paid in other than cash, are confined to such as were contributed for stock or shares in the corporation or partnership; and the property is to be taken at its actual cash value "at the time of such payment" — distinctly negativing any allowance for appreciation in value. There is but a single exception: tangible property paid in prior to January 1, 1914, may be taken at its actual cash value on that date, but in no case exceeding the par value of the original stock or shares specifically issued for it; a restriction in itself requiring the valuation to be taken as of a date prior to the war period, and in no case to exceed the stock valuation placed upon it at the time it was contributed. The provision of clause (3) that includes "paid in or earned surplus and un- divided profits used or employed in the business" recognizes that in some cases contributions are received from stockholders in money or its equi- valent for the specific purpose of creating an actual excess capital over and above the par value of the stock; and, in view of the context, surplus "earned" as well as that "paid in" excludes the idea of capitalizing (for the purposes of this tax) a mere appreciation of values over cost. 899 The same controlling thought is carried into the proviso, which relates to the valuation of patents, copyrights, trade-marks, good will, franchises, and similar intangible property. Every line shows evidence of a legislative purpose to confine the account to such items as were paid in for stock or shares, and to their values "at the time of such payment"; but, with regard to those bona fide purchased prior to March 3, 1917, there is a special provision, limiting the effect of any adjustments that might have been made in view of the provisions of the Act of that date. 900 It is clear that clauses (1) and (2) refer to actual contributions of cash or of tangible property at its cash value contributed in exchange for stock or shares specifically issued for it; and that neither these clauses, nor clause (3) which relates to surplus, can be construed as including within the definition of invested capital any marking up of the valuation of assets upon the books to correspond with increase in market value, or any paper transaction by which new shares are issued in exchange for old ones in the same corporation, but which is not in substance and effect a new acquisition of capital property by the company. 901 It is clear enough that Congress adopted the basis of "invested capital" measured according to actual contributions made for stock or shares and actual accessions in the way of surplus, valuing them according to actual and bona fide transactions and by valuations obtaining at the time of acquisition, not only in order to confine the capital, the income from which was to be in part exempted from the burden of this special tax, to something Copyright 1922, by The Corporation Trust Company « WAR TAX 382 SERVICE 1-2-22. EXCESS-PROFITS TAX. — SUPREME COURT DECISION. approximately representative of the risks accepted by the investors in em- barking their means in the enterprise, but also in order to adopt tests that would enable returns to be more easily checked by examination of records, and make them less liable to inflation than if a more liberal meaning of "capital and surplus" had been adopted; thus avoiding the necessity of employing a special corps of valuation experts to grapple with the many difficult problems that would have ensued had general market values been adopted as the criteria. 902 In view of the special language employed in Section 207, obviously for the purpose of avoiding appreciated valuations of assets over and above cost, the argument that such value is as real as cost value, and that in the terminology of corporation and partnership accounting "capital and surplus" mean merely the excess of all assets at actual values over outstanding liabilities, and "surplus" means the intrinsic value of all assets over and above outstanding liabilities plus par of the stock, is beside the mark. Nor has the distinction between capital and income, discussed in Doyle v. Mitchell Bros. Co., 247 U. S. 179, 187; Hays v. Gauley Mtn. Coal Co., 247 U. S. 189, 193; and Southern Pacific Co. v. Lowe, 247 U. S. 330, 334-335, any proper bearing upon the questions here presented. 903 Upon the strength of an administrative interpretation contained in a Treasury Regulation pertaining to the Revenue Act of 1917, under which "stocks" were to be regarded as tangible property when paid in for stock or shares of a corporation, it is insisted that appellant's stock dividend distribution of 1912 ought to be treated as paid for in tangible property, the old stock surrendered being regarded as tangible for the purpose. But that distribution, in substance and effect, was an internal transaction, in which the company received nothing from the stockholders any more than they received anything from it (see Eisner v. Macomber, 252 U. S. 189, 210-211); and the old shares cannot be regarded as having been "paid in for" the new ones within the meaning of Section 207 (a) (2), even were they "stocks" within the meaning of that Regulation, which is doubtful. 904 It is said that the admitted increase in the value of appellant's ore lands is properly to be characterized as earned surplus, because it was the result of extensive exploration and development work. We assume that a proper sum, not exceeding the cost of the work, might have been added to earned surplus on that account; but none such was stated in appellant's petition, nor, so far as appears, in its return of income. In the absence of such a showing it was not improper to attribute the entire $9,915,400, added to the book value of the ore property in the year 1912, to a mere appreciation in the value of the property; in short, to what is commonly known as the "unearned increment," not properly "earned surplus" within the meaning of the statute. 905 The foregoing considerations ^dispose of the contention that either the increased value of appellant's ore lands, or the surrender of the old stock in exchange for the new issues based upon that value, can be re- garded as "tangible property paid in other than cash, for stock or shares in such corporation" within the meaning of sec. 207 (a) (2); and of the further contention that such increased value can properly be regarded as "paid in or earned surplus and undivided profits" under sec. 207 (a) (3). 906 It is urged that this construction, defining invested capital according to the original cost of the property instead of its present value, has the effect of rendering the Act "glaringly unequal" and of doubtful constitutionality; the insistence being that, so construed, it operates to Copyright 1922, by The Corporation Trust Company^ WAR TAX 383 SERVICE 1-2-22. EXCESS-PROFITS TAX.— SUPREME COURT DECISION. produce baseless and arbitrary discriminations, to the extent of rendering the tax invalid under the due process of law clause of the Fifth Amendment. Reference is made to cases decided under the equal protection clause of the Fourteenth Amendment (Southern Ry. Co. v. Greene, 216 U. S. 400, 418; Gast Realty Co. v. Schneider Granite Co., 240 U. S. 55); but clearly they are not in point. The Fifth Amendment has no equal protection clause; and the only rule of uniformity prescribed with respect to duties, imposts, and excises laid by Congress is the territorial uniformity required by Art. I, sec. 8. Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 557; Knowlton v. Moore, 178 U. S. 41, 98, 106; Flint v. Stone Tracy Co., 220 U. S. 107, 150; Billings v. United States, 232 U. S. 261, 282; Brushaber v. Union Pacific R. R., 240 U. S. 1, 24. That the statute under consideration operates with territorial uniformity is obvious and not questioned. 907 Appellant cites Looney v. Crane Co., 245 U. S. 178, 188, and Inter- national Paper Co. v. Massachusetts, 246 U. S. 135, 145, but these cases also are inapplicable, being based upon the due process clause of the Fourteenth Amendment, with which state taxing laws were held in conflict because they had the effect of imposing taxes on the property of foreign corporations located and used beyond the jurisdiction of the taxing State. There is no such infirmity here. 908 Nor can we regard the Act — in basing "invested capital" upon actual costs to the exclusion of higher estimated values — as productive of arbitrary discriminations raising a doubt about its constitutionality under the due process clause of the Fifth Amendment. The difficulty of adjusting any system of taxation so as to render it precisely equal in its bearing is proverbial, and such nicety is not even required of the States under the equal protection clause, much less of Congress under the more general requirement of due process of law in taxation. Of course it will be understood that Congress has very ample authority to adjust its income taxes according to its descretion, within the bounds of geographical uniformity. Courts have no authority to pass upon the propriety of its measures; and we deal with the present criticism only for the purpose of refuting the contention, strongly urged, that the tax is so wholly arbitrary as to amount to confiscation. 909 The Act treats all corporations and partnerships alike, so far as they are similarly circumstanced. As to one and all, Congress adjusted this tax, generally speaking, on the basis of excluding from its operation in- come to the extent of a specified percentage (7 to 9 per cent) of the capital employed, but upon condition that such capital be valued according to what actually was embarked at the outset or added thereafter, disregarding any appreciation in values. If in its application the tax in particular instances may seem to bear up on one corporation more than upon another, this is due to differences in their circumstances, not to any uncertainty or want of generality in the tests applied. 910 Minor distinctions — such as those turning upon the particular dates of January 1, 1914, and March 3, 1917 — are easily explained, as we have seen. The principal line of demarcation — that based upon actual costs, excluding estimated appreciation — hnds reasonable support upon grounds of both theory and practice, in addition to the important consider- ation of convenience in administration, already adverted to. There is a logical incongruity in entering upon the books of a corporation as the capital value of property acquired for permanent employment in its business and still retained for that purpose, a sum corresponding not to its cost but to what probably might be realized by sale in the market. It is not merely Copyright 1922, by The Corporation Trust Company. WAR TAX 384 SERVICE 1-2-22. EXCESS-PROFITS TAX.— SUPREME COURT DECISION. that the market value has not been realized or tested by sale made, but that sale cannot be made without abandoning the very purpose for which the property is held, involving a withdrawal from business so far as that particular property is concerned. Whether in a given case property should be carried in the capital account at market value rather than at cost may be a matter of judgment, depending upon special circumstances and the local law. But certainly Congress, in seeking a general rule, reasonably might adopt the cost basis, resting upon experience rather than anticipation. 911 In organizing corporations, it is not unusual to issue different classes of securities, with various priorities as between themselves, to repre- sent different kinds of contribution to capital. In exchange for cash, bonds may be issued; for fixed properties, like plant and equipment, preferred stock may be given; while more speculative values, like good-will or patent rights, may be represented by common stock. In the present case, for instance, when appellant took the estimated increase in value of its ore lands as a basis for increased capitalization, it issued preferred stock to the amount of the former total, carrying those lands at cost, and issued a like amount of common stock to represent the appreciation in their market value. It does not appear that in form the new issues were thus allocated; but at least there was a recognition of a higher claim in favor of one part of the book capital than of the other. Upon like grounds, it was not unreasonable for Congress, in adjusting the "excess profits tax," to accord preferential treatment to capital representing actual investments, as compared with capital representing higher valuations based upon estimates, however confident and reliable, of what probably could be realized were the property sold instead of retained. 912 From every point of view, the tax in question must be sustained. We intimate no opinion upon the effect of the Act with respect to deductions from cost values of capital assets because of depreciation or the like; no question of that kind being here involved. Judgment affirmed. Mr. Justice McReynolds concurs in the result. [T. D. 3181.] Copyright 1922, by The Corporation Trust Company. WAR TAX 385 SERVICE 1-2-22. EXCESS-PROFITS TAX.— COURT DECISION. (Decision.) kenue Act of 1917 — War Excess- Profits Tax. A corporation whose entire income is derived from royalties on patents in which it has no investment is entitled to assessment under Section 209 as being engaged in a trade or business having no invested capital or not more than a nominal capital. United States District Court, District of New Jersey. De Laski & Thropp Circular Woven Tire Co. vs. Iredell, Collector. (268 Fed. 377.) {Note Supplementary Bulletin Rulings at Sec. 327, Art. 901-13, Ruling No. 17, and particularly the matter quoted there from T. B. M. 9.) 913 BODINE, District Judge. The plaintiff, a New Jersey corporation, 666 has brought suit against the collector of internal revenue for the First district of New Jersey to recover an excess profits tax for the year 1917, alleged to have been improperly levied, assessed, and collected, and the defendant has moved to strike out the complaint, for the reason that — "A corporation whose sole income is received from licensed patents is a corporation having more than a nominal capital, within the meaning of section 209 of the Revenue Act of October 3, 1917." 914 The complaint discloses that the plaintiff was incorporated in 1903, with an authorized capital stock of $100,000. At the time of its in- corporation its officers contemplated engaging in the business of manu- facturing pneumatic vehicle tires of a peculiar and unusual construction. The Company experimented at great expense over a period of years, until it was determined that the manufacture of its tires was not commercially pos- sible. One of the officers of the Company during the period of experimenta- tion developed a new form of mold for vulcanizing pneumatic tires, which mold was of general utility, and a patent was secured, which was assigned to the Company for $1, together with other patents relating to tire-manu- facturing apparatus. 915 In 1911 the Company ceased conducting any other business than that of granting licenses under its patents. Its capital was reduced to $10,000. During the year 1917 the capital and surplus were $10,000 and $2,000, respectively, or a total invested capital of $12,000, which capital was used as a fund from which to advance salaries, wages, etc., and to provide office furniture, accommodations, and equipment. The Company was in much the same position as an individual who, having invented a machine desired by others, received royalties for the use of his invention and kept sufficient money on hand to provide for his needs during periods when roy- alties would not be received. The Company's net income during the year 1917 was $105,650.29. It is clear, therefore, that, the^patents^had^real value. 916 The plaintiff concluded that it was entitled to be assessed under section 209 of the Revenue Act of 1917, on the theory that it was a Copyright 1922, by The Corporation Trust Company. WAR TAX 386 SERVICE 1-2-22. EXCESS-PROFITS TAX.— COURT DECISION. corporation "having no invested capital or not more than a nominal capital." The Treasury Department, however, acting under section 210 of the act, on the theory that it was unable to satisfactorily determine the invested capital of the plaintiff, assessed an additional tax, which Was paid by the plaintiff under protest, and for the recovery of which this action is brought. 917 Section 201 of the Revenue Act of 1917 provides that, in addition to an income tax, every corporation, except those specifically exempted, of which the plaintiff is not one, shall pay the additional tax upon its net income. The tax was graduated, and was a certain percentage of the net income, not in excess of certain fixed percentages of the invested capital. Under section 207 of the act the term "invested capital" is defined. It appears from this section that the plaintiff's patents would not be included in the term "invested capital," for the reason that no stock of the plaintiff Company was issued therefor, nor were these patents specifically paid for in cash or tangible property. The only invested capital of the plaintiff was the $12,000 of capital and surplus, which was not used in the production of the net income of the plaintiff, but merely for the purpose of advancing salaries, wages, and providing office accommodations and equipment, and which in itself, under treasury ruling, would not bring the Company under section 201 of the act. 918 In determining the question whether such a corporation, deriving its income solely from royalties or licenses from patents, can be said to be a corporation "having no invested capital or not more than a nominal capital," within the meaning of section 209, reference is made in behalf of the collector to the Congressional Record of October 6, 1917, containing a statement by Hon. Claude Kitchin, who was at that time chairman of the Ways and Means Committee. It appears from this statement that the Excess Profits Tax Law, as contained in the House Bill, applied only to cor- porations and partnerships, and not to individuals. The Senate brought within the scope of the law individuals in trade or business, but excluded lawyers, doctors, professional men, and officers of corporations, as well as governmental officers. The House conferees, it would seem from Mr. Kitchin's statement, opposed the inclusion of individuals, unless they were all brought in. The Senate insisted upon the exemptions, and section 209 of the act resulted, which, it is the claim of the collector, was intended to apply to a definite class of persons; i.e., lawyers, doctors, professional men, and high-salaried officers of corporations and the government. 919 If this idea of providing especially for those rendering a personal service was all that was in the minds of the conferees, there seems to be no reason why they should not have used more exact language to convey their meaning, and further there is no reason at all why Congress should have specifically provided that, in a case of a trade or business "having no invested capital or not more than a nominal capital," there should be assessed a tax other than the tax to which such trade or business would otherwise be liable under section 201, unless there was to be a distinction between those employ- ing "invested capital" and those employing "nominal capital." These terms admit of exact definitions. 920 The determination of this case must, as already indicated, depend upon the meaning of the words "not more than a nominal capital." It is clear from section 207 that the patents from which the plaintiff derived its revenue cannot be regarded as "invested capital." Counsel for the plaintiff, in a most exhaustive and painstaking brief, has shown that the treasury rulings indicate that the word "invested" was omitted in the act Copyright 1922, by The Corporation Trust Company.] WAR TAX 387 SERVICE 1-2-22. EXCESS-PROFITS TAX.— COURT DECISION. by oversight in the phrase "not more than a nominal (invested) capital. " This suggestion, however, is not well taken, for the reason that, whatever the treasury rulings may have been, they can be given no force to modify or add to the clearly expressed language of Congress. 921 It does not follow, however, that the word "capital" embraces patents. The following definitions of "capital" are in point: "Wealth employed in or available for production." Funk & Wagnalls New Standard Dictionary. "That part of the production of industry which, in the form either of national or of individual wealth, is available for further production." The Century Dictionary and Cyclopedia. 922 The late J. S. Mill, the eminent economist, defines "capital" as follows : "What capital does for production is to afford shelter, protection, tools, and materials which the work requires, and to feed and otherwise maintain the laborers during the process. Whatever things are destined for this use, destined to supply productive labor with these various prerequisites, are capital." Political Economy, i, iv, § I. (The italics are mine.) 923 Taking this last definition, which embodies the thought of all the others, it seems clear that patents do not fall within the term "capital;" and it also seems to be clear that this is what was in mind when Congress made the distinction between "invested capital," which is defined under section 207 to include the actual cash value of patents paid for in stock or shares, and also such other intangible property, which had been paid for in money or stock, and also what was in mind when the word "capital" is used alone in section 209, preceded by the word "nominal;" that is, in the sense of something in name only employed in or available for production. The distinction is between those employing those stored-up concrete things, essential to productive labor, and those employing these things existing in name only. Patents were never capital in an economic sense. Congress included them within the term "invested capital" to the extent only of the investment in them; if no investment in them, then they remain in the same class as that intangible something which makes for the wealth of the pro- fessional man, the broker, or others engaged in a personal service, which could never be "capital," except in name only. 924 The decision of this case, however, need not depend solely upon the meaning of the word "capital," to be found in the distinction be- tween "invested capital" and "nominal capital," as used in the act. The patents which the plaintiff owned were the concrete embodiment of the skill which the plaintiff possessed in its field of activity. This skill or service it bartered for a consideration. Such skill or service is like the service a lawyer in large practice renders for an annual retainer, and is very nearly akin to the service which a commission house renders to those who buy and sell through it, or the service of a concern engaged in selling or leasing real estate, and in writing insurance. The plaintiff's source of income was that which certain persons were willing to pay it for the use of its skill and knowl- edge. It is true that skill and knowledge had been reduced to concrete form; but the payment was for the use of the skill and knowledge, and not for any part or parcel of the form to which the skill and knowledge had been reduced. Hence it would seem that in a very real sense the plaintiff was engaged in rendering a personal service, and was not employing "capital," and certainly no more than a "nominal capital. " 925 The motion to strike is dismissed. Copyright 1922, by The Corporation Trust Company. WAR TAX 388 SERVICE 1-2-22. EXCESS-PROFITS TAX.— COURT DECISION. {Decision.) Revenue Act of 1917. Additions to surplus account; Earned surplus expended in developing and improving a secret process, or used to repay borrowed money so expended. United States District Court, Southern District of New York. Lincoln Chemical Company, Plaintiff, against William H. Edwards, as Collector, etc. (272 Fed. 142.) 926 Action by a taxpayer against the Collector for refund of a part of 771 the excess profits tax for 1917. The plaintiff, a domestic corporation, 772 filed its return for 1917 and calculated its capital upon the basis of Section 209 of the law of October 3, 1917; that is to say, it assumed that it had "no invested capital or not more than a nominal capital." The Treasury officials reassessed the tax at a larger figure upon a basis not now necessary to set forth, because it is conceded that the propriety of their action depends upon the correctness of the plaintiff's reading of Section 209- If that is right, the plaintiff wins; if it is wrong, the defendant. 927 The case was tried before a jury of one, and at the conclusion of the evidence both sides moved for the direction of a verdict. The evi- dence, which was undisputed, showed the following state of facts: The plaintiff was organized in April, 1909, under the laws of New York, with a capital stock of ten thousand dollars. There were but two persons financially interested in it, Loeb and Riddle. Riddle was an inventor, and before the incorporation came to Loeb with a process for extracting cocoa butter out of cocoa shells, a by-product. This process proved worthless, and Riddle thereupon suggested to Loeb the possibility of converting the process into one from which he could extract from cocoa shells a chemical substance, known as theobromine, allied to caffeine. Loeb, having some money, con- tinued to advance it in defraying Riddle's further experiments, until he became fearful of two wide involvement, and determined to incorporate the venture. Riddle agreed to work for the corporation for five years at a salary of eighteen hundred dollars and to convey his process, still unperfected, both for twenty-four hundred dollars par value of the plaintiff's stock. Loeb agreed to convey the machinery and supplies par for par in stock, seventy- four hundred dollars, and two hundred dollars was paid in cash. 928 During the year 1910 the company borrowed nearly twenty thou- sand dollars, which it spent in Riddle's further experiments upon the process, which was then complete. During that year it got one Schaefer, a man- ufacturing chemist, to make a contract for the exploitation of the process on a royalty basis, but the sales of theobromine were so few that the royalty was never earned. In 1912 they got Schaefer to give them better terms; he agreed to pay two thousand dollars a year for the process over a period pf fifteen years and to furnish theobromine to the plaintiff at $2.50 a pound, or less. This gave the plaintiff control of a supply without manufacturing. At the time of the first contract in 1910, the plaintiff sold all its machinery and pjant to Schaefer for $1,155, and its supplies for $407, and this money was either used in development or upon the indebtedness. In any event, it had all disappeared before 1914. The plaintiff never manufactured any theobromine after 1910. Copyright 1922, by The Corporation Trust Company. WAR TAX 389 SERVICE 1-2-22. EXCESS-PROFITS TAX.— COURT DECISION. 929 The plaintiff's profits on the sale of theobromine made by Schaefer under the process were not large throughout the year 1911, but they began to increase in 1912 and 1913, and the company thus made a small income besides the royalty paid by Schaefer. The advent of the Great War in 1914 greatly increased the demand, and the business became very profit- able, so that by January 1, 1917, all its debts were paid and it had a surplus of thirteen thousand dollars after writing off a depreciation of seven thou- sand seven hundred dollars upon the process. 930 The business was done as follows: There were but three purchasers of theobromine, all large manufacturing chemists, who bought at ten days' cash. The plaintiff necessarily bought all its theobromine (made under the process), from Schaefer at fifteen days cash, and was therefore in a position to pay Schaefer out of the moneys which its customers paid to it. As these were of high financial responsibility it had no need to hold a reserve in its treasury, in order to finance its purchases, though at times, when in ample funds, it did use its surplus to pay Schaefer before the cus- tomers paid for their consignments. 931 During the year 1917 the assets of the plaintiff, therefore, consisted only of its cash on hand, the contract with Schaefer, and the secret process finally perfected by Riddle. Its stock was ten thousand dollars, and its surplus as stated, thirteen thousand dollars, of which over seven thousand dollars was in cash. It necessarily followed that its other assets were valued at sixteen thousand dollars. 932 The case depends upon the meaning of the phrase "invested capital" and "nominal capital" as used in Section 209 and as defined in Sec- tion 207. The plaintiff asserts that there was only two hundred dollars of •cash paid in, no tangibles remaining after 1913, no surplus "used and em- ployed" in the business, and that the secret process was an "intangible" which must be taken at its "actual cash value" in April, 1909, which is shown to be nothing. The defendant argues that the sums spent upon the process which did in fact increase its value by nineteen thousand dollars should be taken as a surplus "used and employed" in the business. 933 LEARNED HAND, D. J.: I shall decide this case upon the as- sumption that "nominal capital" in Section 209 means "nominal invested capital," without of course passing upon that question. I shall further assume — and indeed on this point both sides agree — that the secret process of Riddle was "intangible property" within the meaning of Section 207 (a) (3) (b). I shall finally assume that the process had only a nominal value in April, 1909, when it was sold to the plaintiff for twenty-four hundred dollars of stock. With these assumptions the question arises whether the money used to develop the process can be regarded as "paid in or earned surplus and undivided profits used or employed in the business" under Section 209 (a) (3). On the trial I thought that the plaintiff was right on this point, and for clarity I shall therefore state its argument as strongly as I can. The statute, it says, prescribes that "intangible property" of this kind "shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase." Disregarding "paid in surplus," of which there is none here, the "earned surplus" is the only item into which the supposed added value of the process can be placed. Now surplus, or at least "earned surplus" is merely an accountant's way of saying that the value of the assets are greater than the liabilities. When the statute Copyright 1922, by The Corporation Trust Company. WAR TAX 390 SERVICE 1-2-22. EXCESS-PROFITS TAX.— COURT DECISION. speaks of "invested capital," it must be understood to refer to existing property, i. e. "means of production," and to use accountant's language, not because accounts can ever of themselves be the basis of taxation, but because they are the most convenient record of actual values, embodied in property which is alone the proper basis of taxation. "Earned surplus" must therefore represent the value of existing property. 034 This being true, continues the plaintiff, the only asset of value in 1917 was the perfected process and we may assume that it had enough value to give more than a "nominal" "earned surplus" above the capital stock, which was the only liability. Therefore, if the asset could be taken at its true value in 1917, Section 209 of the statute would not apply. The difficulty with the Collector's position, however, is that Section 207 directed us to include the process at no more than its "actual cash value" in 1909, and at that time it had none. The money spent in improving and perfecting the process had, in 1917, no existence at all, save in the process itself. It was spent in machinery or supplies or Riddle's living expenses, or salaries. So far as our treasury was concerned there was nothing now left except the process. That was therefore the only asset which could figure on the credit side of our account to establish any" earned surplus," and the statute forbade its inclusion at anything but a nominal value. Therefore, we had no "earned surplus," and only a "nominal invested capital." 935 This argument appears to me unanswerable if the incompleted process be regarded as the same asset for all purposes when finally developed as when first acquired. The statute must of course mean something, and the least that it can mean must be, I think, that any automatic increase in value of a process or "other intangible property," must be disregarded. The "unearned increment," as economists would call it, will be ignored. There- fore, I should altogether disregard any increase in the value of this process dependent upon general conditions of industry, as for example the rise in the price of theobromine due to the Great War. Furthermore, for the purposes of this case, anyway, I may assume that an increase in the value of the process, resulting from spending money in advertising or the like, which leaves it unchanged in itself, will fall into the same category. That question can await decision till it arises; I say nothing about it here. The case at bar is, how- ever, one where money has been spent in changing the property itself, so that in place of a formula which prescribed one sequence of steps, there emerged another which prescribed a different sequence. Fair analogies appear to me, for example, cattle fed for market, or houses rebuilt or enlarged. It is true that for convenience we speak of such property as always remaining the same, though in fact it is not only different in value, but that difference results from a change in the objective character of the property itself, but that convenience should not disguise the substantial fact that it is, economically speaking, new property which appears. 936 When such changes have resulted from the expenditure of new capital, I see no reason why the statute should be construed as per- emptorily directing that they should be disregarded. It is quite true still, as the plaintiff argues, that the "earned surplus" must be found in some assets and that the only asset in the case at bar still remains the process, but it is a different process. The limitation of Section 207 may be confined, without undue violence to the sense of the words, to such increases in value as arise without the addition of new capital, and it may be, to such others also as involve no objective change in the thing itself. Copyright 1922, by The Corporation Trust Company. WAR TAX 391 SERVICE 1-2-22. EXCESS-PROFITS TAX. — COURT DECISION. 937 Indeed, it can scarcely be supposed that Congress could have had any other purpose than to prevent the taxpayer from crediting his capital account with increases which he had done nothing to produce. If they meant to include also new outlays upon existing capital, no matter how providently made, the statute provides a direct incentive to extrava- gance. Often, perhaps generally, it is a sound industrial policy to improve existing capital, rather than to scrap it, and invest anew. Yet if the plaintiff be right, no such investment can ever do more than meet depreciation, and this would apply as well to "tangibles" as to "intangibles." The only new values which could be recognized would be in property bought outright after incorporation, and those investments which may have been the means of changing the industrial character and value of existing property, would be totally lost for purposes of taxation. When taxes can be as high as the excess profits tax may be, such inducements may become a patent influence upon industrial conduct, and it cannot be supposed that the result of the plain- tiff's construction was within the purposes of Congress. 938 Again, it should be a weighty consideration with me that the Tax Bureau has made these allowances in the past in the case of thousands of taxpayers and has drafted its regulations upon the assumption that the statute permits them. I therefore hold that when money has been earned and spent in improving a process such as this, its increased value due only to that expenditure may figure as an asset in estimating under Section 207 "earned surplus," if any, as an element of "invested capital." 939 It does not follow, of course, in the case at bar that the value of the process so improved was enough to cause any "earned surplus" to emerge. That depends upon whether the assets, so estimated, were greater than the stock, ten thousand dollars, by more than a "nominal" amount. Now the value of the "tangibles" must under Section 207 be taken as of Jan- uary 1, 1914, at which time they had disappeared. Therefore, the process must have increased from its nominal value in 1909 to more than ten thousand dollars before any "earned surplus" could begin to appear at all. The value at which the plaintiff carried the process does not definitely appear on its books. On January 1, 1917, it had a surplus of $13,088.59 and therefore assets of $23,088.59. Of this, $7,367.64 was in cash, leaving $15,720.95 for other assets which must be the process and the contract. The contract got its value only from the process and may be disregarded. The value of the process as of that year would therefore appear to be this sum. 940 This figure, it is true, does not correspond with other evidence and apparently is incorrect. In its income tax return for 1916 it valued the process as of March 1, 1913, at $19,716.84, and claimed a deduction for depreciation to date of $7,761.42, leaving a value of about $12,000 as of Jan- uary 1, 1917. The discrepancy of some $3,700 I have been unable to account for except upon the hypothesis that there were other assets not shown. Perhaps the cash was greater, because the cash book showed a balance on January 2, 1917, of $11,000 which just about makes up the difference. As- suming that this is the proper explanation, still on the plaintiff's own admis- sion it had an "earned surplus" of $2,000 which in view of the size of the busi- ness I should not consider "nominal." 941 But the defendant was not bound by the plaintiff's admission. It was for the plaintiff to prove that it had only a nominal capital. The process was clearly of very substantial value. The contract had ten years more to run and there was a minimum royalty of - $2,000. . Besides this the plaintifTcould call for at least three thousand pounds of theobromine Copyright 1922, by The Corporation Trust Company. WAR TAX 392 SERVICE 1-2-22. EXCESS-PROFITS TAX.— COURT DECISION. yearly at not more than $2.50 a pound, a right which had been of substantial value in the years before the war began to affect the price. In 1914 this right was worth $525 and the royalty apparently $2,854. Moreover, when the contract terminated the process would not necessarily become worthless. Indeed it may have a very substantial value for an indefinite time. The plaintiff has certainly failed to prove that its value in 1917 over $10,000 was "not more than nominal." 942 I therefore conclude that the case is not proved and will direct a verdict for the defendant. (The foregoing is reproduced in T. D. 3183 not as a ruling, but for information. The case is reported at 272 Fed. 142.) 943 tO 999 Blank. 1000 For If 1000, at which the Excess-Profits Tax Title of the Revenue Act of 1921 begins, see page 401, immediately following the Sup- plementary Bulletin Rulings. Copyright 1922, by The Corporation Trust Company. WAR TAX^ j[t393 tO 400 SERVICE OOOi i-2-22. INDEX TO THE EXCESS PROFITS TAX. — 1918 ACT. [The references are to paragraph numbers.] Accounts receivable. .550, 7381 Administrative provisions. . 860 Claim for refunds. . 8022 Payment of taxes. .585, 833-835, 849, 861 Admissible assets. .553, 750 Affiliated corporations, consolidated returns. .587, 821 Excess profits credits. . 588, 724 Invested capital, in general. .587, 821-828 Inadmissible assets. . 825 Intangible property paid in. . 823 Prewar period. . 828 Stock of subsidiary acquired for cash. . 826 Stock of subsidiary acquired for stock. . 827 Liberty bond holdings. . 735, 736 Prewar net income. .587, 734 War profits credits. . 588, 723 Agricultural organizations, exemption. . 667 Allocation, net income to particular source. . 520, 607 Stock dividends. .508 Amortization: Munition manufacturer's tax law. . 763 Restoration of depreciation allowance to surplus account. . 765 Apportionment of specific exemption from excess-profits tax. .528, 684 Appreciated values, use of in determining invested capital. . 865, 889 Assessment, excess profits tax in special cases. .565, 570, 831 Assets, transfer of. .579, 841 Valuation of, upon reorganization. .579, 841 Associated Press franchises, intangible property. . 738 Associations, exemption. . 666 Authority for regulations. . 859 Average invested capital. . 563, 687, 806 Average percentages: "the median". .694 Bank deposits, invested capital. . 742 Discounts, invested capital. .791 Beneficiary societies, exemption. . 667 Bills receivable. . 550, 738 Bonds, Discount on, deduction. . 790 Invested capital. . 790 Liberty bonds. . 726, 735, 736 United States, Security. . 8075 War Finance Corporation. .726, 732, 745 Bonus, Stock, invested capital. . 753 _ Borrowed capital, amount left in business. . 740 Bank deposits. . 742 Invested capital in general. .551, 561, 739, 751, 865, 889 Securities. . 739 Unexpired subscriptions. . 742 Building and loan association, exemption. . 667 Burden of proof: Understatement of capital or surplus account. . 764 Business leagues, exemption. . 667 Cancelled indebtedness to stockholders, borrowed capital. . 740 Capital: Impairment of. . 815 Cash paid in, invested capital. .556, 753, 815 Cemetery companies, exemption. . 667 Certificates of indebtedness, medium of payment of tax. . 8020 Change in ownership during taxable year, return by affiliated corporations. .571, 579; 837-841 Charitable corporations, exemption. . 667 Chautauqua association, exemption. . 667 Citation of act. . 8082 Civic leagues, exemption. . 667 Copyright 1923, by The Corporation Trust Comp—y. WAR TAX SERVICE Excess Profits Tax— 1918 Act— Index Page I 1-2-22. INDEX TO EXCESS-PROFITS TAX.— 1918 ACT. The references are to paragraph numbere. Claims of refund. . 8022 Clubs, exemption. .667 Collectors of Internal Revenue, List of. .see page 1711 Commissions, selling securities: invested capital. .752 Compensation, deduction of expenditures. . 838 Computation: Excess profits tax, fiscal year. .580, 842 Foreign corporations. .567, 830, 831-835, 852, 861 Government contracts. .604 Illustrations. .608, 648, 683 Sale of mineral deposits. .586, 853, 858 Special cases. .565, 570, 831-835, 861 Year 1918. .510, 602 Years after 1918. .514, 517, 603, 604 Invested capital. .555, 751, 807, 820, 828, 865, 889 Limitation of excess profits tax. . 523, 639, 643 Conditional exemptions. .667 Conditional sales, personal property, gross income. . 792 Consolidated returns, affiliated corporations. .587, 821 Consolidated, excess profits tax. .575, 579, 837-841 Constitutionality. . 889 Contracts: Government. .503, 604 Intangible property. .738 Copyrights. .549, 738 Corporations, affiliated. .580, 842 Apportionment of specific exemption. . 528, 634, 684 Conditional and other exemptions. .525, 667 Exemption. .525, 667 Foreign. .540, 542, 565, 570, 830, 852 Liberty bond exemptions. . 733 Gold mining. .527, 682 Net income. .543, 725 Returns. . 585, 849 Consolidated. .587, 821 Transportation. .522 County fairs, exemption. .667 Courts, jurisdiction of. . 8003 Court decisions: De Laski & Thropp Circular Woven Tire Co. vs. Iredell. .913 La Belle Iron Works vs. U. S.. . 889 Lincoln Chemical Co. vs. Edwards. . 926 Credits: Excess profits. .541, 724 Foreign corporations. .540, 542, 830 War profits, in general. .530, 686 Affiliated corporations. . 588, 723 Foreign corporation. . 830 Meager prewar net income. .533, 688 No prewar net income. .533, 536, 690, 722 Deductions: Compensation. . 838 Vessels; net earnings of certain. . 869 Defaulted payments on sale of real estate. .799 Personal services, compensation for. .838 Definitions: "Admissible assets". .553, 750 "Affiliated corporations". .589, 821 "Borrowed capital". .551, 739 "Collector". .8092. "Commissioner". .8091 "Corporation". . 8086 "Dividends". .505, 597 "Domestic corporation". . 8087 "Excess profits tax". . 500 Copyright 1922, by The Corporation Trust Company, WAR TAX SERVICE Excess Profits Tax— 1918 Act— Index Page 2. 1-2-22. INDEX TO EXCESS-PROFITS TAX. — 1918 ACT. The references are to paragraph numbers. Definitions: — Concluded. "First taxable year". .501 "Fiscal year". .501, 597 "Foreign corporation". . 8088 "Government contract. . 503 "Inadmissible assets". .552, 743 "Intangible property". .549, 738 "Invested capital". .555, 751, 865, 869 "Military or naval forces". . 8094 "Net income". . 543, 725 "Paid". .504 "Paid or accrued". . 504, 597 "Person". . 8085 "Personal service corporation". . 502, 597 "Prewar income". . 544, 545 "Prewar period". . 529, 685 "Revenue act of 1916". .8078 "Revenue act of 1917". .8080 "Secretary". . 8090 "Tangible property". . 550, 738 "Taxable year". .501, 597 "Taxpayer". .8093 "Terms relating to invested capital". . 548 "United States". . 8089 Depletion allowance, invested capital. .761, 762, 877, 879 De Laski & Thropp Circular Woven Tire Co. vs. Iredell. .913 Depletion reserve, invested capital. . 778 Deposit of United States bonds as security. . 8075 Deposits, bank, invested capital. . 742 Depreciation adjustments. .877, 879, 885 Depreciation allowance, invested capital. .761-764, 877, 879, 885 Depreciation reserve, invested capital. .778 Discount, banks, invested capital. .791 Bonds, Invested capital. . 790 District courts, jurisdiction of. .8003 District of Columbia, obligations, invested capital. . 748, 755 Dividends. . 505 Invested capital. .803, 813, 814, 889 Stock dividends. .814, 889 Earned surplus, invested capital. .558, 761, 877 Educational corporations, exemption. . 667 Election of business enterprise to be taxed as corporation. .577, 839 Evidence: Understatement of capital or surplus account. . 764 Evidences of indebtedness, invested capital. . 754 Excess payments under section 328. .861 Excess profits tax: Affiliated corporations, credits. . 588, 723, 724 Invested capital. .587, 821-828 Allocation of net income to particular source. . 520, 607 Application for assessment. .569, 831 Apportionment of specific exemption. . 528, 684 Assessment. .831 Associated Press franchises, intangible property. . 738 Change of ownership .575, 837-841 Computation, fiscal year. . 580, 842-846 Foreign corporation. .567, 831, 832, 834 Fractional part of year. . 634, 666, 684 Government contracts. . 604 Illustrations. . 608-634, 648, 683 Limitation. . 523, 639, 643 Sale of mineral deposits. .586, 853, 858 Special cases. .565, 831, 832, 834 Year 1918. .510, 602 Year 1919 .514, 517, 603, 604, 626 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax— -1918 Act—Index Page 3. 1-2-22. INDEX TO EXCESS-PROFITS TAX. — 1918 ACT. The references are to paragraph numbers. Excess profits tax: — Concluded. Consolidations. .575, 837-841 Credits. .541, 724 War profits. .530, 686-723 Definitions. .500, 597 Exemptions. . 525, 528, 666-667, 684, 870 Fiscal year 1917-1918. .580, 843, 844 1918-1919. .582, 845 Different rates. . 580, 842 Illustration of computation of tax. . 846 Foreign corporations. .567, 830, 831-835, 852 Gas wells, sale of. .586, 853, 858 Gold mining, computation of tax. . 683 Illustrations, computation. .608-634, 648, 683 Computation of limitation. .643 Imposition. .510, 598 Intangible property, definition. .549, 738 Installment payments. .833, 861 Invested capital. See Invested capital. Limitation of tax. .523, 639, 643 Mailing lists, intangible property. . 738 Mineral deposits, sale of. .586, 853, 858 Net income. .543, 587, 725, 734 Oil wells, sale of. . 586, 853, 858 Partnership. .583, 842 Payment. .585, 833-835, 849, 861 Personal service corporation, apportionment of invested capital and net income. . 524, 645 Computation of tax on net income. . 646, 648 Making return for fiscal year 1917-1918. .583, 842 Prewar period, adjustment, etc. .578 840 Credits. . 530, 686-723 Definition. . 529, 685 Net income of affiliated corporations. . 587, 734 Refunds. .581, 584, 844, 8022 Reorganizations. .575-579, 837-841 Returns. .585, 849 Special cases. .565, 852 Subscription lists, intangible property. . 738 Tangible property, definition. .550, 738 Transportation corporations. .522 United Press franchises, intangible property. . 738 Vessels; income from and sale of certain. . 869 Exemption. .525, 667, 913 Apportionment. .528, 634, 684 Royalties on patents. .913 Expenses, computation of earned surplus. .761, 926 Extension of existing statutes. . 8000 Fairs, exemption. .667 Farm loan bonds, invested capital. .552, 557, 748, 755 Farmers, cooperative association, exemption. . 667 Farm loan bonds, invested capital. . 748, 755 Reserve bank stock. . 744 Fire insurance, exemption of association or mutual company. . 680 Fiscal year, definition. .501 1917- 1918, different rates. .580, 581, 843, 844 1918- 1919, different rates. .582, 845 Different rates of tax. .580, 583, 842-845 Illustration of computation of excess-profits tax. .846 Fixtures, addition to surplus account of amounts expended for. . 764 Copyright 1922, by I he Corporation lrust Comfy WAR TAX SERVICE Excess Profits Tax— 1918 Act— Index Page 4. INDEX TO EXCESS-PROFITS TAX.— 1918 ACT. The references are to paragraph numbers. Foreign corporations, computation of excess-profits tax. .567, 830, 831, 834 Credits, excess profits. . 540, 542, 830 Definition. . 8088 First installment of excess-profits tax. . 834 Invested capital. . 830 Liberty bond exemptions. . 733 War profits credits. . 830 Fractional part of year, computation of excess-profits tax. . 634, 666, 684 Invested capital. . 808, 809 Franchises, intangible property. . 738 Fraternal beneficiary societies, exemption. . 667 Furniture, addition to surplus account of amounts expended for. . 764 Gas wells, excess profits tax on sale. . 853 Gifts to corporations, invested capital. .760, 816 Gold mining, computation of excess profits tax. . 527, 683 Exemption from excess profits tax. . 682 Good will, intangible property. . 549, 738 Good will, invested capital. .549, 738, 769, 776 Government contracts, computation of excess profits tax. .520, 569, 604, 831 Horticultural organizations, exemption. . 667 Illustrations, computation of excess profits tax. . 608, 648, 683, 846, 858 Computation of limitation of excess profits tax. . 643 Impairment of capital. .815 Improvement of secret process. . 926 Inadmissable assets.'. 552, 562, 743, 805 Income and excess profits taxes; reserves for. .782, 783 Installment due-and-payable dates govern. . 785 Income. .543, 725 Inflated values, use of in determining invested capital. . 865, 889 Installments, payment of tax. .573, 833, 861 Insurance: Companies invested capital. . 829 Premiums, corporation officer, invested capital. . 787 Intangible property, definition. . 549, 738 Paid in, invested capital. . 559, 560, 804 Interest: Invested capital. . 739, 740, 743, 749 Liberty bonds. . 726 United States obligations. . 726 War F inance Corporation bonds, credits. . 726 Invested capital: Admissible assets. .553, 750 Aliiliated corporations. .587, 821-828 Appreciated values. . 865, 889 Bank deposits. . 742 Bonus stock. . 753 Borrowed capital. .551, 561, 739-742, 751, 865, 889 Cancelled indebtedness to stockholders. . 740 Cash paid in, bonus stock. . 753 Changes during year. . 806 Computation. .555, 570, 751, 807, 820, 865, 889 Average invested capital. . 563, 634, 806 Definition. .555, 751, 865, 871, 889 Dividends. .803, 813, 814, 889 District of Columbia obligations. . 748, 755 Effect of ordinary dividend. .813 Stock dividend. .814, 889 Exemptions. .570, 832, 861 Expenses of organization. . 750 Federal farm loan bonds. . 748, 755 Foreign corporations. . 567, 830 Fractional part of year. .809, 810 Good will.. 549, 738 Impairment of capital. .815 Inadmissible assets. .552, 562, 743-749, 755, 805 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax— 1918 Act— Index Page 5. 1-2-22. INDEX TO EXCESS-PROFITS TAX. — 1918 ACT. The references are to paragraph numbers. Invested capital: — Concluded.j Inflated values. .865, 889j Insurance companies. . 829 Intangible property defined. .549, 738 Paid in. .559, 560, 804 Interest. . 739, 740, 743, 749 Measures of capital. . 820 Method of determining available net income. .810 Nominal, under 1917 Act. .913 Organization expenses. . 750 Patents. .549, 738, 913 Percentage of inadmissible assets. . 562, 805 Possessions of United States obligations. .748, 755 Preferred stock. . 739 Purchase of stock. .817 Reorganizations. .575, 577, 579, 837-840, 841 Return for fractional part of year. . 809 Securities. . 552, 739, 743 Special cases. .565, 570, 831, 832, 913 State obligations. . 748, 755 Subscriptions of publishing concerns. . 742 Surplus. See Surplus and undivided profits. Surrender of stock. . 816 Tangible property paid in, evidences of indebtedness. . 557, 754 Inadmissible assets. .557, 755 Mixture of tangible and intangible property. . 557, 756 Value in excess of par value. .557, 757 Territorial obligations. . 748, 755 Undivided profits. See Surplus and undivided profits. Jurisdiction of district courts. .8003 La Belle Iron Works vs. U. S.. . 889 Leaseholds. .550, 738 Liberty bonds: Affiliated corporations. . 735, 736 Interest, taxability. . 726 Life insurance, corporation officers, invested capital. . 787 Limitation, excess profits tax. .523, 639, 643 Lincoln Chemical Co. vs. Edwards. .926 Loans as invested capital. .551, 739 Location of mining claims, effect as to tax on sale of mineral deposits. .853 Lodges, exemption. .667 Losses, computation of earned surplus. . 761 Mailing lists, intangible property. . 738 Median: average percentages. .538, 694 Medium of payment of tax. . 8020 Mines, depletion. . 762 Excess profits taxes in case of depletion. . 762 Sale of minerals. . 586, 853, 858 Munition manufacturer's tax: amortization allowance. .763 Net income: Definition. .543, 725 War profits and excess profits taxes. . 527, 543, 682, 725, 734 Nominal capital under 1917 Act. .913 Notes, invested capital. .557, 754 Obsolescence, losses from, computation of earned surplus. .761 Oil wells: Excess profits tax on sale. .586, 853, 858 Ore, depletion. .558, 762 Original subscription to Victory notes. .730 Paid-in surplus, invested capital. .558, 760 Impairment of. .815 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax— 1918 Act—Index Page 6. 1-2-22. INDEX TO EXCESS-PROFITS TAX.— 1918 ACT. The references are to paragraph numbers. Partnership: Election to be taxed as corporation. .577, 839 Net income and invested capital of predecessor. .576, 838 Returns. .583, 842 Taxability — tax applies to corporations only. .510, 598 Patents: Intangible property. .549, 738 Invested capital. .549, 558, 769, 776, 913 Patterns, addition to surplus account of amounts expended for. .764 Payment of taxes. .716, 833-835, 849, 861 Certificates of indebtedness as medium. .8020 Fractional part of cent. .8019 Installments. .716, 833-835, 861 Medium. .8020 Personal property taken for debt, invested capital. .788 Personal services, compensation. See Compensation. Personal service corporations. ..502, 524, 645 Definition. .502 Excess profits tax. .524, 645, 646 Possessions of United States, obligations, invested capital. .552, 748, 755 Preferred stock, invested capital. .739 Premiums, insurance, corporation officers, invested capital. .787 Prewar period, definition. .529, 685 Income of. .544, 547, 687, 725 Invested capital of affiliated corporation. .587, 828 Net income of affiliated corporation. .587, 734 No income for. .533, 688 Not in existence during. .536, 690, 694 War profits credit. .530, 686-723 Promissory notes, invested capital. .557, 754 Rates of tax, corporations. .510, 598, 603 Real estate, exemption of corporation organized to buy and sell. .667 Taken for debt, invested capital. .788 Refunds. .761, 8022 Regulations, authority for. .859 Regulations 45, Revised, (Part II-B (1918 Act), .page 316 Religious corporations, exemption. .667 Reorganization. .575, 577, 579, 837-840, 841 Reserves, depletion or depreciation, invested capital. .778 Income and excess profits taxes, invested capital. .782, 783 Installment due-and-payable dates govern. .785 Returns. .585, 849 Affiliated corporations. .587, 734, 821 Amended where inflated values used in determining invested capital. .865 Consolidated returns of corporations. .587, 734, 821 Foreign corporations. .852 Forms. .849 No taxable income. .851 Sales: Mineral deposits, excess profits tax. .586, 853, 858 Savings bank, exemption. .667 Scientific corporations, exemption. .667 Secret formulae or processes. .549, 738 Securities, invested capital. .551, 552, 739, 743 Social clubs, exemption. .667 Social welfare organization, exemption. .667 Specific exemption. .526, 666 Apportionment. .528, 634, 684 State obligations, invested capital. .552, 748, 755 Stock: Bonus, invested capital. .753 Dividends, invested capital. .814 Purchase, invested capital. .817 Surrender, invested capital. .816 Tangible property. .550, 738 Valuation . .557, 559, 560, 754, 804 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excew Profit* Tax— 1918 Act— Index Page 7. 1-2-22 INDEX TO EXCESS-PROFITS TAX.— 1918 ACT. The references are to paragraph numbers. Subscriptions, publishing concern, invested capital . v 742 Lists, intangible property. .738 Surplus and undivided profits. .558, 760, 810, 926 Additions to surplus account. .764, 769, 926 Current profits. .803 Depletion allowance. .762, 877, 879 Reserve. . 778 Depreciation allowance. .762, 877, 879 Reserve. .778 Discount reported by bank. .791 Sale of bonds. .790 Earned surplus. .761, 926 Insurance on corporation officers. .787 Paid-in surplus. .760 Patents. .776 Property paid in and subsequently written off. .773 Taken for debt. .788 Reserve for depletion or depreciation. .778 Income and excess profits taxes. .782 Surrender of stock, invested capital. .816 Tangible property, definition. .550, 738 Paid in, invested capital. .557, 754-757, 865, 889 Tax. .510, 598 Computation of, in special cases. .570, 832 Telephone clearing association, exemption. .667 Territories, obligations, invested capital. .552, 557, 748, 755 Time: Filing returns. .585, 849 Payment of taxes. .585 Tools, addition to surplus account of amounts expended for. .764 Trade brands. .549, 738 Trademarks. .549, 738 Trade names. .549, 738 Transportation corporations under Federal control. .522 Uncertified checks, payment of tax. .8020 Undivided profits. See Surplus and undivided profits. United Press franchises, intangible property. .738 United States: Possessions, obligations, invested capital. .552, 557, 748, 755 Taxability and exemption of interest upon obligations. .726 Valuation of assets upon reorganization of business enterprise. .579, 841 Stock. .555, 575, 579, 751,815, 820, 837, 865, 889 Victory notes. .727, 730 War Finance Corporation, interest on bonds. .726, 732 As admissible and inadmissible assets. .745 War profits tax. See Excess profits tax. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Exccm Profits Tax— 1918 Act— Index Page 8 Reprints of Profits-Taxes Special Rulings From The Bureau of Internal Revenue Bulletins. FOREWORD Early in 1920 the Government published its 1919 Cumulative Bulletin of Special Rulings, which rulings had been issued confidentially during 1919 for the exclusive use of the Bureau's employees. During 1920 by a change of policy, continued in 1921, rulings were made public week by week. So far as appears, the weekly Bulletins will continue to issue during 1922. On the pages following are reproduced in full, verbatim as originally published by the Government in the Bulletins mentioned above, those rulings having specific application to the War-Profits and Excess-Profits^Tax Title of the Revenue Act of 1918.* This Supplement (and that it is a supplement must be borne in mind constantly) will be up-to-date at all times. Rulings based on the 1917 Acts are included to the extent that they are applicable, directly or indirectly, to the provisions of the 1918 and 1921 Acts, but not otherwise. Excluded rulings relate in very large measure to the former tax on individuals. Rulings bearing on provisions of the 1918 law applicable now to a restricted degree only, or entirely inapplicable now, are nevertheless included. The table below is explanatory of the abbreviations used by the Bureau. A, B, C, etc.=The names of individuals. A. R. M. — Committee on Appeals and Review Memorandum. A. R. R. — Committee on Appeals and Review Recommendation, C. B. — Cumulative Bulletin. Ct. D. — Court Decision. M, N, X, Y, Z, etc.=The names of corporations, places, or businesses, according to context. Mim ==Mimeograph Letter. O. or L. 0.=Solicitor's Law Opinion, O. D =-Office Decision. Op. A. G.=Opinion of Attorney General. S.=Solicitor's Memorandum. Sol. Op. — Solicitor's Opinion. T. B. M.=Advisory Tax Board Memorandum. T. B. R.=Advisory Tax Board Recommendation. T. D.=Treasury Decision. x is used to represent a certain number, and when used with the word "dollars" represents a sum of money. Each Special Bulletin ruling is cited to its source as (29-20-1081: A. R. M. 71). This particular ruling, then, is the 71st memorandum of the Com- mittee on Appeals and Review, is the 1081st ruling made, and was first published in Bulletin No. 29, of the 1920 Series. Each special ruling when originally published is assigned to a particular- Article of Regulations 45.* We continue this assignment in the Supplement, giving to each Article its separate page or series of pages, where the special rulings assigned to it are reproduced in the order of their issue, as 12-20-799, 22-20-979, 38-20- 1200. The rulings appearing under each Article are numbered serially, by us, in bold face type, as 1, 2, 3, etc., the serial number appearing in each case, at the end of the ruling, on the left. The Articles of Regulations 45,* referring to the 1918 profits-tax law, as- the reader knows, are grouped under the respective Law Sections. The grouping is clearly shown in the Table of Contents, beginning on page 316. In the compilation, beginning cn page 318, the Articles are reproduced in their numerical sequence. The numbers and captions of all profits-tax articles are shown in bold face type, unmistakably distinguishing them from the interpolated Treasury Decisions and special rulings. At the top of each page in the compilation on the right is shown the number of the Law Section (as "§326" [see page 350]), to which Law Section the Articles on that page directly apply. If the first Article assigned to a Law Section begins else- where than at the top of the page, its Law Section number is shown at the top of the Article (as "§326" [at 1[751, page 349]). If, as happens in one or two instances, related matters are printed on a page to the exclusion of profits-tax Articles, the immediately preceding Article, designated by a bold face number and caption, under which such related subjects are grouped, is the guide to the supplementary special rulings. Thus is the reader enabled to turn direct to the Special Rulings in the Supplement relating to the sub- ject matter then under his eye. The Supplementary Bulletin Rulings Pages are not numbered. As stated before each Article has its page or series of pages — as Sec. 326, Art. 850.-1, or 2, -3, -4, etc., and each special ruling is numbered serially. On the last page of the Supplement, immediately preceding the blue pages on which is printed the Excess-Profits Tax Law for 1921 (Revenue Act of 1921), is an always-up-to-date table, giving a complete list of existing Article numbers, showing, by serial number, either the last published Special Ruling assigned to that Article number, or stating by use of the word "none" that there have been no Special Rulings assigned to certain articles. Thus is there a perpetual, automatic check on the completeness of the Supplement. *We shall have to await developments to see to what extent (if at all) our present method of placing the Bulletin rulings before our subscribers will require adjustment to bring it into harmony with the numbering of the Articles of the regulations to be issued on the provisions of the 1921 Act, and with whatever change may be made (if any) by the Government in its scheme of assigning rulings to Law Sections and Regulation Articles, by numbers, in its Bulletins, after the new regulations are issued. However, unless otherwise noted, all rulings are based on the provisions of the 1918 Act and the formal regulations relating thereto. Very Important Caution. The following is printed on the front cover of every Bulletin of Special Rulings published by the Government. "The Income Tax Rulings [The Bureau so designates all of its Bulletin Rul- ings} constitute a service of information from which taxpayers and their counsel may obtain the best available indication of the trend and tendency of official opinion in the administration of the income and profits tax provisions of the Revenue Acts. The rulings have none of the force or effect of Treasury Deci- sions and do not commit the Department to any interpretation of law which has not been formally approved and promulgated by the Secretary of the Treasury. Each ruling embodies the administrative application of the Law and Treasury Decisions to the entire state of facts upon which a particular case arises. It is especially to be noted that the same result will not necessarily be reached in another case unless all the material facts are identical with those of the reported case. As it is not always feasible to publish a complete statement of the facts underlying each ruling, there can be no assurance that any new case is identical with the reported case. As bearing out this distinction, it may be observed that the rulings published from time to time may appear to reverse rulings previously published. "Officers of the Bureau of Internal Revenue arc especially cautioned against reaching a conclusion in any case merely on the basis of similarity to a published income Tax Ruling, and should base their judgment on the application of all perti- nent provisions of the law and Treasury Decisions to all of the facts in each case. The Income Tax Rulings should be used merely as aids in studying the law and the Treasury Decisions." 2-20-22. Sec. 301. Art. 711— 1. Law Section 301— Imposition of Tax (1918 Act— 1f5l0 ante): (1921 Act— If 1011, post). Article 711— Imposition of Tax (Reg. 45— If 598, ante): (Reg. 62— If 1135, post). 21-21-1655: O. D. 928. When a corporation may deduct the amount of its net operating loss for the calendar year 1919, which is in excess of the net income for the calendar year 1918, in computing net income for the calendar year 1920 in accordance with section 204 of the Revenue Act of 1918, the excess profits tax imposed by section 301 and limited by section 302 is upon the net income so determined. 1 Supplementary Bulletin Ruling*. 2-20-22. Sec. 301. Art. 714.— 1. Law Section 301 —Imposition of Tax (1918 Act— H510 ante): (1921 Act — IflOll, post). Article 714. — Computation of Tax on Income from Government Con- tracts (Reg. 45— H604, ante): (Reg. 62 — H1137, post). 1-19-113: T. B. M. 4. In the case of a fiscal-year corporation the computation under section 301 (c) (1) should be based on the entire net income for the fiscal year even though no part of the income from Government contracts was derived after January 1, 1919. The following question has been submitted: In the case of a fiscal-year corporation should the excess tax for 1919 based on income from a Government contract be prorated to apply only to income attributable to that contract in 1919, or should the tax be computed on the basis that the income was received throughout the fiscal year? The computation under section 301 (c) (1) of the Revenue Act of 1918 should be based on the entire net income for the taxable year, or, in other words, should be on the basis that the income was received throughout the fiscal year. In the judgment of the board any other ruling would be in conflict with the express provisions of the statute. It is a fundamental principle of the application of the provisions of the several acts relating to fiscal years that no adjustment should be made even though it can be def- initely shown what proportion of the income was derived during each portion of the fiscal year. 1 f 24-19-557: O. D. 295. A Government contract entered into in 1917, amended as to some of its provisions in 1918, and further modified in 1919, is in effect the same contract as entered into in 1917 if the original contract has not been revoked or sup- planted by a new contract. Therefore, income derived from the contract should be computed in accordance with the provisions of subdivision (c) of section 301. 2 ni D9firt3D s& nni>j jb/ij io griias^ffi 9iu niiljiw jOBYnioo Jiiammavoty b Jon 28-19-620: A. R. M. 5. If a corporation has a net income from a Government contract and sustains a net loss from other operations in the submission of a fiscal year return for a period ending in 1919, the loss may be deducted from the income from the Government contract. Inquiry is as to the amount of net income to be taxed in the case of a fiscal-year corporation submitting a return for a period ending in 1919 if there is profit from a Government contract and loss from other operations. Section 301 (c) of the Revenue Act of 1918 provides: For the taxable year 1919 and each taxable year thereafter there shall be levied, collected,, and paid upon the net income of every corporation which derives in such a year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both the intention of the parties is conclusively presumed to be that such purchasers become stockholders and, on a distribution of assets to pay debts, their rights are inferior to creditors. It is concluded that the preferred stock under consideration in the instant case is part of the capital stock of the corporation and that the rights of the holders thereof are inferior to the rights of general creditors. Determined by the rule stated in article 812, Regulations 45, such preferred stock is, there- fore, invested capital and not borrowed capital. It is held that preferred stock, if in the records of the corporation it is declared to be part of its capital stock, though convertible into first mortgage bonds of even date therewith, is inferior, on a distribjtion of assets to pay debts, to the rights of general creditors, and is to be treated as invested capital so long as it is not converted. 1 21-20-962: A. R. R. 116. REVENUE ACT OF 1917. Held in the matter of the appeal of the 0 Co npany (Inc.), that the debenture bonds in the amount of lOx dollars can not be included in the computation of it? invested capital. The Committee on Appeals and Review has had under consideration the appeal of the 0 Company from a decision of the Income Tax Unit elim- inating an item of 10* dollars from the invested capital of this corporation. It appears that prior to 1911 the business was conducted as a copartner- ship. The copartnership transferred its assets to the O Company and received in payment therefor debenture bonds in the amount of 10* dollars, payable in 30 years, bearing interest at the rate of 6 per cent per annum. The copartnership also received other good and valuable consideration in the form of common stock in the amount of 20:v dollars, which was issued against good will, trade-marks, etc. The debenture bonds issued in payment for the assets of the copartnership were delivered to the partners pro rata. The common stock issued was distributed to the partners in the same ratio a< the bonds. The debenture bonds were issued in payment for the tangible at ets of the copartnership, which were worth approximately 11* dollars, as set forth in a schedule attached to the brief of the corporation, and the common stock was issued in payment for good will, trade-marks, etc. The revenue agent, under date of August 21, 1919, submitted ^ report in which he recommended that additional taxes be assessed against the 0 Company for the years 1916 and 1917. it was contended that since the resolution of acceptance of the tern.- o: the sale by the O Company distinctly sets forth that the bonds should be Supplementary Bulletin Rulings. .SI8 .UA Sec. 325. Art. 812.— 3. "subject to all rights of creditors of said corporation now existing and at all times existing during the term of said bonds, " such bonds are in fact no more than 6 per cent preferred stock and that the property for which the debenture bonds were issued was already invested in the business and fully paid for and, therefore, the situation was not one where the corporation borrowed money against the issuance of debenture bonds and subsequently purchased goods or developed its business. It may be conceded that the provision of the offer of sale of the partner- ship property and the resolution of acceptance thereof, which provided that the bonds should be "subject to all rights of creditors of said corporation now existing and at all times existing during the terms of said bonds," was fully operative (because it constituted one of the conditions on which they were issued) as between the original bondholders having actual notice and knowledge thereof, and who it appears have always retained ownership thereof, thus eliminating from consideration the situation resulting if the bonds had been held by innocent third parties. The facts therefore appear in their most favorable aspects to the taxpayers. The attorneys submitted further to substantiate the contention that these bonds were nothing more than preferred stock, that the debentures were in 1918 turned in by the owners of the O Company and preferred stock was issued in lien thereof to the respective owners of the bonds. This, it is urged, shows that the owners of these bonds recognized that they were subordinate both as to payment of principal and interest to the rights of the general creditors of the corporation. Where a corporation purchased certain assets, paying therefor by creating a bonded debt drawing 6 per cent interest peranum, which, though a subordi- nate lien to claims of general creditors of the corporation, was nevertheless superior to the rights of stockholders of the corporation, so that on a dissolu- tion such bonds would be first paid before the stockholders could be admitted to share in the assets of the corporation, the bonds represent borrowed money and not invested capital within the meaning of section 207, Revenue Act of 1917. Article 44(b) of Regulations 41 provides that — The term "money or other property borrowed" as used in section 207 and these regu- lations includes not only cash or other borrowed property which can be identified as such, but current liabilities and temporary indebtedness of all i inds, and any permanent indebted- ness upon which the taxpayer is en itled to an interest deduction in computing net income. A corporation which under the income tax law is allowed to deduct only a part of the entire interest paid upon its indebtedness, may include in its invested capital such a proportion of its permanent indebtedness as the amount of interest upon such indebtedness which the corporation is not allowed to deduct is of the total amount of interest paid upon 3uch indebt- edness during the taxable year. Section 325(a) of the Revenue Act of 1918 provides that as used in this title: The term "borrowed capital" means money or other property borrowed, whether repre- sented by bonds, notes, open accounts, or otherwise. Article 812 of Regulations 45 provides that — Any interest in a corporation represented by bonds, debentures, or other securities, by whatever name called, including so-called preferred stock, if with respect to the payment of either interest or principal it ranks with or prior to the interest of the general creditors, is borrowed capital and can not be included in computing invested capital. Any such pre- ferred stock may, however, be so included if it is deferred with respect to the payment of both interest and principal to the interest of the general creditors. In general, it might be said that it is always a question of fact whether a given amount paid or left in the business of a corporation constitutes borrowed capital or paid-in surplus. The general principle is that if interest is paid, or is to be paid, on any such amount, or if the stockholders' or officers' Supplementary Bulletin Rulings. Sec. 325. Art. 812. — 4. right to repayment of any such amount ranks with or before that of the general creditors, the amount so left with the corporation must be treated as bor- rowed capital. In the instant case, the bonds were issued in payment for property, interest has been regularly paid each year and has been deducted by the corporation in computing its net income for each year up to and including 1916, but no interest deduction on account of this indebtedness was claimed for 1917, even though the corporation actually paid 6 per cent on the outstanding debenture bonds. The Committee is of the opinion that the O Company is not entitled to include in the computation of its invested capital the item of debenture bonds on which interest was paid but not deducted in the computation of the in- vested capital for 1917. The corporation will, however, be entitled to a deduction in computing its net income of the interest so paid on these bonds within the statutory limitation with respect to the payment of interest for the year 1917. The intent of the parties in this case was truly reflected in the form in which they organized their corporate business. They chose to organize and carry it on by creating a corporate debt to be repaid at a future date, plus a fixed rate of interest evidenced by the debenture bonds secured by a lien on corporate assets, subordinate to claims of its general creditors. Bondholders have different rights or interests in corporate business and assets than would preferred stockholders. True, preferred stock might have been issued in lieu thereof, but the parties elected otherwise, and they are bound by their act so long as the bonds in question are outstanding. The subordination of the lien of the bonds to claims of general creditors is not enough to render the bonds the equivalent of preferred stock. Nor is the mere fact that pos- sibly in an effort to characterize the bonds as the equivalent of preferred stock the corporation did not deduct interest thereon in filing its return for 1917 sufficient to change or fix their status. A memorandum supplementing the original brief has been filed in which the attorneys refer to and quote from certain court decisions to the effect that, as between the corporation and the original purchasers, the bonds were subordinate both as to the payment of principal and interest to the rights of the general creditors. The bonds in question are an obligation of the corporation to pay and in the judgment of the Committee should be classed as "borrowed capitaL' , The Committee therefore recommends that the decision of the Income Tax Unit disallowing the item of 10* dollars from the invested capital of the 0 Company be sustained and that the case be otherwise closed in accordance with this recommendation. 2 33-20-1142: A. R. R. 237. Recommended in the appeal of the M Company that the decision of the Income Tax Unit holding that amounts received from the sale of so-called debenture stock constitute part of the invested capital of the corporation and that the interest paid thereon does not constitute an allowable deduction in the computation of net income, be reversed. The Committee has had under consideration the appeal of the M Company from a decision of the Income Tax Unit holding that the amounts received from the sale of .^-called debenture stock shall be treated as part of the Supplementary Bulletin Rulings. Sec. 325. Art. 812.— 5. invested capital and that the interest paid thereon can not be deducted in the computation of net income. The ruling in question was as follows: It seems clearly to be the intent of the corporation to subordinate the payment of the principal of the debenture stock in question to the claims of the general creditors. You are advised, therefore, that the amount received from the sale of these stocks constitutes a part of the invested capital of the M Company, and must be included in the computation of that item. The company is not. permitted, in its option, to treat this amount as borrowed capital. You are advised, further, that the payments of interest on these stocks in reality are dividends, and as such are not to be deducted by the corporation in computing its taxable net income. It is from this rule that the corporation has appealed to the Committee. Since the questions raised by the corporation were questions of law and not of fact, the Committee requested advice from the Solicitor and under date of July 7, 1920, the following opinion was received: The war profits and excess profits tax, being Title III of the Revenue Act of 1918» provides, in part, as follows: "Sec. 325(a) That as used in this title — The term 'borrowed capital' means money or other property borrowed, whether repre- sented by bonds, notes, open accounts, or otherwise; * * * Sec. 326(b) As used in this title the term 'invested capital' does not include borrowed capital. * * *" Elsewhere in the Act it is provided — "Sec. 234(a). That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: • * * (2) All interest paid or accrued within the taxable year on its indebtedness, * * V ■'The i\i Company was duly incorporated under the laws of the State of Delaware under a charter which provided that its capital stock should be divided into x shares without nominal or par value, and which authorized the corporation under the general power to borrow money to issue a form of obligation in the nature of certificates of indebtedness to the extent of lOOx dollars, which should be known as debenture stock. Pursuant to the latter named power the M. Company issued for cash to the face value thereof 100* dollars of such debenture stock, represented by certificates reading, in part, as follows: "This is to Certify that the M Company * * * hereby acknowledges itself indebted to , in the sum of Dollars, principal payable at the expiration of the corporate existence of the corporation, interest at the rate of y per cent per annum payable semiannually on the first days of and in each year in gold coin of the United States of America, of the present standard of weight and fineness, represented by shares of debenture stock of the corporation, each of the par value of one hundred dollars. "In the payment of their several claims, all creditors, other than the stockholders of the corporation, shall rank superior to the holders of the debenture stock, but all holders of debenture stock shall rank pari passu with each other, and superior to the stockholders of the corporation, with respect to their share stock. "The corporation shall, nevertheless, have the right, the interest on the debenture stock having been paid, from time to time to declare and pay dividends out of the net earnings, upon the stock or share capital of the corporation. "The debenture stock shall be subject to redemption by the corporation upon any interest date, upon the affirmative vote of two-thirds in amount of the capital stock of the corporation then issued and outstanding, at the rate of one hundred twenty-five dollars per share for each one hundred dollars of the principal or par value, plus all unpaid accrued interest, including interest at the aforesaid rate of y per cent per annum up to the time of redemption. "Neither the corporation nor its shareholders shall have power to mortgage the property or franchises of the corporation, except by the written consent of the then registered holders of at least two-thirds in amount of the debenture stock. * * *" The company in its return of annual net income under the Revenue Act of 1918, deducted from gross income, among others, the amount of interest paid by it upon the above men- tioned certificates of debenture stock. This deduction was disallowed by the Income Tax Unit on the ground that the holders of such stock were in reality preferred stockholders, and amounts contributed by them were part of the invested capital of the corporation and that interest paid was in reality in the nature of dividends. Recognizing that the true character of an interest in a corporation is not determined solely by its name, article 812 of Regulations 45, provides: "Any interest in a corporation represented by bonds, debentures or other securities, Supplementary Bulletin Rulings. Sec. 325. Art. 81° —6. by whatever name called, including so-called preferred stock, if with respect to the payment of either interest or principal it ranks with or prior to the interest of the ieneral creditors, is borrowed capital and cannot be included in computing invested capital. Any such pre- ferred stock may, however, be so included if it is deferred with respect to the payment of both interest and principal to the interest of the general creditors." If the instrument in question creates or evidences a debt, it will be given the character- istics of such obligation, regardless of its name. Spencer v. Smith, C. C. A. 8th Circ. 201 Fed. 647; Heller v. Marine Bank, 89 Md. 601. In the latter named case the court, passing upon the question whether certain so-called preferred stock was in fact entitled to priority, stated the general rule as follows: "The question in such cases is, not what did the parties call it, but what do the facts and circumstances require the court to call it. Courts are not influenced by mere names. They look beyond these and give to the subject dealt with the character — the status — which its properties denote it possesses. The qualities and properties of a thing are its essentials — they define and mark what it is — the name is purely accidental — it is no part of the thing named." The term "debenture" is well known in England to describe any instrument issued by a corporation which creates or acknowledges a debt. Cook on Corporations, 6th ed. 2709. "Debenture stock is of the same nature as ordinary debentures, except that instead of each bond securing a definite amount, the whole sum secured is treated as a single stock, and bonds are issued declaring the holder to be entitled to a definite sum, part of this stock. This sum is not necessarily a round sum, but may be for any number of pounds, it may include fractions of a pound unless limitation is made in that respect. A debenture stock may be repayable at a fixed date, or may be irredeemable, according to the deed creating it, and may be secured in any manner in which a debenture may be secured." See Lindley's Company Law, 195. As used in this country the term "stock" does not mean a debt, but simply an interest in the corporate enterprise. Examining the provisions of the certificates of so-called debenture stock in question, it leemg clear that the parties in interest intended to and did create or acknowledge a definite obligation on the part of the corporation to repay a specified sum of money. In other words, the certificates in question are more nearly related to bonds or notes or certificates of indebtedness than to certificates of preferred stock. It will be noted that the certificates state that the corporation is indebted in a specified amount to the holders thereof payable at the expiration of the corporate existence. Irredeemable notes or bonds are of compara- tively common occurrence in England, although not so well known in this country. There are instances, however, of such perpetual debts, and courts have held that the character of such obligations is not affected by the fact that they are not redeemable at a fixed time. Thus, in Philadelphia c5 Reading Railroad Company v. Stichter, 11 Weekly Notes of Cases, Pennsylvania, 325, it was held that it was not ultra vires for a railroad company to raise funds by issuing bonds at a large discount. It will be noted that payment of the principal is subordinated to other indebtedness cf the company. This feature, however, does not preclude regarding the obligation r.3 a debt, for I know of no principle of law which prevents corporations from creating priorities among creditors. It should be noted that some security is given to the holders of these certificates by the provision which prevents the corporation from mortgaging its property or franchises without the written consent oi at least two-thirds of the holders of such debenture stock. As corollary there are no indications that the parties intended the holders of these certificates to be stockholders. In the first place, the certificates are issued under a power granted in the charter to borrow money,and aot to issue stock. It is elementary that a corporation Jannot issue stock except under authorization of its charter. See Cook on Corporations, 6th ed. 268. Secondly, the certificates provide speci- fically for the payment of interest at a specified rate per annum. No qualification is found in the charter or in the by-laws limiting this obligation, and there is no reason why the holders of such certificates cannot sue for the interest if default is made in payment. This, of course, is foreign to the idea of preferred stock, for it is well settled that a preferred stock- holder is not a creditor of the corporation. Warren v. King, 108 U. S. 389. A preferred stockholder may not sue for dividends unless they are declared, and a pro- vision guaranteeing the payment of dividends is absolutely void. Cook on Corporations, 6th ed. sec. 271. Finally, there is nowhere to be found in the charter or in the by-laws any indication of an intent that the holders of such certificates shall share in the assets of a corporation over and above the face amount of their interest. As stated by attorneys for the M Company: "The holders of such debenture stock certificates do not have any share in the profits of the business in any way whatsoever, irrespective of the amount of profits made in any one year or over a score of years, and no dividends could be declared on these certificates of indebtedness. And in the event of the dissolution of the company if there should be Supplementary Bulletin Rulines. Sec. 325. Art. 812.— 7. assets remaining at that time, more than sufficient to repay the face value of the certificate! of obligation called debenture stock, as well as the capital contributed by the holders of the ordinary capital stock, the debenture stock lolder* would not share in this excess. By the express terms of the charter the holder of a debenture stock certficate obtains no more at any time than the amount of the principal with interest thereon payable semiannually." It is held, therefore, that whether or not amounts received by a corporation upon the •ale of so-called debenture stock constitute invested caoital or borrowed capital depends upon the rights and powers enjoyed oy the holders of such stock and the obligations with respect thereto undertaken by the corporation; that where so-called debenture stock it issued by a corporation for cash or Droperty under a power granted by tie charter to borrow money, and the certificates of such stock contain an agreement on t le part of the corporation to repay the face amount thereof upon dissolution, and to pay interest thereon from time to time, at a certain rate per cent per annum; and where it appears that the claim of such debenture stockholders will, upon dissolution of the corporation, be subordinate to tie claims of general creditors but superior to the claims of the ordinary stockholders; and where it further appears that the holders of such certificates exercise no voice in the control or management of the corporation, the amounts received for the sale of such stock con- stitute borrowed capital, and the interest paid thereon, from tine to time, by the corpo* ration is properly deductible as a business expense. In view of the foregoing advice from the Solicitor, the Committee recom- mends that the action of the Income Tax Unit be reversed and that the amounts received by the M Company from the sale of the so-called debenture stock be treated as borrowed capital, and that the interest paid thereon be allowed as a deduction in computing the net income. 3 Supplementary Bulletin Rulings. 2-20-22. Sec. 325. Art. 813.— 1. Law Section 325.— Terms Relating to Invested Capital (1918 Act— f 548, ante): (1921 Act— «|1028, post). Article 813. — Borrowed Capital — Amounts Left in Business (Reg. 45— ^740, ante): (Reg. 62, <|1181, post). 23-19-552: T. B. M. 82. Excess profits tax — Surplus paid in by stockholders. The M Company was organized in 1910 with a capital stock of lO.r dollars. Such stock was subscribed for as follows: A, all but 2 shares; B, 1 share; and C, 1 share. All the capital represented by this stock was actually furnished by A; the other stockholders holding their stock for him. No change in stock ownership took place, and during 1915 A paid into the company Ix dollars. No action was taken by the corporation which would indicate the nature of this payment, except that it was entered upon the company's books as a contribution to capital and was never treated as an account payable. No stock was issued and no interest was charged on this amount. During 1917 this money was repaid by the corporation to A. No evidence is presented to indicate the nature of this payment or how it was treated by the corporation. The company contends that this sum should be Included in invested capital for the proper part of the year 1917. It is evident that the formalities of proper corporate action have in this case been disregarded. This makes a determination of the exact relation between A and the corporation with reference to the Ix dollars very difficult. Article 813, Regulations 45, contains the general principle: That if interest is paid or is to be paid on any such amount, or if the stockholders' or officers' right to repayment of such amount ranks with or before that of the general creditors, the amount so left with the corporation must be considered as borrowed capital and be so treated in computing invested capital. It is accepted legal doctrine that where stockholders voluntarily assess themselves to relieve the corporation from pecuniary embarrassment or for the betterment of their stock, whatever may be the occasion of the assessment, the advances thus made are not debts against, but assets of, the corporation. (Broderick v. Brown, 69 Fed., 497.) It is the opinion of the Advisory Tax Board that this payment was in the nature of a voluntary assessment by the one who was practically the sole stockholder of the corporation, and that after it was paid to the corporation no obligation to repay it existed. The treatment of this payment by the corporation upon its books (undoubtedly with the knowledge of A) is highly significant and would undoubtedly postpone A to the general creditors of the corporation as to this amount. The repayment of this sum in 1917 to the stockholder must be deemed to be out of undivided profits or earned surplus so far as possible. (Section 31(b), Revenue Act of 1916, as amended.) While this distribution was informal, it can not be treated as a return of capital unless the undivided profits and earned surplus accumulated since 1913 are first distributed as dividends. Whether or not such repayments will reduce the invested capital will depend upon the amount of current earnings available for distribution at the time of such repayment. It is therefore recommended that the M Company be permitted to include in its invested capital for the taxable year 1917 the sum of Ix dollars as a surplus paid in by the stockholders, proper adjustment being made for any distribution of dividends in excess of available net earnings. 1 18-20-905: A. R. M. 44. REVENUE ACT OF 1917. Advice has been requested as to whether an amount paid into a corpo- ration ratably by its stockholders under corporate resolution authorizing and Supplementary Bulletin Rulings. Sec. 325. Art. 813. 2. making the assessment can be properly treated as invested capital of the corporation, even though its books indicate and show that the amount so paid in has been treated as a loan; that interest has been regularly paid to the contributing stockholders and that the corporation has regularly deducted the interest so paid in making its returns up to 1917. A revenue agent submitted a report of his examination of the tax liability of this company and recommends the elimination of the amount so paid in from its invested capital for the reason that such amount has been treated on the books of the company as borrowed capital and further, for the reason that it has regularly each year in computing its net income deducted interest on this amount at the rate of 5 per cent per annum. No capital stock was issued for this amount of money paid in and no notes were given by the corporation acknowledging its indebtedness to the stockholders for this amount. The amount paid in in accordance with the corporate resolutions was entered on the books of the company as a capital reserve fund and in 1917 it was carried as "Advances by stockholders. ,, The company urges strongly that this amount is not borrowed money. It is urged by the taxpayer that it makes little difference whether or not interest was paid on this amount and it submits that the payment of the interest is not determinative of the question involved. The payment or non- payment of interest, it is contended, does not change the character of this capital and whether such capital is borrowed money or paid in surplus must be determined by the facts and by the intentions of the parties. This can best be determined from the books and records of the company. The tax- payer submits that its records clearly show that the amount was paid in as assessments in pursuance of corporate resolutions duly passed by the board of directors and that the amount so paid in was set up on the books as "Reserve capital." The company further urges that inasmuch as no notes or other evidences of indebtedness were issued for this money, there was no obligation to repay same to the contributors other than that attaching with respect to the original capital. Section 207 of the Revenue Act of 1917 provides that, as used in this title, "Invested capital" does not include stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the tax imposed by this title, nor money or other property borrowed. Article 44 of Regulations 41 provides, in part, as follows: The terra "money or other property borrowed" as used in section 207 of these regu- lations includes not only cash or other borrowed property which can be identified as such, out current liabilities and temporary indebtedness of all kinds, and any permanent indebted- ness upon which the taxpayer is entitled to an interest deduction in computing net income. A corporation, which under the income tax law is allowed to deduct only a part of the entire interest paid upon its indebtedness, may include in its invested capital such a pro- portion of its permanent indebtedness as the amount of interest upon such indebtedness which the corporation is not allowed to deduct is of the total amount of interest paid unon such indebtedness during the taxable ye,, r The Committee has considered all the facts presented in this case and has reached the conclusion that the money paid into the company under corporate resolution for which no notes were given nor even authorized does not fall within the provisions of article 812, Regulations 45. It is not thought that any court of equity or law would permit the repayment of this money ratably to the stockholders and interest thereon before the general creditors had been satisfied. If this assumption be correct, then assessments paidjn would be subordinated to the rights of the general creditors as to the payment of both the principal and interest thereon. Therefore, after careful consideration of the brief submitted by the'eom- Supplementary Bulletin Rulings. Sec. 325. Art. 813. — 3. pany,, and the recommendations of the revenue ^agent in this case, it is the opinion of the Committee that in determining the invested capital of this corporation the minute books of the corporation showing the resolutions making the assessment against the stockholders, reflect more clearly the true nature of the transaction than do mere bookkeeping entries concerning the same transaction made at a later date by a subordinate officer of the corporation. Although the sums paid to the stockholders as a return on their capital on account of these assessments were noted on the books of the corpo- ration as interest, the facts indicate that such payments were more in the nature of dividends. The books of the corporation treat the amounts paid by assessment as an obligation of the corporation. This is true, but so also are amounts paid in for capital stock carried as liabilities of a corporation. The resolutions authorizing the assessments do not provide that interest shall be paid to the stockholders, no notes or other evidence of indebtedness are given by the corporation, and the stockholders are not preferred over general creditors as to the amounts paid in assessments. Held, that the corporation may include in its invested capital for 1917 the amount assessed against its stockholders and paid in by them. 2 21-20-963: A. R. R. 102. REVENUE ACT OF 1917. Held in the appeal of the M Company that the amount of 36* dollars standing upon the books of the company to the individual credits of three stockholders, at the beginning of business July 1, 1916, is not invested capital within the meaning of the Revenue Act of 1917 The M Company is a corporation, all of the stock of which was owned by three stockholders, A, B, and C. During the lifetime of these stockholders no distribution of profits was made and the earnings were allowed to accumu- late from year to year. At the death of A, in 1907, the board of directors passed a resolution ordering the reserve fund to be prorated and credited to the deposit accounts of the three principal stockholders. In accordance with this resolution the accumulated profits were divided and placed to the credit of these various accounts. None of these profits was withdrawn; the business proceeded as before and the profits were allowed again to accumulate until 1909, when B died, and the same procedure was taken as in 1907; although it does not appear in the record that there was formal action on the part of the directors, nor is the rate of the division nor the total amount divided, shown. From the inception of the business until the present day no dividend has been declared nor have any of the profits been withdrawn from the business or segregated from the surplus of the company except as hereinbefore stated; but against the accounts credited as above, comparatively small charges have been made from time to time to cover living expenses of two of these stockholders. It is contended and sworn to that substantially all of the profits thus credited to these three stockholders have been, by verbal agreement, left in the corporation funds for the conduct of its business and that on the amounts so credited no interest has ever been paid by the corpo- ration nor have notes been issued therefor, for the reason that they never have been considered as obligations of the corporation; but, on the contrary, as funds left in the business to be used as capital; and deponents further de- Suppiementary Bulletin Rulings. Sec. 325. Art. 813.— 4. clare that the banks and other large creditors of the corporation were, and are, cognizant of this verbal agreement, and by reason of it extend credit to the corporation on these funds considered as capital. In support of this sworn statement there were submitted two identical affidavits of the presidents of two banks, to the effect that the amounts carried on the books to the credit of the stockholders were considered by their respective banks as capital left in the business of the corporation by those parties under a verbal agreement, and that on the strength of this agree- ment and the indorsement or guaranty given to these banks by the individuals named, credit was extended by these banks to the corporation; these credits amounting to I2x dollars and 25x dollars, respectively. On this statement of facts, which is not contested by the Income Tax Unit, the taxpayer appeals to this Committee to have these credits to these individual stockholders, which on July 1, 1916, amounted to 36* dollars considered as invested capital of the corporation; the Unit having denied such consideration. Section 207 of the Revenue Act of 1917 provides that — * * * As used in this title "invested capital" does not include * * money or other property borrowed, and means, subject to the above limitations: (a) In the case of a corporation or partnership: (1) Actual cash paid in, * * * and (3) paid in or earned surplus and undivided profits used or employed in the busi- ness, * * *. In the consideration of this case no question of good faith or of fact is involved. There is no doubt that these amounts have been left in the business in accordance with the verbal understanding above referred to, to be used as capital, or that they have been so used as necessary contributions to the working capital of the business, which has expanded so rapidly that their withdrawal would at all times have rendered necessary some provision for the financing of the company upon some other basis. It is contended in the taxpayer's brief and was reasserted at an informal oral hearing before this Committee on April 10, at which the taxpayer was represented by is president, that these amounts, which admittedly constitute a considerable part of the actual working capital of the business, should be, by reason of that fact, regarded as a part of the invested capital of the busi- ness within the meaning of the Revenue Act of 1917. In support of this contention the taxpayer advances the argument that these credits and the funds representing them have been regarded as a part of the capital of the corporation by the banks with which it does business and which loan it large amounts of money by reason of these credits as well as by its other large com- mercial creditors. The taxpayer contends that the intent of these stockholder-creditors, rather than the letter of the law, should prevail in the consideration of this case and that the good faith behind such intent has been amply and cone clusively demonstrated by the fact that these amounts have been left in the business over a period of more than 10 years, to the actual and material financial detriment of these creditors by reason of the fact that the funds representing these amounts have been actively and continuously used in the conduct of the business and in earning profits for the stockholders, from which profits these creditor stockholders derive no advantage beyond the general pro rata participation in the earnings enjoyed by all the stockholders alike. The taxpayer further contends that it should not be penalized in 1917 merely because of its failure to have made a "book entry," converting these credits into capital stock. The Committee has given due and earnest consideration to all the facts Supplementary Bulletin Rulings. Sec. 325. Art. 813.— 5. in this case and to the arguments presented by the taxpayer; but it can not see its way clear to accept the taxpayer's views. Under section 207 as quoted above, these credits are, in law, obviously either borrowed money or earned surplus and undivided profits. The very purpose for which and the circumstances under which they were created excludes them from consideration as "surplus and undivided profits." It was to determine exactly the equities of these three stock- holders in the profits or surplus, until that time undivided, that these credits were established. The president of this corporation vigorously denies that they are "surplus" of the company in the sense that all the present stockholders have a right to share in them ratably, and admits that these rights of these three stockholders would be asserted as against the other stockholders, though not against the general creditors. That being true, they form no part at all of the "surplus" of the corporation, and the alternative that they are borrowed money can not be escaped. Article 813 of Regulations 45 provides that — Whether a given amount paid into or left in the business of a corporation constitutes borrowed capital or paid-in surplus is largely a question of fact. Thus, indebtedness to stockholders actually canceled and left in the business would ordinarily constitute paid-in surplus, while amounts left in the business repre- senting salaries of officers in excess of their actual withdrawals, or deposit ac- counts in favor of partners in a partnership succeeded by the corporation, will be considered paid-in surplus or borrowed capita! according to the facts of the particular case. The general principle is that if interest is paid or is to be paid on any such amount, or if the stockholder's or officer's right to repayment of such amount ranks with or before that of the general creditors, the amount so left with the corporation must be considered as borrowed capital and be so treated in computing invested capital. These credits unquestionably rank, in law, with the claims of other general creditors ; even though by the good faith and honor of these three stockholders, they would be voluntarily deferred until the claims of the other general creditors had been liquidated in full. The Committee, moreover, can not concede the corporation's con- tention that it is being penalized merely because of its failure to have made a "book entry" converting these credits into capital stock ; be- cause there can be no doubt that these credits being a direct and fixed obligation of the corporation, ha~ T e not at all the same status among the corporation's liabilities as would have been the case had they, by formal action of the board, been converted into capital stock and certifi- cates issued therefor, or had the interested stockholders waived all proprietary rights to them and thus actually contributed them to surplus. Therefore, the Committee is of the opinion that the Income Tax Unit was correct in disallowing as invested capital this amount of 2>6x dollars and the action of the Unit is confirmed. 3 52-20-1366: A. R. R. 356 REVENUE ACT OF 1917. Held, that special accounts in a corporation, represented by interest-bearing notes in the hands of certain stockholders, cannot be included in invested capital, even though such notes carry a condition that demand for payment will not be made until all gen- eral credits are satisfied. The Committee has had under consideration the appeal of the M Supplementary Bulletin Rulings. Sec. 325. Art. 813.— 6. Company, a corporation, from the action of the Income Tax Unit in disallowing an item of 3 dollars as invested capital, this amount having been paid into the corporation by certain stockholders and held, at interest, under certain conditions as working capital of the corporation. This company was incorporated July, 191-, with an authorized capital stock of Ax dollars of which only 3x dollars has been paid in. Its business is conducted on the same general plan and by practically the same in- dividuals who were copartners in the predecessor company. Prior to the incorporation, the partners had allowed a portion of their earnings to remain in the business, such amounts being credited as "Special Accounts" of partners. When the partnership was liquidated certain partners returned their pro rata share in distribution to the corporation and on the books of the corporation amounts so paid in were again credited to certain "Special Accounts." Since the incorporation certain other amounts, acquired by declaration of dividend, have been credited to these accounts. It is stated that it was the intention of the stock- holders, as it had been the custom of the partners, to allow this fund to be used in the business of the company so long as it was necessary, subject to all the debts of the corporation as fully as though it had been paid in for capital stock. It is accordingly contended by the corporation that the entire amount so credited to the special accounts is "Surplus accumulated during the existence of the partnership and the existence of the corporation — while technically the amount received from the partnership cannot be treated as a surplus of the corporation, still so far as the individual interest of the stockholder is concerned, it is the same thing as though the entire amount was an accumulated surplus of the corporation." These special accounts of the corporation are now covered by notes, the pertinent part of which reads as follows: Bv mutual agreement and consent, demand for payment "of this note is not to be made by . . , his heirs or assigns, until all of the indebtedness of the M Company, for money borrowed, merchandise bought and delivered, together with unfilled contracts for merchandise bought which may be out- standing when notice is given that payment is desired, has been fully paid and satisfied. This note is nonnegotiable. The Income Tax Unit has denied the inclusion of these special ac- counts for invested capital for the following reasons : 1. They represent advances made by the stockholders from time to time but not in proportion to stockholdings and, therefore, do not repre- sent paid-in surplus. 2. They were secured by notes which were payable on demand provided all obligations outstanding at the time demand was made were satisfied, and accordingly the obligation of the notes is inferior to claims of general creditors only until the date when notice is given that pay- ment is desired. 3. The notes contain an absolute and unconditional promise to pay interest every six months, which promise is not modified by the pro- vision subrogating the principal of the notes to the general creditors, and accordingly the notes could not be considered in the light of pre- ferred stock. The Committee finds this case quite analogous to that covered by its recommendation No. 102. (Cumulative Bulletin Xo. 2. page 277.) The following exceptions of importance, however, are noted: Supplementary Bulletin Rulings. Sec. 325. Art. 813—7. 1. The special accounts, as indicated, represent loans only by special stockholders. 2. Interest is paid on such loans. 3. An agreement in the notes to the effect that demand for payment is not to be made until all indebtedness of the corporation is liquidated. 4. The guarantee of certain stockholders to be individually respon- sible for the entire debts of the corporation to the extent of the private resources of such stockholders. The stockholders are ten in number. Of this ten, five are owners of the so-called "Special Accounts" for which the above-mentioned notes were given. The liability, therefore, is not to all of the stockholders, pro rata according to the shareholdings. It is not an undivided amount which may be distributed pro rata in liquidation. The amounts so re- tained in the business are subject to interest charges and interest is actually accrued but it is apparently credited to the special accounts in part or in whole. There is an obligation on the part of the stockholders directly interested in the special accounts, not to demand payment of the notes supporting these special accounts until the indebtedness of the coq)oration is fully paid and satisfied but this agreement does not preclude the corporation as a distinct entity from liquidating these liabilities at such time as it may be deemed proper and in accordance with the tenor of the notes — not pro rata according to shareholders in the corporation. Furthermore, as stated by the Income Tax Unit : "The notes contained an absolute and unconditional promise to pay interest every six months, which promise is not modified by the provisions sub- rogating the principal of the notes to the general creditors and ac- cording! v the notes could not be considered in the light of preferred stock." It is further stated in affidavit submitted by the five stockholders, who financially give independent support to the corporation, that they are "guarantors of the debts of the corporation on guarantees given by the corporation to our banks and brokers and each and every one of us is individually liable on these guarantees for the entire debts of the corporation up to the extent of our private means as fully as though we were members of a partnership." This obligation establishes a right of action against the stockholders individually and not against the corpora- tion. As against the corporation it would not be enforceable at law r which limits the liability of the stockholder to his share of paid-in capital. Briefly, it may be stated that capital in' a corporate enterprise is : U Cash or property paid in by subscription to capital stock or as paid-in surplus. 2. Borrowed money for which obligations of the corporation may be issued. 3. Undivided increment of income resting in the surplus of the cor- poration. Manifestly these "Special Accounts" do not represent either stock subscriptions of undivided increment of income. In the latter the share- holder's interest is measured by his pro rata share interest in the cor- poration. This undivided increment of income is not a vested right. Borrowed capital is not invested capital under section 207 of the Revenue Act of 1917, which reads: * * * As used in this title "invested capital" docs not include * * • money or other property honow. .!. ^n.i m, ;«ns, subject to the above limitations: (a) In the case of a corporation oi partnership: Supplementary Bulletin Rulings. Sec. 325. Art. 813.— 8. (i) Actual cash paid in, * * * and (3) Paid-in or earned surplus and undivided profits used or employed in the business * * * , - / It seems pertinent at this point to quote from the recommendation of this Committee (102), supra: Under section 207 as quoted above, these credits are, in law, obviously either borrowed money or earned surplus and undivided profits. The very purpose for which and the circumstances under which they were created excludes them from consideration as "surplus and undivided profits." It was to determine exactly the equities of these three stockholders in the profits or surplus, until that time undivided, that these credits were established. The president of this corporation vigorously denies that they are "surplus" of the company in the sense that all the present stockholders have a right to share in them ratably, and admits that these rights of these three stockholders would be asserted as against the other stockholders, though not against the general creditors. That being true, they form no part at all of the "surplus" of the corporation, and the alternative that they are borrowed money cannot be escaped. Accordingly the Committee recommends that the conclusions of the Income Tax Unit in denying- these "Special Accounts" as invested capi- tal, be sustained under section 207 of the Revenue Act of 1917. 17-21-1602: A. R. R. 473 Recommended, in the case of the M Company, that treasury demand notes drawn by order of the president of a corporation payable to its stockholders, but not in proportion of shareholdings, do not constitute a liability of the corporation even though such notes are charged against surplus on the books of the company. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in disallowing the item of x dollars as invested capital in the taxable year 1918 on the ground that the item constituted notes of the corporation in the hands of its stockholders. The facts, as submitted, are as follows: The company had prior to December 31, 1910, acquired a paid-in and earned surplus of x dollars, represented by increased inventory stock, capital expenditures on machinery, plant, and equipment, and accounts receivable and notes receivable, thus absorbing the whole of this amount in the conduct of the business. At this time the president of the corporation instructed the secretary of the company to make demand notes out in the names of the stockholders for their respective interests in the x dollars, merely as a memorandum of the amount representing such interest, and not as an obligation of the company. The board of directors never authorized the issue of these notes, and there is no resolution on the records of the corporation authorizing the issue of these notes; said notes were never issued to the respective stockholders, but were retained by the treasurer of the corporation, and are to-day in his possession. The notes were made without any reference to payment of interest, or principal, and no interest has been paid, or credited to the accounts of the respective stockholders, and furthermore it was not the intent when these notes were made out to pay either the principal or interest, as the company was never in a financial position to liquidate this amount. No entry was ever made on the books of the company apportioning this amount to the respective stockholders, the amount reading "undivided surplus." These facts are not disputed by the Income Tax Unit, but the Unit contends that the demand notes in the amount of x dollars issued to the stockholders of the corporation in effect represent borrowed capital and, there- fore, should be disallowed as statutory invested capital in accordance with Article 813 of Regulations 45. The Unit has evidently overlooked the fact that a corporation can not, without consideration, issue notes to its stockholders for the amount of its surplus, except bv declaration of dividends prorata according to Stock- pile fnllowirtir f»CCtiQWte*'v ,1 '* ; «J >«> »«<-»tt»:ia«MOo * lo )U» SOI til (m) Supplementary Bulletin Rulings. 6-2-22. Sec. 325. Art. 813.— 9. holdings, for the stockholders have no vested right in the surplus of a corpo- ration. If this transaction was intended as a dividend with the accrued liability covered by demand notes, it was not sanctioned by formal resolution of the directors. It is manifest the issuance of the notes was not for the purpose of setting up a dividend liability, because the company states, and its statement is not controverted, that no apportionment of the x dollars wa8 made prorata according to shareholdings of the stockholders. - The action taken by the secretary of the company was on instructions from its president, and the only entry made was to debit surplus to the credit of notes payable. Furthermore, delivery of demand notes by the maker is essential to negotia- bility, and as long as these notes remain in possession of the corporation without formal declaration of distribution of surplus prorata according to shareholdings under formal action of the corporation, they can not be held to constitute a liability. The Committee accordingly is of the opinion that the action of the Income Tax Unit in considering this amount as borrowed capital should be reversed. S 34-21-1786: O. D. 1006. A Massachusetts corporation declared dividends as follows: November, 1916, x dollars; December, 1916, x dollars. These dividends were credited to the respective accounts of the shareholders with the understanding that they were not to be drawn against, and were not to bear interest, since the corporation needed the capital and it did not possess the cash with which to make actual payment. These dividends have been treated as liabilities of the corporation from 1916 down to date, and no interest has been paid or accrued thereon. The first dividend was formally declared by the board of directors, but the second dividend was credited to the stockholders, under an agreement that it was to be like the first dividend, although its declara- tion was not recorded in the minutes book of the corporation. The corporation requests permission to use these amounts credited to the stockholders' accounts as a part of its invested capital. Held, in view of Massachusetts court decisions that the dividend formally declared by the board of directors and credited to the accounts of the stock- holders on the books of the company was a distribution of part of the cor- poration's surplus. From the date of its declaration the corporation became a debtor and the stockholders became creditors, ranking with general creditors in their right to reduce to possession the amounts credited to their accounts. The amounts of surplus agreed to be credited to the stockholders' accounts by all the stockholders without formal action on the part of the directors was equivalent to a dividend. Its effect on the corporation's surplus and the rights of the stockholders are exactly the same as though the dividend had been formally declared. While the corporation may have had the use of the amounts credited to the stockholders, it was at all times liable to them for payment. Viewed in this light, the corporation's surplus must be reduced from the date the first dividend was formally declared and from the date the agreement was made informally to further credit stockholders' accounts with profits. 6 Supplementary Bulletin Ruling.-;. Sec. 325. Art. 813.-10. 37-21-1821: O. D. 1034. A corporation filed a return for 1920 showing a loss of 7x dollars. At the close of the taxable year the corporation owed its officers 4# dollars, which it was unable to pay. The officers agreed to a reduction of x dollars each, which, after the permission of this office had been granted, the officers deducted in reporting their salaries on their individual returns. A total of 3x dollars was waived by the three officers. This amount was credited to surplus in January, 1921, thus wiping out the deficit which existed at the close of 1920. While this book credit was actually made in 1921 it is contended that it was really an offset to the losses of 1920, and if so regarded, the corpora- tion would show a credit balance for 1920 of x dollars. It is held that the amounts waived by the officers did not constitute income to the corporation. Such amounts are paid-in surplus and should be so treated in making a return for the year 1921. Therefore no amended return is required for the year 1920. This ruling is based on the principle that there was in fact a valid obliga- tion on the part of the corporation to pay the amounts waived by the officers. If no such obligation existed, an amended return should be filed in which the amounts claimed as a deduction on account of the salaries of the officers should be reduced, which would result in there being additional taxable income disclosed by the corporation's return. 7 I ('22)-22-322: I. T. 1334. Revenue Act of 1918. In November, 1919, the stockholders of the M Company, by proper resolution, voted to increase the capital stock of the company. In pur- suance of such resolution, the officers of the company issued to everyone entitled thereto a certificate called a "stock subscription warrant" setting forth the terms upon which subscription to the stock of the new issue would be received. If such person accepted the offer to subscribe, his acceptance was indicated by signing a printed acceptance on the back of such warrant. It was provided that such warrant should be surrendered to the M Com- pany on or before January — , 1920, accompanied by an installment pay- ment of . . . . per cent of the par value of the stock subscribed for. Upon such surrender and payment the company issued to the subscriber a stock subscription certificate which read as follows: This certifies that has subscribed for shares of the capita i stock of the M Company, of a par value of $100 each, in accordance with resolutions adopted by the stockholders on November, 1919, and has agreed to pay therefor tjie par value thereof, and has paid the first installment of per cent thereon, and that sub- sequent installments will be payable * * * as follows: Second installment on or before April — , 1920. Third installment on or before July ■ — , 1920. Interest at the rate of 6 per cent per annum will be allowed from January • — , t<< June — , 1920, on all payments made on or before January ■ — , 1920, and interest at baid rate will be allowed from April ■ — , 1920, to June — , 1920, on all payments made after January ■ — , 1920, and on or before April — , 1920. And the stock subscribed for Will participate in dividends from and after July — , 1920. Upon full and final payment as herein provided, and the surrender of this certificate, and as soon as may be practical after July — , 1920, certificate for full paid stock will be issued, and adjustment of interest will be made. In the event of a failure to pay any of said installments when due, the company may sell the stock subscribed for at public or private sale without notice, and apply thfe a&\ proceeds to the payment of the amount still payable under said subscription, acci iii tii»; to the subscriber for any surplus, he to remain liable for any deficit. This certificate may be transferred by assignment as indorsed hereon, but :. Supplementary Bulletin Rulings. 6-2-22. Sec. 325. Art. 813.-11. hereof will be valid until this certificate is surrendered and the transfer is recorded on the books of the company. * * * * * * * * * The payments made by the subscribers were credited on the general books of the company to an account called "Received on stock subscriptions, new issue," but on the books of the transfer department an account was kept with each subscriber, crediting him with payments made and showing the amounts of interest paid him. The M tompany is a corporation organized under the laws of Texas. Article 1145 of the Revised Statutes of Texas (See Vernon's Sayles' Texas Civil Statutes, 1914) governing increases in capital stock provides as follows : Art. 1145. May increase its capital stock, hou . — A corporation may increase its author- ized capital by a two-thirds vote of all its stock; provided, that no stock shall be issued except for money paid, labor done, or property actually received. And when such vote is given in favor of the increase, the same may be done by the board of directors, trustees' or managing board of such corporation; and, upon such increase of stock being made in accordance with the above provisions and certified to the secretary of state by the direc- tors, together with satisfactory proof, which shall be the affidavit of the directors showing that the full amount of the increase has been in good faith subscribed, and 50 per cent thereof paid, and in other respects conforming to the proof required as on original appli- cation for charter, or showing that such portion thereof has been subscribed, or subscribed and paid, as is required for the corporation thus increasing its stock, and, if the secretary of state is satisfied that the increase of stock has been made in accordance with law and that the requirements of law have been complied with as to the subscription and pay- ment of stock and in other respects, as on an original application for charter, he shall file such certificate of increase; and. thereupon the same shall become a part of the capital stock of such corporation. Such certificate shall be filed and recorded in the same manner as the charter. The certificate of increase, with the necessary proof to support the same, was not filed with the secretary of state until August, 1920, whereupon such increase was approved. Thereafter the subscription certificates were taken up and canceled and certificates of stock were issued to the holders thereof. The question presented in the case is whether the payments made in accordance with the agreement evidenced by the stock subscription certifi- cates should be treated as a part of the capital stock of the company from the time of the receipt of each such payment or should be treated as bor- rowed capital until the increase in the capital stock of the company was properly authorized. Payments received by a corporation for which it is obligated eventually to issue stock, which it has no present power to issue, meanwhile paying interest, may be treated as constituting a loan until the stock is issued rather than as a payment into the capital stock of the company. (Associated Pipe Line Co. v. United States, 258 Fed., 800.) Tbe nature of the agreement under which payments are received is dependent upon the intention of the parties. Under article 1140 of the Revised Statutes of Texas, every private corporation, as such, has power "to enter into any obligation or contract essential to the transaction of its authorized business." Such power includes the power to borrow money. An agreement entered into by a corporation having power to borrow money is prima facie a loan agreement if it contains provisions for the payment by such corporation of interest upon money received by it thereunder. Interest is compensation for the use of money. Under article 1145 of the Revised Statutes of Texas, quoted above, an increase in the capital stock of a company does not become effective until a certificate of such increase has been filed with the secretary of state. This provision is very similar in its operation to article 1132 of such statutes, which provides that the existence of a corporation shall date from the riling Supplementary Bulletin Rulings. Sec. 325. Art. 813.— 12. of the charter in the office of the secretary of state. In Bank of De Soto v. Reed (50 Texas Civil Appeals 102, 109 S. W., 259) it was said that perform- ance of all the prerequisites short of filing the charter with the secretary of state is not sufficient to bring a company into existence as a corporation de jure, nor are such acts sufficient to create an association a corporation de facto. The court said that the filing of the charter in the office of the secre- tary of state was a necessary act to bring the corporation into existence. The requirements of article 1145 with respect to an increase of capital stock are expressly placed upon the same basis as an original application for a charter. Articles 1132 and 1145 are provisions of law in pari materia, and if the charter of the proposed corporation is not effective until the filing thereof in the office of the secretary of state, a proposed increase in the capital stock of a company is likewise not effective until a certificate of increase has been filed with the secretary of state. It follows that prior to complete compli- ance with the provisions of article 1145 a corporation has no power to in- crease its capital stock. The issuance of share-stock by the company before such compliance would be ultra vires. An unauthorized increase of capital stock is void and a subscriber to such increase incurs no liability by reason of his subscription, nor can he derive any benefits from it. The contract fails for lack of consideration to support it. ( Kampmann v. Tarver, 87 Tex., 491; 29 S. W., 768, 769, citing Scovill v. Thayer, 105 U. S., 143, and Insurance Co. v. Kamper, 73 Ala., 325.) The M Company had no power, therefore, to issue, prior to August, 1920, new shares of stock pursuant to the increase of its capital stock voted by the stockholders. The contract set out in the certificate quoted above evidences an understanding by the parties of this fact. It was provided that shares of stock would be issued as soon as practicable after the final payment upon the subscription was made, which may fairly be construed to mean that share-stock would be issued when the authority to do so was procured. Meanwhile the subscriber was not, of course, a shareholder or member. The company had no authority to bring him in as such. His relations with the corporation could not extend beyond his contract, which, under the circumstances, was one of purchase of share-stock to come into being in the future. Since he was not a stockholder or member he could not share in the earnings of the company. He was in all fairness, of course, entitled to a return upon the money paid in and for this reason the company agreed to pay him interest in the manner set out in the subscription certifi- cate. There is no qualification of the subscriber's right to interest for the period specified. It was payable whether or not the company had earnings on hand when it fell due. Such interest payments can not, therefore, be considered to be distributions of profit. While the subscription contract does not contemplate a repayment of the money paid by the subscriber, the company's right to such payments was not complete until it was properly authorized to increase its capital stock. In view of this fact, together with the considerations outlined above, it is believed that the payments made to the M Company under the subscription contracts here considered should be treated as borrowed capital until the authorization to increase the com- pany capital stock was properly secured. It follows that the interest payments made are properly deductible as such by the company. Such payments, in the hands of the holders of the stock subscription certificates, constitute interest received and are subject to both normal tax and surtax. This is so, even if such payments were made by way of a credit to the price of the share-stock to the subscriber, in which Supplementary Bulletin Rulings. 9-13-22, Sec. 325. Art. 813.— 13. case such interest payments are to be treated as if received by the subscribers and immediately reinvested by applying them to the purchase price of the new stock. 8 I-('22)-37-507: A. R. R. 1004. Section 207, Revenue Act of 1917. Section 326, Revenue Act of 1918. Recommended in the appeal of the M Company, that the action of the Income Tax Unit in holding that certain items of earned surplus distributed upon appellant's books and placed to the credit of individual surplus accounts standing in the names of the stockholders do not constitute a part of invested capital under section 207, Revenue Act of 1917, and section 326, Revenue Act of 1918, be sustained, and, accordingly, that the appeal be denied. The Committee has had under consideration the appeal of the M Com- pany from the action of the Income Tax Unit in holding that certain items appearing on its books on January 1, 1917, and January 1, 1918, do not constitute earned surplus within the meaning of section 207, Revenue Act of 1917, and section 326, Revenue Act of 1918, and therefore are not to be included in invested capital for those years. The appellant through its representatives, both by brief and in oral conference, has submitted arguments in support of its contention that the items involved should be treated as earned surplus used and employed in the business and as such included in the computation of its invested capital. The facts as they appear upon the record are substantially as follows: The taxpayer was incorporated in Connecticut in 189-. The outstanding capital stock is x dollars. Prior to 1917 there were but three stockholders, two of them, A and B, owning substantially the entire capital stock in nearly equal proportions. In 1917 and 1918 there were four stockholders. A hold- ing 52 per cent, B, 45 per cent, and two others each holding lJ/£ per cent. Until 1918 the taxpayer was engaged in manufacturing. During 1918 it was engaged in the manufacture of certain devices for the Government. Its net income for 1917 was lOAx dollars, and for 1918, 2.3x dollars. For many years prior to 1917 it was the custom of the board of directors to pass a resolution annually authorizing a distribution of the year's net income to the stockholders pro rata to their stockholdings. On January — , 1917, the directors passed the following resolution, differing from those passed annually for many years prior thereto only in the designation of the year to which it applied: It was moved and voted that the net profit for the year ending December 31, 1916, be divided pro rata with the stockholders as the individual holdings appear and credit the amount to the individual surplus accounts standing in the names of the stockholders. On January — , 1918, the following resolution was passed, referring to the division of profits for the year 1917: It was moved and voted that the net profits remaining after deducting salaries, expenses, and war-profits tax be divided in the following proportions and the amounts credited to the individual surplus accounts of the stockholders: Per cent. A hi 52 j, B 45 , c : " va . Pursuant to these resolutions, the amount of the surplus at the end of each year was credited on the corporation's books to the surplus accounts Supplementary Bulletin Rulings- Sec. 325. Art. 831— 14. standing in the names of the stockholders. From time to time the stock- holders withdrew a portion of the amounts credited to their accounts with- out further authority from the corporation, although this was done only- after consultation between A and B. the president and treasurer, respec- tively. Such withdrawals were never in excess of current annual earnings, except in the year 1918, and were charged by the taxpayer to the special surplus accounts bearing the names of the respective stockholders, An examination of the individual returns of the stockholders shows, and this is admitted in the affidavit of the president, A. that they reported the income when credited to their accounts and not when actually withdrawn. The entire profits credited to the stockholders' accounts were not with- drawn immediately or in any one year, but were allowed to accumulate from time to time, and remain in the business, without interest. The aggregate amount of the accumulated earnings remaining in the business on January, 1917 and 1918 was 18.8a; dollars and 19.5.V dollars, respect.i\ elv. The cur- rent profits and withdrawals, which do not include salary, were as fdUbws for the years which are material here: Year. - — _„oiij ic\ Uj. Current profit?. With- drawals. Dollars. Dollars. 3 . 0.v 6. lv 5 . S.v 1Q18 1 ' 1 In connection with the income and excess-profits tax returns for the year 1917 and income and profits tax return for the year 1918, the Unit has held that the earnings and profits, placed to the credit of the individual stock- holders and voluntarily left in the business without interest, should be treated as borrowed capital no part of which can be included in computing invested capital. The Unit relies upon A. R. R. 102 (C. B. 2, p. 277) and A. R. R. 133 (not published). A computation of the tax under sections 201 and 207 of the Revenue Act of 1917 and section 301 of the Revenue Act of 1918 indicated a tax liability in excess of — per cent of the net income of the corporation for these years. The taxpayer, therefore, was granted relief under section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918. The taxpayer has declined to accept the relief granted and appeals. It contends that the surplus of the taxpayer credited to the surplus accounts in the names of the stockholders and used in the business constitute earned surplus and not borrowed money, and, therefore, is a part of its invested capital. It contends that the resolutions referred to do not constitute a legal declaration of a dividend. The taxpayer concedes that the with- drawals by the stockholders reduced the invested capital by the amounts thereof from the date of such withdrawals. The question at issue has been considered by the Solicitor of Internal Revenue upon the basis of the facts just stated and under date of May — , 1922, he submitted to this Committee an informal opinion the pertinent portions of which are here quoted: Section 207 of the Revenue Act of 1917, in defining invested capital, limits it among other things to the following, subdivision (a) (3.): Paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year. The corresponding provision of the Revenue Act of 1918, section 326(a)3, reads: fctnl/CODB' °l!lCpU3 3flf Oj ?5lCOO 2 flOJJ BlOqiOJ 9T»J a" UlJiiJ 'IJ u^*» Supplemcni ary Bulletin Rulings. 9-13-22. Sec. 325. Art. 813.— 15. Paid in or earned surplus and undivided profits not including surplus and undivided profits earned during the year. The questions involved here rest on whether the proportionate amounts of annual earned surplus credited to the respective individual surplus account of the several stock- holders were dividends, or in whole or in part earned surplus. Article 858, Regulations 45, in so far as pertinent here reads as follows: A dividend other than a stock dividend affects the computation of invested capital from the date when the dividend is payable and not. from the date when it is declared, except that, where no date is set for its payment the date when declared will be considered also the date when payable for the purpose of this article. * * * From the date when any dividend is payable the amount which the several stockholders are entitled to receive will be treated as if actually paid to them, whether or not it is so paid in fact, and the surplus and undivided profits, either of the taxable year or of the preceding years, will in accordance with the foregoing provisions be deemed to be reduced as of that date by the full amount of the dividend. The statute of Connecticut as to dividends follows the general form as that of most States. It prohibits a corporation from paying any dividend or from making any other distribution of its assets except from its net profits or actual surplus, unless in accordance with the law as to the reduction of stock or upon dissolution. While the resolutions referred to do not specifically refer to the amounts credited to the so-called individual surplus accounts as dividends, the purpose is clear that it was intended to make available to each stockholder at least a large part if not all of the amounts so credited. This is evidenced by the large withdrawals without any further corporate action. While the usual and proper way to appropriate corporation profits to stockholders is by formally declaring a dividend, it has been very generally held that there may be a division of profits among stockholders without the formality of declaring a dividend, and that such a division is the equivalent of a dividend. (Smith v. Moore, 199 Fed., 689; Hartley v. Pioneer Iron Works, 73 N. E., 576 (N. Y.).) And it has been held that if the directors ascertain the profits and set apart the portion thereof that is to be divided, a failure to observe the forms prescribed by law as to the time, place and manner of declaring them is immaterial. (Breslin v. Fries- Breslin Co., 58 Atl., 313 (N. ].).) This is the law in Con- necticut. {Cogswell v. Second National Bank, 60 Atl., 1059, affirmed in 204 U. S., 1.) In the instant case the directors having ascertained the profits, and set apart certain sums which were actually credited to the individual stockholders, all matters of form are immaterial. The evidence shows that at stated times the specific things necessary to warrant a declaration of dividends were done and that the profits actually made were set apart for distribution among the stockholders. This is the essence of the declaration of a dividend, so far as it results in segregating a portion of the property of the company for the use of the stockholders. Thenceforward the corporation, as such, had no property interest in the money thus set apart. (Breslin v. Fries- Breslin Co., supra; Barnes v. Spencer & Barnes Co., 127 N. W., 752 (Mich.); Cogswell v. Second National Bank, supra (Conn.).) The effect of the declaration of a dividend is at once the establishment of a debt due from the corporation to each stockholder. (Boardman v. Mansfield, 66 Atl., 169 (Conn.); Bishop v. Bishop, 71 Atl., 583 (Conn.).) The amounts credited to the accounts of the respective stockholders were freely drawn upon and the amounts so credited reported as income by the individual stockholders when credited to their accounts. These are circumstances which are of great persuasive force in reaching a conclusion as to how the individual stockholders themselves considered the amounts so credited. It is, therefore, the opinion of this oifice that the proportionate amounts of the annual earned surplus credited to the respective individual surplus accounts of the several stock- holders were dividends, and that such surplus accounts were in effect debts owing at all times by the corporation to its stockholders, any withdrawal by individual stockholders merely being a debit against the proper individual surplus account. It follows that for the years 1917 and 1918 the net credit, balances of individual surplus accounts can not be included in the invested capital of the M Company. Iii accordance with the above opinion of the Solicitor, in which the Com- mittee concurs, it is recommended that the action of the Income Tax Unit in holding that certain amounts standing as credits to the individual surplus accounts of stockholders on January 1, 1917, and January 1, 1918, repre- sented dividends owing to its stockholders and not, as contended by the appellant, earned surplus which could properly be included in invested capital, be sustained, and, accordingly, that the appeal be denied. 9 Supplementary Bulletin^Rulings. 2-20-22. Sec. 325. Art. 815.— 1 Law Section 325.— Terms Relating to Invested Capital (1918 Act— 11548 ante): (1921 Act— 111028, post). Article 815.— Inadmissible Assets (Reg. 45—^743, ante): (Reg. 62— •[1183, post). 1-19-116: O. 781. War Finance Corporation Bonds — "Admissible Assets." interest on an amount of bonds of the War Finance Corporation, the principal of which does not exceed in the aggregate $5,000, is # exempt from Federal income and excess-profits taxes. Corporate funds invested in such bonds are inadmissible assets to the extent that they are invested in bonds of a face value of not more than $5,000, but funds of a corporation or an association invested in such bonds are admissible assets so far as they are invested In such bonds beyond a principal or face value of $5,000. Opinion is requested as to whether War Finance Corporation bonds are admissible or inadmissible assets of a corporation, within the meaning of section 325(a) of the Revenue Act of 1918. That subsection includes the provision that — The term "inadmissible assets" means * * * bonds and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income * * * The term "admissible assets" means all assets other than inadmissible assets, valued in accordance with the provision of subdivision (a) of section 326, section 330, and section 331. Therefore, if funds which would otherwise be a part of the invested capital of a corporation are invested in War Finance Corporation bonds, no exclusion of funds so invested from invested capital will be necessary unless interest on such bonds is not included in computing net income. As shownbelow, the interest on so much of the principal of such bonds as exceeds $5,000 is included in net income, and no funds so invested are to be considered inadmissible assets, by reason of being invested in such bonds, except as are invested in bonds having a face value of $5,000, the interest on which is exempt. This conclusion has the following basis: War Finance Corporation bonds, held in excess of $5,000 principal, are subject to surtaxes, although not to normal taxes, under the provisions of section 213(a) (4) Revenue Act of 1918— In the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof at amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under this title and under Title III. That is, if, under the Acts authorizing the issuing of such bonds, they arc not wholly exempt from taxation, such interest may not be excluded from gross income. These bonds are issued under the authority of the Act of April 5, 1918, which provides, in section 16 — That all such bonds shall be exempt, both as to principal and interest, from ali taxation now or hereafter imposed by the United States * * * except (a) estate or inheritance taxes and (b) graduated additional income taxes, commonly known as surtaxes, and excess profits and war profits taxes, now or hereafter imposed by the United States upon the income or profits of individuals, partnerships, corporations, or associations. The interest on the amount of such bonds the principal of which does not exceed in the aggregate $5,000, owned by any individual, partnership, corporation, or assocation shall be exempt from the taxes referred to in clause (b). Recognizing that a taxpayer may be required to include a certain amount of interest upon such bonds in gross income, section 216(b) of the Revenue Act of 1918 allows a credit for — The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is included in gross income under section 213. Supplementary Bulletin Rulings. Sec. 325. Art. 815— 2. It is therefore held that interest on an amount of bonds of the War Finance Corporation, the principal of which does not exceed in the aggregate $5,000, is exempt from Federal income and excess profits taxes. Corporate funds invested in such bonds are inadmissible assets to the extent that they are invested in bonds of a face value ot not more than $5,000, but funds of a corporation or an association invested in such bonds are admissible assets so far as they are invested in such bonds beyond a principal or face value of $5,000. 1 1-19-118: O. D. 81. Federal reserve bank stock held by member banks is held to be an in- admissible asset in determining invested capital for excess profits tax purposes. 2 (See 22-19-538; Section 1 326, Article 838.) Stock of foreign corporations deriving no income from sources within the United States. 3 24-19-576: O. D. 305. Inasmuch as dividends received by a domestic corporation from a foreign corporation deriving income from sources within the United States are allow- able deductions in ascertaining the net income of the domestic corporation subject to tax, there could not be included in the invested capital of the domestic corporation receiving the dividends the amount of capital invested in the stock of the foreign corporation, or any part of the value thereof, except as outlined in article 817. 4 21-21-1656: O. D. 929. School warrants issued by a county of a State are held to be inadmissible assets in determining invested capital for excess profits tax purposes. [For modification see No. 3 at Sec. 325, Art. 818.— 1.] Supplementary Bulletin Rulings. 1-31-22. (2) 9-1-22. Sec. 325. Art. 815.— 3. 40-21-1857: 0. D. 1057.^ Inquiry if made whether 4 per cent bonds of the Government of the Philippine Islands are to be considered admissible or inadmissible asset* in computing invested capital. Section 325 (a) of the Revenue Act of 1918 provides that: The term "inadmissible assets" means stacks, bonds and other obligations (other that, obligations of the United States), the dividends or interest from which is not included in computing net income * * *. It is further provided in section 213(b) 4 of the Act that interest upon obligations issued by a possession of the United States is exempt from Federal income tax. The bonds referred to are not obligations of the United States, but on the contrary are obligations of a possession of the United States. Accordingly, it is held, that 4 per cent bonds of the Government of the Philippine Islands are inadmissible assets within the meaning of section 325 (a) of the Revenue Act of 1918, 6 42-21-1875: O. D. 1069. Since the income from Federal land bank bonds is tax free and since such bonds are not obligations of the United States, they are inadmissible assets within the meaning of section 325(a) of the Revenue Act of 1918, and should be so treated in computing the invested capital of a corporation. 7 (See I ('22)-4-48; Section 326, Article 831. Ruling No. 32.) Foreign corporate stock. S 1-35-486: I. T. 1434 Revenue Act of 1921. The M. Company, a corporation with a fiscal year ending April 30, 1922, owned on May 1, 1921, y shares of the capital stock of the O Company which were carried as an asset at x dollars, representing their cost price. In June, 1921, the O Company was dissolved. The general corporation laws of the State under which it was organized provide that a corporation continues in existence for three years after the date of its dissolution for the purpose of closing its business and distributing its assets, but not for the purpose of continuing its business, and that during this period the directors or governing body of the corporation are its trustees with power to settle its affairs, convey its property, pay its obligations, and divide its remaining assets among its stockholders. Inquiry is made whether the undivided interest of the M Company in the liquidation of the assets of the O Company is an admissible asset from and after June, 1921, the date of the dissolution of the latter company. Held, that the interest of the M Company in the assets of the dissolved corporation is represented by its stock in that corporation until such time as the assets of that corporation are actually distributed. It accordingly follows that any interest the M Company has in such assets prior to their distribution must be classed as an inadmissible asset. 9 Supplementary Bulletin Rulings. 2-20-22. Sec. 325. Art. 816.— 1. Law Section 325.— Terms relating to Invested Capital (1918 Act— If 548, ante): (1921 Act— ^1028, post). Article 816. — Inadmissible assets: Government Bonds (Reg. 45 — 1l748, ante): (Reg. 62— f 1184, post). 38-21-1836: O. D. 1044. Inquiry is made whether bonds issued by Porto Rico and Hawaii are inadmissible assets. The Revenue Act of 1918 provides, in part, as follows: Section 325(a). That as used in this title the term "inadmissible assets" means stocks, bonds, and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income * * * It is further provided in paragraph 4, section 213(b), of the Act that interest -upon obligations of a possession or territory of the United States is exempt from Federal taxation. The foregoing provisions of law are here applicable. The bonds referred to are not obligations of the United States within the meaning of the paren- thetical clause embodied in section 325(a) of the Act. Therefore, they fall squarely within the general language of that section and must be held to be inadmissible assets. 1 Supplementary Bulletin Rulings. .1 — .d 18 ,1i A .est .o»8 r Sec. 325. Art. 817.— 1. Law Section 325.— Terms Relating to Invested Capital (1918 Act— 1[548 ante): (1921 Act— H1028, post). Article 817. — Inadmissible Assets: Partial Exception (Reg. 45 — 1f749 ante): (Reg. 62— Hi 185, post). Revenue Act of 1921. I ( , 22)-5 1-649: I. T. 1536. A corporation sold inadmissible assets consisting of stock at a profit and so brought itself within the provisions of article 817 of Regulations 62, to the effect that where the income derived from inadmissible assets con- sists in part of profit from the disposition thereof, a corresponding part of the capital invested in such assets shall be deemed an admissible asset. The question was submitted as to whether under these conditions a cor- poration should deduct only the cost of the stock sold from its inadmissible assets for the period after the sale or whether it is permitted to deduct an amount equal to the amount which is added to admissibles as a result of the sale of the stock. Held, that under the conditions stated, a corporation can decrease its inadmissibles only in an amount equal to the cost of the stock sold, for the period after the sale, as the value of both admissible and inadmissible assets employed in determining the invested capital of a corporation is represented by their cost of acquisition. In other words, when inadmissible assets are eliminated through sale, the total value of the inadmissibles is reduced by the cost price of the inadmissibles sold. A corresponding increase equal to the cost of the inadmissibles sold should be made in admissibles effective only from the date of the sale, unless such proceeds are reinvested in admissibles. Any profit realized during the year on the sale of inadmissibles is a current profit and can not, under the provisions of the statute (section 326(3) ), be included in invested capital until the succeeding year. 1 Supplementary Bulletin Rulings. A—SIS JtA .2S£ .os'S Mf—iok 8IQI) bsliquD bsteavnl ot znmT -.2££ nobos8 w .(taoq t 8S0X|P— -toA ISQI) :( 9 jm5 QKlf— 2* . 3 95I) noitqoDx3 ifiihfiq rgJsaaA sldiaaimbfinl -.YI8 sIoitiA .(teoq ,581 I]f~ Sd : (etxiB Jnoiq £ ;f£ .aooia lo gnijaianoo alaaae sldiaaimbfini bloa noijinoqioj enotfsIirgdJH to "18 obiiifi to anoiaivoiq odl nirtoiw Ibaii jrf^uoid c -noo aJoaa/; Mdiaaimb£ni mo'il boviiob amooni odi owdw .t£d;f joolb - to Jifiq tjnibiioqsjmoa b ( fo*to£b nofriaoqaib odi moil jftoiq lo ima a ^^fmba n£ bwnwb ad Hade tteta* doua ni bSi^ni £iq .100 £ anombnoo oaoxfj lobnir rated* oj 8£ bottimdira a fi w Aofc&ttp * Mizaimb&m all moil bloe ioo^a adi lo Jzoo odj ylno Joubsb bf-rod? n£ Joubab oJ boj jimiaq ai Ji lodiodw io slse sdt *itl* hnh-irr «»,{♦ rnoir vln 3flJ 131 kjiqir? »nu t Jorr r boJ80Vfli ni b ■ - - o} {fjup^ Sflsstooi gnibnoqaonoo A io yvitems aoldigaimbs ni sbfim ad bfuoda Idiaaimb£ ni bstfaavoisi sib abooooiq dot/* 100 £ ai aaldiaairabfini lo 3U3 oiLf no tasy nobooa) olul&n 3 dJ lo anoiaiYoiq .i£9Y anibooooua adl liinu 2-20-22. Sec. 325. Art. 818.— 1. Law Section 325. — Terms Relating to Invested Capital (1918 Act — ^548, ante): (1921 Act— «I1028, post). Article "818.— Admissible Assets (Reg. 45 — 1f750, ante): (Reg. 62— If 1186, post). 1-19-40: O. D. 28. The computation of exempt interest from Liberty loan bonds will be based upon the full amount of bonds subscribed for and still owned. Interest upon obligations incurred to purchase or carry Liberty bonds issued after September 24, 1917, may be deducted from gross income. In computing the amount of admissible assets for the purpose of determin- ing the average percentage of inadmissible assets, the total cost of bonds subscribed for, whether fully paid for or not, may be included in admissible assets, s 1-19-132: O. D. 93. Conversion of certificates of indebtedness purchased by a corporation in 1918 into Victory loan notes of same value would not affect invested capital for purposes of war profits tax. 2 45-21-1915: O. D. 1096. A bank is in possession of certain warrants drawn by a school district on the superintendent of schools for a county. These warrants are in the nature of drafts drawn in favor of the teachers in the public schools of a particular district. They were cashed by the bank as a matter of accom- modation only for the teachers of the district. These warrants have been returned by the superintendent upon whom they were drawn with the nota- tion thereon that no funds were available with which to meet these obli- gations. The warrants are carried by the bank without any remuneration in the shape of interest or discount. Advice is requested as to whether these school warrants are admissible or inadmissible assets for the purpose of computing invested capital. The definition of "inadmissible assets" as laid down in the different revenue Acts implies that stocks, bonds, and other obligations must be potentially interest-bearing or dividend-producing securities to come within the classification of an inadmissible asset. In the instant case it appears that the drafts, or school warrants, were cashed for the accommodation merely of the school teachers in whose favor they were drawn. No discount was received by and no interest is payable to the bank. Held, that the noninterest bearing warrants drawn by the particular school district on the superintendent of schools for a county are admissible assets capable of being included in the invested capital of the bank in com- puting its assets. (O. D. 929. C. B. 4, p. 363, modified [see No. 5 at Sec, 325, Art. 815-?, herein].) 3 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 831.— 1. Law Section 326— Invested Capital (1918 Act — •j555, ante): (1921 Act— 1fl035, post). Article 831. — Meaning of Invested Capital (Reg. 45— H 751, ante): (Reg. 62— <[1187, post). 9-19-350: O. D. 202. The amount of taxes withheld at the source to be later paid over to the Government is not an asset of the withholding agent and must be eliminated entirely from the computation of invested capital. 1 10-19-365: O. 872. Valuation of Invested Capital in Case of Consolidation Prior to March 3, 1917. Where two corporations are engaged in different branches of the same business, and the certificate of incorporation of one of them is amended so as to change its name and increase its capital stock, which new stock is issued in exchange for the •lock of the original companies, and this exchange is made prior to March 3, 1917. to determine the invested capital of the new organization there should be added to the invested capital, as defined by Section 207 (a). Revenue Act of 1917, of the company whose certificate has been awarded the fa.r value of the assets of the other company, this latter valuation to be made as of the date of the exchange of stock, and not of a later formal transfer of the tangible assets. (Revenue Act of 1917, sees. 201, 207, and 208.) Opinion is requested as to the method of determining the amount of the invested capital of the Z Company for the year 1917. In the year 1916 the M Company and the Y Company were engaged in the manufacture and sale of certain commodities. The M Company had a cap- italization of 8* dollars; the Y Company of 5x dollars. It was decided to consolidate the business of the two companies, and to this end the certificate of incorporation of the M Company was in 1916 amended so as to change its name to "Z Company," and to increase its capital stock to 67* dollars. The stock of the Z Company was in that year issued to the stockholders of the M Company and of the Y Company. The assets of the Y Company were formally transferred to the Z Company by a bill of sale and by deed in 1917. A valuation was made in 1916 of the properties of the two companies which indicated that the net assets of the M Company were 12a* dollars and of the Y Company 10* dollars. The Z Company seeks to have this valuation of the assets of the two companies, a total of 22x dollars, accepted as the basis of its invested capital for the year 1917. It is assumed from the statement of facts that there was no change of corporate entity as between the M Company and Z Company, a theory which seems fair to the taxpayer by reason of the statement in the brief presented in its behalf that the certificate of incorporation of the M Company was amended, changing its name to "Z Company," and increasing its capital stock, etc. The question presented is whether a "reorganization, consolidation, or change of ownership" under these facts was effected before or after March 3, 1917, within the meaning of section 208 of the Revenue Act of 1917; and if before March 3, 1917, how far the valuation of the assets of the two companies made in 1916 may be accepted as the basis of the invested capital of the Z Company for 1917. The original M Company dealt in raw product, and the Y Company bought and manufactured it. It was, however, decided that the entire business could be better conducted under one management; and with this end in view the M Company increased its capital stock and issued it in ex- Supplementary Bulletin Rulings Sec. 326. Art. 831.— 2. change for the stock of the other two companies. The result was to vest complete control of the entire business in the Z Company, and to transfer to that company the control of the property of the Y Company as of the time when such merger so became legally effective, which was in 1916. The Revenue Act of 1917 imposed a tax called the "War excess profits tax" upon "the net income of every corporation, partnership, or individual," in so far as such income exceeded certain percentages "of the invested capital for the taxable year" of the taxpayer (Revenue Act of 1917, sec. 201). "In- vested capital" is defined as consisting of (1) actual cash paid in; (2) the cash value of tangible property paid in; and (3) surplus and undivided profits, exclusive of those earned in the taxable year (sec. 207). The statute further provides: That in case of the reorganization, consolidation, or change of ownership of a trade or business after March 3, 1917, if an interest or control in such trade or business of 50 per cent or more remains in control of the same persons, corporation, associations, partnerships, or any of them, then in ascertaining the invested capital of the trade or business no asset transferred or received from the prior trade or business shall be allowed a greater value than would have been allowed under this title in computing the invested capital of such prior trade or business if such asset had not been so transferred or received, unless such asset was paid for specifically as such, in cash or tangible property, and then not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment. (Sec. 202.) The general rule indicated in the statute is that the value of invested capital is to be determined at the time when it is "paid in." It must now be decided when such payment is deemed to be made in cases where there has been a transfer or substitution of stock made in 1916, followed by a formal transfer of tangible assets in 1917. Restating the rule of section 208, Revenue Act of 1917, for the determin- tion of invested capital: A. By express provision where there is a reorganization, consolidation, or change of ownership, (1) after March 3, 1917, and (2) 50 per cent or more of an interest or control remains in the same persons, corporations, associations, partnerships, or any of them, then as to assets transferred or received from the prior trade or business, no greater value shall be allowed therefor than if there had been no transfer, unless paid for in cash or tangible property B. In cases not covered by the provision quoted, that is, cases where the reorganization, consolidation, or change of ownership occurred before March 3 ; 1917, or after March 3, 1917, with less than 50 per cent remaining in the same control, the invested capital will be determined under the general rule. But where there is no change of identity of the absorb- ing organization, its prior assets must be valued under section 207 and not at the time of the reorganization, consolidation, or transfer, since there was no transfer of its assets at that time. Applying the rule to the present case, the mere change of name by a nend- ment with an increase of stock did not involve a change of indentity as to the M Company, and there could not have been therefore, a transfer of the assets of that organization within the meaning of the statute. As to the Y Company, there was a transfer of control, and under the facts this transfer was consummated before March 3, 1917, and its assets may therefore be valued as of the time of such transfer. It will be necessary, therefore, in determining the invested capital of the Z Company to add to the valuation of the assets of the Y Company made in 1916 (assuming such a valuation to have been fair) such a sum as represents the^n vested capital of the M Company as defined by section 207(a) of the Revenue Act of 1917. The valuation of the assets of the latter company made in 1916 will have to be disregarded, and its assets valued on the basis that no change of ownership or control has occurred as to those assets. There was no transfer or receipt from "a prior trade or business" as to such assets. 2 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 3. 11-19-389: T. B. M. 49. It appears that the Y Company went into the hands of a receiver, the plant being worth, on the basis of cost less depreciation, approximately 8x dollars. The creditors acquired the assets at a receiver's sale at a nominal figure in order to cover loans. They turned the business over to the Z Com- pany, a new corporation formed for the purpose of taking over the property. The conditions of this latter sale were: (1) the Z Company was to supply x dollars working capital; (2) the Z Company was to assume the unpaid liab- ilities of the Y Company and pay them off within a period of years; (3) the Z Company was to have the assets of the Y Company in return for meeting the liabilities. Upon these conditions the Z Company was duly incorporated with a capital stock of x dollars subscribed. It is claimed that the stockholders of the new corporation are the same as those of the defunct Y Company, and for that reason the new corporation requests to be permitted to set up an invested capital equal to that of the defunct corporation. There is a difference of opinion as to whether the x dollars actually paid in to the Z Company in return for their stock should be considered the total invested capital of the new corporation or whether the view should be taken that the new business is substantially a reorganization of the old, and, there- fore, the invested capital be fixed upon that basis. It would appear that the first of these views is correct. The Y Company went into the hands of a receiver and its property was sold to its creditors who were not the stockholders of the corporation. The title to this property passed absolutely to the purchasers, who were in nowise connected with the old corporation, except as creditors. The transaction was closed and com- pleted as far as the old corporation and its stockholders were concerned. The new corporation which was formed to take over the property could have been incorporated by stockholders of the former company or by entire strangers; the situation so far as it affected the creditors would have been the same. There may have been a community of interest between the stock- holders of the old corporation and its creditors, and such interest would be a proving factor in the creation of the new corporation to salvage the property, but this would not change the legal status of the transaction. The new corporation having been formed, it took over the property which had been taken by the creditors in satisfaction of their claims on the following con ditions : They were to furnish x dollars working capital, to raise which they sold stock; and they were to assume the unpaid liabilities of the old corporation in exchange for the property taken over by the banks. The invested capital of the Z Company, therefore, would appear to be the x dollars received for the stock sold. The value of the property received on condition of the assumption of the unpaid liabilities of the Y Company can not be included in invested capital because it is borrowed capital. 3 11-19-391: T. B. R. 40. Reasonable commissions or other forms of compensation lawfully paid by a corporation for the sale of its capital stock not to be deducted in cornp ; invested capital. The opinion of the Advisory Tax Board has been asked as to whether commissions paid by a corporation for the sale of its capital stock are to be Supplementary Bulletin Rulings. Sec. 32£. Ait. 831.— 4 deducted in computing invested capital. Upon this question section 326(a) states that invested capital means (1) "Actual cash bona fide paid in for stock or shares." * * * These words signify the actual cash paid in to the corporation or to its duly authorized agents by the shareholders. Moreover, the treatment of this question and that of the deductibility of such com- missions from gross income as ordinary and necessary expenses should be correlative. Under all Federal income tax laws corporations have been denied the right to deduct such commissions either as current expense or as a deferred charge to future years. As it is a fact that such commissions are "ordinarily" paid — and in the organization of many corporations "neces- sarily"paid — the position of the department with respect to the deductibility from income of this expense can rest only on the ground that it is essentially a capital expenditure, balanced by the acquisition of a permanent capital asset of equivalent worth. Such payments must, like other compensation for personal service, be "reasonable" in amount. The payment of any unusual or disproportionate commission should, in the opinion of the Advisory Tax Board, be examined for the purpose of ascertaining whether the cash subscription has been "bona fide paid in" and whether under the circumstances of the particular case the commission was reasonable. 4 13-19-425: O. D. 246. No taxable income accrues to a public utility corporation from a mere book entry charging construction account and crediting income account due to charging interest on the company's own funds used temporarily for con- struction purposes, as permitted under the Interstate Commerce Com- mission's classification; neither will the company be allowed to include in its assets such amount of interest charged to capital account for the purpose of determining invested capital. 5 13-19-431: O. D. 248. Shares of stock distributed by a corporation to its employees in payment of services rendered, where the amount is not excessive, may be included in invested capital to the extent of the actual cash value of the services rendered. 6 24-19-577: O. D. 306. Where bonds are exchanged for stock in the same corporation under the terms of a convertible trust deed, it will be presumed, for the purpose of computing invested capital, that the value of the bonds is equivalent to the value of the stock. The addition to invested capital would accordingly be the amount for which the bonds were originally sold. 7 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 5. 24-19-578: O. D. 307. A contract may be treated as tangible property when it relates to rights in tangible property to such an extent that its value arises chiefly therefrom, but it may not be treated as invested capital unless it is bona fide paid in for stock or shares in the corporation, in accordance with section 326(a) of the Revenue Act of 1918. 8 1-20-664: A. R. R. 10. Held, that the M Company is entitled to include in invested capital only the amounts which have actually been paid to the company for the shares of stock issued and sold to officers and employees of the company under an installment agreement. A meeting of the stockholders of the M Company authorized the setting aside of a sufficient number of shares of its common stock for the benefit of such employees as desired to purchase stock under prescribed conditions, and in pursuance of this authority a certain number of shares were so set aside, part of which were taken by an officer of the company and the balance of the stock by other employees. The officer's stock was charged to his personal account, which draws interest. The stock sold to the employees was sub- scribed for under agreement which permitted payment in cash, part cash and part deferred payments, or all deferred payments, subject to conditions that payment of subscriptions should be in weekly installments; that deferred payments should bear interest; and that the agreement might be canceled either upon request of the employee, failure to make payments, any attempt of the purchaser to sell his stock or agreement, or resignation or dismissal of the employee prior to the expiration of five years; in the event of any cancellation the employee to receive from the company the full amount of all payments with interest, and, dependent upon the time held more than one year, certain percentages of the difference between the subscription and market price of the stock. Dividends on the stock were to be credited to the subscriber's account as additional payments. In case of cancellation, however, the divi- dends were not to be credited and the subscriber is not to be charged with interest upon deferred payments. Upon this statement of fact only so much of the subscription payments as have been actually received by the company may be recognized as invested capital from the date of such receipt. In the case of the officer's stock only so much of the stock as canceled a credit balance in his personal account or was actually paid for by him can be recognized. 9 14-20-838: A. R. R. 48. RULING UNDER REVENUE ACT OF 1917. Amounts added to invested capital in accordance with article 44 of Regulations 41 must be based on the amount of interest for the taxable year which is not allowed as a deduction, and not on amounts disallowed repre- senting accrued interest for prior years. 10 Supplementary Bulletin Rulings Sec. 326. Art. 831.— 6. 17-20-881: A. R. M. 43. National banks at times declare dividends which instead of being paid to stockholders are carried with the consent of the stockholders to a stockholders' liability account in the name of a trustee and the amount invested in deals not countenanced by the Comptroller of the Currency. Such stockholders* trustee account, however, is a liability to the individual stockholders, and the assets in which the reserve is invested are the property of the trustee for the stockholders. Therefore, from a technical viewpoint, no part thereof should be included in the invested capital of the bank even though it includes the income from the reserve in its gross income. Since shares in the bank and in this reserve are on the same pro rata basis, and the stockholders are in fact an association, a consolidated return could be required of the bank and the association, the practical effect of which /ould be to include the amount of the reserve in the consolidated invested capital and the income from the reserve in the consolidated income. The Committee therefore recommends that the returns as made, including the stockholders' reserve accounts in the capital of the banks, and the income therefrom in the income of the banks, be allowed to stand. I ! 28-20-1063: A. R. R. 167. At the request of the taxpayer the Committee has reconsidered Recom- mendation 10, dealing with the question of whether or not an issue of stock sold to officers and employees of the M Company can be regarded as invested capital, the taxpayer urging that the conclusion of the Committee is not consistent with article 833 of Regulations 45, which holds that enforceable notes or other evidences of indebtedness, either interest bearing or noninterest bearing, of the subscriber received by a corporation upon a subscription for stock may be considered as tangible property and included in invested capital. The Committee requested advice from the Solicitor as to whether or not the subscription agreements under which it was originally understood all of this stock was issued can be regarded as enforceable notes or other evidences of indebtedness within the meaning of this regulation, and is in receipt of a memorandum from him expressing the opinion that such stock agreements are not evidences of indebtedness and concurring in the conclusion reached by the Committee on Appeals as to these subscription agreements. It now appears, however, that the stock issued to the president was not issued in ac- cordance with the conditions of the subscription agreements, but was a straight-out unconditional subscription charged to his account, bearing interest and subsequently converted into a note. The Committee therefore recommends that so far as stock issued under subscription agreements is concerned the conclusion in A. R. R. 10 should stand, but that the stock issued to the president, not issued under sub- scription agreement, should be recognized as invested ^capital under the provisions of article 833. 112 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 7. 31-20-1109: 0. D. 618. A domestic corporation has a branch office in London which keeps a separate set of books in English currency and renders a report at the end of the year as to the profits, making remittances to the home office from time to time as they accumulate in excess of the amount required for regular expenses. In order to obtain the correct invested capital as at the beginning of the taxable year 1919, it is necessary to consolidate the balance sheet of the branch office with that of the home office. It is assumed that the net profits earned by the London branch during the year 1918 represent surplus; there- fore in determining the amount of earned surplus attributable to the London branch, the amounts remitted by it to the home office should be taken into earned surplus at their value in American currency at the time when such remittances were made, and the balance of the net profits expressed in English currency should be converted into United States money at the rate of exchange as of the end of the taxable year, regardless of the fact that the profits may not have been remitted to the home office. 13 (See 31-20-1111; Section 327, Article 901.) Authority of Secretary of Treasury to fix tax and determine invested capital under section 210 of the Revenue Act of 1917. 14 41-20-1238: A. R. R. 268. The Committee has had under consideration the appeal of the M Com- pany, a Georgia corporation, from the audit of the company's returns for the years ended August 31, 1917, and August 31, 1918, resulting in additional assessments for those years. In determining the invested capital of the corporation the field agent undertook to establish values as of 1898, on the theory that the company has been in continuous existence since that date. It appears, however, that the charter of the original corporation expired in 190-, which fact was not called to the attention of the officers or stockholders until 190-, at which time a new charter was secured. The question at issue, therefore, between the Unit and the taxpayer is whether the present company was in fact organized in 190-, or has been in continuous operation at least since 1898. As this was a question of law involving the scrutiny of the Georgia statutes, an opinion of the Solicitor upon the point involved was requested and the Committee is in receipt of an opinion from him as follows: The Revenue Act of 1917, on the subject of invested capital of corporations provides as follows: Sec. 207. That as used in this title, the term "invested capital" for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly. As used in this title "invested capital" does not include stocks, bonds (other than obli- gations of the United States), or other assets, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means, subject to the above limitations: (a) In the case of a corporation or partnership: (I) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stocks or shares in such corpo- ration or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 8. par value of the original stock or shares specifically issued therefor); and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: Provided, That, (a) the actual cash value of patents and copyrights paid in for stock or shares in such corporation or partnership, at the time of such payment, shall be included as invested capital, but not to exceed the par value of such stock or shares at the time of such payment, and (b) the good will, trade-marks, trade brands, the franchise of the corporation or partnership, or other intangible property, shall be included as invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash or tangible property, the value of such good will, trade- mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will, trade-marks, trade brands, franchise of a corporation or partnership, or other intangible property, bona fide purchased prior to March third, nineteen hundred and seventeen, for and with interests or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hundred and seventeen), in an amount not to exceed, on March third, nineteen hundred and seventeen, twenty per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corporation, shall be included in invested capital at a value net to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the par value of such stock. Its terms, with some modifications not necessary to consider here, were extended and embodied in section 326 of the Revenue Act of 1918. The only other provisions in either of said Acts relating to invested capital are sections 204 and 208 of the Revenue Act of 1917, and sections 330 and 331 of the Revenue Act of 1918. Sections 204 of the first Act and 330 of the latter Act both are limited in scope to the determination of invested, capital for the prewar period and not for the taxable year, the former relating to reorganization ''on or after January 2, 1913,'' and the latter to reorganization "after January 1, 1911" (see article 22, Regulations 41, and article 931, Regulations 45). While neither sections 208 of the former Act nor 331 of the latter Act have any application to reorganizations prior to March 3, 1917, since in express terms both relate to companies reorganized "after March 3, 1917," it is considered that the fair inference to be drawn from them is that assets, in case of reorganization prior to March 3, 1917, should be valued as of the date of transfer to the new corporation for the purpose of deter- mining the invested capital of such corporation for the taxable year. The question is now asked in connection with the appeal of the M Company, a Georgia corporation, whether said company is a continuation of a predecessor corporation, of the same name, whose charter actually expired in 190--, or is it, under the Georgia law, a new entity entitled to consider the value of assets paid in in 190-, in the determination of its invested capital. The Income Tax Unit has taken the position that there was no reorganiz- ation in 190-. It appears that originally the M Company was organized in 187-, as a Georgia corpo- ration, the life of its charter being 30 years. During this period it built up a large business, and acquired control of, and in 1898 absorbed, the property and business of several other corporations. The charter expired by limitation in 190-. There was no renewal of the old charter. In 190 -the stockholders discovered that the corporation's charter had expired, and they then organized a new corporation under the laws of Georgia known as M Company; issued new shares of capital stock and paid for these shares by turning over to the nev corporation "all of the property and assets and all of their interest in the M Company chartered in 1 87—." The new company was authorized "to ratify and accept as its corpo- ration action all acts and deeds of the plants of the M Companv which, was charterer ti 1«7-." Park's Georgia Code, par. 2241, provides that "Every corporation is dissolved (1) by exj iration of its charter." And par. 2245 thereof provides: "Upon ihc dissolution of a cor- poration .for any cause all of the property and assets of every description belonging to the corporation shall constitute a fund, first for the payment of its debts and then for equal distribution among its members." The Supreme Court of Georgia has held that, where a corporation's charter expired "the corporation was as dead as if it had never been chartered": ( Terry v. Merchants \S P. Bk., 66 Ga. 177-8); that "after expiration of its charter, the corporation was no longer a legal entity" and a writ of error pending in the Supreme Court at the time of such expira- tion was dismissed, {Logan v. W. IS A. R. Co., 87 Ga. 533), as (there being then no longer anv law under which it could exist) no valid judgment could be rendered against it (citing Bertram v. Collins Mfg. Co., 69 Ga. 751, Ran v. Union Paper Mill Co., 95 Ga. 208); and that the remedy provided by the Georgia Civil Code. par. 1886, when litigation was pending against a corporation at the time of expiration of its charter, is to have a receiver appointed to administer its assets under the direction of the court, its debts to be first paid, and the balance, if any, distributed among its shareholders, "as the action of its stockholders (who were separate and distinct from the corporation) owning all the stock, in continuing to Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 9. defend the suit after the expiration of the charter" did not operate to make the dead corporation a corporation de facto, or a corporation by estoppel, so as to authorize the plaintiffs to proceed to judgment against it. {Venable v. Southern Granite Co., 135 Ga. 508-9). The rules in question are not peculiar to Georgia, but are of general application and have been variously stated as follows: On the termination of the corporate life, either by lapse of time or decree of court or otherwise, stockholders are at least the equitable owners of its assets, and it seems that, after the debts are paid, the legal title to real property vests in them as tenants in common, where the title of the corporation or its officers is not continued by statute or where the time during which the corporate life is extended by statute has expired, or where the term of the statutory trusteeship of the corporate officers has expired. (8 Fletcher Cyc. Corp. par. 5591, 5593 (37); Stearns Coat and Lbr. Co. v. Van Winkle, (Ky.) 221 Fed. 590.) Pewabic Min. Co. vr. Mason, 145 U. S. 349, 356, 36 L. Ed. 732. When the charter expires, the corporation ceases to be a corporation either de jure or de facto and can thereafter exercise no corporate powers. (1 Fletcher Cyc. par. 285.) A deed made by a corporation after its charter has expired is a nullity. (2 Cook on Corporations, par. 641, p. 1829). Furthermore, "the stock cannot be transferred." (8 Fletcher Cyc. Corp. par. 5587). It is said rhat "a dissolution of a private corporation entirely changes the character of the property interest of the stockholders; it destroys their stock as such and under the modern equitable view substitutes the thing which their stock represented, that is, an interest in the corporate property." (7 R. C. L. par. 745). Solicitor's Opinion 4 is consistent with the foregoing. It is therefore held that for the purpose of determining invested capital for the taxable year a new and distinct corporation is created, where, upon the expiration of the corporate charter of the old organization, a new corporation is formed under a different charter, and property and assets of the old corporation are transferred by the old stockholders as legal owners thereof to the new corporation prior to March 3, 1917, in return for capital •tock, and that the provisions of section 207, Revenue Act of 1917, and section 326, Revenue Act of 1918, embodying with some modifications its terms, are applicable in determining the invested capital of the corporation in question. In this conclusion the Committee concurs, and it will be necessary for the Income Tax Unit to redetermine the invested capital paid in at the date of organization in 190-. 16 46-20-1307: A. R. R. 315 REVENUE ACT OF 1917. The Committee has had under consideration the appeal of the M Com- pany, from the action of the Income Tax Unit in denying the claim of the company for assessment under the provisions of section 209 for 1917, and assessing tax under the provisions of section 210 The facts appear to be that this company was organized with a small amount of capital stock, none of which was paid up, and later it secured a lease to wharf property, no bonus being paid for the lease. The businees of the company is the subletting of this leased property. It is clear that the income of the company is derived chiefly from the possession of a capital asset which is not capital in name only, but a real tangible asset, to wit, its lease upon the wharf property. The Committee is therefore of the opinion that the company can not be construed to have had no capital or only a nominal capital in the sense in which nominal capital has been construed by the courts, that is, capital in name only, and that the action of the Unit in denying assessment under section 209 and assessing tax under section 210 was proper. It therefore recommends that the action of the Unit be sustained. 16 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 10. 47-20-1317: O. D. 734. In 1912 a piece of property was leased by the M Company for 50 years to A, who assigned his interest to the X Company, of which he was president. In 1913 the X Company erected a theater building on the property, which building became part of the reversion, and in 1914 leased the building and its interest in the assignment for a period of 20 years to the Z Company, which agreed to pay certain expenses as well as all taxes of both corporations (X, Company and Z Company) and distribute remaining profits in accor- dance with certain terms agreed on, the X Company and the Z Company being in no manner affiliated and having no stock holdings in common. Held, that the X Company and the Z Company should each file a separate return and compute their tax on their own invested capital. In computing the income and invested capital of the X Company the erection cost of the theater building should be allocated over the term of its lease under the assignment from A, such amounts being deducted each year as business ex- penses. The value of the building may be included in invested capital to the extent that it was erected out of the original paid-in capital or surplus of the X Company. Any part of its cost which was borne by borrowing money can not be so included, In arriving at the amount of invested capital as of the beginning of the taxable year, the sum of such prorated amounts which^were or should have been deducted from the gross income* of prior years, should be subtracted from the original cost of the building. 17 7-21-1456: A. R. R. 384. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in reducing an improvement account carried on the corporation's books to cover the cost of improving a leased property under the terms of a 10-year lease which expired April, 1915, through depreciation charges allocated over the term of such lease, and disallowing as invested capital any portion of such account for the taxable year 1917 and subsequent years. It appears from the records that the M Company, a corporation organized for the purpose of conducting a restaurant, leased certain portions of a building from A for a period of 10 years and 3 months. Under a memoran- dum of agreement which formed a part of the lease between A and the cor- poration, the latter obligated itself to pay a monthly rental of x dollars for the demised premises plus certain contingent charges and to expend 30* dollars or more in making certain specified permanent improvements to such premises. The amount expended in making these improvements was carried to an improvement account on the books of the corporation, which account is still maintained. It is this account which the Unit has disallowed as invested capital for the year 1917 and subsequent years, from which action the taxpayer now appeals for the reason that no depreciation on the improve- ments has ever been claimed and for the further reason that the premises with respect to which the improvements were made are still in the possssions of the taxpayer, the original lease having been renewed. The taxpayer has filed with the Unit a certified copy of the memorandum of agreement which formed a part of the original lease dated November, 1904, together with certified copies of the agreements covering renewal leases dated March, 1915, and April, 1920. This memorandum of agreement specifically provides that the imp rove- Supplementary Bulletin Rulings. Sec. 326. Art. 831.-11. ments therein provided for shall upon their installation by the lessee immedi- ately become the property of the lessor. It contains no provision granting the lessee any right of renewal upon expiration of the lease and it is not shown nor claimed that the lessee had any such right under the lease itself. The lease was to run for a period of 10 years and 3 months beginning Febru- ary, 1905, and ending April, 1915, on which latter date the lessee corporation was to surrender all right and title to the demised premises and the improve- ments which it was obligated to make. That the corporation did surrender all of such right and title is evidenced by the memorandum of agreement form- ing part of the renewal lease, dated March, 1915. Article 109 of Regulations 45 as amended by Treasury Decision 3062, provides: Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on the number of years the lease has to run. * * * The cost borne by a lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the total cost of such improvements divided by the number of years remaining of the term of lease, and such deduction shall be in lieu of a deduction for de- preciation. * * * Under the provisions of the above-quoted article the amount invested by the M Company in the said improvements, if paid for out of original capital or surplus, can be held to constitute invested capital for the taxable year during which expended, such invested capital to be reduced at the beginning of each subsequent year by an amount equal to the result obtained by dividing the total cost of such improvements by the number of years of the lease term. The lease under the terms of which the improvements were made expired in 1915, and subsequent to that year the taxpayer had no right or title under the lease to any asset which constituted a part of such improve- ments, not even the right of usage. The amount expended for the improve- ments and their installation may be considered as a bonus paid to secure the execution of the lease, or as additional rental for the leased premises to be charged off as expense ratably over the term of the lease. Whether or not such amount was so charged off, any right or title which the taxpayer ever possessed in the investment was exhausted upon termination of the original lease in April, 1915, and subsequent to that date it possessed nothing therein which can be said to constitute invested capital for the purpose of computing excess profits tax under the provisions of the Revenue Act of 1917 or 1918. The Committee, therefore, recommends that the action of the Unit in disallowing as invested capital any portion of the amount expended for improvements by the M Company under the terms of the lease dated No- vember, 1904, be sustained. 18 7-21-1453: O. D. 811. No taxable income accrues to a railroad corporation from a mere book entry charging construction account and crediting income account due to charging rental on its equipment such as locomotives, cars, etc., when used temporarily by the corporation for its construction work, as permitted under the Interstate Commerce Commission's classification. Neither will the company be allowed to include in its assets such amount of rental charged to capital account for the purpose of determining invested capital. 19 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 12. 8-21-1470: A. R. R. 393. REVENUE ACT OF 1917. Held, that values claimed for "contracts, brands, and good will" can not be allowed as invested capital when it is not conclusively shown that such values represent paid-in capital of a partnership, and that in reorganization no greater value can be given to corporate assets than existed before reorganization, the interest in the corporation being substantially the same as that in the partnership. The Committee has had under consideration the appeal of the M part- nership, and the N corporation, from the action of the Income Tax Unit in disallowing certain items as invested capital. The action of the Income Tax Unit in disallowing, in the taxable year 1917, 7x dollars as invested capital of the M partnership is explained in the following language: This decrease is due to the disallowance of 7x dollars claimed as the value of contracts and good will not shown on the books of the partnership. No evidence has been submitted as to the value of these intangible assets, the methods of acquiring them, and the cost. (See Regulations 41, articles 57-60, 64.) The action of the Income Tax Unit in disallowing as invested capital for the N corporation an item of lOx dollars is explained in the following language: The amount at which these intangible assets were included in the invested capital of the M partnership, in its return for the five months' period ended May 31, 1917, has been excluded from the invested capital of the partnership in a letter addressed to it by this office. The corporation succeeded the partnership as of June 1, 1917. The excess profits tax return filed by the corporation shows that an interest of 50 per cent or more remained in control of the same persons. In such case no asset transferred from the partnership will be allowed to be included in the invested capital of the corporation, at a value greater than would have been allowed in computing the invested capital of the partnership if no transfer of assets had taken place, unless such asset is specifically paid for in cash or tangible property. (See Regulations 41, article 50.) The facts on which the appeal has been taken may, therefore, be said to be definitely stated in the exceptions above quoted. The partnership was of more than 40 years' standing and on June 1, 1917, its affairs were incorporated as the N Corporation with capital stock of 40x dollars. In the year 1917, just prior to this reorganization, there was set up on the books of the partnership an item of 7x dollars for "contracts, brands, and good will," but in the reorganization by incorporation the said account "contracts, brands, and good will" was set up on the books of the corporation as of the value of lOx dollars. It is contended that two contracts, recorded in this accounting, were worth at least lOx dollars, but it is noted, these contracts dated as far back as the year 1908. It is further contended that as the result of an examination and audit of the books of the M part- nership, for the years 1908 to 1912, inclusive, the average net earnings on invested capital of said partnership were more than 52 per cent. It is noted however, that at December 31, 1916, the financial statement of the partner- ship showed a deficit of l^x dollars. It is not in evidence that the value of "contracts, brands, and good will," either in the amount claimed as set up on the partnership books or in the amount claimed as set up on the corporation books, was actually paid into the partnership or corporation. Article 42 of Regulations 41 provides, in part, as follows. The basis, or starting point, in the computation of invested capital is found in the amount of cash and other property paid in, the original values of such other property being determined in accordance with the rules laid down in these regulations. * * * If value appreciation of a kind not subject to income tax (other than that allowed under article 55) has been taken up in the accounts, a deduction must be made in respect of such appreciation so taken up. Supplementary Bulletin Rulings Sec. 326. Art. 831.— 13. This Committee, in its Recommendation 17 published in Bulletin 3-20, said, in part, as follows: The fact remains, however, that the law expressly provides what may be regarded as the invested capital of a corporation or partnership, and that is, as affects the question now at issue, the amount of cash or tangible property paid in to the corporation or part- nership for stock or shares, the share evidently referring to the member's interest in the paid-in capital of the partnership. The law and the decisions issued thereon by the Department have con- sistently stated that the basis or starting point in the computation of invested capital is the amount of cash or other property actually paid in, the original values of such other property being determined in accordance with the statute and regulations. It is contended that the partnership was one of long standing and that the right to include this additional capital is entirely justified from figures and detailed statements of earnings as reflected by two contracts alone. The Committee can not concur in this contention. It can not recognize going concern value or appreciation growing out of the development and ex- pansion of a business. There is no justification in the law or in the regula- tions for doing so. Furthermore, it has been conclusively pointed out by the Income Tax Unit, that under article 50 of Regulations 41 : If an interest or control in such trade or business of 50 per cent or more remains in con- trol of the same persons, corporations, associations, partnerships, or any of them, then in ascertaining the invested capital of the trade or business no asset transferred or received from the prior trade or business shall be allowed a greater value than would have been allowed under these regulations in computing the invested capital of such prior trade or business if such asset had not been so transferred or received, unless such asset was paid for specifically as such, in cash or tangible property, and then not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such pay- ment. In this article no distinction is made between tangible and intangible assets so transferred. The Committee accordingly recommends that the action of the Income Tax Unit in disallowing these items as invested capital of the partnership and of the corporation be sustained. 20 8-21-1471: A. R. R. 396. REVENUE ACT OF 1917. Held, that the value of certain patents for which stock of the M Company was issued must be measured by the cash consideration paid therefor by certain in- corporators of the company just prior to incorporation. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in disallowing as invested capital the par value of shares of stock of the said corporation issued specifically for patents at date of incorporation. The M Company was incorporated in 1914, with capital common stock of 250x dollars. The articles of incorporation read, in part, as follows: The amount of the capital stock of said corporation shall be 250* dollars divided into 25y shares. It appears that in September, 1913, A assigned an undivided one-half interest in two patents to B in consideration of \\^x dollars in cash, and in June, 1914, A assigned his remaining one-half interest in said patents to C, D, E, and F, in consideration of 5x dollars cash and in further consideration of said assignees assuming the liability of A in all the debts and outstanding Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 14. obligations of the A Company, a partnership, which debts and obligations amounted to 2>]/^x dollars. The Income Tax Unit, based on the report of an examining revenue agent, allowed 6}/2X dollars as the value of the patents acquired for 225* dollars of the total issue of capital stock of the corporation organized imme- diately thereafter. In addition thereto, there was allowed as invested capital llx dollars, the said amount being the cash paid in at par ($100) for 1 l-10y shares. There was also allowed as invested capital XY^x dollars, the actual cost of patents subsequently acquired, making a total invested capital of 19# dollars. Because the income of the corporation was disproportionate to the amount of invested capital, the tax was subsequently adjusted under section 210 of the Revenue Act. The taxpayer contends that the full par value, namely, 225a: dollars, should be allowed for the two patents first mentioned, and that on this basis of invested capital the tax should be assessed under section 207 of the Revenue Act. As above stated, the Income Tax Unit has rested its decision on the purchase price of the patents, as evidenced by sale when acquired by certain individuals, five of whom subsequently became incorporators of the M Company. No evidence has been submitted by the taxpayer to show the value of similar patents, if indeed such evidence could be produced, but the record shows that for the fractional part of the year 1914 (the year in which the company was incorporated) there was a profit of }/§x dollars from operations; in 1915 a profit of Tlx dollars; in 1916 a profit of 44a; dollars, and in 1917 a profit of 43a; dollars. In this latter year the corporation claimed a deprecia- tion based on the life of the patents which, if disallowed, would leave a net income of 70a; dollars. It is also a matter of record that the 1 l-10y shares of stock were sold at par to about 25 individual subscribers in various propor- tions and an affidavit has been submitted by a broker who says that he has been engaged in the brokerage business for several years and that in the course of his business he has sold a good deal of the stock of the M Company during the three years just prior to May, 1919, at a price uniformly something near par, the sales ranging: between $85 and $105 per share. The Committee has given careful consideration to the above facts, but it can not fail to recognize that the A Company, a partnership, which con- veyed the patents immediately prior to the organization of the M Company, a corporation, to the principal incorporators for a cash consideration definitely known, was not successful in developing these patents. What efforts were made to do so are not recorded in the files before the Committee, but the fact is that after final sale of the patent rights to a group of successful business men there was immediately put forth an active, progressive, commercial plan which gave general recognition to the practical use of the patents. It was this development of an idea in a systematic, corporate way without the necessity of large financial investment by any one of the incorporators of the M Company that gave substantial return to the stockholders. The Revenue Act does not recognize as paid-in capital a value rising from develop- ment of an idea after incorporation. It may be said this value is reflected in the earned surplus and, as such, it is a part of the invested capital of the corporation. That a cash value of 225* dollars for the patents at time of incorporation of the M Company was not recognized by the incorporators is indicated by failure of such incorporators to return as individual taxable income the difference between this amount, pro rata, and the cash purchase price. Supplementary Bulletin Rulings. Sec. 326. Art. 331.— 15. On these conclusions the Committee recommends that the action of the Income Tax Unit in fixing a value of the patents by the cash consideration paid therefor just prior to incorporation of the M Company and the sub- sequent assessment of taxes by the Unit under Section 210 of the Revenue Act of 1917 be approved. 21 8-21-1468: O. D. 821. Section 1764, Wisconsin Statutes (1915) provides that the corporate existence of a dissolved corporation shall be continued for the purpose of liquidating its assets and winding up its affairs. It is held, therefore, that profit resulting from the sale of assets of a Wisconsin corporation in process of liquidation is subject to income and excess profits taxes in the same manner as profits derived from the active operation of the corporation. In such a case the invested capital to be used as a basis in determining the excess profits credit is arrived at in the same manner as invested capi- tal of an active corporation, making due allowance for any amount of capital assets which have been liquidated and returned to the stockholders. Section 1764, Wisconsin Statutes (1915) provides: * * * and when any corporation shall become so dissolved the directors or managers of the affairs of such corporation at the time of its dissolution, by whatever name they may be known, shall, subject to the power of any court of competent jurisdiction to make, in any case, a different provision, continue to act as such during said term and shall be deemed the legal administrators of such corporation with full power to settle its affairs, etc. Therefore, the responsibility for filing appropriate returns for the cor- poration and paying taxes shown thereby to be due devolves upon the trustees in liquidation of such other legal administrators as have charge of the property and affairs of the corporation during the period of liquidation. They must make returns of income for such corporation in the same manner and form as an active corporation. Conversely, they are not required to file returns as fiduciaries. 22 9-21-1487: A. R. R. 390. The Committee has had under consideration the appeal of the M Company, a corporation, from the action of the Income Tax Unit in adjusting the company's tax returns for the years 1917 and 1918. The points at issue are the valuation of the old plant of the company as of February 14, 1917; de- preciation actually sustained in the years 1917 and 1918, and a proper com- pensation for officers. As of January 1, 1917, the N Company had outstanding paid-in capital stock of \0x dollars, all of which was owned by A and B, but the buildings and the land on which the buildings were located were owned individually by A and B. During the month of January there was a reorganization. The name of the company was changed to the M Company and the capital stock was increased to 40a: dollars and issued in equal amounts to A and B. The stock of the N Company v/as retired, and the additional capital of 30* dollars was written up on the books as good will. Under date of February 14, 1917, A and B, without further consideration, turned over to the corporation the buildings, which they individually owned, and the original bookkeeping entry was adjusted, crediting good will with 15* dollars to the debit of real estate and buildings. The revenue agent, who examined the books of Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 16. the corpuiaaon, reduced the value of these buildings from 15* dollars to 6x dollars, and this deduction affected both depreciation and invested capital. This examination was made in 1919 and he based his reduction of this asset on a statement made by A that he would accept 4# dollars in cash for the property, and on a statement made by B that they were holding the property at 8x dollars on a trade for some other real estate. The taxpayer, in taking exception to the valuation determined by these statements, has submitted two appraisals, one by C, which places a going concern value on the property as of February 11, 1917, of 15x dollars, and the other by D, which places the appraisal on a cost basis less depreciation as of December 22, 1919, at 10a; dollars, of which valuation 9x dollars is for the buildings and x dollars is for the land. In a conference held with the Income Tax Unit the valuation of 6x dollars placed by the revenue agent was increased by the Unit to Sx dollars. The Committee is of the opinion that the going concern value, as deter- mined by the appraisal by C, is more or less speculative and that the value adopted by the revenue agent is without substantial foundation. The additional value allowed by the Unit appears to be more or less arbitrary in an effort to arrive at a compromise adjustment which, however, was not accepted by the taxpayer. Accordingly, the Committee is of the opinion that it can not fail to respect the appraised value (by D) of lOx dollars, plus the depreciation on the buildings from February 14, 1917, to December 22, 1919, as most correctly reflecting the sound value at date of transfer. This adjustment of value will change the amount of depreciation as adjusted by the revenue agent, but in addition thereto the taxpayer, through public accountants of good standing, has submitted a very elaborate schedule of depreciation on all other property values, basing the same on inventory of the values taken by the owners of the property in March, 1913. These were depreciated values but the taxpayer applied these rates of depreciation annually on reduced values. The revenue agent made no changes in this basis but accepted the taxpayer's figures as reasonable. The public account- ants, however, have consistently, in the compilation of their statement, applied the rates annually on the appraised value or on cost when acquired subsequent to appraisal and it is understood that no substantial change has been made in the rates except in the year 1917 when, on account of the plant running at double capacity, an accelerated rate on machinery, based on 40 per cent of the normal rate, was used. The Committee has carefully analyzed this schedule of depreciation prepared by the public accountants and is of the opinion that it should govern in disposing of the question of depreciation, subject, however, to the valuation as above approved for the buildings taken over in February, 1917. For three years prior to 1917, A and B, sole owners of the stock of the corporation, and its principal officers, were each paid x dollars annual salary. In November, 1917, by resolution of the board of directors, this salary was increased to a total salaried expense of 5x dollars per annum. Of this aggregate amount for the two officers, the revenue agent disallowed 2x dollars prorated for 1917 and for the year 1918, making the salary of each 1 V£r dollars per annum instead of 2%x dollars. This disallowance of 2x dollars was reduced by the Income Tax Unit, in conference with the taxpayer, to x dollars, which gave each of the officers of the company an annual salary of 2v dollars per year as against 2%x dollars per year as claimed in the returns and supported by the action of the directors of the company. The average yearly sales of the company from 1912 to 1916, inclusive, amounted to 45* dollars. In the year 1916 the sales were 52* dollars; in Supplementary Bulletin Rulings. .81— .I£8 .ftA .dSfc .392 Sec. 326. Art. 831.— 17. 1917, 72x dollars; in 1918, 82* dollars. In the latter year the net income of the company was less than in 1917, but this is explained by the retirement of substantial parts of the old plant and to moving into the new plant. How- ever, a salary deduction of 4x dollars for the taxable year is in fair com- parison with that of similar industries and on this basis it was allowed by the Unit. Summing up, the Committee is of the opinion that value of buildings acquired in February, 1914, should be accepted on basis of recognized ap- praised value; that depreciation should be adjusted on this value and on the appraised value as of March, 1913, of other units of equipment and at established rates to which the taxpayer conforms in his depreciation schedule and that the action of the Income Tax Unit be sustained in allowing com- pensation of the two principal officers at the rate of 4x dollars per annum. 23-21-1680: Ct. D. 12. [ThisV'ruling"^consists, merely, of the United States Supreme Court decision in the La Belle Iron Works case reported in full beginning at f889 herein. — The Corporation Trust Company.] 24 27-21-1719: A. R. M. 134. REVENUE ACT OF 1917. Held, that the M Company should be allowed the full amount of 2>\$x dollars expended by it in cash prior to the year 1909 and capitalized as a part of the cost of developing certain intangible assets which it had acquired for stock and cash. The Committee has had under consideration the request of the Income Tax Unit for an expression of opinion whether an expenditure of 3%x dollars by the M Company for advertising prior to the year 1909 can be capitalized and allowed as invested capital for the taxable year 1917. The M Company was incorporated in 189-, at which time it acquired a trade-mark for a consideration of 2x dollars cash. This purchase included a contract granting to the corporation the exclusive right to sell this prepa- ration. In 189- it acquired certain other trade-marks for 3x dollars, issu- ing therefor capital stock of the company in this amount. In another year prior to 1909, it acquired several other trade-marks and formulae, issuing therefor 2x dollars in capital stock. In 1905, by action of the board of directors of the company, the sum of x dollars, expended for advertising, was capitalized by being charged to trade-marks, formulae, etc. In 1906 the board of directors ordered x dollars eliminated from expense and capitalized. In December, 1906, by order of the board of directors, following an advertising campaign, a credit of }/^x dollars was carried to profit and loss (thus decreasing expenses and increas- ing net income) and same was capitalized by charging it to trade-marks, formulae, etc. In April, 1906, by action of the board of directors, a further expenditure of x dollars, made as of a previous year for advertising, was capitalized and charged to trade-marks, formulae, etc. The items for ad- vertising, capitalized as above indicated, aggregate 3%x dollars and the corporation now contends that the capital stock issued against this intangible Supplementary Bulletin Rulings. Sec. 326. Art 831.— 18. should be allowed in full as invested capital since the intangible was acquired for cash. It is noted that all of these transactions occurred prior to the year 1909 and the case, therefore, as presented, is not unlike that on which the Com- mittee passed its opinion under Recommendation 115 (not published in bulletin service), March 27, 1920. In that opinion it was said: The Committee is not of the opinion that article 841 of Regulations 45 should be applied in the instant case. This regulation seems obviously to have been drawn for the purpose of preventing the inclusion in surplus or invested capital, for the taxable year 1918, of amounts charged to expenses prior thereto, when the intent was to evade taxation. But such intent in this case is not clear, nor can it even be inferred. Indeed, the facts abso- lutely prohibit such an inference, for the reason that the transaction by which this res- toration to invested capital was accomplished was made effective on the first day of March, 1909, thus conclusively demonstrating the intention of the directors in regard to these expenditures, many years before the income and excess-profits tax law was placed upon the statute books. In the opinion of the Committee, the regulation would be effective to prevent the res- toration to invested capital in 1918 of amounts previously charged to expenses, but a careful reading of the regulation renders it exceedingly doubtful that it is subject to so broad a construction that it can, by any possibility, be applied to transactions accom- plished and completed before that year. Attention is particularly directed to the last sentence of the regulation quoted above: "An election of this sort which was made con- currently with the transaction can not now be revised, and amended returns in respect thereof can not be accepted."' There is no intent on the part of the corporation now to revise an action taken years ago and no attempt has been made to file amended returns. The Committee believes that this reasoning is strengthened by the following quotation from Article 843 of Regulations 45: * * * Where a corporation has charged to current expenses the cost of developing or protecting patents, no amount in respect thereof expended since January 1, 1909, can be restored in computing invested capital. In respect of expenditures made before Jan- uary 1, 1909, a corporation now seeking to restore them must be prepared to show to the satisfaction of the Commissioner that all such items are proper capital expenditures. While the opinion just quoted was applicable to the invested capital of a corporation for the taxable year 1918, there is no reason why the same prin- ciple should not be applied in determining the invested capital of the M Company for the taxable year 1917. The Committee accordingly is of the opinion that the M Company should be allowed the full amount of 3%x dollars, expended by it in cash prior to the year 1909 and capitalized, as a part of the cost of developing certain intangible assets which it had acquired for stock and cash. 25 Supplementary Bulletin Rulings. 1-31-22 Sec. 326. Art 831.— 19. 32-21-1765: O.D. 991. In 1920 a corporation increased its capital stock by issuing y additional shares of stock of a par value of x dollars perjshare. Each stockholder registered on the corporation's book at the close of business March — , 1920, was given the right to subscribe for one new share of stock for each two shares of old stock held by him_on^that date uponjpayment of 2%x dollars per share, payable as follows: x dollars on May — , 1920, %x dollars on June — , 1920, and %x dollars on July — , 1920. The company was to pay interest at the rate of 6jper^cent|per annum on such payments from the date each payment was made. Interest on all payments ceased August — , 1920, the date when the certificates were ex- changed for the stock of the company. Stockholders desiring to pay in full at one time were privileged to do so on May — , 1920, but at no other time. The right to subscribe for stock expired on May — , 1920. The question raised is whether the payments made prior to August — , 1920, can be treated as invested capital from the date on which they were received, or whether the invested capital may be increased only as of August — , 1920, the date on which the subscribers received their paid-up stock certificates. Held, that the subscription payments received by the^company may be properly treated as invested capital from the date on which they were received, and that the so-called interest paid to the subscribers on the install- ment payments from the date of each payment to August — , 1920, was, in fact, distribution of profits from surplus, and accordingly is not deductible expense. 26 34-21-1789: O. D. 1007. The books of a corporation were kept according to the single-entry system of bookkeeping, and its income and expenses were|recorded on a cash receipts and disbursements basis. At the end of the taxable year 1919 a statement of assets and liabilities was prepared in connection with its Federal income and profits tax return. There were reported on the statement as assets the cash balance, the fixed and intangible assets, and also such ac- counts receivable as were on the memorandum records, but the income from which had not been taken into the books. The statement also showed on the liability side the amount of outstanding capital stock and also bills payable and accounts payable which were shown by the memorandum records, but the expenses for which had not been taken into the books. Held, that the corporation can not report its income on a cash receipts and disbursements basis and compute its invested capital on an accrual basis. As the corporation's income is reported on a cash receipts nad disburse- ments basis, accrued items can not be taken into consideration in computing its invested capital. 27 41-21-1862: O. D. 1061. The principles contained in office decision 246 [No. 5 of Sec. 326. Art. 831. — 4, herein.] are applicable under the Revenue Acts of 1916 and 1917. 28 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 20. 49-21-1968: O. D. 1131. It is the purpose of Treasury Decision 3220, in cases in which returns were filed contrary to section 207 of the Revenue Act of 1917 and section 326 of the Revenue Act of 1918, and the regulations issued thereunder, to have amended returns filed and any tax shown to be due thereon paid immediately, rather than to wait until the returns are finally reached in the regular course of audit in this office. The fact that there may be no further tax shown to be due on the amended returns in such cases is not sufficient to waive the filing of such returns. 29 I ('22)-l-14: I. T. 1155. Revenue Act of 1918. A corporation which is a "dealer in securities" within the meaning of article 1585 of Regulations 45 is not entitled to include in invested capital amounts invested in inadmissible assets, even though such assets are held as merchandise, except under conditions entitling it to the benefits of article 817 of Regulations 45. 30 IC22)-2-25: I. T. 1163 Revenue Acts of 1917 and 1918. Where for the year 1918 returns were filed and the war and excess profits tax paid was equal to 50 per cent of the net income, relief having been re- quested under sections 327 and 328 of the Revenue Act of 1918, or where for the year 1917 returns were filed under article 64 of Regulations 41, and full disclosure was made on the return of the inclusion therein of restorations to invested capital, amended return will not be required under T. D. 3.220 (Bui. 37-21, p. 18) and T. D. 3243 (Bui. 48-21, p. 18). However, in cases where returns were filed under article 64 of Regulations 41 and no disclosure was made of the inclusion therein of restorations to invested capital, the requirements of T. D. 3220 and T. D. 3243 must be complied with. 31 I ('22)-4-48: I. T. 1177. Revenue Acts of 1917 and 1918. A domestic corporation, prior to March 3, 1917, transferred tangible property to a foreign corporation in exchange for over 50 per cent of the stock of the foreign corporation. Subsequent to March 3, 1917, the domestic corporation transferred certain other tangible property to another foreign corporation in exchange for over 50 per cent of the stock of the foreign cor- poration. Neither foreign corporation had income from sources within the United States. Two questions are raised: (1) At what value may the domestic corporation include in its invested capital the stock of the foreign corporations under the Revenue Acts of 1917 and 1918? (2) In case the foreign corporate stock is recognized as invested capital only to the amount of the original cost of the property transferred, is it possible for any taxable income to accrue from the exchange? These two inquiries may be considered together, as the same principles of law are involved. Section 208 of the Revenue Act of 1917 and section Supplementary Bulletin Rulings 8-7-22. Sec. 326. Art. 831.-21. 331 of the Revenue Act of 1918, relating to a determination of the invested capital of a corporation exchanging its stock for tangible property, are not here applicable. A foreign corporation having no income from United States sources would be tax exempt, and consequently its stock in the hands of a United States corporation would constitute an admissible asset. The exchange being of one kind of property for another kind, a profit or loss would normally arise, as the values would ordinarily not be exactly equal. An exchange of one capital asset for another would not, however, affect the invested capital of the United States corporation, unless in the case of a loss the current earnings were insufficient to meet such loss, in which case the true or earned surplus would have to be reduced; but in no case should the original paid-in capital or surplus be reduced on account of such loss, it not being permissible to reduce those items except upon partial or total liquidation. Accordingly, it is held that the stock should be included in invested capital at the same value that the tangible property exchanged therefor would have been entitled to be included therein had no exchange taken place, regardless of when the transaction was consummated, and that taxable income or deductible loss might result from the transaction. A domestic corporation owning stock of. a foreign corporation should treat such stock as an inadmissible for the entire taxable year if at any time during such taxable year the foreign corporation had income from sources within the United States. 32 I('22)-6-82: 1. T. 1201. Revenue Acts of 1917 and 1918. In determining invested capital for 1917 and subsequent years the tax- payer, an insurance company, used security valuations demanded and furnished by the insurance department of the State and, as required, filed a copy of its State report with this office. Owing to its inability to furnish cost values of securities, advice was requested as to what action should be taken in order to comply with the provisions of Treasury Decision 3220 (1J865 herein). Held, that as the invested capital of insurance companies is adjusted by this office on the basis of cost from annual statements rendered to the insurance departments at the close of the previous year, it will not be nec- essary for insurance companies to file amended returns under the provisions of Treasury Decision 3220, if in the original returns securities or real estate have been valued on the basis of book or market as reported to the insur- ance department of the State 33 I('22)-8-108: I. T. 1218. Revenue Acts of 1917 and 1918 The taxpayer company for several years prior to 1917 followed the consistent practice of adding taxes paid upon its real estate to the capital account representing such real estate on its books, and did not charge such taxes to expense, and did not make any deduction on account of such taxes in preparing its income tax returns for the years 1909 to 1916, inclusive. Supplementary Bulletin Ruling*. Sec. 326. Art. 831.— 22. During 1917 and subsequent years such real estate taxes were charged to expense and were not capitalized. Held, that taxes on real estate are not properly chargeable to the real f estate capital account for income and profits tax purposes, but are deduct- ible as expenses for the year in which paid or accrued, dependent on how the taxpayer's books are kept. The taxpayer should eliminate from its invested capital the taxes formerly included in its real estate capital account, and the excess profits tax for 1917 and subsequent years should be recomputed. 34 I('22)-9-122: I. T. 1226 Revenue Act of 1917. The terms current liabilities and temporary indebtedness, as used in article 44 of Regulations 41, which reads as follows: The term "money or other property borrowed" as used in section 207 and these regula- ^ tions includes not only cash or other borrowed property, which can be identified as such, but current liabilities and temporary indebtedness of all kinds, and any permanent in- debtedness upon which the taxpayer is entitled to an interest deduction in computing net income. A corporation which,- under the income tax law, is allowed to take only a part of the entire interest paid upon its indebtedness, may include in its invested capital such a proportion of its permanent indebtedness as the amount of interest upon such in- debtedness which the corporation is not allowed to deduct is of the total amount of interest paid upon such indebtedness during the taxable year — are intended to apply to liabilities chargeable against profits as distinguished from indebtedness incurred for the purpose of raising capital. Such per- manent indebtedness amounts to a capital investment. Therefore, while the amount of interest on current liabilities deductible against income for the year # is included within the language of the Act limiting the amount of interest deductible as well as interest on permanent indebtedness, article 44 did not operate to make current liabilities includable in invested capital, since from their nature they were not includable. It does permit a portion of the per- manent indebtedness to be included where the interest on such permanent indebtedness is not deductible by reason of the limitation contained in section 12 of the Revenue Act of 1916 as amended by the Revenue Act of 1917. In case a corporation had no permanent indebtedness but the amount of deductible interest was limited, no amount may be included in invested capital on account of such limitation. But a corporation which has both temporary and permanent indebtedness may assume to the extent of its ^ permanent indebtedness that any interest which it is not allowed to deduct has been paid upon such permanent indebtedness. The term permanent indebtedness is intended to cover money and prop- erty borrowed to be invested in the business. If the indebtedness is of a permanent character the term or nature of the particular obligation by which the indebtedness is evidenced at any time is not conclusive. Thus, notes used to acquire borrowed capital which the ^ corporation plans to continue to use after the maturity of the notes (meeting the matured notes with the proceeds of other borrowings) may be regarded as permanent indebtedness within the meaning of article 44 of Regulations 41. So also in the case of bonds, mortgages, or other obligations about to fall due. If in the regular financial procedure of the corporation these obliga- tions will be met by the proceeds of other indebtedness, such obligations may be treated as a part of the permanent indebtedness. * The computation of additions to invested capital must be based on per- Supplementary Bulletin Rulings. 7-20-22. Sec. 326. Art. 831.— 23. manent indebtedness as distinguished from temporary indebtedness and current liabilities. In case the permanent indebtedness is increased, dim- inished, or liquidated during the tax period the average amount of such indebtedness for the period should be used in applying the provisions of article 44 of Regulations 41. 35 I ('22)- 13- 190: I. T. 1260 Revenue Act of 1921. Where a business owned by an individual is organized as a corporation under the provisions of section 229 of the Revenue Act of 1921, investments owned by the individual but not connected with his business can not be included in invested capital unless and until they are paid in and become assets of the corporation. 36 I('22)-26-375: I. T. 1374 Revenue Acts of 1918 and 1921. In 1919 a group of men contributed 300a: dollars in cash to a common fund which was placed in the hands of a trustee for the purpose of acquiring royalty contracts under certain patents which they desired to obtain for a proposed corporation which had not been incorporated at that time. Later this trustee obtained assignments of these various contracts and rights for a total consideration of 300a; dollars in cash. A corporation was then formed and after its organization the trustee offered to transfer to the corporation all of the contract rights which he had acquired in consideration of the issu- ance of 300y par-value shares of its stock to the parties who were the original contributors of the 300a; dollars cash with which he acquired these rights. This offer was accepted by the corporation and the agreement was carried into effect. ||f Held, that the facts stated show this to be a case where a corporation acquired intangible property for stock, and that as such it must be governed by the provisions of section 326(a)5 of the Revenue Acts of 1918 and 1921, and that the invested capital of the corporation represented by the patent rights is subject to the 25 per cent limitation imposed by that section. This is true, although the individuals who advanced the money for the purchase of the contract rights were the same individuals who became the stockholders of the corporation through a transfer of these rights in exchange for the corporation's stock. 37 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 24. I ('22)-28-405: I. T. 1391. Revenue Acts of 1918 and 1921. The procedure set forth in Office Decision 623 (C. B. 3, p. 105) to be fol- lowed by concerns which report profits from installment sales as realized at dates of payments does not contemplate adjustments of the capital invest- ment account either for payments on such contracts or for the final transfer of title. It does, however, require the elimination from inventory of goods sold on installment contracts. No distinction is made between sales on con dition, in which title remains in the seller, sales which involve transfer of title subject to a lien and sales in which title passes but is revested in the vendor by means of a chattel mortgage. (Article 42, Regulations 45.) The following example illustrates the effect of this procedure: Inventory, January 1, 1921 $100,000 Installment sales, 1921 100,000 Cash receipts from installments saies contracts, l!v21 50,000 Gross profit percentage . , 50% (a) Installment sales contract (1921) $100,000 Goods sold (at cost) 50,000 Unrealized gross profit on installment sales con- tracts (1921) 50,000 (b) Cash 50,000 Installment sales contracts (1921) 50,000 (r) Unrealized gross profit on installment sales contracts (1921) 25,000 Realized gross profits on installment sales contracts 25,000 It will be seen that installment sales contracts (1921) less unrealized gross profits at the time of the sale equals the value of goods sold and is sub- stituted therefor. The installment sales contract account is decreased and replaced to the extent of cash payments thereon. At the same time that proportion of unrealized gross profits on installment sales contracts which represents the gain included in cash receipts is transferred to realized profits on installment sales contracts. In the balance sheet as at December 31, 1 ' 2 1 , the opening inventory of $100,000 is replaced by cash, $50,000; installment sales contracts less unrealized profits, $25,000; inventoiy, $50,000. These items reflect the original value plus a realized gain of $25,000. 38 (See A. R. R. 988; sec. 331, art. 941 [ruling No. 17*1.) Increase of invested capital of a corporation by appreciation in value of its assets upon dbajrge of ownership which was nominal and not substantial. 39 Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 25. I ('22)-33-459: I. T. 1420. Revenue Acts of 1917, 1918, and 1921. In 1885 certain persons organized a corporation and a certificate of incorporation was issued to them. In 1911, in pursuance of the advice of an attorney, the company was reorganized in order to cure defects in its original organization, and the powers of the corporation were broadened, its capital increased, and its existence made perpetual. In 1914 the name of the corporation was changed and thereupon all of the assets standing in the then name of the corporation were transferred by a deed having a covenant of warranty to the corporation designated by its new corporate name. Held, that the copy of the original charter of the corporation and of the renewed charter, and the other evidence submitted by the taxpayer, disclose that the amendmen of its charter and the subsequent change in its name did not create a new corporation, nor cause any change in its existing cor- porate organization. The invested capital of the corporation, accordingly, must be computed in the same manner as though the invested capital of the corporation originally formed in 1885 was being determined. The values of the assets on hand at the beginning of 1917 and later years must be deter- mined by their values at the time of their original acquisition, as limited and defined by the Revenue Acts applicable to the taxable years involved, and their values at the date of the amendment of the corporation's charter or at the date of its change of name can not be considered for such purpose. 40 I ('22)-49-628: I. T. 1523. Revenue Acts of 1918 and 1921. If a corporation acquires patents or other intangible assets for cash, such assets may be reflected in its invested capital at an amount equal to the amount of the cash actually paid for them, but if they are acquired for stock they can be reflected in invested capital only to an amount not in excess of 25 per cent of the capital stock of the corporation outstanding at the begin- ning of the taxable year. This limitation prevents intangibles purchased with stock from being included at their full cost only when such cost exceeds in amount 25 per cent of the par value of the total stock or shares of the cor- poration outstanding at the beginning of the taxable year. No expenditures of capital made by a corporation in organization or advertising can be used to increase the value at which the patents owned by it may be reflected in its invested capital, as this amount is fixed by the cost of the acquisition of the patents, subject to the 25 per cent limitation in case they were acquired for stock. In the case of the reorganization of a corporation which does not involve a change in corporate identity, no change takes place in the value at which its intangibles acquired for cash are to be included in its invested capital, and no change takes place in this value with reference to patents or other in- tangibles acquired for stock, unless the reorganization involves a change in the amount of the corporation's capital stock which is sufficient to cause a different result when the 25 per cent limitation is applied. In case the reorganization involves a change of corporate identity through which the assets of an existing corporation are acquired by a successor, the rule applicable to the original corporation will apply in determining the amount at which the intangible assets acquired by the new corporation may be included in its invested capital. If such assets are acquired for cash, they Supplementary Bulletin Rulings. Sec. 326. Art. 831.— 26. may be included in computing invested capital at their cost price, while if they are acquired for stock they may be included to an amount not in excess of the par value of the stock issued for the same, subject to the 25 per cent limitation, as explained above. , , The statements in the preceding paragraph, however, are subject to re- quirements of sections 331 of the Revenue Acts of 1918 and 1921. From the foregoing it is apparent that the reorganization of a corporation does not necessarily cause any decrease in its capital represented by patents or other intangibles. 41 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 833. — 1. Law Section 326.— Invested Capital (1918 Act— ^555, ante): (1921 Act— H1035, post). Article 833. — Tangible Property Paid in: Evidence of Indebtedness (Reg. 45— 1 754, ante): (Reg. 62— 1jll89, post). 22-20-980: S. 1391. WAR PROFITS AND EXCESS PROFITS TAX— SECTIONS 325 AND 326, REVENUE ACT OF 1918. INVESTED CAPITAU Notes to be paid for only out of earnings accruing on stock for which they are ostensibly given should not be included in invested capital. Section 325 (a) of the Revenue Act of 1918 provides that the term "in- vested capital" as used in the Act shall include notes. The by-laws of the M Company, a corporation organized under the laws of the State of Oregon, provide that no one shall be allowed to hold stock in the corporation who is not actually identified with and devoting his entire time and talents to the interests of the company, and it is the practice in that company when the services of a desirable person are secured to pay him a nominal salary and issue him shares of stock, for which his enforceable note is taken, the note being paid out of the profits accruing on the stock. The questions are as follows: (a) Do the laws of the State of Oregon allow issuance of capital stock for (enforceable) notes? (b) Can the amount of (enforceable) notes outstanding at the beginning of the year be included in invested capital? (c) Are the notes, given under the conditions named above, enforceable within the meaning of the law as enacted by Congress, and inter- preted by the Commissioner to govern invested capital computa- tions ? (a) It is not found that the laws of Oregon specifically recognize the is- suance of stock for notes. They do, however, recognize issuance of stock without cash payment. They also recognize the issuance of stock for prop- erty, real or personal. Section 6694, Lord's Oregon Laws, provides: Every corporation organized under this chapter shall keep a stock book in such manner as to show intelligibly the original stockholders, their respective shares, the amount paid, and the amount due thereon, if any * * *. See also sections 6696 and 6707. If stock may be issued for property or without any payment, it seems clear that it may be issued for notes. (b) Section 326 (a) of the Revenue Act of 1918 provides: That as used in this title the term "invested capital" for any year means * * * (a) Actual cash value of tangible property other than cash, bona fide paid in for stock or shares at the time of such payment * * *. Under this language it is not sufficient that notes are enforceable. They must be bona fide paid in. This point is discussed more fully in dealing with the next question. (c) While nothing is found in the statement submitted to show that the notes in question are not legally enforceable, it does not necessarily follow that they are such notes ~s were contemplated by the framers of the Act as to be treated as invested capital. The law limits includable tangible property to that bona fide paid in. The notes in question are taken from employees, and it is stated by the president of the concern that it is "clearly understood that the notes given as evidence of stock ownership were to be paid wholly from the earnings of such stock and in the event that such em- ployee-stockholder severed his connection with the company, such stock immediately would revert to the company, and the net earnings accrued on same would be immediately paid to him." Notes given under such condi- Supplementary Bulletin Rulings. Sec. 326. Art. 833.-2. tions are not bona fide paid in within the intent of the statute. As indicated by the regulations, article 833, Congress doubtless had in mind notes given in absolute and unqualified payment, notes which are practically equivalent to cash and might be sold for cash, which, in other words, work an increase of the assets of the concern. Here the notes are given only as "evidence of ownership" and no collection thereon is to be made from the employee until he receives or is credited with dividends on the stock for which the notes are ostensibly given. The notes, therefore, add nothing to the resources of the company. There is no increase in its invested capital until it is earned by the company. It would not be consistent with the understanding between the company and the employee to raise money by discounting the notes. Conceivably, the concern might achieve an increase of working capital by borrowing on the notes, but by the express terms of the Act, borrowed money is not admissible. Section 325 (a), section 326 (b). If such arrangements should be recognized as working an increase of invested capital, invested capital might, at least to the extent of the amount authorized by the com- pany's charter, be increased practically at will. The conclusion reached is that a note to be paid for only out of earnings accruing on the stock for which it is ostensibly given should not be included in invested capital. 1 10-21-1502: A. R. R. 413 Held, that good will in a corporation can not be allowed as invested capita": under a claim that a price paid to stockholders by certain individuals was ii. excess of corporate book value of the stock. Good will must be acquired by direct purchase; it can not be determined by a collateral transaction. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in denying an hem of good will of 10* dollars, claimed bv the corporation to have been purchased with cash in 1911. In 1876, A established a restaurant business and continued to operate the same as sole owner until his death in February, 1901. After his death, the business was carried on under the terms of his will by certain trustees. The trust estate continued for a period of 10 years, but on account of contracts expiring in 1905 and 1906 requiring a renewal for a period of 10 years, thus extending beyond the trust, it was necessary to create some entity capable of contract. A corporation with nominal capital of 4x dollars was accord- ingly formed and, in keeping with tue terms of the will, the stock was issued in the name of the trustees. All contracts were renewed in the name of A, except for certain business directly pertaining to the State of Y, which business was contracted in the name of the N Company, another corporation capitalized at 4x dollars to meet statutory requirements of the State of Y. It is the contention of the taxpayer that the business of the corporation was conducted substantially as a personal service corporation and that all bank accounts were continued in the name of A. In 1911, in accordance with the provisions of the will, the trust terminated and it was necessary to make distribution to the six heirs. Under this dis- tribution the widow was entitled to 50 per cent of the estate and the balance was to be equally divided among five children. In order to make satisfactory distribution, the trustees sold the stock which they held for 60* dollars in cash and this amount was distributed to the heirs in the proportions above indicated. It appears that the book value of the stock was only 50 ; v dollars and in order to measure the value of the stock by the cash consideration that was paid to the trustees, there was set up an asset of good mu in the Supplementary Bulletin Ruling!. 4-6-22. Sec/326. Art. 833.— 3. amount of 10* dollars. This amount was subsequently, in the next succeeding five years, charged off at 2x dollars per annum. In submitting the case for consideration by this Committee, B, president of the corporation, made affidavit in the following statement: * * * in other words, there was paid in cash for 4# dollars par value of M Company stock (with which went the 4# dollars par value N Company stock), 50# dollars being the book value of the furniture, fixtures, supplies, etc., and also 10* dollars for good will, or a total of 60* dollars which was contributed as follows: B, 38%; C, 20%; D, 20%; E, 15%; F, 7% and the stock was distributed accordingly. Of these purchasers, only B and D were beneficiaries under the will, each receiving 10 per cent of the estate. Subsequent to consideration of the case by the Committee but prior to the final approval by the Committee, B submitted an additional affidavit in which the statement is made that — As representative of the corporation, I had agreed to sell to myself and the other four individuals, the entire assets of the business of the M Company and the N Company. This was my intention; it was what we did. The matter of the transfer of this property to the new organization was never din- cussed, but what we were purchasing was minutely understood by all of us; that is to say, we were purchasing all of the assets of the business No thought was given to the purchase of stock, and no thought was given as to the method of transfer. This subsequent affidavit seems to have no material bearing on the case, since it is a matter of record that the corporation known as the M Company was never liquidated. A corporation can not sell its assets and at the same time retain them. The M Company is doing business to-day under the charter issued at date of organization, namely, June, 1906, and the same amount of capital stock is outstanding, namely, ix dollars. It was, of course, necessary to cancel the certificates of stock that were outstanding at the time of purchase by B and his associates because, as above suggested, the certi- ficates had to be issued in different proportions of ownership. The trans- action, accordingly, was between stockholders and individuals, and, under such circumstances, where value in excess of corporate book value is the consideration for the acquisition of stock, the exchange value does not measure the value of assets of the corporation. It is admitted by the tax- payer that the 10* dollars in cash, in excess of the book value of the assets and forming a part of the cash consideration of 60x dollars was never paid in to the corporation but went to the trustees of the A estate and was distri- buted to the beneficiaries under the will. Hence, to include this 10* dollars in the assets of M Company, through a credit to the surplus account of the company, would be the recognition of appreciation based on going concern value. The earnings of the business of the M Company undoubtedly justify establishing good will, but good will can only be set up on the books of a cor- oration and considered as invested capital for tax purposes when acquired y direct purchase. Article 57 of Regulations 41 reads: If good will * * * of a corporation or partnership * * * j ia3 been purchased with stock or shares issued prior to March 3, 1917, the amount that may be included in invested capital must not exceed: (a) 20% of the par value of the total stock or shares outstanding on that date, nor (b) the actual value of the asset at the date acquired, nor (c) the par value of the sto:>k issued in payment for the asset. Article 60 reads: Good will and other similar intangible assets purchased with cash or tangible property must be taken at a value not in excess of the cash or actual cash value of the tangible property specifically paid therefor. These articles do not contemplate a value measured by a collateral transaction, and while, as above stated, this corporation has undoubtedly Supplementary Bulletin Rulings. Sec. 326. Art. 833.-4. earned a good will value, there is no provision in the law for its inclusion in invested capital, except by purchase direct by the corporation or part- nership. Appreciation arising from going concern value is not recognized in the Revenue Acts of 1917 and 1918 for invested capital purposes. The taxpayer has made reference in his contention to this Committee's Memor- andum 21 wherein it is said: If, upon the sale of the capital assets of a corporation to another corporation shares of stock are surrendered by the old stockholders to the vendee corporation, the nature of the transaction is not changed from one of the sale by the corporation to one of sale of stock by the stockholders. In this transaction there was a sale of assets by several incorporated companies to another incorporated company, and as an incident of the transfer of the assets all of the stock of said companies was to be transferred and delivered at the time the sale and purchase was finally consummated. Accordingly, this was not a transaction between individuals. The Committee finds no basis on which to establish a precedent by ignor- ing the corporate entity of the M Company^ and is accordingly of the opinion that the taxpayer's claim for good will of 10* dollars, measured by a transaction in the sale of stock of the corporation, by the stockholders to individuals, can not be sustained under the Revenue Acts of 1917 or 1918. 1 I('22)-14-204: A. R. K. 81V Section 207 — Revenue Act of 1917.™ Invested Capital. Recommended in the appeal of the M Company, that the action of the Income Tax Unit, in its adjustment of invested capital, be sustained, and accordingly that the appeal be denied. The Committee has carefully considered the appeal of the M Company from the action of the Income Tax Unit with respect to an increase of 50* dollars in invested capital as evidenced by an issue of capital stock having a par value of like amount. The pertinent facts are related as follows: The appellant company was organized in 190- with a paid-in capital of 75* dollars and an authorized capital of 125* dollars. The compan)' was organized for the purpose of purchasing the going business of the O Company, for which it paid 25* dollars cash and executed nine notes, eight for the sum of 10* dollars each and one in excess of 5* dollars (one note maturing June 1 of each year there- after). These notes were all indorsed by the stockholders of the company. In 191- the company was embarrassed in the conduct of its business by reason of the heavy indebtedness which it carried and the consequent effect upon its credit. In order to relieve this situation, arrangements were made with A, the holder of the purchase money notes, to accept in lieu of five 10* dollar notes of the corporation, five personal notes of the stockholders of the company for similar amounts. The stockholders thereupon agreed to execute five 10* dollar notes in favor of the corporation in consideration of the balance of 50* dollars of the authorized and unissued capital stock of the company. Subscriptions for the unissued stock were duly taken in most cases and stock was receipted for, and all of it was left in the treasury of the company as collateral to the notes. These notes were immediately indorsed to A, and five of the corporation's notes of the same amount and of like dates, were taken up and canceled, thus reducing the indebtedness of the corporation by 50* dollars. Later, as these notes matured, they were taken up by the M Company in behalf of its individual stockholders, but the corporation still Supplementary Bulletin Rulings Sec. 326. Art. 833.-5. held the notes and the capital stock. When the notes were paid by the corporation, the entry was posted from the cash book to a special dividend account. The Unit in passing on the point involved stated: The new corporation from time to time paid off these notes out of its earned surplus. None of the notes were paid by the stockholders who had signed them. The certificates of capital stock of the new corporation were attached to the notes as collateral security. The new corporation paid off" the new notes on which it was the indorser at the rate of a bout 10* dollars per year, plus interest at 6 per cent, and retained the notes in its treas- ury for the alleged purpose of increasing its credit with out-of-town banks. This seems improbable in view of the fact that some of the stockholders' notes became as much as seven years overdue, and in view of the further fact that as soon as the notes were paid they were charged on the books to "Special dividend account." The new corporation claimed that these notes paid by the corporation are still assets of the corporation and should be included in its invested capital, in addition to the amounts paid in satisfaction of these notes, even though none of the interest and principal was ever paid by the stock- holders who signed them, and they were when paid charged to "Special dividend account." In the case here at issue the notes of the stockholders were paid for assets of the old corporation, the new corporation merely being the original payee and an indorser. The notes were satisfied out of the earnings of the new corporation and then allowed to become overdue without any attempt having been made to collect from the makers of such notes. Therefore, as fast as such notes are paid, they should be eliminated from invested capital, and the stockholders should report as dividends received the amounts so paid. In connection with the position taken by the Unit, that the payments actually made were in fact dividend payments, the taxpayer states the following: The declaration and payment of a dividend by a corporation may be legally accom- plished only by certain formal action on the part of the^board of directors of a corpor- ation, and no such action was taken. The question involved has been considered by the office of the Solicitor of Internal Revenue, which requested a brief from the taxpayer on the question as to whether the notes executed by the stockholders and indorsed over to A by the company, after having been redeemed by the company, constituted enforceable obligations against the stockholders under the statutes of the particular State, and further requested the corporation to submit for in- spection its books containing the special dividend account, surplus account, regular dividend account, and its minute books of the directors' meetings. It developed that the capital stock books showed that the stock in question was in fact issued. Most of it had been receipted for, although certificates had never been removed from the stock book. The "special dividend account" and the "dividend account" shown on the ledger are identical with copies of book entries found in the file. The "Capital Stock account" on the ledger shows entries under date of June — , 190-, of 75x dollars, and February — , 191—, of 50x dollars, total capital stock issued 125# dollars. The "Surplus account" has been reduced by the amount of the regular annual dividend, but has not been reduced by the amount of the notes paid by the corporation. Copies of some of the notes were exhibited and the word "Canceled" appears in red ink across the face of the notes. Two notes were submitted in the sum of 10* dollars each, which were stated to be in renewal of notes which were barred by the statute of limitations. It developed, however, that these notes were renewed after the revenue agent made his investigation. The taxpayer's brief on page 3, which was sworn to, states in part that: Two of the notes as originally drawn were at the time of the revenue agent's investi- gation barred by the statute of limitations, their renewal having been overlooked. These two notes have been renewed in order that the obligation may be kept legally enforce- able, and they will be exhibited at the hearing. Supplementary Bulletin Rulings. 326. Art, KVI. Sec. 326, Art. 833.-^. The minute books of the directors' meeting showed dividends regularly declared each year, a typical resolution being as follows: On motion, a special dividend of 25 per cent on 75* dollars of capital stock be paid at once. The minute books also show a resolution for each year from 1913 to 1917, inclusive, declaring a special dividend of lOx dollars to pay the stockholders' notes as they fell due. The typical record of such action is as follows: A special dividend of 10* dollars to meet note for A, made by stockholders was ordered. It is apparent, therefore, that the statements in the taxpayer's brief, that no dividend had been declared, is not in fact true. The minute books also show that only z out of 2%% shares of the stock were considered as voting stock, the z shares held as collateral for the notes evi- dently being treated as treasury stock. The following is quoted from an informal memorandum written by the Solicitor under date of January 25, 1922, and trie observations and opinion are subscribed to by the Committee: It appears to this office in view of the additional facts gathered from the books that the capital stock of the corporation is 125* dollars and that the 50* dollars in notes issued for the 50* dollars stock in February, 1911, was an enforceable obligation against the stockholders of the corporation until the corporation paid each note by the declaration of a special dividend. It is not believed, however, that the notes can be treated as an asset of the company after they were paid out of the profits of the corporation in the form of a dividend to the stockholders. All of the stockholders signed the notes and were liable as between themselves in the same proportion as they held the stock of the corporation. A declaration of a dividend to pay the notes therefore was regular, and the earnings of the corporation were sufficient to pay the dividend regularly declared. It is urged by the taxpayer that the action of the corporation and the stockholders is inconsistent with the theory that the declaration of a dividend was intended, but that the action taken should be construed to have been merely an authorization by the direc- tors to the treasurer to take up these notes and hold them as an accommodation to the stockholders. The action of the directors and stockholders, however, does not seem to sustain this theory. The corporation's liability upon the notes was only secondary, and it was not obliged to take up the notes unless and until the stockholders had defaulted. It is affirmatively stated by the taxpayer and proven by other evidence that each of the stockholders is worth much more than his liability on these notes. The notes were in- terest bearing and in all the period since they were executed no stockholder has been called upon to pay any of the principal, nor has any stockholder paid any interest upon them. The notes were not due until June 1 each year, and without waiting for the due date or default of the stockholders the corporation declared dividends in February of each year to take up the notes when they became due June 1, and thus by its voluntary action legally obligated itself to the stockholders in advance to pay their obligation and charge it to their dividend accounts. Furthermore, when the notes were paid the cash entry was posted direct from the cash book to a special dividend account and the book- keeper who posted the entry is a stockholder, director, and secretary and treasurer of the corporation. All further arguments of the taxpayer are based upon the fundamental error that the dividend was to be paid with the stockholders' notes, whereas at the time the divi- dends were declared and paid the corporation did not hold the notes of the stockholders which were being paid. Thus the taxpayer contends that if a dividend was in fact de- clared, it was never paid, whereas all the dividends in question were paid promptly, in cash, to A, the person to whom they were payable on behalf of the stockholders, accord- ing to the resolution declaring the dividend. It contends that the statute of limitations has now run against the stockholders and they can not enforce the collection of the divi- dends, whereas the dividends were paid on June 1 each year and the stockholders have no rights against which the statute may run. Again, it insists that the assets with which alone the dividends as declared might be paid were allowed to remain in the business and became paid-in surplus, when the dividends were payable, and were paid in cash from the earnings of the corporation; that the stockholders are estopped from claiming that divi- dends were declared, although they have received the payment of them in the payment, of their notes. No other conclusion can be reached than that the corporation did what its records indicate; that is, declared and paid a dividend out of its earnings each year in the sum Supplementary Bulletin Rulings. 1-4-23. Sec. 326. Art. 833.-7. of lOx dollars for the payment of these notes, and it should have reduced its surplus accord- ingly- It might be, as between the stockholders and creditors of the corporations, that the stockholders would be held estopped from denying that they still owe these notes to the corporation, but that is extremely doubtful, and could be determined only upon the hap- pening of that contingency. However that may be, such an estoppel would not set up these notes as valid and legal obligations, but would only estop the stockholders from claiming that they had already been paid. It is suggested, therefore, that the surplus account of the corporation be reduced each year by the amount which it paid as a dividend in satisfaction of these notes as they fell due. This conclusion necessarily reduced the corporation's invested capital by 40a; dollars prior to the year 1917, and requires an adjustment on account of the lOx dollar note paid on June 1, 1917. In view of the foregoing quoted opinion, with which the Committee is in accord, it is recommended that the surplus account of the corporation be reduced each year by the amount which was paid as a dividend in satisfaction of these notes as they fell due, and that the corporation's invested capital be reduced by 40* dollars prior to the year 1917 and a further adjustment of invested capital be made as of June 1, 1917, on account of the note paid through the medium of a special dividend on that date. Accordingly, it is recommended that the action of the Income Tax Unit be sustained and the taxpayer's appeal be denied. S I ('22)-31-^44: I. T. 1409. Revenue Act of 1918. Section 8632 of the Ohio General Code, which provides that at the time of making a subscription 10 per cent on each share subscribed for shall be paid, and which provides that the residue shall be paid in such installments at the times and places and to such persons as the directors require, has been construed by the Ohio courts as merely marking the time when the first installment shall be payable upon a stock subscription and as providing the mode for determining the time at which the residue shall become payable. (Chamberlain v. Railroad, 15 Ohio State, 249.) Stock issued without the payment of the first 10 per cent at the time of making the subscription is not invalid. (Smith v. Railroad, 15 Ohio State, 336, and Henry v. Ra.lroad, 13 Ohio Reports, 187.) A note given for such 10 per cent is enforceable (Latham v. Insurance Co., 1 Bull., 127.) In view of the above interpretation, it is held that, under the provisions of section 8632 of the Ohio General Code, promissory notes of subscribers may legally be received in respect of the entire amount of stock subscribed. Consequently, it follows that all the notes received by the M Company upon stock subscriptions may be included in the company's invested capital to the extent of their fair market value at the time paid in under the pro- visions of article 833 of Regulations 45, provided they were received in abso- lute payment and not as conditional payment only. 4 Supplementary Bulletia Ruling*. .tea Sec. 326. Art. 833.-8. I ('22)-52-660: I. T. 1542. Revenue Act of 1918. Inquiry is made whether under the laws of the State of New York notes may legally be received in payment for stock. Section 326(a) 1 of the Revenue Act of 1918 provides: That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section)- Actual cash bona fide paid in for stock or shares; * * *. Article 833 of Regulations 45 provides: Tangible property paid in: evidences of indebtedness.— Enforciblc notes or other evidences of indebtedness, either interest-bearing or noninterest bearing, of the subscriber received by a corporation upon a subscription for stock may be considered as tangible property in computing its invested capital to the extent of the actual cash value of such notes or other evidences of indebtedness at the time when paid in, but only (a) if such notes or evidences of indebtedness could under the laws of the jurisdiction in which the corporation was organized legally be received in payment for stock, and (b) if they were actually received by the corporation as absolute, and not as conditional, payment in whole or in part of the stock subscription. With regard to incorporation under New York laws, section 55 of the stock corporation law provides that stock may be issued only for money, property, or services, and where a subscription is payable in money, section 53 requires 10 per cent of such subscription to be paid in cash. Section 29 provides that no corporation or officer thereof shall "discount any note or other evidences of indebtedness, or receive the same in payment of any installment * * * due or to become due on any stock in such corporation." (Birdseys, Consoli- dated Laws of New York, p. 8205.) Accordingly, under the laws of New York, any notes given for balances of stock subscriptions may not legally be discounted or received as payment for stock. Such notes, therefore, may not be included in invested capital under section 326 of the Revenue Act of 1918 and article 833 of Regulations 45. 5 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 834— 1 . Law Section 326.— Invested capital (1918 Act— «j555, ante): (1921 Act— *[1035, post). Article 834. — Tangible Property Paid in.- inadmissible Assets (Re^. 45 — • ^755, ante): (Reg. 62— *;119G, post). 21-20-964: A.R.R.lll REVENUE ACT OF 1917. The Committee has had under consideration the appeal of the O Com- pany. This appeal is based on two grounds: One, the action of the Unit in rejecting the claim for assessment under section 210, and the other, the dis- allowance, in the computation of invested capital under section 201, of an amount of x dollars representing capital stocks of other corporations owned. At the time of organization, the business having been conducted originally by a partnership, no attention appears to have been given to the actual value of the assets assumed by the corporation, which started business with a capital stock of y dollars, and one of the grounds for the claim under section 210 is this defective accounting. It is understood, however, that in 1912, and again in 1913, the value of these permanent assets was appraised and written up and stock issued therefor, all of which has been allowed as invested capital. The other ground is that the corporation's income in 1917 was the fruits of previous activities. It is claimed that a large part of the income for 1917 was from a contract undertaken in 1916. The matter of the company's claim for assessment under section 210 was under consideration by the Tax Reviewers and by them rejected, and the Committee sees no sufficient reason for a reversal of this action. Further- more, it appears from a statement of the special assessment section that the company's excess profits tax was 41 .49 per cent of the income and that statis- tics obtained from comparison of other corporations engaged in a like or similar business reflect an average tax of 40.14 per cent of the income. The disallowance of the x dollars of inadmissible assets appears to grow out of the strict interpretation and application of article 44 of Regulations 41. This article, following the provisions of section 207 of the excess profits tax law, provides that "Stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the excess profits tax" may not be incuded in invested capital. This is merely a state- ment of the general principle adopted in the Act that borrowed money, interest on which is an allowable deduction, may not be included in invested capital, nor may assets the income from which is not included in the income account, be included. The framers of the Act, however, did not foresee or make specific provision for a situation w r here inadmissible assets are purchased with borrowed money. It was clearly not the intention of Congress, where, for instance, a corporation has $250,000 of admissible assets, $250,000 of inadmissibles, $250,000 of cash capital and $250,000 of borrowed money, to hold that the corporation has no invested capital, nor does the law so provide unless the cash capital is invested in inadmissible assets. When Regulations 41 were in course of preparation the method of meeting this situation was given very careful consideration and full discussion. It was recognized that in many, if not most instances, it would be impossible to earmark the dollar paid for inadmissible assets and to say whether it represented invested capital or borrowed money. It was therefore deter- mined to give the taxpayer the benefit of the doubt, and this w T as done by paragraph 129 of article 53, which, after specifying certain adjustments necessary to be made, provides that the sum so found shall be the invested capital at the beginning of the taxable year, "except that in any case where Supplementary Bulletin Rulings. Sec. 326. Art. 834.-2. the admissible assets * * * are less than the amount of such adjusted total, then the invested capital must be further reduced to an amount equal to the sum of the admissible assets." In drafting the form to put into effect this provision it was found to be an awkward thing to accomplish, and precisely the same result was accomplished in the method prescribed by Schedule C 8, Form 1 103, and the instructions covering same; that is to say, if the admissible assets are in excess of the adjusted capital and surplus, no further deduction is required because of inadmissible assets; in other words, only the excess of inadmissible assets over total indebtedness is to be deducted from the capital and surplus so found. ^Therefore, giving the intended effect to article 53 and to schedule 8 (c) of the form, the deduction of x dollars for inadmissible assets, which is much less than the outstanding indebtedness of the company, was not required, and the action of the Unit in further adjusting the capital and surplus by a reduction for inadmissible assets was erroneous, and the Committee therefore recommends that the corporation be advised to file claim for abatement of the a nount of the assessment based on this error, or if claim has already been filed that it be allowed to such extent; and that the action of the Unit in rejecting the claim for assessment under section 210 be sustained. 1 Supplementary Bulletin Rulings 2-20-22. Sec. 326. Art. 835.— 1 Law Section 326.— Invested Capital (1918 Act— ^[555, ante): (1921 Act— If 1035, post). Article 835. — Tangible Property Paid in; Mixture of Tangible and In- tangible Property (Reg. 45—^756. ante): (Reg. 62— ^1191, post). 1-19-120: T. B. M. 5. Where since the organization of a corporation its capital stock has been increased or reduced and such change represents an actual acquisition of new property for stock or an actual impairment of original properties, the 20 per cent limitation imposed by section 207, Revenue Act of 1917, will be based upon the par value of the total stock outstanding on March 3, 1917. 1 16-19-467: T. B. R. 49. Article 59 of Regulations 41 is a reasonable interpretation of the Act of October 3, 1917, and where a corporation has acquired tangible and intangible property in exchange for its bonds and stocks it will be deemed, in the absence of clear evidence to the contrary, that the intangibles were acquired by the stock. In computing consolidated invested capital, where one corporation has acquired the stock of one or more subsidiary companies, such transaction should be treated in effect as though the assets of the respective companies had been acquired. In the case under consideration, the decision of the income tax unit in allowing a 9 per cent deduction is approved. (1) The W Company was formed through the merger of the Y Com- pany and the Z Company with the W Company as it existed before the merger. The new company issued the following securities: Bonds 67 x dollars Capital stock 59 x dollars Total bonds and stock 126 x dollars The company also assumed liabilities amounting to 9x dollars. For the above securities and the assumption of the liabilities just mentioned the com- pany acquired total tangible assets of 84* dollars and intangible assets of 51* dollars. In computing its invested capital for 1917 the company claims that these securities were issued ratably for both tangible and intangible assets, and that, therefore, 46 per cent of the bonds were issued for tangible and 54 per cent for intangible property. These ratios apply also to the common stock. Is this method of computation correct? The act of October 3, 1917, provides that, where intangible assets, such as good will, trade-marks, trade brands, etc., have been acquired by capital stock, the maximum amount that may be included in invested capital in respect of such intangibles is limited to 20 per cent of the capital stock of teh corporation outstanding on March 3, 1917. This is a purely arbitrary limita- tion designed to prevent the inclusion in invested capital of excessive amounts of capital stock issued for intangibles in excess of their reasonable value. Where capital stock is issued directly for intangible property, the application of this rule is simple, but where, as in the present case, a mixed aggregate of tangible and intangible property is acquired for the total amount of securities, part of which are in the form of bonds and part of which are in the form of stock, it becomes necessary to determine how much of the tangible property was acquired by bonds and how much, if any, by the issuance of capital stock. Regulations 41, article 59, lays down the rule that — In the absence of satisfactory evidence to the contrary, it will be presumed in the case of a corporation that its stock was issued for the following purposes in the order named: (a) Supplementary Bulletin Rulings. Ssc. 326. Art. 835.-2. Good will or other intangible property, (b) patents and copyrights, (c) tangible property. Stating the rule conversely, bonds are to be applied first against tangible froperty, and any remainder only will be applicable to intangible property, here is no clearly stated rule in the statute; therefore the regulation is based upon inference, and to be sound must be a reasonable interpretation of what the statute requires. In any case in which a mixed aggregate of tangible and intangible property is acquired for a block of securities consisting in part of bonds of the corporation and in part of its capital stock, the allocation of the tangible and intangible property to the respective securities may be made upon one of three possible bases: (a) That the stock was issued first against tangible property, and that the bonds were issued against intangible property; (b) That the bonds and the stock apply ratably against the tangible and intangible assets; and (c) That the bonds apply first against tangible assets, and that the stock was issued against any remaining tangible property and for the intangible property. Considering briefly these possible bases, the first must be discarded as altogether unreasonable. Corporate securities are not and could not in any ordinary case be issued upon such a basis. The second basis is that claimed by the taxpayer, but it also must be discarded on the ground that it does not conform to the methods of corporate finance. Bonds are universally drawn in such a way as to rank senior to capital stock. A bond aims to give the maximum of security with a moderate rate of return, and this return, while limited in amount, is nevertheless a fixed obligation for the payment of which, together with the principal of the bond, tangible assets are specifically pledged. It is true that in some instances the mortgage or other instrument may cover not only tangible property but intangible property also, but even in such a case the satisfaction of the bond is first sought against the tangible property. The stock as the junior security is more speculative in character. It has no right of foreclosure and after satisfaction of the senior securities the stock must bear all losses. As against this, however, the stock is limited in its return only by the earning capacity of the corporation. Tangible property has an actual value resting upon its permanency and upon the variety of its possible uses. Intangible property is evanescent in its character, and its value rests upon its potential earning power and its use is limited usually to the trade or business in which it has its origin. It thus lacks the elements which make tangible property the accepted security for bonds, but because of its earning power it is a fitting basis for an issue of common stock. These distinctions are not merely theoretical but underlie the whole structure of corporate finance in this country, and are so interwoven with the practice and procedure in the issuance of securities that they have become, for all practical purposes, obligatory. The rule laid down in article 59 of Regulations 41 is, in the opinion of the Advisory Tax Board, reasonable and fairly interprets the intent of the Statute. It is, therefore, recommended that the claim of the W Company to the right to compute invested capital upon the basis of prorating the bonds and stock issued by it over the tangible and intangible property be denied. (2) In accordance with a court decree the W Company as it then existed was dissolved. Two new companies, the R Company and S Company, were organized and a certain portion of the tangible and intangible assets of the W Company was transferred to these new corporations. In this connection the W Company claims that the tangible and intangible property transferred at this time was acquired by it partly for bonds and partly for stock. This question is not material in view of the negative conclusion reached in (1) Supplementary Bulletin Rulings. Sec. 326. Art. 835.-3. above. This applied, however, only in so far as it relates to property ac- quired at the time of the merger and it may be that some part of the intan- gible property in the form of trade-marks or trade brands so transferred may have been acquired for cash or tangible property since that date. Proper recognition should, of course, be given to the facts in such an event. (3) The W Company acquired through the merger already mentioned the stock of certain subsidiary companies. In the computation of the con- solidated invested capital the Income Tax Unit has treated the acquisition of the stock of these subsidiary companies in the same manner as if the tan- gible and intangible assets of the respective companies had been acquired. In some cases these subsidiary companies have since been dissolved and upon dissolution the assets have been taken up by the parent company and the liabilities assumed by it. In the opinion of the Advisory Tax Board the method of computation used by the unit as above stated is correct. (4) The W Company makes claim for prewar deduction of 9 per cent, although its actual earnings during the prewar period amount to less than this percentage of its invested capital. Representative corporations, however, show more than 9 per cent, and the W Company would have shown more than 9 per cent except for a charge that occurred during this period by way of premium paid upon certain bonds of the company which it had called in and canceled pursuant to the dissolution decree. In view of all these circumstances, the Advisory Tax Board concurs in the decision of the Income Tax Unit that the taxpayer's claim should be allowed. 2 kL i 31 44-20-1282:^ ^A.'R. R. 307. The Committee has had under consideration the appeal of the N Com- pany against the ruling of the Income Tax Unit disallowing an item of 50* dollars claimed as good will in its invested capital for 1918. The facts appear to be that the N Company, a corporation, succeeded N and Company, a partnership, in 1897. The partnership had been very profitable prior to incorporation, its average earnings for the five years just prior to 1897 being approximately 100* dollars. As its tangible assets pre- sumably were substantially the same as when turned over to the corporation in 1897, 200a: dollars, it is clear that its earnings indicated a good will worth at least as much as the tangible assets. The deed transferring assets to the corporation specifically recited that the 200# dollars in stock was paid for the trade name and good will of the business and the physical assets. The amount of the net tangible assets taken up on the books of the corporation was 200x dollars, the good will not being carried on the books as an asset at all. The denial of the item of 50x dollars claimed as invested capital appears to be based upon the assumption that if allowed at all it must be allowed as paid-in surplus, and the Unit has consistently and correctly, in the opinion of the Committee, taken the attitude that no paid-in surplus is permissible direcdy or indirectly as to intangible assets conveyed . However, this amount may be allowed without its inclusion as paid-in surplus. The tangible assets taken oyer were raw materials and stock in trade which were sold long prior to any income tax law. To distribute the purchase price of the tangibles and intangibles purchased as being 150* dollars for tangibles and 50* dollars t' r intangibles will have the effect of reducing the cost price of assets from Supplementary Bulletin Rulings. Sec. 326. Art. 835. 200* dollars to 150* dollars and consequently increasing the earned surplus by 50* dollars. It is clear that this is a case of acquisition for stock of a mixed aggregate of tangibles and intangibles such as would justify the application of section 327 if satisfactory allocation of values can not be arrived at. In view of the history of the concern and the profits earned in excess of a return upon tangible assets, the Committee is clearly of the opinion that the intangible assets were as readily worth 50* dollars as the tangibles were worth 150* dollars. How- ever, as 50* dollars in 1918 is the maximum value which can be included in invested capital by reason of the purchase of intangible assets for stock, the Committee recommends that the corporation be allowed to allocate the values at the time of purchase and to attribute to the tangibles a cost of 150* dollars and to the intangibles a cost of 50* dollars, and to adjust its books so as to increase its earned surplus by the sum of 50* dollars. 3 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 836.— 1. Law Section 326.— Invested Capital (1918 Act— «[ 555, ante): (1921 Act— If 1035, post). Article 836. — Tangible Property Paid in; value in Excess of Par Value of Stock (Reg. 45 — 1|757, ante): (Reg. 62—111192, post). 1-19-128: O. D. 89. The value as at January 1. 1914, of tangible property .paid in for stock or shares is no factor in computing invested capital under the Revenue Act of 1918. 1 1-19-129: O. D. 90. Paid-in surplus representing tangible property need not be reduced by reason of depreciation of the property in question. All adjustments neces- sary on account of inadequate or excessive depreciation should be made in connection with earned surplus or undivided profits. 2 8-19-334: T. B. R. 32. How invested capital shall be determined in the case of the X company where bondholders purchased at foreclosure sale the property covered by the mortgage securing the bonds, and then transferred said property to a new corporation in exchange for its total authorized stock issue. The bondholders of the X Company obtained judgment against the debtor corporation in the amount of Ax dollars. The property of the corporation was sold and bid in by the bondholders for 3x dollars. The memorandum states that the cash value of the property was probably less than the judg- ment and probably more than the bid. After the property was bid in by the bondholders a new corporation with an authorized stock issue of 2x dollars was organized, and the property bid in at foreclosure sale by the bondholders was exchanged for the total issue of the stock of the new corporation. The inquiry is, What shall be the amount of the invested capital of the new cor- poration? Article 153 of Regulations 45 provides that where under foreclosure a mortgagee buys in the mortgaged property and credits the indebtedness with the purchase price, the difference between the purchase price and the indebtedness will not be allowable as a deduction for a bad debt, for the property which was security for the debt stands in place of the debt. Article 1563, Regulations 45, also provides that there is no gain or loss arising from the acquisition and subsequent disposition of property when as a result of a transaction there is not a change in substance but merely in form of ownership. It is provided that there must be a change into the equivalent of cash to complete or close a transaction from which income may be realized. These regulations deny to the stockholders the right of taking loss upon the basis of any estimated difference in value between their investment in bonds and the property taken to secure such bonds. Article 836 provides that evidence offered in support of a claim for a paid-in surplus may consist among other things of an appraisal of the prop- erty; certification of the assessed value in the case of real estate; and proof of a market price in excess of the par value of the stock or shares. It provides, Supplementary Bulletin Rulings. Sec. 326. Art. 836.-2. however, that "generally, allowable claims under this article will arise out of transactions in which there has been no substantial change of beneficial interest in the property paid in to the corporation, and in all cases the proof of value must be clear and explicit." In the case of the X Company there has been no change of beneficial interest of the stockholders, and the Advisory Tax Board is of the opinion that the corporation should be allowed to set up an invested capital equal to the value of the property transferred to the corporation as of the date of transfer, such value to be established by evidence acceptable to the Commis- sioner. The question of gain or loss to the stockholders who were the former bondholders and the invested capital of the new corporation are not con- current as to time of determination in the above case. The gain or loss of stockholders will be determined on the basis of the price paid for the bonds and the price received. for stock of the new corporation when sold. 3 13-19-432: O. D. 249. Where a corporation exchanges its stock for the assets of a partnership, which are greatly in excess of the par value of the stock, and there is no written obligation to the partners as to the payment of the excess, the taxpayer is entitled to submit evidence in support of a claim for paid-in surplus; however, if the corporation is obligated to the partners for any portion of the excess, a claim can not be sustained. 4 icjd^L t>rb 3yni£g£ Inarrrgbuj. Lanbsldo vneqmoO X od.3 to aiobioribnod oHT i rniibfifi-iomom odT .audfob iot faobiorlbnod arta vd ni bid bnfi bios t&n -gbui oih nerli szoi vjdfidoiq aisw yn^qoiq aril k> suIbv riaiso arb JbHj eaJAJi 14.19.440: T. B. M. 57. The assets of a corporation can not be valued as of March 1, 1913, for the purpose of computing invested capital. The X Company has appealed from a decision of the Income Tax Unit that it can not appraise its assets as of March 1, 1913, and use the values thus ascertained as a basis for determining invested capital. The company relies on Lynch v. Turrish (247 U. S., 221) and similar decisions, holding that appreciation prior to March 1, 1913, can not be considered net income for the purposes of the income tax. An inspection of section 207 of the Revenue Act of 1918 with its reitera- tion of the phrase 'Value * * * at the time of such payment" clearly shows that with minor exceptions the statutory invested capital is based upon the value of property at the time it is paid in for stock or shares and not upon |a valuation at some subsequent date. The law has been consistently inter- preted to mean that the basis or starting point in the computation of invested capital is found in the amount of cash or other property paid in, the original values of such other property being determined in accordance with the statute and the regulations. (Art. 42, Regulations 41.) In enacting the Revenue Act of 1918, Congress advisedly continued and confirmed this general prin- ciple. (Senate Rept. No. 617, p. 11; sec. 326, Revenue Act of 1918.) This well-established rule must be applied in the present case. The fact that this particular company has defective accounting records and can not accurately compute its invested capital in the ordinary manner may justify assessment under section 210 of the 1917 Revenue Act or section 328 of the 1918 Revenue Supplementary Bulletin Rulings. .d£8 .HA .dSE .D58 Sec. 326. Art. 836.-3. Act, but does not permit any appraisal of assets at a time subsequent to the date on which they were paid in for stock as a basis of a computation of invested capital. 21-20-965: S. 1387. EXCESS PROFITS TAX, REVENUE ACT OF 1917, SECTION 207 (a), REGULA- TIONS 41, ARTICLE 63. Time of Valuation for the Purpose of Determining Invested Capital of Property Acquired bj a Corporation by Gift. Where certain commercial leases to oil lands are informally transferred to a corporation formed by the lessees for the purpose of taking over such leases, no consideration being paid for such transfer, it will be deemed that the transfer was made at the time of taking possession, and the addition to invested capital of the corporation upon such transfer is the fair market price or value of the leases at the time possession is so taken by the corporation. Opinion is requested as to the time when certain commercial leases should be valued for the purpose of determining the invested capital of the M Com- pany which leases were informally transferred to the corporation without consideration by its stockholders. The Revenue Act of 1917 provides, section 207. That as used in this title, the term "invested capital" * * * means * * * (a) In a case of a corporation or partnership * * * (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year; * * *. Interpreting this section article 63 of Regulations 41 provides: When Tangible Property May Be ^ Included in Surplus. — Where it can be shown by evidence satisfactory to the Commissioner of Internal Revenue that tangible property has been conveyed to a corporation or partnership by gift or at a value, accurately ascertainable or definitely known as at the date of conveyance, clearly and s bstantially in excess of the cash or tlv; par value of the stock or shares paid therefor, then the amount of the excess shall be deemed to be paid-in surplus. The adopted value shall not cover mineral deposits or other properties discovered or developed after the date of conveyance, but shall be confined to the value accurately ascertainable or definitely known at the time. Evidence tending to support a claim for paid-in surplus under these circumstances must be as of the date of conveyance, and may consist, among other things, of (1) an appraisal of the property by disinterested authorities, (2) the assessed value in the case of real estate, and (3) the market price in excess of the par value of the stock or shares. Prior to October, 1913, the M Company was a partnership. This part- nership acquired leases to certain oil lands in consideration for its promise to begin drilling wells on the lands leased within a stated period of time, and to continue development. About October, 1913, the partnership instituted proceedings to incorporate. Immediately upon incorporation, and without formal record in any manner, the commercial leases held by the partnership were turned over to the corporation, which, thereupon, continued the work of drilling wells and developing properties. At the time of this formal transfer to the corporation the leases in question were of a value which can be determined with reasonable accuracy. A few months later, as a result of the development carried on by the corporation, the value of the leases became greatly enhanced. It is the contention of the taxpayer that since the only way title to the leases could be acquired by the corporation was by fulfilling their individual requirements as to the developing of the properties, the leases were acquired on different dates, that is, the dates when permanent improvements were made by the corporation. The excess profits tax law of October 3, 1917, authorizes a corporation to Supplementary Bulletin Sec. 326. Art. 836.--4. include in "invested capital" as paid-in surplus the actual cash value of tangible property made the subject of a gift. Construing this provision, section 207 (a) 3, Regulations 41, article 63, provides that where tangible property has been conveyed to a corporation or partnership by gift or at a value accurately ascertainable or definitely known as at the date of con- veyance, clearly and substantially in excess of the cash or the par value of the stock or shares paid therefor, then the amount of the excess shall be deemed to be paid-in surplus. That article >oes on to state that the adopted value shall not cover mineral deposits or other properties discovered or de- veloped after the date of conveyance, but shall be confined to the value ac- curately ascertainable or definitely known at that time. Although not definitely authorized by this article, the practice of the Bureau has been to regard as paid-in surplus the entire value of property made the subject of a gift at the date of its "conveyance. " The term "conveyance'' is not used in this article in its strict technical sense, but means simply a transfer of the interest of the donor to the donee. This is shown by the fact that the article is concerned with tangible property in general, whereas, as is well known, the term "convey ance" is, strictly speaking, applied only to the formal transfer of real property by deed. In the instant case it is undisputed that the entire interest of the part- nership or the individual members thereof in the leases in question was trans- ferred to the corporation at its date of incorporation. While it is true that after such transfer of interest the corporation was required to continue the drilling of wells and the developing of the properties in order to carry out the terms of the original leases, still, so far as the part- nership, the donor, and the corporation, the donee, are concerned, the entire interest of the former was transferred at the date of incorporation. The con- ditions which had to be fulfilled by the corporation did not affect the transfer of interest in the leases from the partnership, but simply the maintaining of the property in the leases as originally made. As a general rule a sale of an interest in real property is held to occur at the time a deed passes or at the time possession and the burdens and benefits of ownership are, from a practical standpoint, transferred to the buyer, whichever occurs first. (See Law Opinion 988; Solicitor's Memorandum 1267, and cases therein cited.) The rule as to the effective date of a gift of an interest in real property for purposes of valuation should be the same as in the case of a sale. Since only the original parties are concerned, this conclusion is not affected by reason of the fact that the transfer was oral. In the instant case possession of the lands covered by the leases was taken immediately by the corporation; in fact such taking of possession is the only evidence of the transfer. Even if there had been a subsequent written as- signment of the leases, such assignment would, for the purpose of fixing valuation, be retroactive to the time when the parties intended the property to pass, i. e., in this instance to the time when the corporation took possession and dealt with the leases as the owner thereof. It is, therefore, held that where certain commercial leases to oil lands are informally transferred to a corporation formed by the lessees for the purpose of taking over such leases, no consideration being paid for such transfer, it will be deemed that the transfer was made at the time of taking possession, and the addition to invested capital of the corporation upon such transfer is the fair market price or value of the leases at the time possession is so taken by the corporation. 6 Supplementary Bulletin Rulings. Sec. 326. Art. 836.-5. 28-20-1064: A. R. R. 161. REVENUE ACT OF 1917. Recommended that the claim of M. & Company for a paid-in surplus of 15* dollars on account of the excess value of properties in 1911 be allowed. The Committee has had under consideration the appeal of M. & Com- pany, a corporation, from the action of the Unit in disallowing a claim for 15* dollars as paid-in surplus in the determination of the corporation's in- vested capital for the purpose of adjusting excess profits tax. M. & Company was organized in 1911 as a consolidation of two pre- existing corporations. Among other assets which were taken over by the present corporation and for which stock was issued were two pieces of real estate, the values of which are the basis of the present claim. One of these properties, the so-called warehouse property, was purchased by the original corporation at a cost of x dollars and on which a warehouse building was erected in the year 1902 at an actual cost of 2x dollars, this property having a book value of 3x dollars at the time of organization of the new company, at which value it was taken over, stock issued therefor, and the property set up on the books of the new corporation. The other, the main store building, was purchased by the original corporation at approximately 5x dollars, and there was erected thereon, in the years 1902 and 1903, a store building at an actual cost of llx dollars, the property being carried on the books of the old corporation at 16* dollars, at which figure it was taken over and carried on the books of the new corporation. The claim for paid-in surplus arises on the alleged excess of value of the land on which these two buildings stand, in 1911. There was no substantial change of interest at the time of reorgani- zation, the stockholders of the new corporation being practically the same as in the old. Article 63 of Regulations 41 provides as follows. Where it can be shown by evidence satisfactory to the Commissioner oi internal Revenue that tangible property has been conveyed to a corporation or partnership by gift or at a value, accurately ascertainable or definitely known as at the date of conveyance, clearly and substantially in excess of the cash or the par value of the stock or^shares paid therefor, then the amount pf the excess shall be deemed to be paid in surplus." The adopted value shall not cover mineral deposits or other properties discovered or developed after the date of conveyance, but shall be confined to the value accurately ascertainable or definitely known at that time. Evidence tending to support a claim for a paid-in surplus under these circumstances must be as of the date of conveyance, and may consist, among other things, of (1) appraisal of the property by disinterested authorities, (2) the assessed value in the case of real estate, and (3) the market price in excess of the par value of the stock or shares. It will be noted that the properties were taken over in January, 1911, and it appears that some time during the late summer of 1912 an appraisal was made of these two properties and the value of the main store lot, exclu- sive of the building, was appraised at 17 x dollars, while the value of the ware- house lot, exclusive of the building, was appraised at 4x dollars. The last paragraph of article 63 requires that "evidence tending to sup- port a claim for paid-in surplus * * * must be as of the date of conveyance," and the Unit has apparently rejected the claim on the theory that the ap- praisal, in order to be valid, must have been made on the exact date of con- veyance. In the opinion of the Committee this is too narrow a construction. It is believed that the real meaning is that the appraisal must have been made as of that date; that is to say, jn the light only of knowledge or facts ascer- tainable on that date and not in the light of subsequent happenings. Evi- dence was produced at the hearing to show that between January 1, 1911, the date of transfer, and the date of this appraisal there was no appreciable in- crease in the value of real estate in the locality. The appraisal then made has been substantiated by an appraisal subsequently made by two/lisinterested Supplementary Bulletin Rulings. Sec. 326. Art. 836.-6. appraisers as of January 1, 1911, who find the values only slightly different from those reached by the first appraisers, the recent appraisal being 4x dollars for the warehouse lot and 18* dollars for the store lot. At the time of the appraisal in 1912, 5x dollars of the increase shown thereby was carried into the books of the company and a tax of 1 per cent paid thereon under the Act of 1909, under the mistaken view, subsequently reversed in the Baldwin Locomotive Co. case, that appreciation written on the books constitutes income. It is stated that the reasons for not then carrying the entire appreciation on to the books were that, first, they were under the impression that they would have to pay tax on all the amount written on the books; second, that an increase in book values might lead to an increase in their local taxation; and, third, and probably most cogent of all, was the fact that the stock was issued under a stockholders' agreement, under which no stock could be sold unless first offered to remaining stock- holders, and that in the event of the death of any stockholder, the corpora- tion had the right to purchase stock from his estate at approximately 10 per cent in excess of its then book value. The store is advantageously located in the business center of the city, while the warehouse property is only a few blocks away. The properties clearly had a value in excess of that at which they were taken on to the books of the corporation in consolidation, and it has been adundantly established to the satisfaction of the Committee that the real estate had a value not less than 15* dollars in excess of the figure at which it was taken over. It accordingly recommends that the claim of the corporation to an addi- tion of 15* dollars to its invested capital as paid-in surplus be allowed. 7 2-21-1393: A. R. R. 358. REVENUE ACT OF 1917. The Committee has had under consideration the appeal of the M Com- pany from the action of the Income Tax Unit in denying to the taxpayer an invested capital as of January 1, 1913, based upon an appraisal of the tax- payer's property as of January 1, 1917. K j It appears that the business which is now carried on by the M Company was organized by A in the year 1880. From that time until January 1, 1913, he carried on the business as an individual and was successful in building up a large business. During all this period, it is said that A kept practically no accounts beyond a few memoranda principally for the purpose of showing his current earnings from time to time. In the fall of 1912 he decided to incorporate the business, and as he was not dependent upon credit, he thought a corporation with a capital of 5* dollars would answer his purpose. There- fore on January 1, 1913, he turned over all the assets of the business to the new corporation, including cash and cash assets totaling 2x dollars, and machinery, fixtures, plant, and equipment valued, for the purpose of giving to the capital stock a book value equal to the par value thereof, at an arbi- trary figure of 3x dollars. In return he received all the capital stock of the corporation. After its incorporation few~changes were made in the method of keeping the books of the company; and when early in 1917 it was discovered by the attorneys of the company that it was practically impossible to get from such books the necessary information for the proper preparation of income tax returns and also for the purpose of determining the amount of assets for Supplementary Bulletin Rulings. Sec. 326. Art. 836.-7. Insurance purposes, a thorough and complete inventory and valuation were made and certified to by the N Appraisal Company, which showed the valua- tion of the plant as of the date of January 1, 1917, in the sum of 8x dollars. Following this appraisal another firm of certified public accountants was engaged to make an examination of the books of the company from the time of its incorporation and to restate the company's accounts as of January 1, 1917, using for the valuation of the plant and equipment the figures as deter- mined by the inventory and appraisal. gf^When it became necessary in the early part of 1918 to make up the excess profits tax return of the company for the year 1917, the N Appraisal Com- pany was again engaged to value the plant, this time as of January 1, 1913, at which time the company took it over. This valuation was arrived at by deducting from the plant valuation as of January 1, 1917, the additions to equipment which had been acquired after January 1, 1913, allowing for depreciation and other adjustments to value. This computation showed a valuation of the plant as of January 1, 1913, in the sum of 7x dollars, which amount was 3x dollars more than the nominal sum at which the plant had been valued at the date of incorporation; and this is the value which the taxpayer desires to include in its excess profits tax return for the year 1917 for the purpose of determining its invested capital. In their argument for the inclusion of this amount in the invested capital of the taxpayer, its attorneys rely upon article 63 of Regulations 41, and upon Recommendation 161 of this Committee [Sec. 326. Art. 836. — 5, herein], which was based upon the regulations above referred to. Article 63 of Regulations 41 is as follows: Where it can be shown by evidence satisfactory to the Commissioner of Interna! Revenue that tangible property has been conveyed to a corporation or partnership by gift or at a value accurately ascertainable or definitely known as at the date of conveyance, clearly and substantially in excess of the cash or the par value of the stock or shares paid therefor, then the amount of the excess shall be deemed to be paid-in surplus. The adopted value shall not cover mineral deposits or other properties discovered or developed after the date of conveyance, but shall be confined to the value accurately ascertainable or definitely known at that time. Evidence tending to support a claim for a paid-in surplus under these^ circumstances must be as of the date of conveyance, and many consist, among other things, of (1) an appraisal of the property by disinterested authorities, (2) the assessed value in the case or real estate, and (3) the market price in excess of the par value of the stock or shares. This Committee's Recommendation 161 (Bulletin 28-20-1064) was concerned with a claim for paid-in surplus on account of the excess value of properties in 1911, and in that case the Committee recommended the allow- ance of such excess valuation as invested capital; but the facts therein were quite different from those now under consideration. In that recommendation the Committee held that in order to establish such excess valuation, it was not necessary that the appraisal should have been made upon the exact date on which the tangible property had been conveyed to the corporation; but only that the appraisal must have been made "as of that date; that is to say, in the light only of knowledge or facts ascertainable on that date and not in the light of subsequent happenings." The tangible property, the value of which was then under consideration, was real estate and buildings, and the Committee held that inasmuch as the evidence was of such character that these values could be ascertained from all the surrounding facts at that time with an accuracy amounting almost to a certainty, therefore, the taxpayer was entitled to include that excess value in his invested capital, since the value, clearly and substantially in excess of the par value of the stock or shares paid therefor, was accurately ascertain- able or definitely known as at the date of conveyance. It must be remem- Supplementary Bulletin Rulings. Sec. 326. Art 836.-8. bered that the Bureau was here dealing with real estate and buildings and that the appraisah wasjnade^ within Jiwo^years of the date of valuation. In the instant case theJE>ureau is asked to accept not an appraisal as of January 1, 1913, but an estimated figure resulting from a computation which was based upon an appraisal made as of January 1, 1917, or four years later; and this so-called appraisal is not merely a valuation of real estate and build- ings, the value of which might be definitely ascertained even after so long a lapse of time, but of machinery and equipment, by an entirely empirical process of adjusting valuations obtained four years later; so that it can not be asserted or successfully maintained that the valuation as of January 1, 1913, was made "in the light only of knowledge or facts ascertainable on that date and not in the light of subsequent happenings." The appraisers and the accountants were without doubt justified, for commercial purposes, in establishing tne valuations and recasting the books as of January 1, 1913, by the best method at their disposal, which may have been the one employed; but the Committee does not believe that either the appraisers or the accountants would certify to the rigorous accuracy of such a valuation or of accounts established upon such a basis without quali- fications which would render the valuation and accounts worthless for the purpose of computation of invested capital. As a matter of fact, the taxpayer himself admits the unreliability of valuations so arrived at when he says in his brief that — Using the valuation of the plant as of January 1, 1913, as shown by the appraisal, add- ing to that value the additions to the plant between January 1, 1913, and January 1, 1917, and deducting the depreciation charged off during the same period, the plant had a valuation on January 1, 1917, as shown by the books of the corporation, in the sum of Ix dollars, as against the appraisal value at the same date of 8x dollars; and the taxpayer says, further, that — Inasmuch as the books of the company had been restated by the accountants on the basis of the appraisement of January 1, 1917, it was evident that the item of plant had been entered on the books at X dollars in excess of the proper figures for invested capital, and accordingly in making up the company's return this excess amount was deducted from the invested capital appearing on the company's books; but while this tends to demonstrate the good faith of the taxpayer in making its claim, it shows conclusively the unreliability of the figures obtained by any such methods. Therefore, the Committee recommends that the claim"of the taxpayer for invested capital on January 1, 1913, based upon adjustments of an appraisal made as of January 1, 1917, be denied, and that the action of the Unit in disallowing such claim be sustained. 8 7-21-1457: O. D. 813. The M Company was organized subsequent to 1919. Soon thereafter it acquired all the capital stock of the N Company by issuing to the stock- holders of the N Company its own stock in an amount equal to the par value of their shares of stock. The M Company thereupon by merger absorbed the N Company and became the owner of all the property of the N Company, which consisted of real estate, buildings, machinery and equipment, stock on hand, and work in process. This property had been purchased by the N Company in the same year at a bargain, as shown by an appraisal made of the property about the time it was taken over by the M Company. Held, that the company could not include in its invested capital as paid-in Supplementary Bulletin Ruiingo. 2-6-22. Sec. 326. Art. 836.-9. surplus the excess of the value of the property over the purchase price paid therefor. Any excess resulted from a successful bargain and is not paid-in surplus. Paid-in surplus as used in section 326'of the Revenue Act of 1918 does not mean the excess value of property purchased in a bona fide sale over the purchase price thereof. To constitute paid-in surplus of a corporation there must, in effect, be a gift to the corporation. 9 I ('22)-5-60: A. R. R. 747. Revenue Acts of 1917 and 1918. Recommended, upon the reconsideration of the appeal in the case of the M corpora- tion from the action of the Income Tax Unit in holding that the invested capital can not be satisfactorily established and that assessment of excess profits taxes for the year 1917 should be made under the provisions of section 210 of the Revenue Act of 1917 and for subsequent years under the provisions of sections 327 and 328 of the Revenue Act of 1918, be reversed; that Committee on Appeals and Review Recommendation 490 sus- taining the action of the Unit be revoked; that retrospective appraisals be accepted as evidence of paid-in surplus when made upon the basis herein outlined and the facts upon which the appraisals are based have been established by proof; that the retrospective appraisals and the facts upon which they are based in the instant case be verified to deter- mine the method of their construction and the truth of the facts upon which they are based; and that in this and in all similar cases where the law directs that the value of property at a given basic date be ascertained, the Unit be instructed to receive such proof of the facts as is ordinarily accepted in important business transactions of like character and that the practice which has obtained in the Unit in refusing to receive such proof on the ground that it consisted of so-called retroactive appraisals be discontinued. The Committee has reconsidered its Recommendation 490 (not pub- lished) in the matter of the appeal of the M corporation from the action of the Income Tax Unit in assessing excess profits taxes for the year 1917 under the provisions of section 210 of the Revenue Act of 1917 and for sub- sequent years under the provisions of sections 327 and 328 of the Revenue Act of 1918. In a memorandum from the Unit transmitting this case to the Committee the following statement is made: The corporation was organized in 1914 and took over the assets and assumed all the liabilities of two going concerns, the O corporation and the P partnership, the entire capital stock of the new corporation, Ax dollars, issued to the stockholders of the old corporation and the members of the partnership. The evidence submitted in the form of various appraisals shows that the assets acquired had a valuation far in excess of the capital stock. The corporation, however, could not submit any data showing the cost of the assets, as the records had been destroyed by water. In January, 1921, appraisals of the different classes of assets were made as of 1914 by different individuals assisted by others who were employed by the corporation in 1914. In the conference the manager of the corpor- ation first stated the method used in determining whether the assets listed were acquired in the. consolidation in 1914 was by taking an appraisal made in 1917 and eliminating there- from all items shown by the books to have been purchased and charged to the asset accounts from 1914 to the date the appraisal was made. Later he stated that the appraisal was made by the former employees going through the department and listing the assets which from their own knowledge were acquired in the consolidation and afterwards comparing these items with the appraisal made in 1917. In the consideration of this case it is necessary to refer to the provisions of the Revenue Act of 1917 which deals with tangible property paid in for stock. The pertinent part of section 207 (a) reads as follows: * * * (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January 1st, 1914, the actual cash value of such property as of January 1st, 1914, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and Supplementary Bulletin Rulings. Sec. 326. Art. 836.-10. undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year. * * * Article 63, Regulations* 41, interprets the foregoing provisions of the statute and reads as follows: Where it can be shown by evidence satisfactory to the Commissioner of Internal Rev- enue that tangible property has been conveyed to a corporation or partnership by gift or at a value, accurately ascertainable or definitely known as at the date of conveyance, clearly and substantially in excess of the cash or the par value of the stock or shares paid therefor, then the amount of the excess shall be deemed to be paid-in surplus. The adopted value shall not cover mineral deposits or other properties discovered or developed after the date of conveyance, but shall be confined to the value accurately ascertainable or definitely known at that time. Evidence tending to support a claim for paid-in surplus under these circumstances must be as of the date of conveyance, and may consist, among other things, of (1) an appraisal of the property by disinterested authorities, (2) the assessed value in the case of real estate, and (3) the market price in excess of the par value of the stock or shares. The pertinent part of the Revenue Act of 1918 reads as follows: * * * (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus. * * * Article 836, Regulations 45, interprets the foregoing quoted provision of the statute and reads in part as follows: Evidence offered to support a claim for a paid-in surplus must be as of the date of the payment, and may consist among other things of (a) an appraisal of the property by disinterested authorities made on or about the date of the transaction; (b) certification of the assessed value in the case of real estate; and (c) proof of a market price in excess of the par value of the stock or shares. The additional value allowed in any case is con- fined to the value definitelv known or accuratelv ascertainable at the time of the pav- raent ' * * * The records in the case show that for several years prior to 1914 the P partnership had conducted a repair business. In 190- a corporation known as the O corporation was incorporated, its entire capital stock being owned by the P partnership. In 1914 this corporation and the P partnership, con- sisting of A, B, and C, were consolidated and incorporated under the name of the M corporation, with a capital stock issue of Ax dollars. This capital- ization was nominal and was not based on any valuation of either plant, as it was not deemed necessary to set an actual value on the asset because of the fact that all the corporate stock was held by the three members of the partnership. During the lifetime of A the partnership's accounting system was very lax and, as shown by a number of affidavits filed in behalf of the M corporation, all the books, balance sheets, and other accounting records of the P partnership and the O corporation were rendered useless during a storm in 1918, so that at the present time no records exist from which -might be obtained a complete statement as to the cost of the assets taken over by the M corporation in the consolidation of 1914. Under these circumstances the Unit holds that the statutory invested capital of the cor- poration can not be satisfactorily determined, and proposes to make assess- ment of excess profits tax under the provisions of section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918. The corporation has had various appraisals and estimates made in an effort to show the value of the assets in order to establish a claim for paid-in surplus, which appraisals may be classed as follows: (1) Two appraisals were made by engineers versed in the particular line of business in 1917. Supplementary Bulletin Rulings. 2-6-22. Sec. 326. Art. 836.— 11. Each of the gentlemen who fixed upon the values shown above was un- doubtedly well qualified to make appraisals covering the assets of the char- acter owned by the M corporation, but it is to be noted that while there is a net difference of but 2x dollars between the totals of the two sets of figures no one unit was given the same value except in the case of automobiles, etc., the difference in the values given the other items ranging from ^x dollars in the case of office furniture to 2^2 X dollars in the case of other property, which in a measure indicates the difficulties experienced in fixing upon definite values. (2) Three affidavits as to the value of the property taken over by the M corporation were submitted by persons familiar with values of such property. Each of these gentlemen stated in his affidavit that of his own knowledge and belief the plant and equipment of the P partnership in 1914 was worth 60x dollars, while the fair value in 1914 of the plant and equipment of the 0 corporation as estimated by one of them was 24\x dollars and by the other two about 240x dollars, although no value is placed upon any individual assets. (3) Three affidavits similar to the next above made give a value of 29lx dollars. (4) A composite appraisal made in 1921 — assets being divided into classes and itemized and each class appraised by men particularly qualified for the work, showing a total value as of 1914 of 304x dollars. This last appraisal was taken subsequent to a conference held in 1920 between representatives of the taxpayer and members of the Income Tax Unit, during which the former were advised that in order to establish a claim for paid-in surplus evidence must be furnished showing the assets taken over upon consolidation, the cash value of the assets as of that date, the cost of subsequent additions by years, the proportion of such cost, if any, which had been included in the deductions claimed on taxpayer's returns, and the assessed value of the properties. To each individual ap- praisal which forms a part of this composite appraisal is attached an affidavit signed by the appraiser indicating the character of the work performed and the experience had by him in the past which would serve to qualify him to place fair and just values on the particular class of assets covered by his appraisal, but the appraisals contain little or no evidence of the facts upon which they are based and as to how they acquired their information or data to make up the appraisals, or as to how the appraisals were constructed. It was stated during a conference granted representatives of the taxpayer by this Committee that no assets were included in these appraisals except such as were positively known to have been in the possession of the P part- nership and the O corporation and taken over by the M corporation at the time of consolidation except an item of "Hand tools," etc., valued at 4x dollars, with reference, to which the representatives of the taxpayer volun- teered the information that such item was a mere estimate. No other proof is submitted to show how it was known that nothing was included except that which was in the possession of the company in 1914. Accompanying this appraisal are statements taken from the books show- ing the amounts expended in the purchase of additional assets during the years 1914-1919, the amount of depreciation charged off during each of those years, and a summary showing the adjusted values of all lands, build- ings, machinery, and equipment for the years 1914-1919 based on the appraisal made as of January 1, 1914. Supplementary Bulletin Rulings. Sec. 326. Art. 836.— 12 As shown above, the appraisals forming the first set were taken in 1917 and show values as of that year. The affidavits forming the second and third sets contain nothing except general statements to the effect that in the opinion of the affiants the assets taken over upon consolidation were worth certain amounts in 1914. Neither of these appraisals or estimates, therefore, can be said to be of such a satisfactory and convincing character as to justify the acceptance of the values therein stated for invested capital purposes in the computation of excess profits tax liability without further investigation by the Unit to ascertain whether such values were computed upon the basis outlined herein. The representatives of the taxpayer have stated to the Committee that their whole objection to assessment under the provisions of sections 210 and 328 of the Revenue Acts of 1917 and 1918, respectively, is on the ground that such a method of assessment affords no stable basis from year to year for a determination of the corporation's tax liability, for which reason they desire that the corporation be classed as one having a determinable statutory invested capital rather than as one entitled to relief under the provisions of the said sections even though its tax liability be greater under the first method than under the latter. The values as stated in the four sets of appraisals mentioned above were apparently fixed by men who were well qualified for the work, but a differ- ent value is stated in each appraisal, which indicates the difficulties experi- enced in carrying out such a task and the practical difficulty in establishing cost. The first appraisal being taken at 1917 values, and the affidavits comprising the second and third appraisals, so called, being nothing more than general statements, can not be accepted. The fourth appraisal, while stated in detail, shows in some cases approxi- mations and not actual ascertainment of values. That part of this appraisal which covers fire protection system, plumbing and piping, indicates that the great majority of the items so covered was approximated, while that part which covers certain other property indicates that the quantity of material entering into the construction of such assets has been approximated. Errors in stated figures which affect the total value shown have also been made. While many of the assets covered by this appraisal are of such character and size, such as lands, large machines, etc., as to be easily identified as having been among the assets transferred, even after a lapse of years, by those who had worked with, around, and among them, and their value as of time of transfer more or less satisfactorily established, yet it is to be noted that this appraisal covers hundreds of very minor items which, because of their lack of size, importance, and cost, ranging in stated figures from a few cents to not more than $50, lack distinctive character, and the Committee finds it hard to believe that such assets would so firmly fix themselves in the remembrance of any man or men as to permit such persons to posit i\ ely identify them in 1921 as having been the identical articles which wore in the hands of the P partnership and the O corporation and transferred to the M corporation in 1914, especially when it is known that many of mcfo items were removed from a plant and reinstated and rearranged in new buildings in another community. It is also shown by an appraisal made in 1917, by competent men, and before the loss of the book records, that the value of the assets at that time was a little less than 240.v dollars and there is nothing to show why the assets were worth approximately 60x dollars more in 1914 than in 1917. It was stated in conference that since the consolidation in 1914 accurate book records have been kept from which it is possible to accurately deter- Supplementary Bulletin Rulings. 2-6-22. Sec. 326. Art. 836.— 13. mine just what additions to the plant had been made in order that the ap- praisals as of 1914 might contain nothing acquired since consolidation, and yet, in a statement filed with the Unit, the cost of such additions made during the year 1917 was stated as dollars, while in a later statement such cost is stated as \}/§x dollars, which fact throws doubt upon the accuracy of such book records as have been kept. In the said appraisal the value of all flat lands, regardless of location or character, is stated at a certain amount per square foot, but no statements have been submitted showing the values placed thereon for local tax purposes. In the consideration of the case the Committee has pointed out certain discrepancies in the appraisals which it is sought to have the Income Tax Unit accept as a basis for the allowance of a paid-in surplus. These dis- crepancies raise a doubt as to the accuracy of the figures submitted in such appraisals and of the facts upon which such appraisals are based. The appraisals in question are apparently based upon the opinions of persons qualified to testify in a matter of this kind, but it does not appear that the inventory of the assets of this corporation, as enumerated in the appraisals, has been valued upon a cost basis. It is thought possible to so value the assets in this case when the appraisals have been modified in accordance with the method hereinafter outlined and to this end the Unit should make or have made an independent appraisal for the purpose of verifying or check- ing the amounts and values stated in the appraisals submitted by this com- pany before accepting same as representing sound values of the assets at the time they were paid in to the corporation in 1914. In the past it has been the policy of the Bureau to construe strictly the requirements of article 63, Regulations 41, and article 836, Regulations 45 (1920 edition). As a result of such construction of these articles numerous retroactive or retrospective appraisals have been rejected as a basis for a claim for paid-in surplus. The Committee has made an exhaustive study of appraisals and their relation to invested capital of corporations. It has also considered appraisals in connection with establishing March 1 values for purposes of depreciation and depletion, and for purposes of establishing certain values in connection with amortization claims, and has reached the conclusion that the Unit has been too strict in interpreting the provisions of the statute and the articles of regulations interpreting same quoted above, and that retrospective appraisals, if made upon the basis hereinafter out- lined and proof is furnished of the facts upon which they are based, may properly be accepted as a basis for the allowance of a paid-in surplus. The Unit, as well as the Committee, is continually fixing values for one purpose or another. This is particularly true in fixing the March 1 values for the purpose of computing gain or loss upon the sale of an asset which has been held for some time and which is of a class not regularly dealt in by the public. In the instant case it is not only necessary to determine the actual cash value of the tangible assets at the time paid in in 1914 for the purpose of invested capital, but it is necessary to determine the fair market value of the depreciable property so paid in as at March 1, 1913, for depreciation purposes and also for the purpose of ascertaining whether or not the stock- holders in the O corporation and the partners in the P partnership derived any profit from the sale of these assets to the M corporation. It is under- stood that the stockholders and copartners did not include any profit in the computation of their net income for the year 1914. In making a retroactive or retrospective appraisal to show the actual cash value of tangible assets at the time paid in at some date in the past, Supplementary Bulletin Rulings. Sec. 326. Art. 836.— 14. care should be exercised in order to eliminate any appreciation written upon the books of the corporation since the date of acquisition, and also to value the assets in question at cost. In the case of the La Belle Iron Works v. United States (C. B. 4, p. 373), decided by the Supreme Court on May 16, 1921, it was held that any appreciation in value of property over its cost is not to be included in invested capital as paid-in surplus. Treasury De- cision 3220 (Bulletin 37-21-1822) was promulgated subsequent to this deci- sion and requires the filing of amended returns in all cases where taxpayers have written appreciated or inflated values upon their books and have used same in determining the amount of their invested capital. It would, there- fore, appear that no appreciation over cost can be recognized in the com- putation of invested capital and that appraisals made for the purpose of establishing invested capital and for the purpose of allowance of a paid-in surplus should be based upon the actual cost of the tangible properties as they existed at the time they were paid in, giving particular attention and consideration to the original cost and depreciated reproduction cost as at the basic date and the remaining expectancy of life. In order to accomplish this result it will be necessary to inventory at cost as of the basic date (the date of acquisition) the property then on hand and in many cases to estab- lish by historical investigation the date of original acquisition, date of re- newal, and the cost of additions made subsequent to the date the property- was paid in. Adjustments should be made for property scrapped or dis- carded and for depreciation. The books of account, if available, should be considered the best evi- dence as to dates of acquisition and actual cost. The asset account showing the tangible property may be incomplete for many reasons and may include property still on the books that has been discarded as well as property in existence that has never been capitalized or entered on the books and certain arbitrary amounts charged off as depreciation which have no relation to the expired and remaining life of the property. The tangible property actually in existence and in use should be con- sidered as the basic evidence of the invested capital in existence and should be used as a basis for the proper correction of the accounts to correctly reflect the actual investment in the depreciable properties in existence during the taxable years. The burden of proof is upon the taxpayer when a claim for a paid-in surplus is made, and in so far as the records of the taxpayer may be incom- plete or the regulations permit values of the property at the date paid in should be established by proof. The regulations quoted above do not pre- scribe any specific method for ascertaining the facts, but only indicate some of the means by which appropriate proof may be furnished which would be acceptable to the Bureau. A retrospective appraisal is in substance the opinion of experts based upon the facts presented to them and as such is admissible as evidence of a paid-in surplus, but its value as proof of a paid-in surplus must depend upon the truth of the facts upon which it is based. Necessarily, if any of the facts presented to the experts are not accurate, the experts' opinion is inaccurate to the extent that such facts are inaccurate. In order, therefore, for the Bureau to accept as conclusive a retrospective appraisal, it must be satisfied under the regulations that the facts upon which the appraisal is based are true. In determining whether or not the facts are true the Bureau should accept such proof of the facts as is ordinarily accepted in business transactions of like character. In all such inquiries the Bureau is dealing with facts which themsehes come within the control Supplementary Rullclin Rulings.. 2-9-22. Sec. 326. Art. 836.— 15. of human will or human caprice, and the evidence for which depends on the trustworthiness of human informants. Such evidence may range through every degree, from the barest likelihood to that undoubted moral certainty on which every man acts without hesitation in practical affairs. The Bureau must receive and consider such appraisals, therefore, with a sound and in- telligent discretion as it considers much other evidence, and be content to accept them, without being able to prove their accuracy as mathematicians judge accuracy, if they convince the mind of their correctness to that moral certainty upon which practical men of affairs act. In view of the foregoing, it is recommended that the action of the Income Tax Unit in holding that the invested capital can not be satisfactorily estab- lished and that assessment of excess profits taxes for the year 1917 should be made under the provisions of section 210 of the Revenue Act of 1917 and for subsequent years under the provisions of sections 327 and 328 of the Revenue Act of 1918 be reversed; that Committee on Appeals and Review Recom- mendation 490 sustaining the action of the Unit be revoked; that retro- spective appraisals be accepted as evidence of paid-in surplus when made upon the basis herein outlined and the facts upon which the appraisals are based have been established by proof; that the retrospective appraisals and the facts upon which they are based in the instant case be verified to deter- mine the method of their construction and the truth of the facts upon which they are based; and that in this and in all similar cases where the law directs that the value of property at a given basic date be ascertained, the Unit be instructed to receive such proof of the facts as is ordinarily accepted in im- portant business transactions of like character and that the practice which has obtained in the Unit in refusing to receive such proof on the ground that it consisted of so-called retroactive appraisals be discontinued. 10 I('22)-6-83:Sol. Op. 129. Excess Profits Tax— Revenue Acts of 1917 and 1918. Where water power is developed and applied on the same parcel of land by virtue of riparian rights of the owner of the land, its value is an element of the value of the land and should be treated as tangible property for the purpose of determining invested capital. Where a number of small dams at a given point are acquired by a corporation and consolidated as one dam, the proper measure of value of the property thus acquired, for the purpose of determining invested capital, is the total value of all the powers thus ac- quired, valued separately. Where water power is valued at a certain amount per horsepower, the valuation in such cases should relate to horsepower actually developed at the date of valuation and not to the estimated potential power. The question has arisen as to whether water power should be treated as tangible or intangible property for the purpose of determining invested capital under the Revenue Acts of 1917 and 1918. A claim was filed by the M Company for the abatement of 8x dollars cor- poration income and excess profits taxes for the calendar year 1917, and 8^v dollars corporation income and excess profits taxes for the calendar year 1918. A claim was also filed by the Q Company for the abatement of 2}^x dollars corporation income and excess profits taxes for the calendar year 1917. The last-named company is a subsidiary of the former, and consolidated returns for the income of both corporations were made and the tax assessed upon the two corporations on that basis. Owing to the consolidation, this case will be treated as one involving a single claimant. Supplementary Bulletin Rulings. Sec. 326. Art. 836. 16. It is stated in a memorandum submitted to this office that the claims are based on additional information furnished in conference and with amended returns relative to an increase in depreciation deduction, and an increase in paid-in surplus for excess value of water power rights over the par value of capital stock issued therefor. It does not appear from the memorandum submitted with respect to what property deductions for depreciation are claimed, nor the amount of these items nor the basis upon which such items were adjusted. No opinion, therefore, is given relative to the adjustment of depreciation allowance. In connection with the water power values, it appears that in 190- claim- ant acquired the property of several companies and individuals, which properties were used in the operation of wing dams on the Y River, issuing in payment therefor 18j^x dollars par value of its stock. In 190- claimant removed all the wing dams and constructed a dam across the entire river, hereinafter referred to as the O Powers. In 191—, claimant acquired the asset s and assumed the liabilities of the P Company operating the R dam and issued its stock in payment therefor. In both cases claimant owns the land adjacent to the dam where the power is developed. Claimant submitted evidence in support of the contention that the water powers in question were of an actual value of I05x dollars at the time the purchase thereof was made with the capital stock of the corporation, and in computing its invested capital, included 85x dollars as paid-in surplus. In the memorandum submitted to this office it is recommended that 44%x dollars be allowed as paid-in surplus, for the reason that such amount repre- sents the excess in the actual value (as accepted in conference) of the water power rights acquired over the par value of the capital stock issued therefor. Under section 207(a) 2, 3, of the Revenue Act of 1917, and article 63 of Regulations 41, and also under section 326(a)2, of the Revenue Act of 1918, and articles 836 and 837 of Regulations 45, the value of tangible property clearly and substantially in excess of the par value of stock issued in exchange therefor by a corporation may be treated as paid-in surplus. Article 63, Regulations 41, provides: Art. 63. When tangible property may be included in surplus. — -Where it can be shown by evidence satisfactory to the Commissioner of Internal Revenue that tangible property has been conveyed to a corporation or partnership by gift or at a value, accurately ascer- tainable or definitely known as at the date of conveyance, clearly and substantially in excess of the cash or the par value of the stock or shares paid therefor, then the amount of the excess shall be deemed to be paid-in surplus. The adopted value shall not cover mineral deposits or other properties discovered or developed after the date of conveyance, but shall be confined to the value accurately ascertainable or definitely known at that time. Evidence tending to support a claim for a paid-in surplus under these circumstance^- must be as of the date of conveyance, and may consist, among other things, of (1^ an appraisal of the property by disinterested authorities, (2) the assessed value in the case of real estate, and (3) the market price in excess of the par value of the stock or shares. Article 836 of Regulations 45 provides: Art. 836. Tangible property paid in: value in excess of par value of stock. — Evidence offered to support a claim for a paid-in surplus must be as of the date of the payments, and may consist among other things of (a) an appraisal of the property by disinterested authorities made on or about the date of the transaction; (b^ certification of the assessed value in the case of real estate; and (c) proof of a market price in excess'of the~par_value of the stock or shares. The additional value allowed in any case is confined to the value definitely known or accurately ascertainable at the time of the payment. No claim will be allowed for a paid-in surplus in a case in which the additional value has been developed or ascertained subsequently to the date on which the property was paid in to the corpora- tion, or in respect of property which the stockholders or their agents on or shortly before the date of such payment acquired at a bargain price, as for instance, at a receiver's sale. Generally, allowable claims under this article will arise out of transactions in which there has been no substantial change of beneficial interest in the property paid in to the corporn- tion, and in all cases the proof of value must be clear and explicit. Supplementary Bulletin Ruling*. 2-9-22. Sec. 326. Art. 836.-17. The questions arise in this case as to whether the items of water power involved are to be treated as tangible property,* and if held to be tangible property, whether it has been established that they had a value at the time they were acquired clearly and substantially in excess of the par value of the stock issued in exchange therefor. Section 325 of the Revenue Act of 1918 defines intangible property as "patents, copyrights, secret processes and formulae, good will, trade-marks, trade brands, franchises, and other like property" and tangible property as "stocks, bonds, notes, and other evidence of indebtedness, bills and accounts receivable, leaseholds and other property other than intangible property." There are two distinct and entirely different things which may be referred to as a water power. First, there is the natural condition consisting of a fall or rapid in a stream and which may be regarded as latent until some means are created to utilize it; second, when water has been accumulated in a dam so that the potential power has become a reality and is in condition so that it can be parceled out for use, this is also referred to as water power, and is the kind of a water power involved in the instant case. In either case, how- ever, the power belongs to the riparian owner by virtue of his ownership of the riparian land. Under the common law, every riparian proprietor is entitled to the natural flow of any stream through or along his land in the accustomed channels, undiminished in quanity and unimpaired in quality, except as may be occas- sioned by the reasonable use of the stream by other like proprietors. (Farn- ham on Waters, Vol. I, p. 63; 27 E. C. F. Waters, p. 11; Crawford Co. v. Nathaway, 67 Nebr,, 325; 93 N. W., 781; Sanborn v. Peoples Ice Co., 82 Minn., 43; 84 N. W., 641.) In some States this rule is not followed, and there is what is called the doctrine of prior application, and then again in other States there is a mixed application of the two doctrines. The doctrine of prior application prevails generally in the Pacific States. According to this doctrine, the person who first appropriates the waters of a stream for a beneficial use has the first right thereto, whether he be a riparian owner or not. In the State of Wisconsin the common-law rule is in force. (Lawson v. Mowry, 52 Wis., 219; 9 N. W., 230; A. C. Cann Co. v. Lumber Co., 74 Wis., 652; 43 N. W., 660; Kaukeums Power Co. v. Green Bay Co., 75 Wis., 385; 44 N. W., 638; Fox River Co. v. Kelly, 70 Wis., 387; 35 N. W., 744.) In the case of State v. Bancroft (148 Wis., 124), the court in speaking of the right of a riparian proprietor referred to it as "unquestionably a private right appurtenant to the land." Riparian rights are generally referred to as incorporeal hereditaments, appurtenant to the land through which the water flows, which will pass with a conveyance of the land without any designation. (27 R. C. L., 1340.) Farnham on Waters (vol. 2, p. 1567) states: While the water right is incorporeal, it is not personal property, but is a parcel of the estate and therefore partakes of the nature of real estate and in so far a part of the estate to which it is attached that it is an incident of, and will pass with it. Riparian rights are reflected in the value of the land to which they attach and often give the land its chief value. These rights are property rights and can not be taken*: from the owners without just compensation. State v. Bancroft, supra. The property of the owner consists not in the water itself but in the added value which the stream gives to the land through which it flows. While water power itself is simply energy generated by flowing water, we are here dealing with the ownership of that energy, which involves the ownership of tangible property inseparably connected therewith. Supplementary Bulletin Rulings. Sec. 326. Art. 836.— 18. In valuing the land and physical property thereon necessary for power generation, no line can be drawn between the value of the land and physical property on the one hand and the water power on the other. It can be not said in placing a value upon an entire dam that the water rights are reflected in the value of the land only to a certain point and that any value of the dam in excess thereof must be valued separately as power. The combination of the water rights, the land, machinery, and equipment combined together make up the power which may be valued at so much per horsepower and the water power can only be valued as a separate item to the extent that ji m enhances the value of the land and the other physical property necessary for power generation. Where, as in this case, a person owns the land upon which a dam is built and owns the water power developed by virtue of his riparian rights in the land, it is the opinion of this office that such power is so connected with the land to which it is appurtenant that it should be treated as tangible propertv to determine invested capital. ^ Having determined that water power should be treated as tangible property, we come to the question of whether or not it has been established in this case that the water powers in question had a value at the time of their acquisition in excess of the par value of the capital stock issued therefor, This value in the case of the O Power must be as of 190-, and the P Power as of 191—, as those are the dates the respective properties were acquired. (Art. 63, Regulations 41, and art. 836, Regulations 45.) The computation in the memorandum is based on an estimated power at the O dam of 3%x horsepower and at the R dam of 2x horsepower, and while there is evidence upon which to base the findings of value as agreed upon in conference of r dollars per horsepower, the record does not disclose that this amount of power % was ever developed at either of these dams at the date of their acquisition. The O Power was created through the consolidation of several small com- panies, each developing power by means of wing dams. The record does not disclose how much power each of these companies was developing or could develop. Claimant, after acquiring the properties of the companies operating the small wing dams, in 190- constructed a dam across the river and the estimates of power developed seem to relate to the power capable of being developed after the construction of such dam, as none of the companies could develop more than an j-foot head, while if combined, a head of 4s feet could be developed. The increase in power which could be developed by a consolidation of ^ all the powers at this point was not a reality until after the acquisition of the property necessary to construct the entire dam. There was no doubt an appreciation in the value of the property purchased by claimant which could be measured by the increased power capable of development, but the appreciation arose by reason of the combination of several powers which necessarily could not take place until after their acquisition. The proper valuation, therefore, to be given to the O Power for the purpose of deter- ^ mining the invested capital is the total value of all of the powers acquired valued separately. In the case of the R Power acquired in 191- it appears that it was neces- sary to expend the sum of \\Yl x dollars additional after the purchase for the purpose of acquiring riparian rights, and since the acquisition of the property the claimant has obtained the permission of the water power com- mission to hold the water at 3s feet, instead of 2s feet, the limit of the fran- to. chise which had heretofore existed at the place. The allowance of invesnvi capital in this case was based on 2z horsepower, but it does not appear in Supplementary Bulletin Rulings. 5 5-22. Sec. 326. Art. 836. — 1«. the record that the 2z horsepower was developed at the R dam at the date of its acquisition and prior to the time the above changes were made. If a water power is to be valued by the number of horsepower developed, it must relate to the horsepower developed at the date of the valuation and not to the estimated potential power which may be developed at some future time under changed conditions. Article 836, Regulations 45, above quoted., provides that no claim will be allowed for a paid-in surplus in a case in which the additional value has been developed or ascertained subsequently to the date on which the property was paid in to the corporation. It is the opinion of this office that this provision has application to valuation of a water power, and that in valuing a power at a certain sum per horsepower, it should relate only to the actual power developed at the time of the acquisi- tion of the property. Any other method would be too speculative and uncer tain to meet the requirements of the law that the value must be established "clearly and substantially" in excess of the capital stock issued in exchange therefor. The record does not show that the amount of horsepower claimed by taxpayer, or as allowed in conference, was developed at the dams on the dates of their acquisition, and it is the opinion of this office that it has not been established by claimant that the power in question had any value in excess of the value of the capital stock issued in exchange therefor. Carl A. Mapes, Solicitor of Internal Revenue. 1 1 (See A. R. R. 844; sec. 331, art. 941. Ruling No. 16.) Value in excess of par value of stock upon reincorporation which effected merely a change of domicile. 12 I ('22)-16-231: I. T. 1285 Revenue Act of 1918. The M corporation acquired from a partnership a lease to certain property at a cost of 100* dollars, which amount represented the cost of the lease to the partnership, and paid for the lease in stock, so that the members of the partnership thereby became minority stockholders of the corporation. An appraisal was made, immediately after incorporation, of the value of the lease, which showed it to be worth in excess of 300* dollars, and thereupon the corporation made a book entry increasing its paid-in surplus by 200* dollars, representing the excess value of the lease over its cost price. It is held, that the amount of 200* dollars added to the book value of the lease does not constitute paid-in surplus, and that the transaction should be considered as a purchase and sale between a vendee corporation and a vendor partnership which resulted in a substantial change of beneficial interest. The fact that the corporation may have acquired a bargain by the purchase of the lease does not authorize it to increase its surplus by reason of the alleged excess value of the lease over the amount which was paid for it. 13 Supplementary Bulletin Rulings, Sec. 326. Art. 836.— 20. I ('22)-18-258: A. R. R. 761 Revenue Act of 1918. Recommended, in the appeal of the M Company, that the action of the Income Tax unit in disallowing the claim for additional invested capital in the amount of 1,291* dollars for the year 1919 be sustained and the appeal denied. The Committee has carefully considered the appeal of the M Company, of L, from the action of the Income Tax Unit in disallowing a claim for additional invested capital for the year 1919 in the amount of 1,291* dollars. In 190- there was organized under the laws of the State of Z, the O Company for the purpose of manufacturing machines. In 190- the 0 Com- pany reorganized under the laws of the same State as the R Company, with an authorized capital stock of 8,000* dollars. The following year the N Company was organized under the laws of the State of L, with an authorized capitalization of 6,000* dollars, and with practically the same stockholders, for the purpose of manufacturing and selling, within the United States and dependencies and Canada, machines under the patents held by the R Com- pany. Working capital for the N Company was secured by the sale of pre- ferred stock to the stockholders of the R Company. These two affiliated corporations continued business until October, 1913, when the N Company, being in financial difficulties, its affairs were turned over to a bondholders' committee. At the same time the R Company was dissolved and its prop- erties were taken over by its directors as trustees (in dissolution). In October, 1913, the aggregate outstanding capital stock of the two corporations was 9,449* dollars and their net assets were 980* dollars, divided as follows: Tangibles, 542* dollars; intangibles, 438* dollars. In June, 1914, a new corporation, known as the M Company, was incorporated under the laws of the State of L with an authorized capital stock of 1,500* dollars, divided as follows: 2y shares of common stock of the par value of $100 each and y shares of deferred stock of a like par value. The assets of the R Company were sold by the trustees (in dissolution) on March — , 1914, through A, as agent, to B at public sale. On October — , 1913, D, upon application of the bondholders' committee, was appointed receiver for the N Company of L, by the District Court, and in accordance with an order of that court he, as receiver, sold on April — , 1914, all the assets of the X Company to E and on the — day of April did assign, transfer, and set over to the said E all right, title, and interest in and to the assets and property of the said N Company. B and E, upon the organization of the M Company, assigned all the assets of the R Company and the N Company, purchased by them as above stated, to the new company for capital stock of the new company in the amount of 980* dollars. It is alleged by the M Company that the actual cash investments in the R Company and the N Company aggregated 2,271* dollars, and it is con- tended that the excess of this amount over the amount of stock issued for the assets of the two companies, to wit, 1,291* dollars, should be included in invested capital as paid-in surplus for the year 1919. Section 326(a) of the Revenue Act of 1918, approved February 24, 1919. provides : That as used in this title the term "invested capital'' for any year means (except as provided in subdivisions (b) and (c) of this section): (1) Actual cash bona fide paid in for stock or shares; (2) Actual cash value of tangible property, other than cash bona lide paid in for stock or shares, at the time of sucii payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been Supplementary Bulletin Rulings. f-7-22. Sec. 326. Art. 836.— 21. clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus; * * * ******* (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest. * * * From the above statement of facts, it appears that the intangible assets of the R Company and the N Company were paid in for stock prior to March 3, 1917. The invested capital of the M Company, therefore, for the year 1919 must consist of the actual cash value of the tangible property paid in for stock or shares at the time of such payment (sec. 326(a)2) plus an amount of intangibles fixed by the limitations prescribed by section 326(a)4. The statute provides for a paid-in surplus only in connection with tangible prop- erty paid in (sec. 326(a)2) and by its terms (sec. 32fj(a)4) expressly excludes from invested capital any amount in excess of the par value of the stock or shares issued for intangibles. This has been the uniform holding of the Bureau. As the total value of the tangible assets paid in for stock or shares was less than the par value of the stock or shares issued, it is clear that a claim for paid-in surplus based upon the original cost of the assets to the original companies can not be allowed. The taxpayer contends that the beneficial ownership in the new company and the former companies is substantially the same, and that, therefore, the new company is but a continuation of the former companies and entitled to the same invested capital. The soundness of this contention can not be conceded. The present company was organized as a new company under its own charter and is not a continuation of the N Company, which remained in existence. Neither did it acquire the assets of the N Company through succession to that company but by purchase at a receiver's sale authorized by the United States District Court. There is still less ground for con- tending that the present company is in any way a continuation of the R Company. The present company is organized under the laws of a different State and acquired the assets of the first-named company through purchase at a sale by the trustees (in dissolution) and its title is in no sense a con- tinuation of the title of the former company. The identity of the stockholders does not destroy the separate entity of the corporations nor constitute one a successor of the others. As stated in the case of Pittsburgh and Buffalo Company v. Duncan (232 Fed., 584, 587): The mere fact that the stockholders in two corporations are the same, * * * does not make either the agent of the other, nor does it merge them into one, * * * where each corporation is separately organized under a distinct charter. This is but a statement of the principle which has been consistently recognized by the Federal courts. See Peterson v. Chicago, Rock Island & Pacific Railroad (205 U. S., 364); Conley v. Mathieson Alkali Works (190 U. S., 406, 409); Pullman Car Company v. Missouri Pacific Co. (115 U. S., 587, 597). And it is the position taken by the Bureau. Law Opinion 1062 (C. B. 4, p. 168). The cases of Southern Pacific Company v. Lozve (247 U. S., 330) and Gulf Oil Corporation v. Lewellyn (248 U. S., 71), referred to by counsel for the taxpayer as involving a departure from this principle are, as pointed out by the Supreme Court, based upon their peculiar facts and are believed to be readily distinguishable from the instant case. As stated in Eisner v. Macomber (252 U. S. ? 189, 213, 214): * * * looking through the form, we can not disregard the essential truth disclosed; Supplementary Bulletin Rulings. Sec. 326. Art. 836.-22. ignore the substantial ui Terence between corporation and stockholder; treat the entire organization as unreal; look upon stockholders as partners, when they are not such; treat them as having in equity a right to a partition of the corporate assets, when they have none. * * * We must treat the corporation as a substantial entity separate from the stockholder, * * *. Upon full consideration the Committee accordingly recommends, in the appeal of the M- Company, that the action of the Income Tax Unit in dis- allowing the claim for additional invested capital in the amount of 1,291* dollars for the year 1919 be sustained and the appeal denied. 14 I ('22)-27-386: A. R. R. 944 Section 207, Revenue Act of 1917, Section 326, Revenue Act of 1918. Section 203, Revenue Act of 1918. Recommended, in the appeal of the M Company, that the action of the Income Tax Unit in excluding from invested capital for 1917 and subsequent years approximately 300x dollars as paid-in surplus and in increasing income for 1918 by 2x dollars representing an adjustment of inventory at December 31, 1918, be sustained and the appeal be denied. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in excluding from invested capital for 1917 and subsequent years approximately 300x dollars claimed as paid-in surplus and in increasing income for 1918 by 2x dollars representing an adjustment of inventory as at December 31, 1918. The M Company was organized in 190- and acquired the assets and bus- iness of the N Company under the circumstances briefly stated as follows: The business conducted by the N Company had been in existence for a great many years and the stock of the company was widely scattered, being held mostly by small stockholders and trustees. Of the stockholders at date of organization, 76 per cent owned less than five shares each or were fiduciaries. The management of the affairs of the corporation seems to have been centered in the A and B interests, which actually owned a small minority of the stock. Prior to 190- it appears that the business of the N Company had been steadily unprofitable. Accordingly, the stockholders at an adjourned special meeting held in 1 90-: Voted, that the directors shall have authority to liquidate the company and to sell any or all of its plant and property, except its corporate franchise, at public or private sale from time to time in such manner, upon such terms, and for such considerations as shall seem to them to be for the best interests of the stockholders. The A interest through C, an attorney and also son-in-law of A, in whose hands, as stated above, the management of the company seems to have been centered, immediately instituted a scheme of reorganization. Under date of January, 190-, the directors, under authority of the action of the stockholders above quoted, gave to C an option to purchase for 60.v dollars cash, within 30 days, all of the assets of the company excepting the mer- chandise inventory on hand or in process. In order to raise the money necessary to exercise this option, C set about securing subscriptions to stock in a new company which he proposed to organize for the purpose of acquiring the assets and operating the business of the old company. Under date of February — , 190-, these subscribers entered into a so-called "underwriting agreement," wherein they pledged to pay into the new company, or to C for the company, the sum set opposite their respective names. The total amount pledged was 100* dollars,of which only 31* dollars represented subscriptions Supplementary Bulletin Rulings. 7-7-22. Sec. 326. Art. 836.-23. by stockholders in the old company. Several pertinent clauses of this agree- ment are here quoted: Said C shall endeavor to acquire the plant and assets of said N Company at a price not exceeding 60* dollars for everything except the franchise of the company and except stock, raw, wrought, and in process, and articles of supply and repairs on hand; and he shall use subscriptions received hereunder for the purposes of such acquisition. Should he so acquire the property, he is to cause a new corporation to be organized under the laws of Y, with a capital stock not to exceed \20x dollars (one class), and transfer all the said property and the cash capital herein provided for to such new company, taking such capital stock in payment. The subscribers hereto shall be entitled to shares of the new company of a par value equal to the amounts of their respective subscriptions, or the proceeds thereof at par as herein provided. All the stock so received by said C shall, however, be first offered by him, in such reason- able manner as he may determine (and with or without assignable rights), to the existing shareholders of said N Company for subscription at par within such time as he may limit. At a meeting of the board of directors of the N Company held in Feb- ruary, 190-, the treasurer was authorized and empowered "to seal with the corporate seal, acknowledge and deliver at the present time or any future time in the name and on behalf of the corporation a deed or deeds and an assignment or assignments of" all of the assets of the company except those specifically named "to the M Company, a corporation duly organized under the laws of Y." Pursuant to the stipulation in the "underwriting agreement," a part of which is quoted above, C, under date of February, 190-, sent a cir- cular letter to each stockholder in the N Company, notifying him or her that he (C) had purchased all of the assets of the corporation and had caused the same to be conveyed to a new corporation known as the M Company; that the capital stock of the new company was 120* dollars (par value of each share $100); that each stockholder in the N Company was offered the un- assignable right to purchase for cash at par stock in the new company in the proportion of five shares in the new company for each share in the old com- pany, and that such offer must be accepted and the cash remitted before March, 190-, failing in which it would be conclusively presumed that the offer was declined. A few of the stockholders in the old company availed them- selves of the opportunity thus afforded and purchased stock in the new company. After subscriptions were all in it is shown that the stock was taken as follows: Per cent. By stockholders in the N Company 423^ By outsiders 573^2 The new company thus had paid-in capital stock of 120a; dollars repre- sented by: Dollars. Plant 60* Cash working capital 58* Organization expenses 2x (C was paid 2x dollars for his services.) The old company was then liquidated, the stockholders receiving in liquidation about 5 cents on the dollar invested. A few months after the acquisition of the assets here in question the appellant (the new company) had an appraisal made for insurance purposes. This appraisal, a copy of which is in the file, shows a total asset value of approximately 440x dollars, and the company^claims J:hat after providing for proper depreciation, these assets had an actual cash va^.ue at date of acquisition of 365a: dollars, and that inasmuch^ as^only 60x dollars in stock ^was issued therefor, it is entitledjto include in invested capital the excess value, or 305* dollars, as paid-in surplus.] Supplementary Bulletin Rulings, Sec. 326. Art. 836.-24. The Committee has given very careful consideration to the elaborate arguments, oral and written, advanced by the appellant's representatives in connecton with the provisions of the Revenue Acts of 1917 and 1918, and finds itself utterly unable to agree with their claim that a substantial com- pliance with the necessary conditions for allowing paid-in surplus has been effected. Both section 207 of the Revenue Act of 1917 and section 326 of the Revenue Act of 1918 provide that invested capital means the actual cash paid in for stock or snares and (or) the actual cash value of tangible property paid in for stock or shares. In the opinion of the Committee, the facts in this case show conclusively that the M Company was organized with 120* dollars cash paid in, 57^ per cent of which was supplied by outside interests, and that 60x dollars of this cash was paid to the N Company for the assets of the latter. It is further shown that only approximately 20 per cent of the stockholders in the N Company became stockholders in the M Company. It seems fallacious, therefore, to argue that the assets of the N Company were paid in to the M Company for stock of the latter when 80 per cent of the stockholders of the former received none of this stock. For the same reason the argument that the N Company or the stockholders thereof contributed to the M Company value which was not paid for appears to be equally untenable. All of this only emphasizes the soundness of the pro- visions of article 836, Regulations 45, which lays down the rule that: Generally, allowable claims under this article will arise out of transactions in which there has been no substantial change of beneficial interest in the property paid in to the corporation and in all cases the proof of value must be clear and explicit. The Committee is therefore forced to the conclusion that the action of the Unit in rejecting this claim for paid-in surplus was correct and should be sustained. 5 The facts relative to the second point before the Committee on appeal are briefly as follows: During 1918, due to war conditions, the company was obliged to take deliveries as they could be obtained. Storage facilities near the plant being inadequate, it was necessary to store some material outside the premises and about a quarter of a mile from the plant. In taking the inventory at De- cember 31, 1918, the company deducted therefrom the amount of 2x dollars as the estimated expense of hauling this material from the place where it was stored to the regular storage space within the premises. The corporation states that it uses the cost or market, whichever is lower, basis for its in- ventories and contends that upon this basis it was correct to inventory the material stored outside the mill premises at cost, less the estimated expense of hauling it from the ground where it was stored to the regular storage space at the plant. The Committee feels that this contention is entirely without merit and fails to meet the two essential tests to which inventories must conform as laid down in article 1582, Regulations 45, as amended by Treasury Decision 3296. It is therefore recommended, in the appeal of the M Company, that the action of the Income Tax Unit in excluding from invested capital for 1917 and subsequent years approximately 300* dollars as paid-in surplus and in in- creasing income for 1918 by 2x dollars, representing an adjustment of in- ventory at December 31, 1918, be sustained and the appeal be denied. 15 Supplementary Bulletin Rulings Sec. 326. Art. 836.-25. I ('22)-5 1-650: A R. R. 1276. Act October 3, 1917, Section 207. Act February 24, 1919, Section 326. Recommended, in the appeal of the M Company, that the action of the Income Tax Unit in reducing the appellant's invested capital as of July I — ■, 1914, to 63.29* dollars be reversed and that the appraisal as of that date, now filed, subject to check as to individual items, be made the basis of the computation of invested capital. The Committee has carefully considered the appeal of the M Company from the action of the Income Tax Unit in reducing its invested capital as of July — , 1914, from 158.35a: dollars to 63.29* dollars. The N Company, which had operated as a domestic corporation for a number of years, was declared bankrupt in 1913 and was in the hands of receivers in bankruptcy until July — , 1914. A creditors' committee was appointed and a proposed plan of organization adopted under date of Sep- tember — , 1913. The plan of reorganization provided: The new corporation shall issue such amount of first preferred stock as shall be neces- sary for the distribution to creditors as hereinafter provided. The new corporation shall also issue approximately 20x dollars par value of common stock or such other amount as the committee may deem proper. In order to raise additional working capital the committee may offer to preferred stockholders of the N Company a right to acquire, for each two shares of the preferred stock of the N Company now held by them, one share of first preferred stock and one share of 6 per cent second preferred stock (of the par value of $ ) of the new corporation upon payment of an amount equal to the par value of the new first preferred stock so acquired. In such case the new corporation shall issue such additional amount of first preferred stock and such amount of second preferred stock as may be required for the above purposes. Such second preferred stock, if issued, shall not entitle the holders to voting rights in any event for five years, and thereafter only if dividends then accruing remain unpaid. The reorganization plan further provided that each creditor who entered into it should receive an amount of first preferred stock equal in par value to the amount of his claim at the date of bankruptcy with interest at the rate of 6 per cent from said date to the date when dividends began to accrue on such preferred stock. As to the common stock, the reorganization plan provided: The committee shall itself hold the common stock of the new corporation, or cause the same to be held by such persons as it may deem proper under a voting-trust agreement, such voting-trust agreement to be continued for a period of not more than 10 years, or for such shorter period as they may deem proper. Such voting trust agreement may provide that the committee holding such stock may agree with A (subject to such other conditions and limitations as the committee may deem proper for the protection or benefit of first preferred stockholders or as such agreement may provide) that if the new corporation shall redeem all of said first preferred stock at par with all accumulated dividends within five years of the date as of which the same is issued, said common stock shall be delivered to him as his own property. If no such agreement is made, or if the common stock is not so disposed of, the committee holding the same shall within 10 years dispose of or use the same for the benefit of the first preferred stockholders, or for the protection or benefit of the new corporation in such manner as in the committee's sole discretion it may deem proper or as said voting-trust agreement shall otherwise provide. Pursuant to the last quoted provision, voting trustees were appointed by the creditors' committee and an agreement was entered into between the voting trustees and the M Company, in which it was recited: Whereas in pursuance of said plan, a new corporation has been formed called the M Company, which, in accordance with the direction of the committee, has issued all its capital stock (except w shares of common stock subscribed for in cash) for the purpose of acquiring substantially all the property (except $ ) of said N Company, bankrupt, or of the trustees in bankruptcy thereof; and Whereas nearly all the preferred stock of said M Company, has been or is to be trans- ferred to the parties to said agreement of reorganization in proportion to their claims against said_bankrupt, as provided in said agreement, any balance of the total authorized preferred stock of the company not so transferred to be held as treasury stock or otherwise for the benefit of the corporation; and * Supplementary Bulletin Rulings. Sec. 326. Art. 836.-26. Whereas all of the common stock of said M Company, namely 50w shares of the par value of $ each, is now held by B for the benefit of said committee and the persons whom they represent; And in which it was agreed among other things that: At any time before July — , 1919, the trustees may, in their absolute discretion, by an affirmative vote of or writing signed by four of their number, make an agreement with A (former proprietor of the N Company) that if the M Company, a State of U corporation, shall, before July — •, 1919, redeem all of its outstanding preferred stock at par with all accumulated and unpaid dividends thereon, and if such other conditions and limitations as the trustees may insert in said agreement for the protection or benefit of said preferred stockholders shall be fulfilled, then, upon the fulfillment of all the conditions and limitations above referred to, the trustees will convey all the shares held in trust hereunder to said A upon his written request. Said agreement shall not extend in any manner beyond July — •, 1919, and if not then performed shall immediately expire. The agreement with A thus authorized appears to have been made. Pursuant to the plan of reorganization, the assets of the N Company were on July — , 1914, taken over by the M Company, which assumed all the former corporation's liabilities and issued preferred stock for the amount of their claims proven in bankruptcy, aggregating in all 146.84a: dollars par value of preferred stock and 1.51a; dollars of preferred scrip, in all 148.35a: dollars, and 10a; dollars of common stock was issued to the voting trustees in pursuance to the agreement above stated. From the statement of facts filed in support of the appeal it appears that: Just prior to the reorganization, the books of the N Company showed total assets of 263.3* dollars and total liabilities, excluding capital stock, of 218.7* dollars. When the new corporation's books were set up, the plant was taken at a nominal valuation. Real estate carried on the former books at 79.58* dollars was set up on the new books at 35.6* dollars; machinery and equipment carried on the old books at 94* dollars was set up on the new books at 14* dollars; an inventory of finished goods carried on the pld books at 11.1* dollars was set up on the new books at 5.55* dollars, one-half the former book value. The plant account was thus marked down 123.99* dollars and the inventory 5.55* dollars, making a total reduction of assets of 129.55a* dollars. The preferred stock took the place of nearly all of the accounts and notes payable of the old corporation and the new corpora- tion began business with a book deficit of 95* dollars, created by the process of writing down assets as before mentioned. In its returns for 1917, the appellant increased the items of machinery and real estate taken over from 14a: dollars to 60a; dollars and from 35.6a: dollars to 40a: dollars, respectively. The increased values thus claimed were disallowed by the Income Tax Unit, only the amount of 49.6a; dollars set up on the opening account of the new corporation being allowed on account of these items. There has now been filed a complete appraisal of the assets of the appellant company made on January — , 1920, as of July — , 1914. This appraisal shows the cost as of July — , 1914, and accrued depreciation as of the same date as follows: Assets. Cost July — , 1914. Accrued deprecia- tion July — , 1914. Dollars. 10.24* 63.26* 88.01* Dollars. 10.5* 15.38* Total 161.51* 25 . 88* Sound value July — , 1914, 135.63* dollars. The affidavit on behalf of the appraisal company states as to the method of making the appraisal: Supplementary Bulletin Rulings. Sec. 326. Art. 836.-27. The object of making this inventory was to determine the actual cash value of (the physical property as of July — , 1914. A complete inventory of all items of plant and equipment on hand and in active use at January — , 1920, was taken. The date of installa- tion of all items added since July ■ — , 1914, has been determined from the records of the company, careful analysis of plant and expense accounts having been made by accountants. These items were further checked by information obtained from employees in the plant and the remaining items are, therefore, considered to be the items which must necessarily have been in place on July — , 1914. The prices applied to the items acquired from July — , 1914, to January — , 1920, have been actual cost prices taken from the records of the company by the accountants who worked in conjunction with the engineers. It was then necessary to determine the value of the remaining items of equipment in the inventory as of July — . 1914. The first step was to determine the reproduction cost of these items as of July — , 1914,. This was done by using the records of the previous corporation and the records of the O Company. Preference was given to records of the previous corporation when these were available, with the exception of the buildings of the plant which were acquired at a bank- rupt sale. Pvecords of the O Company are made up almost wholly of actual sales to numerous corporations and are not based on quotations or prices given "for appraisal purposes" and are, therefore, we believe, the best evidence of the market price. Every effort has been made to have the prices applied conservative. The reproduction cost having been determined, the next step was to determine the depreciated value and this was arrived at as follows: Competent engineers made careful examinations of each item of equipment to determine its actual condition and the accrued depreciation as of January — , 1920, was thus determined. Yearly depreciation rates were then determined and the entire plant worked back to January — , 1914, all as shown by accompanying schedules. In explanation of the method adopted, the appraiser has sworn: I have investigated the accounts of the predecessor corporation of the M Company and in my opinion it is impossible to correctly determine the plant value as of July — , 1914, from their books of account. The method of accounting then in use does not show, and it is impossible to determine from the books, the expenditures made for rebuilding, renewals, replacements, and extra- ordinary repairs. Plant items also were charged to expense in some cases, and no consistent method of depreciating the property was ever used. It is now contended by the appellant that the value of the buildings and machinery and equipment as of July — , 1914, as shown by the appraisal, should be employed in computing the invested capital and that in addition there should be included the par value of the lOx dollars common stock, for the reason that it respresented the value to the company of the five- year agreement with A which was reasonably worth the par value of the stock. Transmitting the appeal the Unit states: The Unit has taken the stand that the values established by the corporation and set up on its book should be used in the absence of more definite proof of the value of the property involved. The values shown on the books can not be analyzed and it is a well recognized fact that the assets of bankrupt concerns are very often inflated. With this in mind, we find that the officers of the new corporation revalued the assets and wrote them down to such an extent that a capital impairment of over 60 per cent resulted. The Unit contends that the officers of the corporation would not reduce the book values of its assets to a figure below the actual worth of the assets, if by so doing a substantial capital impairment was shown, unless the original values of the assets were inflated. The Committee has carefully examined the appraisal submitted in this case and finds that it has been prepared in the manner stated by the ap- praisers, that the rates of depreciation used were liberal, and that it complies with the requirements of T. D. 3367 (Internal Revenue Bulletin 1-30, p. 17) fl[1288 herein]. It is, therefore, believed that the appraisal constitutes sufficiently definite proof of the value of the property involved as of the date paid in for the purpose of computing invested capital, subject, of course, to check by the Unit as to the particular items and rates of depreciation. The contention of the appellant, however, that the par value of the lOx Supplementary iiulictin Rulings. Sec. 326. Art. 836. 28. dollars of common stock should be added m computing invested capital does not appear to be well taken. As shown by the above recitation of facts, all the capital stock, including the common stock with the exception of w shares which were issued for cash, wa,s issued for the assets of the N Company and not in consideration of services rendered or to be rendered by A. It is expressly provided in the contract entered into between the creditors' com- mittee and A that the common stock was to be turned over to him only upon the redemption of the preferred stock within a period of five years and not otherwise. In other words, it was to be used to pay him a bonus for retiring the preferred stock within the period stated. Until the stock was actually retired, no title whatever vested in A, and the only thing back of it was the assets of the N Company, the value of which as of July — , 1914, for the purpose of invested capital has already been allowed in full in this recommendation. It is, therefore, recommended, in the appeal of the M Company, that the action of the Income Tax Unit in reducing the appellant's invested capital as of July — -j 1914, to 63.29x dollars be reversed and that the appraisal as of that date, now filed, subject to check as to individual items, be made the basis of the computation of invested capital. 1 6 Supplementary Bulletin Rulings. 2-20-22. .S— .Vt8 Ark .6S.I .oe'd Sec. 326. \ft: 337.- 1. Law Section 326.- Invested Capital (1918 Act— 11555 ante): (1921 Act— ^1035, post). Article 837. — Surplus and Undivided Profits; Paid-in Surplus (Reg. 45, ^760, ante) : (Reg. 62—^1193, post). So much of a replacement fund for steamers lost established in accordance with article 50, Regulations 45, as represents excess of the amount of insur- ance received over the book value of the steamers at the time of their de- struction may not be included in invested capital for the purpose of war and excess profits taxes, even though the interest received from the investment of such excess is reported as taxable income, because such excess is not"paid-in or earned surplus" within the meaning of section 326 of the Revenue Act of 1918. 1 17-20-882: A. R. R. 70. REVENUE ACT OF 1917. The principal stockholder of a close corporation invented a certain article and turned over to the corporation his rights to the invention. After some litigation, a patent was granted to the inventor who turned it over to the corporation without consideration. The corporation was engaged in the manufacture and sale of the article both before and since the patent was issued. The questions presented are whether the value of the patent may be included by the corporation in its invested capital for 1017, since it was not paid in for stock but without consideration, and assessment of its excess profits tax for 1917 under section 210 of the Revenue Act of 1917. Section 207 of the Revenue Act of 1917, defining invested capital, pro- vides for three classes of such capital, following the earlier Act of March 3, 1917, as actual cash paid in, tangible property paid in for stock or shares, and paid in or earned surplus. Then follows a proviso not contained in the Act of March 3, 1917, providing for two classes of property as to the classi- fication of some items of which there has been, in the courts of the country, considerable dispute. The first provides that the actual cash value of patents and copyrights paid in may be included in invested capital not to exceed the par value of stock issued therefor; the second provides that good will, trade- marks, trade brands, etc., may be taken into invested capital only to a limited extent as intangible property. It will be seen by this division that Congress manifestly intended in the Revenue Act of 1917, to classify patents and copyrights as tangible property and trade-marks, good will, and other property as intangible; and it also provided that where patents were turned in for stock the figure at which they could be taken into invested capital is the actual cash value or the par value of the stock issued therefor, whichever is lower, but this does not necessarily preclude the recognition of actual value of patents turned in as paid-in surplus. The Committee is therefore of the opinion that under the Revenue Act of 1917, the corporation would be entitled, upon establishing the value of the patent turned over to the company without consideration, to include such value as invested capital. In the present case, however, it is apparent that the inventor turned over to the company the rights to his invention long prior to the issuance of letters patent covering same, in fact, immediately after the invention of the device. The amount which could be recognized, therefore, as paid in surplus would be the value of the invention at the time it was Supplementary Bulletin Rulings. Sec. 326. Art. 837.-2. turned over to the company and before commercial development rather than its value when letters patent were issued and at which time development had proceeded sufficiently to possibly justify the valuation claimed by the com- pany. What that value was at the time of the invention, is in the judgment of the Committee, a fact which can not be satisfactorily determined, and it seems clear that it would be impossible to prove a value at that time in excess of the value given to it in practical effect by the application of section 210; that is to say, the difference between the statutory capital and the constructed capital under that section. The Committee is therefore of the opinion that the action of the Income Tax Unit in assessing the tax under the provisions of section 210 was proper and works no injustice upon the taxpayer. For the same reasons that section 210 was applied under the 1917 Act, it is recommended that the company be assessed for 1918 and subsequent years under the provisions of sections 327 and 328 of the Revenue Act of 1918. 2 19-20-925: A. R. R. 86. REVENUE ACT OF 1917. Held in the appeal of the M Company that a claim for paid-in surplus in 1917 can not be allowed in the case of appreciated value in a leasehold which was acquired by the company as original lessee without cost and which was not paid in at a fixed value for stock or shares. The M Company has appealed from the decision of the Income Tax Unit in connection with its income and excess profits tax for 1917. Amended returns were filed by the company, in which the invested capital for 1917 was increased by including therein as paid-in surplus the appreciated value of a lease, which was acquired by the company as original lessee, and which was not paid in for stock or shares in such company. This leasehold was not carried as an asset bv the company, and was not entered on its books until 1918. It appears that subsequent to the time of filing its return, and during the early part of 1919, the company had an appraisal made for the purpose of fixing the value of this leasehold. This appraisal furnishes estimated values as at the time of the renewal of the lease in 1916, and values for years subse- quent thereto. The company claims in its presentation of the case that article 63 of Regulations 41 permits the inclusion in invested capital as paid-in surplus the appreciated value of the leasehold as ascertained by the appraisal. The original lease, which was acquired without cost, carried an option of renewal, which was exercised by the company in 1916. This renewal, under the option of the original lease, was obtained without cost. The term "invested capital" as used in the excess profits tax law for 1917 means the invested capital of the present owner. The starting point in the computation of invested capital is the amount of cash and other property paid in. In the ascertainment of the correct invested capital, surplus and undivided profits are taken into consideration, and also depletion, deprecia- tion, or obsolescence of the property originally acquired for cash, or for stock or shares, or in any other manner. *** The taxpayer relies on the provisions of article 55 of Regulations 41, reading as follows: Tangible property paid in for stock or shares prior to January 1, 1914, must be valued at either (a) the actual cash value of such property on January 1, 1914, or (b) the pax value qf the stock or shares specifically issued therefor, whichever is lower. This is one Supplementary Bulletin Rulings. .•tfrfiiuM pi! situ a x 1 * Jn,rn3 '}/ix dollars representing claims owed to and canceled by creditor stockholders be reversed, and accordingly that the taxpayer's appeal be sustained. 101 Supplementary Bulletin Rulings 2-20-22. Sec. 326. Art. 838.— 1. Law Section 326.— Invested Capital (1918 Act— ^555, ante): (1921 Act- ios, post). Article 838. — Surplus and Undivided Profits; Earned Surplus (Reg. 45 — <[761, ante) : (Reg. 62— 1fll94, post). 1-19-121: O. D. 82. Good will created to offset impaired capital has no effect on invested capital. Subsequent earnings must be used first to restore impaired capital; excess may be added to original investment as invested capital. 1 1-19-130: O. D. 91. Any portion of surplus or undivided profits representing unearned interest or discount which has not been reported as taxable income, must be excluded in the computation of invested capital for war profits and excess profits purposes. 2 1-19-131: O. D. 92. If a taxpayer reports profits on installment sales on the basis of the pro- portionate part of each installment received representing profit, his surplus account as at the beginning of the taxable year must be reduced in computing invested capital to the extent that the surplus account includes profit on such sales which has not been reported as taxable income. 3 22-19-538: T. B. R. 67. Revenue Act of 1917. — Treatment, for the purpose of determining the invested capital of a domestic corporation, of shares of stock in a foreign corporation de- riving no income from sources within the United States, acquired for cash and in exchange for a patent right. The M Company, a domestic corporation, organized the O Company a foreign corporation. The O Corporation issued stock of the par value of 10* dollars to the M Corporation for 5x dollars cash and for the right to use cer- tain patents, which right was worth at least 5* dollars. None of the income of the O Corporation for the year 1917 was derived from sources within the United States. The question is as to the method of treatment of the shares of stock of the O Corporation in determining the invested capital of the M Corporation for the year 1917, under the Revenue Act of that year. In computing the surplus and undivided profits of the M Company the shares of stock in the O Corporation are to be valued at cost, with proper adjustments, if any. (The method of computing surplus and undivided profits under the Revenue Act of 1918, laid down in article 838 of Regulations 45, is equally applicable to the computation of surplus and undivided profits under the Revenue Act of 1917.) In the cost of the shares of stock of the O Corporation are to be included the cash payment of 5* dollars, and the patent right at its value at the time of the exchange, which value can not be taken as exceeding the value of the shares of stock received in exchange therefor. The effect of the transaction may be to increase or decrease the Supplementary Bulletin Rulings. .1 .SIB AtA .dS£ .398 Sec. 320. Art. 838.-2. amount of the surplus and undivided profits of the M Corporation, though the assets which ultimately give value thereto; to wit, the cash and the patent right, remain the same. Such increase or decrease, however, is due to such a change in the situation as amounts to a realization of gain or loss, and any gain so realized is earned surplus, as any loss so realized effects a decrease in earned surplus. (See Art. 1565, Regs. 45, as amended by T. D. 2924.) Since earned surplus is considered in determining invested capital regardless of the time when it was earned, it is immaterial that the gain or loss realized from the transaction was due to appreciation or depreciation which in part occurred prior to March 1, 1913. In this respect the principles applicable to the computation of invested capital differ from those applicable to the determination of taxable income for, while such part of the realized appre- ciation, if any, as is attributable to the period after March 1, 1913, is taxable income, such part as is attributable to the period before March 1, 1913, though considered in the computation of invested capital, escapes taxation. The shares of stock of the O Corporation constitute "admissible assets" of the M Corporation for the year 1917. The 0 Corporation derived no income from sources within the United States, and consequently was not subject to income tax under Title I of the Revenue Act of 1916, as amended by the Revenue Act of 1917. (Sec. 10.) The dividends received by the M Corporation upon its stock in the O Corporation should, therefore, be in- cluded in the income of the M Corporation for purposes of the excess profits tax. They are not "amounts received * * * as dividends upon the stock * * * of other corporation * * * subject to the tax imposed by Title I of such act of September 8, 1916," within the meaning of section 206 of the Revenue Act of 1917 which authorized the deduction of such amounts from the income of a domestic corporation in order to determine the amount of income of such corporation subject to the excess profits tax. Consequently, the stock of the O Corporation does not constitute "inadmissible assets" under the provision of section 207 of Title II of the Revenue Act of 1917 that — As used in this title "invested capital" does not include stocks ? bonds (other than obli- gations of the United States), or other assets, the income from which is not subject to the tax imposed by this title. It is held, therefore, that for the purpose of determining the invested capital of the M Corporation (a) in computing its surplus and undivided profits its shares of stock in the 0 Corporation are to be valued at cost with proper adjustments, if any, such cost being 5* dollars plus the value at the time of the exchange therefor of the patent rights owned by the M Corpora- tion; and (b) such shares of stock are to be regarded as "admissible assets." 18-20-906: A. R. R. 71. The Committee is of the opinion that appreciation is in no event a part of earned surplus and therefore can not offset depreciation in the value of assets through wear, tear, and exhaustion. Depreciation must first be figured in order to determine true earned surplus. In other words, earned surplus is believed to consist of realized gains or profits and while such realized g^ins or profits must be reduced by any depreciation in value through use or exhaustion of the assets in which they are invested, any appreciation in value of those assets which is not yet realized can not be taken into considera- tion for the purpose of offsetting such decrease. A corporation owns patents covering certain inventions made by its em- Supplf-mpntary Bulletin Rulings. Sec. 326. Art. 838.-3. ployees. The cost of securing the patents and the salaries of the employees whose inventions were patented were paid by the corporation and charged to expense account. The corporation may not include in its invested capital any amount representing either the cost of the patents or appreciation in their value. 6 29-20-1081: A. R. M. 71. Advice is requested as to the proper treatment of credit balances of stock- holders' accounts in the case of the M Company. The facts appear to be that no formal declaration of dividends has been made by this company, but a book entry has been made noting and crediting to each stockholder the share of each year's earnings to which he would be entitled under a dividend declaration, the individual shareholders having returned their shares of such earnings in their personal returns and paid the income tax thereon. Reference is made to Appeals and Review Recommendation 102 as sup- porting the view that balances to the credit of individual stockholders are not invested capital. In that case, however, the balances standing to the credit of individual stockholders were not in proportion to their stockholdings, whereas it appears in the present case each stockholder has been credited with the amount of the earnings attributable to his stock. No interest has been or is to be paid upon the amounts standing to the credit of these stockholders, no formal declaration of a dividend has been made by the board of directors, and it appears that under the State law the stockholders do not rank with general creditors with respect to such credits. Under these circumstances the case is clearly distinguishable from the one covered by Recommendation 102, and in the judgment of the Committee the amounts so credited should be regarded as being a part of the earned sur- plus of the corporation to be included in invested capital. 6 22-21-1667: A. R. R. 517. REVENUE ACT OF 1917. Recommended, in the appeal of the M Company, that a mining corporation, in computing its invested capital for the purpose of the war excess profits tax, be required to reduce its earned surplus by the amount of its sustained depletion to the beginning of the year for which the tax is computed; and, under normal conditions, to inventory its metals on hand and not sold at the close of its annual accounting period, at cost or cost or market, whichever is lower. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in holding that the surplus earnings of the taxpayer at the beginning of the taxable year 1917, amounting to I6}^x dollars, which the company claimed as a part of its invested capital for the taxable year, and which represented the undistributed accumulations of mining and incidental profits during several years, are overstated to the extent of 9^2* dollars; and from the expressed purpose of the Unit to revise the valuation of the taxpayer's inventory of metals on hand at the beginning of the year 1917. The questions involved being wholly ones of law, the case was referred to the Solicitor of Internal Revenue for his consideration, and his conclusions are quoted below: Supplementary Bulletin Rulings. Sec. 326. Art. 838.-4. You present for consideration the questions whether the M Company is re- quired, in computing its invested capital for the purpose of the war excess profits tax imposed by the Revenue Act of 1917, to reduce the amount of its earned surplus by the amount of any sustained depletion to the beginning of the year for which the tax is computed, and whether it is permitted to inven- tory metals on hand at the date of the inventory, and not sold, at the selling price. Section 207 of the Revenue Act of 1917 provides in part that: As used in this title "invested capital" does not include stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means, subject to the above limitations: (a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash for stock or snares in such corpora- tion or partnership at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of un- divided profits earned during the taxable year: * * * Section 10 of the Revenue Act of 1916, as amended by section 1206 of the Revenue Act of 1917, provides: (a) That there shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources by every corporation * * * organized in the United States, no matter how created or organized, * * * a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, • and paid annually upon the total net income * * * Section 13 (d) of the Revenue Act of 1916, which was not modified by the Revenue Act of 1917, provides that: A corporation, joint-stock company or association, or insurance company, keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned. The X mine was discovered prior to 1883. The N company was organized with a capitalization of 3* dollars to develop and operate the mine. In 1886 additional capital was put into the development of the mine and from that time it has proved immensely profitable, in 1889 the profits, without allowing for depletion, amounting to approximately 4x dollars. In 1900, the M Company acquired, through purchase, the mines and works of the N Com- pany; also the entire issue of the stocks and bonds of the O Company; also all of the real and personal property of the N Company, comprising lands, mining claims, buildings, machinery, tools, ore on dumps and in the works, and supplies and stores of all kinds; also the right to receive what was paid in the distribution of the remaining assets of the N Corporation in disso- lution. The consideration paid by the M Company for the above property was (a) the issue and delivery of its capital stock consisting of y shares, par value of $10 per share, (b) 3x dollars of its income bonds in exchange for the transfer of x dollars of the cash assets of the N Corporation, and (c) the assumption of all contracts, debts, and obligations of the N Corporation, amounting, as shown by the accounts, to 1-7* dollars. Upon the evidence filed the Income Tax Unit allowed the M Company a paid-in surplus as of the date of its organization in 1900 of 23^2-v dollars, giving it an invested capital of 263^2* dollars. At the beginning of the taxable year 1917 the company had on hand surplus earnings to the amount of \6 l /2X Supplementary Bulletin Rulings. Sec. 326. Art. 838 —5. dollars. In its return for the year 1917 the company deducted from its in- vested capital the sum of V/^x dollars, being the amount of the deductions for depletion allowed it under the Act of October 3, 1913, and the Act of September 8, 1916. The Bureau claims that the amount of the deductions should be increased by 9%x dollars, making a total deduction of llx dollars, the amount of the sustained depletion from the date of the acquisition of the property to 1917, based upon the original capital investment value of 26}/2X dollars. At the close of the year 1917 the M Company had on hand some 20z pounds of metals produced during that year, which it valued on a basis of cost of production. At the close of the year 1916 the company had on hand some 14z pounds of metals ready for sale, some of which had already been sold for future delivery, and following the method, which it alleges it had con- sistently followed since 1902, it valued all such metals in its closing inventory for the year 1916 at the prices actually obtained for the metals sold (about 40 per cent of the whole), and the prices which, it was estimated, could be counted upon for the remainder of such metals, less the cost of marketing. In making its return for 1917 the company protested against being required to value at cost its inventory of bullion and contended that it should be allowed to continue its long established accounting method and value its inventory of metals on hand at the end of the year 1917 on the basis of the value to a going concern, to wit, at prevailing selling prices. The questions presented will be considered in the order in which they were stated. Article 42 of Regulations 41, relative to war excess profits tax imposed by the Revenue Act of 1917, provides: The term "invested capital" as used in the excess profits tax law means the invested capital of the present owner. The basis or starting point, in the computation of invested capital is found in the amount of cash and other property paid in, the original values of such other property being determined in accordance with the rules laid down in these regulations. But the computation does not stop with such original entries or amounts; it must take properly into account the surplus and undivided profits. In the computation of surplus and undivided profits, however, full recognition must first be given to expenses incurred and losses sustained from the original organization of the business concern down to the taxable year, including among such expenses and losses a reasonable allowance for depletion, depreciation, or obsolescence of property originally acquired for cash or for stock or shares or in any other manner. * * *. Article 64 of Regulations 41 provides that: Where through failure to provide for depletion, depreciation, obsolescence, or other expenses or losses, or where for any other cause or reason the books of account of the taxpayer do not show the true paid-in or earned surplus and undivided profits, in the computation of invested capital such adjustments shall be made as are necessary to arrive at a statement of the correct amount. * * * * * (5) The taxpayer shall also show that adequate provision has been made for the depletion, depreciation, or obsolescence of such of the assets so acquired as are, under the rulings of the department, subject to recognized depreciation. Regulations 45 (1920 edition), construing the very similar provision of the Revenue Act of 1918, provide (article 838): Only true earned surplus and undivided profits can be included in the computation of invested capital, and if for any reason the books do not properly reflect the true surplus such adjustments must be made as are necessary in order to arrive at the correct amount, in the computation of earned surplus and undivided profits full recognition must first be given to all expenses incurred and losses sustained from the original organization of the corporation down to the taxable year, including among such expenses and losses reasonable allowances for depreciation, obsolescence, or depletion of property (irrespective of the manner in which such property was originally acquired), and for the amortization of any discount on its bonds. There can, of course, be no earned surplus or undivided profits until any deficit or impairment of paid-in capital due to depletion, depreciation, expense, osses, or any other cause has been made good. * * *. Supplementary Bulletin Rulings- Sec. 326. Art 838.-6. Article 839 of Regulations 45 (1920 edition) further provides that: Depletion, like depreciation, must be recognized in all cases in which it occurs. Depletion attaches to each unit of mineral or other property removed, and the denial of a deduction in computing net income under the Act of August 5, 1909, or the. limitation upon the amount of the deduction allowed under the Act of October 3, 1913, does not relieve the corporation of its obligation to make proper provision for depletion of its property in computing its surplus and undivided profits. * * *. This article is equally applicable under the Act of 1917. It is contended by the taxpayer that, owing to the peculiar character of mining properties, there is no depletion so long as "discovery and development outrun depletion," and that any actual prior depletion is taken care of by the provision for the valuation of tangible property paid in as of January 1, 1914. The peculiar character of mining property was well stated in Stratton's Independence v. Howbert, 231 U. S. 399, 413, as follows: The peculiar character of mining property is sufficientlyobvious. Prior to development it may present to the naked eye a mere tract of land with barren surface, and of no practical value except for what may be found beneath. Then follow excavation, discovery, develop- ment, extraction of ores, resulting eventually, if the process be thorough, in the complete exhaustion of the mineral contents so far as they are worth removing. Theoretically, and according to the argument, the entire value of the mine, as ultimately developed, existed from the beginning. Practically, however, and from the commercial standpoint, the value — that is, the exchangeable or market value — depends upon different considerations. Beginning with little, when the existence, character, and extent of the ore deposits are problematical, it may increase steadily or rapidly so long as discovery and development outrun depletion, and the wiping out of the value by the practical exhaustion of the mine may be deferred for a long term of years. This statement contains the answer to the contention of the taxpayer. The reason that in the case of mines the Supreme Court has consistently held that no deduction for depletion or depreciation in computing net income can be allowed, in the absence of statutory authority, is that by reason of the fact that discovery and development may outrun depletion there is not necessarily any actual decrease in the value of the taxpayer's property, and, therefore, the entire net receipts may well be considered income. The rule is not new but has come down to us from the common law of England. This, however, does not negative the fact that the removal of each ton of ore depletes pro tanto the ore originally known to exist in the mine and which was originally valued. The maintenance or increase of the original value is solely due to the fact that the loss of value through depletion is equalled or exceeded by the appreciation in value through discovery or development. To treat the entire net income as earnings and as constituting earned surplus in the succeeding year when not distributed by the company would, therefore, to the extent of the depletion actually sustained during the year, be to permit the inclusion of appreciation in the value of the mine, by reason of development and discovery, in invested capital, a thing which is not contemplated by the statute nor permitted by the regulations. This was clearly pointed out in Tax Reviewer's Memorandum of January 29, 1919,* approved and followed in Law Opinion 753 (not pub- lished in the Bulletin Service). While the provision in section 207(a) for the inclusion in invested capital of the actual cash value as of January 1, 1914, of tangible property paid in prior to that date permits the inclusion of appreciation up to the par value of the capital stock for which such property was paid in (see article J55, Regu- lations 41), it clearly contemplates that in valuing the property as of that date any depletion or depreciation shall have been made up out of earnings, and, therefore,_such a valuation does not involve a^second deduction for de- pletion. NHflfftfSfC IVfcf <*>'■ 8*» ^ J 9 ***? *P*>-Z ^T-'5?rV:: • Regulations 33,^revised, construing the^Revenue Actjof^^ as'amended by the Revenue Act of 1917, contains no provision relating to inventories of Supplementary Bulletin Ruling*. 4-19-22. Sec. 326. Art. 833.-7. mining companies, but article 91 governing inventories by manufacturing corporations, to which mining companies are closely analagous, provides that: Gross income for the purpose of returns of manufacturing companies shall consist of the total sales plus the inventory at the end of the year less the sum of the cost of goods or materials purchased during the year and the inventory at the beginning of the year. In- structions as to how inventories shall be taken will be included in special regulations to be furnished upon application to the collector of internal revenue * * *. The special regulations referred to are contained in Treasury Decision 2609, which provides in part as follows: (1) For the purposes of income and excess profits tax returns, inventories of merchandise etc., and of securities will be subject to the following rules: A. Inventories of supplies, raw materials, work in process of production, and unsold merchandise must be taken either (a) at cost or (b) at cost or market price, whichever is lower, provided that the method adopted must be adhered to in subsequent years, unless another be authorized by the Commissioner of Internal Revenue. The regulations relating to inventories under the Revenue Act of 1918 (Regulations 45, 1920 edition), are much more extensive but are general and equally applicable under the Acts here considered. Article 1581 of these regulations provides in part that: Title to the merchandise included in the inventory should be vested in the taxpayer and goods merely ordered for future delivery and for which no transfer of title has been effected should be excluded. The inventory should include merchandise sold but not shipped to the customer at the date of the inventory, together with any merchandise out upon consignment, but if such goods have been included in the salet of the taxable year they should not be taken in the inventory. * * * Article 1582 provides that: Inventories must be valued at (a) cost or (b) cost or market, as defined in article 1584 as amended, whichever is lower. * * * Article 1584 provides that: Under ordinary circumstances, "market" means the current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which ordinarily purchased by the taxpayer, and is applicable in the cases (a) of goods purchased and on hand, and (b) of basic elements of cost (materials, labor and burden), in goods in process of manu- facture and in finished goods on hand; exclusive, however, of goods on hand or in process of manufacture for delivery upon firm sales contracts at fixed prices entered into before the date of the inventory, which goods must be inventoried at cost. * * * This article also provides for valuing goods in process of manufacture and finished goods on hand at sales price where "owing to abnormal conditions, the taxpayer has regularly sold such merchandise at prices lower than the current bid price as above defined." But this provision can have no application in the instant case since the evidence shows that the M Company at the close of the year 1917 was selling its copper at prices which included abnormally large profits. Under these regulations a mining company is required to inventory all metals on hand at the date of the inventory, including goods sold but not shipped to customers, at cost, or cost or market whichever is lower, except in the case of metals on hand for delivery "upon firm sales contracts at fixed prices entered into before the date of the inventory" which it is required to inventory at cost. Article 1581, however, recognizes the right of a mining company, which keeps its accounts upon an accrual basis, to include its metals sold, but not shipped, in its accounts receivable rather than in its inventory if it elects so to do. This provision, however, can have no application to goods on hand at the date of the inventory which have not been sold. It is recognized that, as contended by the taxpayer, to require an inventory at the close of 1917 to be made upon the basis of cost, or cost or market, which- ever is lower, while leaving the inventory at the beginning of the year as it was originally made — that is, upon the basis of the selling price of all metals on Supplementary Bulletin Rulings. Sec. 326. Art 836. —8. hand, sold, or unsold — would lead to a distorted statement of income. The inventory at the beginning of the year, which was the same as the closing in- ventory of the year 1916, must, therefore, be reconstructed, and amended re- turns made for the year 1916. If the adjustment due to the amended returns occasions an inequality in the tax prior to the year 1916, such inequality may be remedied in the return for 1916 by the deduction from or addition to the tax accruing in that year of an amount equal to the net amount overpaid or underpaid in prior years, such amount to be determined by filing with the re- turn for 1916 a composite return for all prior years, accompanied by a state- ment showing the total adjustment for each of the years and the net income for the entire period. It is accordingly held that a mining corporation, in computing its invested capital for the purpose of the war excess profits tax, is required to reduce its earned surplus by the amount of its sustained depletion to the beginning of the year for which the tax is computed, and, under normal conditions, to inventory its metals on hand at the close of its annual accounting period and not sold, at cost or cost or market, whichever is lower. The Committee concurs in this conclusion of the Solicitor, and recom- mends its adoption. 7 I ('22)-16-232: I. T. 1286 Revenue Act of 1918. On January 1, 1918, the M Company had capital stock amounting to 2x dollars and surplus amounting to 11a: dollars, most of which was earned surplus. During 1918 the company suffered an operating loss of 4x dollars. Inquiry is made whether the invested capital of the company as at January 1, 1919, should be reduced because of the operating loss. It is contended that section 326(a)3 of the Revenue Act of 1918 makes no distinction between "paid-in surplus" and "earned surplus" and that surplus having once been earned and invested in the business is just as much a part of the capital invest- ment as paid-in surplus or cash paid in for stock, and that consequently in computing invested capital no reduction of earned surplus is required because of an operating deficit. Section 326(a) of the Revenue Act of 1918 provides, in part, that "* * * as used in this title, the term 'invested capital' for any year means * * * (3) paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year; * * Under this pro- vision of the statute, only true earned surplus and undivided profits can be included in the computation of invested capital. (See Regulations 45, article 838.) There is nothing in the statute defining the term earned surplus and undivided profits or modifying what must otherwise be accepted as the guiding principle to be applied in determining what is surplus. Under the statute, therefore, surplus in any case must be determined in accordance with the accepted principles of accounting. It is an accepted accounting principle that the surplus of a corporation is the excess of the net assets over the total par or face value of the shares of capital stock. The excess of the assets over the liabilities constitutes the net assets of a corporation. It follows that if an operating loss occurs during the year, other things being equal, the surplus at the end of the year is less than at the beginning of the year. The M corporation had on January 1, 1918, an earned surplus of approxi- mately llx dollars. During that year the operating expenses exceeded the income from operations by approximately 4x dollars. If such excess expenses Supplementary Bulletin Rulings. G-26-22. Sec. 326. Art. 838.-9. were paid with assets, the assets were actually reduced by such payments, resulting in a corresponding decrease in the net assets and in the surplus. If such excess expenses were not paid but were set up on the books as liabilities the resulting increase in the liabilities would also reduce the net assets and consequently the surplus by a corresponding amount. It is clear, therefore, that the surplus and undivided profits of the corporation on January 1, 1919, were approximately 4x dollars less than on January 1, 1918, by reason of the operating deficit occurring in 1918. It is held, therefore, that the portion of the surplus of the corporation on January 1, 1918, representing earned surplus must be reduced by the oper- ating deficit in computing the invested capital of the corporation as at January 1, 1919, but that portion representing paid-in surplus need not be reduced on account of the operating deficit for 1918 unless dividends were paid during the existence of the operating deficit in excess of the earnings available for distribution at the time the dividends were paid, as determined in accord- ance with articles 857 and 858 of Regulations 45. 3 Act February 24, 1919, Sections 214fa)8 and 234(a)7. Act November 23, 1921, Sections 214(a)8 and 234(a)7. Recommended, upon the reconsideration of A. R. R. 27 (C. B. 2, p. 139) that obsolescence upon bulk freight vessels upon the Great Lakes be accepted as established by the evidence now on file; that such obsolescence be computed in the case of the various types and sizes of such vessels in accordance with the fol- lowing recommendation; that Solicitor's Opinion 114 (C. B. 5, p. 148) be adhered to; and that the owners of such bulk freight vessels be not required to readjust their invested capital to allow for the obsolescence accrued up to and including December 31, 1917. In December, 1919, a hearing was held by this Committee at which the representatives of the various steamship companies engaged in bulk trans- portation of ore, coal, stone, and grain upon the Great Lakes presented affidavits, and oral testimony was taken relating to the depreciation and obsolescence of bulk freighters on the Great Lakes. As a result of that hearing the Committee held (A. R. R. 27) that the maximum life of such vessels without rebuilding was 33 years and that, therefore, a deduction of 3 per cent on account of depreciation should be allowed thereon. The recommendation added: The committee is therefore of the opinion that obsolescence should be limited to those cases where it can be shown that a type of vessel has been developed so much more econ- omical than existing types that no other than the new type will be built in future, and that a sufficient number of the new type to meet traffic requirements will in all reasonable prob- ability be built within a certain definite period, thereby forcing the older type out of useful existence. Where in any case this condition can be shown to exist and where moreover it can be definitely determined that the established rate of depreciation will not be sufficient to return all of the capital invested as at the date of acquisition or March 1, 1913, whichever was later, by the time the vessel will be rendered useless, an addition to the regular rate to cover this obsolescence may probably be allowed, thus permitting the spread of the foreseen loss over the period from the present time until the loss occurs instead of requiring the entire amount of such loss to be deducted in the year in which the vessel is finally scrapped or salvaged. The amount of this allowance, however, must be determined upon the basis of the facts in each particular case; that is, the type of the vessel in question, the fitness for possible use in other lines of transportation, and the date when it can be definitely foreseen that she will be no longer commercially useful in this particular line of traffic. In accordance with this recommendation the owners of the bulk freighters were called upon by the Unit to establish the facts indicated therein as essential to the allowance of a deduction for obsolescence. At the same time Supplementary Bulletin Rulings. Sec. 326. Art. 833.— 10. these owners were advised, as a result of the opinion of the Solicitor of the Bureau rendered June 23, 1921 fSol. Op. 114), that, if deductions for ob- solescence were claimed for the year 1918 and subsequent years, they would be required to adjust their invested capital for the year 1917 by deducting therefrom the obsolescence which had accrued up to and including December .31, 1917. The owners took the position that no readjustment of invested capital for the years prior to 1918 was contemplated or required either by A. R. R. 27 or Sol. Op. 114 and petitioned the Committee for a reconsideration of A. R. R. 27 and a restatement of the rule as to treatment of obsolescence in more definite form. In connection with their petition the representatives of the owners filed numerous affidavits. These affidavits were supplemented by an oral hearing held by the Committee in January, 1922. At the oral hearing there were present individuals representing directly or indirectly 75 per cent of the bulk freight traffic on the Great Lakes. The testimony of all the witnesses is in striking accord as to existence, date of commencement, date of termination, and method of computation of obsolescence for the various types of Great Lake freighters, and the evidence may be briefly summarized as follows: Up. .-to ,190^ all bulk freighters on the Great Lakes were of the beam and stanchion type of construction and. ranged in carrying capacity from 5,000 to 6,900 tons. About 1905 the arch type of construction was introduced and larger vessels, ranging from 7,000 to 10,000 tons carrying capacity, began to be constructed. Owing to the change of type, the depth of the channels and the size of the wharfing, loading, and unloading facilities, doubts for some time were entertained as to the practicability of the larger boats and they did not demonstrate their practicability and dominate the lake traffic until the year 1910. Since 1910, vessels ranging from 11,000 to 13,000 tons capacity have been built, the average date of construction being 1914, and there are now 57 of these largest size vessels in service. No vessels larger than these have yet made their appearance. There is no obsolescence of any of the:.e vessels for the first five years from the average date of construction, ob- solescence for the next five years is slight, and from the tenth year on the obsolescence becomes more rapid and is progressive throughout the remainder of the useful life of the vessel, but any attempt to compute the actual rate of progression would be too complicated for practical use, and, therefore, ob- solescence should be computed at a uniform rate over the entire period of its existence, or for such portion thereof as the law allows. The average term of usefulness of all of these vessels is approximately 20 years and at the end of 20 years they have a remaining value of 20 per cent of their original cost. If they are retained in service beyond the twentieth year, they lose value at the rate of one-thirteenth of the remaining value of the 20 per cent. If they become obsolete and are junked in less than 20 years, 4 per cent of the cost should be added to the value at the end of 20 years for each year less than 20 years.' The following composite table compiled from figures furnished by c>_: \ Y. of the companies shows the average gross freights per mile, expenses, and net earnings for the various classes of vessels: Supplementary Bulletin Rulings. 6 26-22 Sec. 326. Art. 838.— 11. Gross freights pci mile. Expenses. Cents. Over 10,000 tonners. . . 10,000 tonners 9,000 to 9,500 tonners. 8,000 to 8,500 tonners. 7,000 to 7,500 tonners. 6,000 to 6,500 tonners. 5,000 to 5,500 tonners. 11.9* 10.0* Cents. 11.2* A table showing the corresponding figures for the intermediate tonnages was found to be too complicated and to show no material variations. A statement furnished by A, auditor for the M Company, showed some- what higher figures in all instances, but the increases were shown to be due to the fact that the M Company does not carry total loss insurance, which is generally carried on these vessels, resulting in a saving of about x cents a mile, and to more efficient operation. With the necessary allowance for these factors, the figures corresponded very closely to those shown by the composite figures of the companies named and the proportions as between the various classes of vessels were closely preserved. An examination of this table shows clearly that so soon as enough vessels of a larger class, say of the 10,000 tonners, capable of earning 5.2.Y cents net gross freight per mile, to meet the requirements of the traffic, have been constructed, the 5,000 tonners having a net earning capacity of only x cents will become economically impossible and will be driven out of business, and that if this -occurs prior to the expiration of the period of 33 years, which has been accepted as the physical life of this class of vessels, there will be an amount, in excess of the junk value plus the depreciation which has been taken, for which no deduction will have been allowed. To illustrate: A 10,000-ton vessel built in December, 1910, will become obsolete on January 1, 1935. She will then be 24 years old, and, if the original owner continued in such ownership, he will have deducted 72 per cent for physical depreciation. By the time this 10,000-ton vessel is 24 years old she has a residual value of 14 per cent of the cost (computed on the basis of 20 per cent residual value when 20 years old). Adding together the 72 per cent for depreciation and the 14 per cent of residual value, we have 86 per cent of her cost accounted for and there remains 14 per cent to be deducted for obsolescence, to be spread evenly over the years 1917 to 1934, inclusive, or over such portion thereof as the law may provide. Again, a 5,000-ton vessel built in December, 1900, will become obsolete on January 1, 1922. She will then be 21 years old, and, if the original owner remains in such ownership, he will have deducted 63 per cent for physical depreciation. By the time this vessel is 21 years of age she has a residual value of about 18 per cent of cost (computed on the basis of 20 per cent residual value when 20 years old). Adding together the 63 per cent for depreciation and the 18 per cent of residual value, we have 81 per cent of her cost accounted for and there remains 19 per cent to be deducted for obsolescence, to be spread over the years 1910 to 1921, in- clusive, or such portion thereof as the law may provide. The evidence as to the average dates of construction and the dates of commencement and dates of determination of obsolesecnce for the various classes of vessels may be summarized as follows: Supplementary Bulletin Rulings. Sec. 326. Art. 838. -12. Tons. Average date of con- struction. Date obsoles- cence attaches Date when vessels will be obsolete. 5,000 to 5,900 6,000 to 6,900 7,000 to 7,900 8,000 to 8,900 9,000 to 9,900 10,000 Over 10,000. . 1901 1903 1908 1908 1909 1909 1914 Jan. 1, 1910 Jan. 1, 1910 Jan. 1, 1915 Jan. 1, 1915 ;Jan. 1, 1917 Jan. 1, 1917 Jan. 1, 1922 Jan. 1, 1923 Jan. 1, 1925 Jan. 1, 1927 Jan. 1, 1930 Jan. 1, 1935 The uniformity of the testimony upon the above points and the character and qualifications of the witnesses lead the Committee inevitably to the con- clusion that these figures may be accepted for the purpose of computing obsolescence upon the various classes of vessels. The Committee is also convinced by the evidence that it is impracticable and unnecessary to compute the dates for smaller classes or for individual vessels. In Sol. Op. 114, rendered at the request of the Income Tax Unit following A. R. R. 27, the Solicitor of the Bureau of Internal Revenue held that ob- solescence should be spread over the entire period from date of commence- ment to the date it matured into obsolescence and that only that portion of obsolescence which accrued subsequent to January 1, 1918, could be taken in the returns for 1918 and subsequent years, any obsolescence not thus deductible being deducted as a loss in the year in which the vessel was junked. The correctness of this ruling is attacked in the motion for reconsideration, it being contended that it was the purpose and intent of the provisions of section 214(a)8 and section 234(a)7 of the Act of February 24, 1919, that all of the obsolescence should be deducted in the period subsequent to January 1, 1918. The Committee has carefully considered the ruling laid down in Sol. Op. 114 and has reached the conclusion that the rule there stated is the only one possible under the law. The Act of August 5, 1909, section 38 (second), provided for the deduction, in ascertaining net income, of "all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property , if any, * * *." The Act of October 3, 1913, provided (Section II, Subdivision B) among other deductions "a reasonable allowance for exhaustion, wear and tear of property arising out of its use or employment in the business," and Subdivision G (b) provided, in the case of corporations, for the deduction of "all losses sustained within the year and not compensated * * * including a reasonable allowance for depreciation by use, wear and tear of property, if any" The Act of September 8, 1916, allowed, in the case of individuals, among other de- ductions (sec. 5, seventh) a reasonable allowance for exhaustion, wear and tear of property arising out of its use or employment in a business or trade and, in the case of corporations (sec. 12(a) second), "all losses actually sustained and charged off within the year * * * including a reasonable allowance for exhaustion, zvear and tear of the property arising out of its use or employ- ment in the business or trade." Under these several Acts the Bureau had uniformly held that the de- ductions for "depreciation," "exhaustion, wear and tear" were annual deductions to be made in the computation of annual net income and that the Supplementary Bulletin Rulings. 6-26-22. Sec. 326. Art. 838.-13. depreciation, or exhaustion, wear and tear, which was not charged off in one year could not be accumulated and taken as a deduction in a following year. With knowledge, it must be assumed, of the established practice of the Bureau in this matter the Congress included in the deductions which might be here taken for depreciation or exhaustion, wear and tear "a reasonable allowance for obsolescence" (sees. 214(a)8, and 234(a)7, Act of February 24, 1919). The language employed is significant, "a reasonable allowance for exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence." This language signifies that it was not the intent to add a new kind of deduction but to permit the inclusion of a different element, to wit, "obsolescence," in exhaustion, wear and tear. No different method of computing the deduction for obsolescence than that theretofore used in the case of exhaustion, wear and tear was prescribed, and the pre- sumption from the language employed in permitting this deduction clearly indicates that a different method was not contemplated. The existence of obsolescence under the earlier Acts was recognized but, as it was held not to be included in the terms "depreciation" or "exhaustion, wear and tear," a deduction on account of obsolescence was only permitted when it had ripened into obsoleteness. Article 178 of Regulations 33, revised, thus provides: Amounts representing losses on account of obsolescence of physical property may be included as a deduction from gross income as a loss, provided such amounts have been re- corded in the books following the condemnation and withdrawal from use of the obsolete property. As this resulted in throwing the total deduction for obsolescence as dis- tinguished from depreciation into one year it frequently happened that the then income was less than the allowable deduction and the cost on March 1, 1913, value was not fully returned to the taxpayer. To relieve in a measure this situation Congress provided for the recognition of obsolescence as a progressive process as distinguished from obsoleteness which wasTaccomp- lished status, but, as clearly pointed out in Sol. Op. 114, there is nothing in the Act to indicate that Congress intended that this provision should have a retroactive effect. The language of sections 2 14(a) 8 and 234(a) 7 of the Act of November 23, 1921, which, so far as here pertinent, does not vary from the language of the coiresponding sections of the Act of February 24, 1919, con- firms the Bureau in the correctness of the conclusion heretofore reached upon this point. The Committee has carefully considered the contention made on behalf of the owners of these lake freighters that the right to deduct accumulated obsolescence in succeeding years was recognized in T. B. R. 44 (C. B. 1, p. 133) in the case of good will, trade-marks, and' trade brands. The language of the concluding paragraph of that recommendation must be admitted to lend some support to the contention, but a careful examination of the whole recommendation clearly shows that such was not the intent. On page 136 it is stated: The trend of sentiment was early shown by the action of several States upon which the distillers and dealers in liquors were counting for success, and which were classed as doubtful by the prohibition forces. Thus in January, 1918, Massachusetts, Maryland, and Kentucky, the first two of which were considered very doubtful by the prohibitionists, voted in favor of the prohibition amendment by a decisive vote. Louisiana, another doubtful State, deadlocked in January upon the amendment, and later in the year ratified. It seems certain that an unprejudiced observer would, in view of the history of the movement and the decisive action taken by these doubtful States in January, have concluded that prohibition was a certain event, which, under the terms of the amendment, would become effective within a year from its final adoption. The conclusion is, therefore, reached that it is reasonable to allow distillers and dealers in liquors to make a deduction in computing Supplementary Bulletin Rulings. Sec. 326. Art. 838.— 14. net income under the provisions of the Revenue Act of 1918 for any taxable year ending on or after January 31, 1918, and that the end of the period be fixed at the date upon which a taxpayer engaged as distiller or dealer in liquors discontinues such business, such date being in no case later than January 16, 1920, the date upon which prohibition by con- stitutional amendment becomes effective. It is clear from this language that the Advisory Tax Board did not rec- ognize obsolescence within the meaning of the statute as beginning prior to 1918, when the adoption of the constitutional amendment became a certainty. T. B. R. 44, therefore, is no authority for permitting the deduction of ob- solescence which had accrued prior to 1918, in that and subsequent years, but must be considered only as dealing with the method of spreading the deduction over the period of obsolescence. In the method adopted it is the opinion of the Committee that it must be held to have been based wholly upon its peculiar facts and that the rule there laid down is not to be followed in other than identical cases. The contention on behalf of the owners of lake freighters^based upon the regulations governing deduction for amortization permitted by sections 214(a)9 and 234(a)8 of the Act of February 24, 1919, is without merit since the deduction expressly allowed by the statute is "of such part of the cost of such facilities or vessels as has been borne by the taxpayer," showing that a deduction of the entire amount was contemplated by the Congress. The conclusion, however, which was drawn by the Unit from Sol. Op. 114, that, if the deduction for obsolescence were taken for the year 1918 and the following years, the invested capital for the preceding year must be readjusted to allow for the accrued obsolescence up to 1918, finds no support in that opinion or in A. R. R. 27, nor is it believed to be correct. In article 42 of Regulations 41 it was provided: In the computation of surplus and undivided profits, however, full recognition must first be given to expenses incurred and losses sustained from the original organization of the business concern down to the taxable year, including among such expenses and losses a reasonable allowance for depletion, depreciation, or obsolescence of property. * * * But it is clear that the word obsolescence here was incorrectly used. Deductions for obsolescence were not permitted in terms by the Act of October 3, 1917, and in article 178 of Regulations 33, revised, construing the term "obsolescence" for the purpose of the income tax, it was prescribed: Amounts representing losses on account of obsolescence of physical property may be included as a deduction from gross income as a loss, provided such amounts have been recorded in the books following the condemnation and withdrawal from use of the obsolete property. Showing clearly that the word "obsolescence" was there construed as meaning obsoleteness, and there is no authority for adopting a different meaning for the purpose of computing invested capital under the War Excess Profits Tax title of the Act. Article 838, Regulations 45 (1920 edition), provides: In the computation of earned surplus and undivided profits full recognition must first be given to all expenses incurred and losses sustained from the original organization of the corporation down to the taxable year, including among such expenses and losses reasonable allowances for depreciation, obsolescence, or depletion of property (irrespective of the manner in which such property was originally acquired). * * * But this is no authority for requiring a deduction of accrued obsolescence prior to the year 1918. The article in question construes the Act of 1918, which expressly permitted deductions for obsolescence. And, too, the allow- ance provided by the statute on account of obsolescence is a "reasonable allowance." In A. R. M. 106 (C. B. 4, p. 390) the Committee expressly recognized that it would be unreasonable to require the reduction of earned surplus unless the depreciable assets of the corporation were valued on its Supplementary Bulletin Rulings. 9-8-22. Sec. 326. Art. 838.-15. books at the beginning of the taxable year at an amount in excess of their actual value at that time and quoted with approval the following from article 839 of Regulations 45 (1920 edition): Adjustments in respect of depreciation or depletion in prior years will be made or permitted only upon the basis of affirmative evidence that as at the beginning of the taxable year the amount of depreciation or depletion written off in prior years was in- sufficient or excessive, as the case may be. And in an informal memorandum the Committee has expressed an opinion that: No reduction in earned surplus should be made in any case where, because of repairs, renewals and replacements, the property as a whole remains unimpaired either in intrinsic value or efficiency. The principle last stated is peculiarly applicable to obsolescence. Ob- solescence, of which the case here presented is typical, is not like depre- ciation, a matter of decrease in earning power or in absolute efficiency, but only in relative efficiency. It has its origin in the fact that although the orig- inal efficiency be maintained, yet, owing to improvements in the art or changed economic conditions, a device or factor in production will eventually have to be discarded. The loss is a future loss, but for equitable reasons the statute permits it to be spread over the period for which it can be foreseen, and allows the portion assignable to the period subsequent to December 31, 1917, to be deducted pro rata over such period. In the instant case the vessels of the 5,000-ton class will to-day net x cents freight per mile, as when they were first constructed. Their intrinsic value is unimpaired, but, because the newer and larger type will earn from six to eight times as much, it is evident that, when the number of larger vessels becomes sufficient to handle the carrying trade of the Great Lakes, the smaller vessels will become economically impossible of operation and will necessarily be discarded or junked. Under the principle laid down in A. R. M. 106, as subsequently explained, therefore, there is neither justification nor reason in requiring the reduction of the invested capital in the case of these bulk freighters prior to the time such deductions were actually taken in the com- putation of net income. It is, therefore, recommended, upon reconsideration of A. R. R. 27, that obsolescence upon bulk-freight vessels upon the Great Lakes be accepted as established by the evidence now on file; that such obsolescence be computed in the case of the various types and sizes of such vessels in accordance with the above recommendation; that Solicitor's Opinion 114 be adhered to; and that the owners of such bulk-freight vessels be not required to readjust their invested capital to allow for the obsolescence accrued up to and including December 31, 1917. 9 I ('22)-36-494: I. T. 1440 Revenue Acts of 1917, 1918, and 1921. Depreciation of fixed assets continues whether a taxpayer earns an income or suffers a loss, and its earned surplus should be reduced on account of depreciation, although it sustained a loss for the taxable year. In determining invested capital for subsequent years, the paid-in capital and surplus of the taxpayer are not affected by such depreciation, but if this depreciation has more than exhausted earned surplus, the deficit thus caused must be made good out of the earnings of the company before any earned surplus can be included in invested capital. 10 Supplementary Bulletin Rulings. - 2-20-22. Sec. 326. Art. 839.— 1. Law Section 326— Invested Capital (1918 Act— ^555, ante): (1921 Act— ^[1035, post). Article 839. — Surplus and undivided profits: allowance for depletion and depreciation (Reg. 45— 1[762, ante): (Reg. 62— If 1195, post). 9-21-1489: O. D. 833. Amounts charged off for depletion of stumpage during the years 1909 to 1913, and disallowed as a deduction from gross income can not, merely because of the disallowance, be restored to invested capital. Adjustments in respect to depletion will be made only in accordance with Article 839 of Regulations 45. 1 18-21-1614: A. R. M. 106. [For this Committee on Appeals and Review Memorandum No. 106 see Service Tf877j 2 30-21-1748: A. R. M. 106 Explained. [For this explanation of Committee on Appeals and Review Memorandum .No. 106, see Service 1f879.] 3 46-21-1927: O. D. 1104. [For this^O. D., further relating to A. R. M. 106, above, see Service ^[885.] 4 Supplementary Bulletin Rulings. i i Sec. 326. Art. 840.— 1. Law Section 326.— Invested Capital (1918 AcMf555, ante): (1921 Act-^1035, post). Article 840. — Surplus and Undivided Profits: Additions to Surplus Account (Reg. 45-^764, ante): (Reg. 62-^1196 post). 2-19-151: T. B. R. 6. (1) Where a distilling corporation pursuant to a resolution of the hoard of directors charged against surplus in 1912 and 191 3 amounts aggregating dollars on the ground of alleged obsolescence of apart of its equip- ment and the entire equipment was continued in use the same as previously, no reduction of output being made and no portion of the property having been retired or scrapped, in fact, no change being made beyond the arbitrary reduction of the surplus and invested capital by charging off the dollars on the books of the corporation, it having been shown that these charges were made only for the consideration of the corporation and that they did not enter into the corporation's income tax returns, the amounts so charged off may be restored to invested capital, less proper allowance for ordinary depreciation. 1 15-19-452: T. B. M. 56. Amortization allowances deducted in ascertaining net profits for the purpose of the munition manufacturer's tax act (Title III of the Revenue Act of 1916) do not affect "invested capital" under the Revenue Act of 1918. The munition manufacturer's tax was laid "upon the entire net profits actually received or accrued" from the sale or disposition of specific munitions, and it was provided in section 202: That in computing net profits under the provisions of this title for the purpose of the tax there shall be allowed as deductions from the gross amount received or accrued for the taxable year from the sale or disposition of such articles manufactured within the United States, the following items: * * * (f) A reasonable allowance according to the conditions peculiar to each concern, for amortization of the values of buildings and machinery, account being taken of the exceptional depreciation of special plants. It is apparent from this language that the amortization allowance in question was authorized for the purpose of computing "net profits," not "net income." The right to make a deduction for amortization in computing net income for the income tax did not exist and was repeatedly denied by the bureau prior to the passage of the Revenue Act of 1918. It is to be noted further that the taxes imposed by Title II of the Revenue Act of 1917 and Title III of the Revenue Act of 1918 were explicitly laid upon "net income," and were in a variety of ways impressed with the stamp and character of an income rather than a munition manufacturer's tax. They are in no sense mere continuations or expansions of the tax imposed by Title III of the Revenue Act of 1916. It follows, therefore, that the deduction for amorti- zation under the munition manufacturer's tax law was not allowed for income tax purposes and should not now be permitted to affect the surplus or any other element entering into the "invested capital" employed for purposes of the war profits and excess profits taxes. This conclusion is supported by the character of the amortization allow- ance in question. It was in many respects quite dissimilar from the depre- ciation and depletion allowances. It was not based upon the fact that plant and equipment acquired in the year 1916 or earlier for the manufacture of munitions, actually depreciated in use or market value during the taxable, year 1916.. There was in general no such depreciation m value or impair- Supplementary Bulletin Rulings. Sec. 326. Art. 840.— 2. merit of useful life. Account was taken "of the exceptional depreciation of special plants" but the principal allowance was "for the amortization of the values of buildings and machinery," whether those values increased or de- creased in the immediate future. The principal amortization allowance looked to the establishment of a special fund to recoup exceptional war costs when war uses had ceased; it did not imply that there had been or would be any immediate impairment of physical assets, such as is covered by the depletion allowance, or any immediate exhaustion, wear, tear, or obsolescence in excess of the amount covered by the depreciation allowance. It was, as stated, a special allowance peculiar to this tax, designed possibly to moderate the (then) exceptionally high rates of the munition manufacturer's tax. Reference has been made in this connection to the wording of section 214 (a) (9) and section 234 (a) (8) authorizing a deduction for amortization under the Revenue Act of 1918; but upon careful examination these para- graphs are found to have no bearing upon the present case. It is the opinion of the Advisory Tax Board, therefore, that deductions for amortization taken under the munition manufacturer's tax act do not affect the computation of the invested capital under the Revenue Act of 1918 of the corporations which took such deductions. 2 19-20-926: A. R. R. 100. REVENUE ACTS OF 1916 AND 1917. In re: Additional income and excess profits taxes for 1917 and 1918 anJ munition taxes for 1916 and 1917 assessed against the M Company. The Committee has had under consideration the informal appeal of the M Company against the assessment of additional income and excess profits taxes for 1917 and 1918 and of munition taxes for 1916 and 1917. Four questions were raised by the taxpayer: (1) Liability to munition taxes; (2) value of assets turned over to the corporation on organization; (3) a deduction taken in 1918, covering so-called copper replacement liability: and (4) losses upon the sale of the property. The Unit concedes the cor- rectness of the deduction for loss on the sale of the property, and upon the argument of the case before the Committee the appeal relative to the copper replacement liability was abandoned by the attorney for the company, leaving only two questions to be decided. * * * * * * * * * * * * * * The second question relates to invested capital. It appears that A, in the early part of 1916, purchased the plant and sundry assets for 11* dollars, and that in September, 1916, after rearranging and modifying the machinery and equipment and securing contracts for the manufacture of shell rings, sold the property to the M Company, receiving payment therefor in stock, the revenue agent stating that 2,750 shares of the total issue of 3,000 were turned over to A for this property. It is presumed that the other 250 shares were issued for cash, and upon the theory that the assets turned in for stock under such conditions had an actual cash value equal to the par of the stock issued therefor, the value of tangibles and intangibles acquired from A would be 14* dollars. Claim is made that the value of the intangibles was increased by A after the purchase by himself by reason of his personal services as an engineer in developing the property and perfecting certain processes for which he did not credit himself when constructing the plant and organizing the business. Supplementary Bulletin Rulings. Sec. 326. Art 840.— 3. The Unit concedes that so much of the increased value as represents actual additions and betterments to the plant may be regarded as invested capital and in this view the Committee concurs. However, in the absence of proof as to additions and betterments made, the Committee is of the opinion that the difference between the purchase price of 11* dollars in the early- part of 1916 and the selling price in September, 1916, constitutes an intangible asset or good will subject to the 20 per cent, limitation under the 1917 Act. The Committee therefore recommends that the action of the Unit with respect to invested capital be sustained. 3 50-20-1347: A. R. R. 337 Held, that appreciation of good will and tangible property determined by appraisal against which a stock dividend was issued can not be allowed under article 42 of Regulations 41 and 840 of Regulations 45 as invested capital for excess profits tax purposes. The M Company was incorporated in 188-. In 189- the corporation purchased from the N Company, a separate corporation, its assets valued at 150a; dollars, including good will of 65* dollars for which there was issued 150* dollars in common stock. The item of good will was subsequently written down to * dollars. In 1912 the corporation had an appraisal made and increased its surplus through this appraisal by setting up good will at 500* dollars and tangible assets at 150* dollars. Against this increase in surplus there was issued, by way of stock dividend, 400* dollais in preferred stock and 250* dollars in common stock. The revenue agent, who made an examination of the taxpayer's books, disallowed all of the appreciation for good will except 65* dollars, which had been acquired by the issuance of stock in the purchase of the assets of the N Company in 189-, and all of the appreciation in tangible property which was not clearly shown to have been paid in and thereby properly credited to surplus The taxpayer, in filing his returns for 1917 and 1918, claimed the total appreciation both for good will and tangible property, applying, however the statutory limitation of 20 per cent for good will in 1917 and 25 per cent in 1918. Under assessment by the Income Tax Unit, which sustained the findings of the revenue agent, the taxpayer submitted evidence in the form of an affidavit signed by the president of the company, showing that good will aggregating in value 95* dollars had been actually acquired for cash in addi- tion to the 65* dollars good will acquired for stock as above stated. The Income Tax Unit thereupon revised its assessment and allowed the tax- payer for invested capital purposes a total good-will valuation of 160* dollars. The taxpayer has appealed from this revised assessment and now claims the full appreciation made in 1912 for both tangible and intangible properties, subject only to the statutory limitations of 20 per cent and 25 per cent for the years 1917 and 1918, respectively. Article 42 of Regulations 41 provides that — If value appreciation of a kind not subject to income tax (other than that allowed under article 55) has been taken up in the accounts a deduction must be made in respect of such appreciation so taken up. Supplementary Bulletin Rulings. Sec. 326. Art. 840. Article 55 provides that — Tangible property paid in for stock or shares prior to January 1, 1914, must be valued at either (a) the actual cash value of such property on January 1, 1914, or (b) the par value of the stock or shares specifically issued therefor, whichever is lower. This is one of the few cases in which the law permits allowance to be made for appreciation, and here no appreciation can be recognized unless the original stock or shares were specifically issued in exchange for such tangible property. It must be observed, first, that the appreciation of taxpayers assets as of January 31, 1912, was not subject to income tax, and, second, that only tangible property may be appreciated to (a) the actual cash value of such property on January 1, 1914, or to (b) the par value of the stock specifically issued therefor, whichever is lower. It can not be claimed that a stock dividend issued against a surplus reflecting an appraisal of both tangible and intangible property is an original issue of stock specifically exchanged for tangible property. Article 64 (2) provides that — Amounts expended in the past for good will, trade-marks, trade brands, franchises, and other intangible assets of a like character, are controlled by the language of the statute which provides that such assets "shall be included in invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash or tangible property." The Commissioner of Internal Revenue will recognize additions to invested capital on account of intangible assets only if such assets have been explicitly paid for in the manner prescribed by the statute. Where expenditures have been made for the general development of intangible assets and charged as current expense, no readjustment thereof will be allowed. From the facts as stated, the Income Tax Unit, in its revised assessment letter, allowed an aggregate for good will of 160# dollars. With the exception of 65* dollars of this amount, the good will so allowed was acquired for cash prior to March 1,1913, according to affidavit of the president of the company. These items were properly restored to invested capital under article 64(2) and (3). The item 65* dollars for good will on the books of the N Company was acquired for stock. The value of this item at date of acquisition is a matter of proof. Under article 57 of Regulations 41 evidence sufficient to determine proper allowance as invested capital has not been submitted to the Committee. The Committee therefore sustains the action of the Income Tax Unit in disallowing, under article 42 of Regulations 41 and under article 840 of Regu- lations 45, appreciation of either good will or tangible property. The Committee further sustains the Unit in allowing, under article 64(2) and (3) of Regulations 41 and article 842 of Regulations 45, the good will acquired for cash prior to March 1, 1913. Allowance for invested capital of tangible or intangible property acquired for stock is subject to the limitations pre- scribed by articles 55 and 57 of Regulations 41. 4 52-20-1367: A. R. R. 349 The opinion of the Committee is requested whether the M Company should receive the benefit of an addition to invested capital, for ex- cess profits tax purposes, by submitting amended returns for the years 1916 and 1917; in which returns a deduction for amortization, claimed and allowed in the original returns, should be eliminated. The facts as stated are that the above-mentioned company manufac- tured munitions. In its income tax returns for the years 1916 and 1917, the company has claimed amortization of the facilities for their * „» - %, Supplementary Bulletin Ruling*. Sec. 326. Art. 840.— 5. manufacture in the same amount as appeared upon their munition manu- facturer's returns and the taxpayer now seeks to eliminate from its income tax returns the amount of such amortization which, it is said, has been included therein. This request on the part of the taxpayer has heretofore been denied by the Unit. Title III of the Revenue Act of 1916, known as the "Munition Manu- facturer's Tax," imposes a tax upon the entire net profits received or accrued from the sale or disposition of certain specified articles of munitions manufactured within the United States, and for the purpose of computing such net profits permits certain deductions, among which, under section 302 (f), is — A reasonable allowance according to the conditions peculiar to each concern, for amortization of buildings and machinery, account being taken of the excep- tional depreciation of special plants; and Regulations 39 promulgated under the provisions of the Act, provide more specifically, in article 21, what shall constitute such "amortization" and how the amount thereof shall be determined. The Revenue Act of 1916, both as passed originally and as amended by the Revenue Act of 1917, not only does not provide specifically for any allowance for amortization for income tax purposes, but in Regu- lations 33, revised, promulgated thereunder, specifically prohibits such an allowance although recognizing an allowable deduction on account of depre- ciation in the value of any class of property subject to wear and tear. Article 162 of Regulations 33, revised, provides that: The deduction to be allowed relates solely to loss due to use, wear and tear, and the matter of obsolescense is not relevant inasmuch as when the property becomes obsolete a deduction for the loss sustained thereby, representing the difference between the cost and the amount of depreciation previously charged off or which should have been charged off in prior years, will be allowed. It appears that in preparing its munitions tax returns and its income and excess profits tax returns, this taxpayer deducted in its income tax return the same amount which had been deducted in its munitions tax return; such amount including a charge for amortization (or obsoles- cence), as well as a charge for depreciation, and this charge, in the audit of the taxpayer's income tax return by the Unit, was allowed as a deduction although obviously the Unit was in error in making such an allowance. It is, therefore, recommended that this taxpayer be permitted to file amended income tax returns for the years affected, from which returns shall be excluded as deductions the charges for amortization included within the returns as originally filed, and that the deductions thus ex- cluded shall be allowed as additions to the invested capital of the taxpayer for profits tax purposes. 5 18-21-1615: O. D. 901 Where a corporation claims as an addition to its invested capital for 1917 and subsequent years the excess of the value of its patterns over the value at which they have been carried on its books, and such claim comes within the provisions of articles 840 (2) and 841 (1) of Regulations 45, amended returns may be filed for each year for which an erroneous return has been made both before and after March 1, 1913. Any overpayment of taxes for the years 1917 to 1920 shown on the basis of the amended re^ turns may be made the subject of a claim for refund. Supplementary Bulletin Rulings, Sec. 326. Art. 840.— 6. sir sis^^xi^r^snM^^^te? Recommended, that the action of the Income Tax Unit in disallowing the IV1 Company its claim for capitalization of amounts expended prior to January 1, 1909, for the purpose of increasing the circulation of its paper be sustained under articles 840 and 841 of Regulations 45. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in denying the right to capitalize amounts expended prior to January 1, 1909, which the corporation claims were for the purpose of increasing the circulation of the newspaper published by it. The M Company was incorporated in 188 — with a capital stock of x dollars, and has been since its inception a close corporation. It is claimed that the profits of the company have been used to build up its business and that no additional capital has ever been paid in. It is further stated that due to the fact that the corporation stock has always been closely held no distinct effort has been made to separate capital expenditures from current expenses in years gone by. The company proposed to include in invested capital an item of 20x dollars as an intangible asset representing the cost of acquiring its circulation list. This amount is determined by an analysis of the records of expenditures of the company from the beginning of its business to December 31, 1908. It is stated this analysis separates all expenditures which have been made for maintenance of old circulation and for the acquire-, ment of additional circulation and all expenditures which can be properly classed as chargeable to advertising. In the cost of circulation the appellant has included cost of gathering and disseminating news, cost of editorials, and other features and general expenses. Expenses have been apportioned between "advertising" and "cost of circula- tion" on the basis of the column devoted to each in the daily issues. In setting up the capital expenditures of each year to cover the "cost of in- creased circulation" the appellant has used as a baisis that portion of the entire circulation cost of each year as is represented by the average daily increase over the previous year divided by the average daily circulation of the current year. On this basis of apportionment exhibits have been submitted for each year from 188 — to 1908, inclusive, and on basis of these exhibits its original claim for invested capital amounting to 20x dollars has been amended to \0x dollars. The company claims to have made a consistent effort to increase the circulation of its publication, through the inclusion in its columns of certain special features which, in themselves while nonrevenue producing, appealed to the home. The company claims never to have abnormally increased the cost of acquiring circulation by spectacular methods such as offering of prem- iums, prizes, bonuses, etc., and that as a result the newspaper has a stable home circulation and an advertising clientele consisting of not only local advertising but those located in a near-by city. It is noted the amount claimed as invested capital on account of its expenditures for circulation is limited to the period prior to the year 1909. The Income Tax Unit does not question the value of the circulation in commanding high rates for advertising, nor does it question the propriety of capitalizing such amounts as can be determined to have been expended specifically for the increase in circulation, but contends that it is not prac- ticable to ascribe the increase in circulation to any specific part of the paper or to any particular feature or features, notwithstanding the fact that the features appear to have been used with that sole end in view. Supplementary Bulletin Rulings. Sec. 326. Art 840.— 7. This Committee has, in several instances, stated that in its opinion expenditures made prior to 1909 in the development of an intangible asset and distinctly set aside at the time and capitalized by the issuance of stock gave a definite right to a claim for additional invested capital. • In the instant case, however, the corporation exercised its option in charging to current expenses not only the cost of publication but whatever direct cost there may have been incident to building up a large circulation list. Article 840 of Regulations 45 provides, in part, as follows : (3) Amounts which have been expended in the past for intangible property of any kind can be restored to capital or surplus account only to the extent that the corporation specifically paid such amounts for the intangible property as such. Article 841 makes further provision that: Additions to surplus which a corporation may desire to make under the preceding article (840) fall broadly into two classes: (1) To correct returns of net income for prior years in which actual errors have been made, as, for example, where excessive depreciation has been deducted, additions to plant and equipment or other capital charges have been charged off as an expense, inventories have been taken upon a wrong basis of valuation, etc. (2) To reinstate in surplus deductions from income which are, as a matter of good accounting, to some extent optional, such as experimental expenses, patent litigation, development of good will through advertising or otherwise, etc. Appellant's claim must of necessity rest on the conditions stated in paragraph 3 of article 840, but the article further provides that: Adjustments falling in class (2) can not be permitted, as in such cases it is considered that the corporation has exercised a binding option in deducting such expenses from income. An election of this sort which was made concurrently with the transaction can not now be revised, and amended returns in respect thereof can not be accepted. In the instant case the taxpayer has not shown the extent to which the corporation specifically paid amounts for intangible property as such or for the development of an intangible asset, nor has it shown that such expenditures, when made, were currently set aside and capitalized. The expenditures have been apportioned under the exhibit submitted between "advertising" and "cost of circulation" on the basis of the columns devoted to each in the daily issues, and the entire circulation cost of each year is represented by the average daily increase over the previous year divided by the average daily circulation of the current year. As above suggested, such a basis of claim for an intangible value does not meet the requirements of the regulations. The Committee, accordingly, recommends that the action of the Income Tax Unit in disallowing the M Company its claim for capitalization of amounts expended prior to January 1, 1909, for the purpose of increasing the circulation of its paper, be sustained under articles 840 and 841 of Regula- tions 45. 7 47-21-1937: A. R. M. 141. Held, in the matter of the contention of the M Company and the O Com- pany, taxpayers engaged in the publication of newspapers, that moneys expended out of earned surplus or current earnings for the sole purpose of building up the circulation structure may be added to capital invested when proper proof of such expenditures is made and amended returns for prior years have been filed, and that the circulation structure so built up is intangible property as defined in the regulations. The Committee has had under consideration the general question pre- sented by the M Company and the O Company, taxpayers engaged in the publication of newspapers, as to whether items expended for circulation Supplementary Bulletin Ruling*. Sec. 326. Art. 840.— 8. building are part of invested capital; also whether the circulation structure should be considered as tangible or intangible property. During the latter part of July a hearing was granted to the parties, at which time they were represented by attorneys. It appears that many corporations engaged in the publication of news- papers have built their circulation structure through the expenditure of earnings. Some papers, however, acquired for a cash consideration this structure. It is contended that a newspaper concern can not make any money until the circulation structure is established. The extent to which it can sell advertising space and the price which it can get for that space are dependent on the size and character of that structure — that is, the form of circulation. There is no doubt that this structure is property which pro- duces earnings on which the corporation pays tax, and there is no doubt that the amount of the earnings is measured to a great extent by the charac- ter of the circulation structure, and that the extent and character of the structure are dependent on the expenditures made to build or to purchase it. It was pointed out that in the sale of newspaper property the principal thing considered by the purchaser is the circulation structure, in many cases the expenditures made for this structure have not been reflected in surplus, due to the concern's bookkeeping practice. It has been the policy of the Bureau in instances where the expenditures made in building the circulation structure are not reflected in surplus on the books of account, to give special treatment and assess the taxes under the provisions of section 210 of the 1917 Act and sections 327 and 328 of the 1918 Act. It is now contended that this practice should be discontinued and that corporations publishing newspapers should be permitted to in- crease the surolus account by an amount sufficient to cover the expenditures for building the circulation structure, and that the regulations which classify the circulation structure as intangible property should be repealed. In order to reach a correct conclusion in this matter it is necessary to examine the provisions of the statute defining tangible and intangible prop- erty; also the provisions defining invested capital. Section 207 of the Revenue Act. of 1917 provides that capital invested includes the following: (a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash for stock or shares in such cor- poration or partnership at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclu- sive of undivided profits earned during the taxable year: * * * (b) The good will, trade-marks, trade brands, the franchise of a corporation or part- nership, or other intangible property, shall be included as invested capital if the corpora- tion or partnership made payment bona fide therefor specifically as such in cash or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment * * *. Article 47. Regulations 41, defines tangible property and intangible property as follows: The term "other intangible property" as used in section 207 will be construed to mean property of a character similar to good will, trade-marks, and the other specific kinds of property enumerated in the same clause. With respect to property not clearly of such a character, rulings will be issued as occasion may demand to indicate whether it shall be regarded as tangible or intangible. Supplementary Bulletin Rulintrs. Sec. 326. Art. 840.— 9. Section 326(a) of the Revenue Act of 1918 provides that invested capital includes the following: (1) Actual cash bona fide paid in for stoclcTor shares: (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor * * *: (3) Paid in or earned surplus and undivided profits; not including surplus and un- divided profits earned during the year. Section 325(a) of the Revenue Act of 1918 provides, in part, as follows: The term "intangible property" means patents, copyrights, secret processes and form- ulae, good will, trade-marks, trade brands, franchises, and other like property; The term "tangible property" means stocks, bonds, notes, and other evidences of in- debtedness, bills and accounts receivable, leaseholds and other property other than intan- gible property. Article 811 of Regulations 45 provides, in part, as follows: * * * Associated Press, United Press, and similar franchises, and subscription lists and mailing lists are intangible property. Article 840, Regulations 45, provides in part as follows: A corporation's books of account will be presumed to show the facts. If it claims that its capital or surplus account is understated the burden of proof will rest upon it. Additions to such accounts will be accepted to the following extent: ********* (3) Amounts which have been expended in the past for intangible property of any kind can be restored to capital or surplus account only to the extent that the corporation specifically paid such amounts for the intangible property as such. For provisions relat- ing to patents see article 843. (4) Adjustments necessary to correct other errors found in the books of account may be made. But see the following article. Article 841, Regulations 45, reads in part as follows: Additions to surplus which a corporation may desire to make under the preceding article fall broadly into two classes: (1) To correct returns of net income for prior years in which actual errors have been made, as for example where excessive depreciation has been deducted, additions to plant and equipment or other capital charges have been charged off as an expense, inventories have been taken upon a wrong basis of valuation, etc. (2) To reinstate in surplus deductions from income which are as a matter of good accounting to some extent optional, such as experimental expenses, patent litigation, de- velopment of good will through advertising or otherwise, etc. Adjustments falling in class (1) will be permitted for all years whether before or after March 1, 1913, provided amended returns of net income are filed for each year in which an erroneous return has been made. * * * Adjustments falling in class (2) can not be permitted, as in such cases it is considered that the corporation has exercised a binding option in deducting such expenses from income. An election of this sort which was made concurrently with the transaction can not now be revised, and amended returns in respect thereof can not be accepted. From the foregoing it will be noted that earned surplus is a part of the invested capital. It does not matter whether this earned surplus is invested in plant and equipment or is retained in cash. The Bureau has consistently held that amounts which have been expended in the past for intangible property of any kind can be restored to surplus account to the extent that the corporation specifically paid such amounts in cash for the intangible property as such. Restoration to surplus account can be made only when the amounts expended can be identified. The corporation must, in order to restate the surplus account, show that the amounts expended were ex- pended specifically for an asset whether tangible or intangible. In a recent case decided by the Committee it was held that expenditures made for building up the circulation structure may be added to capital invested when proper proof is made. In that case the expenditures asserted were for inclusion in the columns of certain special features, the companv Supplementary Bulletin Rulings. Sec. 326. Art. 840.-10. claiming not to have resorted to any "spectacular methods such as offering of premiums, prizes, bonuses, etc." The propriety of capitalizing such amounts as can be determined to have been expended for the increase in circulation can not be questioned, but in most cases which have come before the Committee it has not been practicable to ascribe the increase in circula- tion to any specific part of the expenditure. The difficulty in most cases seems to be that the taxpayer can not furnish satisfactory evidence to prove its case. Each case must be adjusted and settled upon its own merits and if a taxpayer can prove the case, then the matter of restating the surplus is a simple one. If the records of any taxpayer are so kept that proof of the amount invested in the circulation structure can be made in actual figures and can be identified as specifically paid in building up the circulation struc- ture, the Committee can not see any reason for denying such taxpayer the right to restate the surplus. Taxpayers of this class who have not kept sufficient records and who are unable to prove their cases are entitled to the benefit of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918. The tax in these cases must be established on a comparative basis. The only proper comparatives would be such concerns as could show the cost of the circulation structure and in this way the entire capital invested may be recognized in computing the tax of a concern which can not properly prove its case. The Committee does not think favorably of the suggestion made by the attorneys that affidavits should be secured from a large number of publishers showing the cost per subscriber of their circulation structure and the use of these affidavits in arriving at a cost per unit per subscriber for the pur- pose of invested capital. This basis is too speculative for use in the com- putation of invested capital. After making an exhaustive study of the principle involved and the assessment of taxes against taxpayers engaged in the business of publishing newspapers, the Committee must decline to accept the view of the attorneys for the taxpayers with respect to the classification of circulation structure. The regulations properly classify such property as "intangible property." However, expenditures of an investment nature may be made a part of earned surplus upon submission of appropriate proof and the amounts so expended may be included in earned surplus whether expended for tangible or intangible property. In view of the foregoing, the Committee is of the opinion in the matter of the argument of the M Company and the O Company, taxpayers engaged in the publication of newspapers, that moneys expended out of earned sur- plus or current earnings for the sole purpose of building up the circulation structure may be added to capital invested when proper proof of such ex- penditures is made and amended returns for prior years have been filed, and that the circulation structure so built up in intangible property as defined in the regulations. 8 Supplementary Bulletin Rulings. Sec. 326. Art. 840— 11. I ('22)-15-219: L T. 1278. Revenue Act of 1921. Inquiry is made as to whether the cost of rotogravure supplements comes within the purview of A. R. M. 141 [Ruling No. 8, above], which permits taxpayers engaged in the publication of newspapers to include in their in- vested capital, for tax purposes, moneys expended out of earned surplus or current earnings for the sole purpose of building up the circulation structure. It is stated that newspaper publishers employ rotogravure supplements largely as a circulation stimulant. The question to be determined in cases affected by the ruling above referred to is whether the amounts claimed as an addition to invested capital can be identified as having been expended out of earned surplus or current earnings for the sole purpose of building up the circulation structure. It is believed that rotogravure supplements constitute a part of the news service furnished by newspapers to their subscribers and are not of such a nature that the expense thereof can be said to be incurred solely for the purpose of building up the circulation structure. It, therefore, follows that the moneys expended therefor may not be added to invested capital. 9 I ('22)-49-629: I. T. 1524. Revenue Act of 1921. A reserve for bad debts carried by a corporation on December 31, 1920, may be included in invested capital for 1921, subject to proper adjustment during the year to the extent thereafter utilized to liquidate debts outstanding on December 31, 1920, subsequently determined to be worthless. Any portion of such reserve which the taxpayer considers not necessary for bad debt purposes may be restored to surplus. 10 Supplementary Bulletin Rulings. c ( \ { 2-20-22. Sec. 326. Art. 841— 1. Law Section 326— Invested Capital (1918 Act— 1[555, ante): (1921 Act- ios, post). Article 841. — Surplus and Undivided Profits; Limitations of Additions to Surplus Account (Reg. 45— H769, ante): (Reg. 62— 1f 1201, post) . 3-19-206: T. B. R. 19. A corporation acquiring with stock the assets of a previously existing corporation, among which assets are included trade-marks, good will, etc., can not claim as an addition to invested capital amounts expended by the predecessor corporation for the general development of such intangibles and charged by it as current expense. 1 (See 8-19-319; Section 311, Article 781.) Adjustment of salaries paid during prewar period. 2 2-20-679: A. R. M. 12. At the request of the Commissioner this Committee has given an oral hearing to representatives of the proprietary medicine manufacturers in general, and of the M Company in particular, upon the question of an addi- tion to invested capital through the recognition of a portion of the amounts spent in prior years for advertising and developing trade-marks and trade brands. It was stated at the hearing that the methods pursued by the company named above are essentially similar to those followed by many other manu- facturers engaged in the same industry, and that this case is a typical one. The asset of greatest value of the M Company is a formula and trade-mark. When this asset was acquired, the product had a certain sale in limited terri- tory. Profits from the sale of the product were reinvested in development of new territory. For instance, if the company decided that it would under- take to develop any territory where it had previously sold no goods, it would institute an intensive advertising campaign in that territory by newspaper and other advertising agencies, distribution of samples, etc. The next year some other territory would be chosen. During this period of development it is claimed that the amount expended in advertising in a given territory was far in excess of the profits made from sales in such territory, and it is, therefore, claimed that a portion of all such expenditures is in reality a capital investment and not merely expense of selling, since it is an investment from which returns are to be expected in the future rather than in the immediate present. It must be conceded that in theory some proportion of all adver- tising is in effect the building up of good will, but it is the judgment of the Committee that it is impossible to allocate any definite percentages as between capital investment and selling costs. It seems clear to the Committee that no court would permit the dis- allowance of a proportion of reasonable advertising in a return of income on the ground that such advertising was a capital investment and not an actual necessary expense of business, and if that be true the converse must follow, namely: that the corporation can not claim that any proportion of such expense is capital investment and not business expense. It was also brought out at the hearing that there have been a number of wideiy advertised trade-marks of this character sold within recent years and that such sales were usuallv made upon the basis of aporoximatelv a five-year Supplementary Bulletin Rutins;-- Sec. 326. Art. 841.— r° return; that is to say, for a price hve times the annual earning capacity. There are, therefore, satisfactory comparatives in the event that it is desired to treat other cases where there have heen no sales as special cases under sections 327 and 328, since the cash paid for tangibles and intangibles affords a fair invested capital basis. It also seems reasonable to regard those cases where large sums have been spent in advertising, thereby creating a good wiil or earning capacity far in excess of recognizable invested capital, as being cases in which there are abnormal conditions affecting invested capital. The Committee, therefore, recommends that the percentage of tax to income in the cases of those corporations which have an adequate recognizable invested capital be determined, and that other cases which have no such invested capital be regarded as coming within the scope of section 327 and the tax properly to be computed under section 328. 3 8-21-1472: A. R. R. 394. Recommended that a corporation which issued bonds at a discount in January, 1900, and elected then to charge such discount to profit and loss for the year of issue and the next two succeeding years, may not now revise its accounts and file amended returns for the purpose of reinstating to invested capital the unexpired portion of such discount and claiming as a deduction from income that portion applicable to each year. It appears from the records that the M Company issued bonds on January 1, 1900, to the amount of 70# dollars at a discount of 7x dollars and charged such discount to profit and loss in 1900, 1901 and 1902. The accountants writing in behalf of the corporation stated that it was their understanding that for the purpose of computing net income the case was covered by article 544 (3) (a) of Regulations 45. The M Company in its appeal contends, in effect, that it did not follow good accounting practice in charging off the discount in question to profit and loss during the years 1900, 1901, and 1902; that recognized accounting authorities, some of whom are named and quoted, hold that discount on bonds issued should be spread over the term of the bonds, and the installments thereof charged against income each year, and that, under article 544, it did not have an option of treating all of such discount as interest expense at the date of issuance of the bonds. Article 544 (3) (a) of Regulations 45, reads: If bonds are issued by a corporation at a discount, the net amount of such discount is deductible as interest and should be prorated or amortized over the life of the bonds. The Unit, in its reply of June 30, 1920, contended that article 544(3) (a) must be considered in connection with article 841, which latter article, bearing the caption "Surplus and undivided profits: limitations of addition to surplus account," provides, in part, that deductions which have been taken from income and which are as a matter of good accounting to some extent optional, such as experimental expenses, patent litigation, development of good will through advertising or otherwise, can not be reinstated in surplus, as in such cases it is considered that the corporation has exercised a binding option in deducting such expenses from income, and an election of this sort which was made concurrently with the transaction can not now be revised and amended returns in respect thereto can not be accepted. The Solicitor of Internal Revenue, in a memorandum dated May 13. 1919, commenting on a ruling in a case similar to the one under consideration stated : Supplementary Bulletin Rulings. 6-9-22. Sec. 326. Art. 841— 3. It appears that the corporation in this case had an option as to the method it would adopt in handling entries of the discount on the bonds which it issued. Two methods were available: First. To treat the discount as interest paid in advance to be amortized over the life of the bonds. Second. To charge the discount as a loss in its profit and loss account. The corporation exercised its option by adopting the second method. It did so appar- ently to lessen its income for the year the transaction took place. It now seeks to adopt the first method and desires to amend its 1917 return accordingly. The effect of this procedure would be that the discount item would be taken from the losses (profit and loss account), thus diminishing the losses and thereby increasing its surplus account, and indirectly its invested capital. Where a corporation has exercised an option as to accounting practice and such option was concurrent with the transaction, amended returns are not permissible. See^article 841 of Regulations 45. While the Committee is in accord with the contention of the M Company that it did not follow the more generally approved accounting method in charging off the discount on its bonds of January 1, 1900, as it did, that fact alone does not entitle it now to adopt another method and adjust its accounts for the purpose of filing amended income and profits tax returns. There were at the time said bonds were issued no income tax regulations prescribing a method to be followed in the treatment of bond discount. It was entirely optional with the taxpayer as to the method it would adopt in handling entries of discount on bonds issued, and inasmuch as that option was exercised at the time the bonds were issued a different method of accounting can not now, in the opinion of the Committee, be adopted for tax purposes, which opinion is sustained by the decision in the case of the C. & A. Railroad v. United States Court of Claims (see article 149, Regulations 33, revised, issued under the provisions of the Revenue Act of 1916, as amended by the Revenue Act of 1917). The Committee, therefore, recommends that the ruling of the Unit be sustained. 4 1-23-336: I. T. 1347 Revenue Act of 1918. If a corporation employed its own labor in the construction of its plants such as building of machine foundations and in the installation and assembling of machines and other equipment, the value of the labor so employed rep- resented a capital expenditure which may be included in invested capital. If the value of such labor was deducted as an expense in excise and income tax returns for years prior to 1917, it may be restored to invested capital at its depreciated value, provided amended returns are filed for each year during which a deduction from income was made, in which returns the amended net income shall be increased by the value of the labor previously deducted as an expense. 5 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 843. -1. Section 326. Invested Capital (1918 Act 1(555, ante): (1921 Act 1| 1035, post). Article 843.- Surplus and Undivided Profits (Reg. 45—11776. ante): (Reg. 62 -U1209, post). 47-20-1312: A. R. M. 95. REVENUE ACT OF 1917. The Committee has had under consideration the appeal of the M Com- pany, from the action of the Income Tax Unit in disallowing for the taxable year 1917, an item of 50x dollars covering depreciation on certain patents. In January, 1902, the M Company, then a newly organized corporation, acquired ownership of eight patents issuing therefor to A, the patentee 900* dollars of stock of the corporation. This amount was subsequently increased 2x dollars by expenses of acquisition. The patents so acquired, except one, issued in 1900, had expired prior to January 1, 1917, but as of March 1, 1913, all but one were in effect. Fifteen new patents had, however, been added to the company's patents between date of incorporation and March 1, 1913. These additional patents were not capitalized. No depre- ciation was taken by the taxpayer on the patents which were capitalized, until the year 1917, when 1/17 of the book value was charged to expenses notwithstanding the fact that all except one of them had expired prior to January 1, 1917. The taxpayer relies upon articles 167 and 843 of Regulations 45, and upon Treasury Decision 2929, amending article 163 of Regulations 45, in support of his action. It is assumed the actual value at date of acquisition of the patents by the issuance of stock has been determined by the Income Tax Unit, since this question is not at issue before the Committee. The case then comes clearly under the provisions of article 174, paragraph 552, and article 167, paragraph 494, Regulations 33, revised, governing the collection of the income tax imposed by the Revenue Act of 1917. Article 174, paragraph 552, provides: An allowable deduction for any given year for return of capital invested in patents at time of issue, will be an amount equal to 1/17 of the actual cost in cash or its equivalent of such patents. This paragraph of article 174, was subsequently amended by Advisory Tax Board Recommendation 59, September 9, 1919, to provide as follows: Depreciation of patents acquired prior to March 1, 1913, should be taken on the basis of their fair market value as of that date, if affirmative and satisfac- tory evidence of such value is offered. Article 167, paragraph 494, provides: Good will represents the value attached to a business over and above the value of the physical property and is such an intangible asset that it is not sub- ject to wear and tear and no claim for depreciation in connection therewith can be allowed. Any loss resulting from or on account of investment of good will can be determined only when the property or business to which the good will at- taches, is sold or disposed of, in which case the profit or loss will be determined upon the basis of the value of the assets, including good will, if acquired prior to March 1, 1913, or their cost if acquired subsequent to that date. The basis for deduction authorized under the provisions of article 174 is the return of capital on an asset, the use of which in the trade or business is definitely limited in duration. The taxpayer did not elect, during the life of the patents acquired in 1902, to provide for this return of capital. Had he made this provision his surplus for invested capital purposes under the Revenue Act, would have been correspondingly reduced. He, therefore, can not now claim in a high taxable year, after the expira- tion of the life of the patents, an amount equivalent to 1/17 of thu co?t ? thereby touring the beneit not ©sly ©I a r#ductio© m hh ta*al£fe bi€£me Supplementary Bulletin Rutins* Sec. 326. Art. 843.-2 for the year 1917, but the advantage of the investment which in value is subject only to the definite limitations prescribed by the Act and the regula- tions. The Committee therefore sustains the action of the Income Tax Unit in disallowing the item of 50* dollars claimed by the taxpayer in the taxable year 1917, as a deduction based on 1/17 of the cost of said patents. 1 13-21-1536: A. R. R. 436 Recommended that 48* dollars be allowed as the value of patents acquired for stock on the basis that the preferred stock was worth par and the common about one-third of par per share as disclosed by collateral stock market quotations at the date of the organization of the M Company in 189- and that the invested capital should not be reduced by the value of patents expired. The Committee has had under consideration the appeal of the M Com- pany, from the action of the Unit in reducing the company's invested capital for 191/. A single issue is presented in the appeal, namely, the amount of invested capital represented by patents acquired on organization of the company in 189-, but this issue has two aspects: (1) Whether or not the company is entitled to any invested capital by reason of the original issue of stock for patents which have long since expired, and (2) what was the value of the patents at the time of organization. The stock of the M Company was issued for stock of five other companies but under the authority of Regulations 41, as amended by Treasury Deci- sion 2901, the Income Tax Unit has considered the acquisition of all of the stock of these five companies as being in effect the acquisition of their assets, and it has therefore gone behind the acquisition of stock to determine the character of the various groups of assets acquired. One of the principal groups is patents, and the question of the value of such patents at the time therefore becomes material. The company has filed numerous affidavits and statements claiming a value of 12x dollars, representing the par value of the stock issued therefor. In the opinion of the Committee, however, appraisals, either by a board of directors at the time of purchase, which notoriously fixes the value as equal to the par value of the stock issued therefor irrespective of actual market value of assets so- acquired, or by individual appraisers at a later date, are not so reliable as those made by the public at the time through the purchase and sale of the stock at or about the time of issuance. The Unit has filed a supplemental memorandum made subsequent to the hearing of the case in which it gives a valuation on the basis of collateral stock market transactions at the date of the organization of the company as 36x dollars. This accords very closely with its revised valuation on the basis of royalties, which is 37x dollars, and in the light of earnings appears to be a much more reliable estimate of value than that claimed by the com- pany. The value of the patents is fully demonstrated by prior earnings of the predecessor corporations and is supported by the earnings subsequent to date of acquisition by the present owner. p I However, at a meeting of the board of directors in April, 1899, at which the president submitted certain correspondence with the N Company in reference to the particular business, it appears that the promoters agreed to subscribe to or cause to be subscribed to y shares of the preferred stock at par, that such stock was subscribed to at par and the amount received therefor paid into the treasury of the company as working capital. The balance of the Supplementary Bulletin Ruling*. Sec. 326. Art. 843.-3. shares of stock issued, 7y shares preferred of the par value of 35* dollars, and 8y shares common of the par value of 40* dollars, was paid over to the various companies for their assets, which consisted chiefly of patents. It is reasonable to assume that since outsiders subscribed for y shares of preferred stock at par and paid 5* dollars cash into the treasury of the company, the remaining shares of the preferred stock were worth par. No evidence has been submitted to show that any of the shares of common stock were sold to the public prior to or at the date of organization of the new company. However, it is disclosed that the shares of common stock were selling on a stock exchange soon after the new company has been organ- ized at about one-third of par per share. Accepting this as a basis, the 8y shares of common stock issued to the various companies had a fair market value of 13* dollars. Arguments and affidavits have been submitted and numerous court decisions have been cited to substantiate the claim that the judgment of the board of directors fixing the value of the patents acquired at approximately 75* dollars represented a true value of such patents. The Committee can not concur in this contention for the reason stated above and, therefore, recommends that the value of the assets (patents) acquired be fixed at 48* dollars, such valuation being based on the theory that if y shares of the preferred stock were sold for par and the cash paid into the treasury of the company, the remaining 7y shares were worth par and the assets transferred in exchange for these shares were worth 35* dol- lars. No better evidence being available, the collateral transactions in the common stock soon after the organization of the corporation at about one- third of par per share have been accepted as establishing the value of the common stock paid over to the various corporations in part payment for the patents in question. The Committee, therefore, recommends that 48* dollars be regarded as the value of the patents at the time of acquisition. The next question is whether or not the company is entitled to retain this full valuation in its invested capital, notwithstanding the patents have expired. At the outset it must be recognized that invested capital originally paid in can be reduced under only one condition — that is, that it has been returned to the stockholder through liquidation. The loss of the original capital or its exhaustion in the business does not alter its recognizable status. The only thing which can be affected by an exhaustion of capital is the earned surplus, which may be adjusted, if necessary, to cover any loss or exhaustion of original values. The Unit in treating this case recognized the principle in article 843 of Regulations 45, namely, that patent values gradually merge into good will. It has sought, however, to apply the 20 per cent limitation provided by sec- tion 207 of the Revenue Act of 1917 to the good will so created. In the opinion of the Committee this application is not warranted by law, since under the express terms of the statute it is applicable only where good will is acquired for stock. As stated in Regulations 45 and in several of the decisions of the Advisory Tax Board and the Tax Reviewers, patent value is closely analogous to good will, both in fact representing the estimated worth of a monopoly — in one case a monopoly created by law; in the other a monopoly due to circum- stance. In Tax Reviewers' Recommendation 1 (not published), approved by the former Commissioner, it was held as follows: Supplementary Bulletin Rulings. Sec. 326. Art. 843.-4. From the standpoint of assets a patent, and more particularly a group of patents, is closely analogous to good will. Their value is contingent upon and measured by their earn- ing power, and whilst patents have a definite life there is a common tendency to extend that life by improvements upon the original patent, and in a successful business the patent value merges more or less completely into a trade name or other form of good will. Therefore whilst deductions in respect of depreciation of patents based upon a normal life period of seventeen years are allowable in computing net income under the several income tax Acts, such deductions are not obligatory, but are optional with each taxpayer. Where, since January 1, 1909, a taxpayer has exercised that option to his own benefit in computing his taxable net income, an amount so deducted can not now be restored in computing invested capital. Where the cost of patents has been charged against surplus or otherwise disposed of in such a manner as not to benefit the taxpayer in computing his taxable net income since January 1, 1909, any amount so written off may be restored in computing invested capital if it be shown to the satisfaction of the Commissioner that the amount so written off repre- sented a mere book entry ascribable to a conservative policy of management or accounting and did not represent a realized shrinkage in the value of such assets. Any amount so restored may not be written off by way of deductions from taxable net income in any subse- quent year or years. Where a taxpayer has charged to current expenses the cost of develop- ing or protecting patents, no amount in respect thereof expended since January 1, 1909, can be restored in computing invested capital, and in respect to expenditures made prior to January 1, 1909, the taxpayer now seeking to restore them must be prepared to show to the satisfaction of the Commissioner of Internal Revenue that all such items are proper capital expenditures. The correct computation of surplus and undivided profits can not be said to require a deduction in respect of expiration of patents, and it follows therefore that where a taxpayer in the exercise of his option has not written down the cost of patents, it is unnecessary to reduce the surplus and undivided profits in computing invested capital whether the patents have been acquired for stock or shares or for cash or other tangible property. Due consider- ation will be given to the facts in any case in which the foregoing rule is obviously unreason- able. This conclusion is supported by Advisory Tax Board Memoranda 17 and 22 (not published), and is not inconsistent with articles 839 and 840 of Regulations 45. There is no warrant in the law or regulations for reducing earned surplus by an amount greater than is necessary to make good the impaired cost of the original asset. The Committee therefore recommends that the value herein fixed as the original value of the patents at the time paid in for stock be recognized in the invested capital for the year 1917. 2 Supplementary Bulletin Rulings. .8gnilu.H ntlsllufl x- 1 - rfnntfqq .•? 2-20-22. Sec. 326. Art. 844.— 1. Law Section 326.— Invested Capital (1918 Act— 1f555, ante): (1921 Act— 1[1035, post). Article 844. — Surplus and Undivided Profits. Reserve for Depreciation or depletion (Reg. 45— ^[778, ante): (Reg. 62—^1210, post). 7-19-308: T. B. M. 41. The claim of the X Company for the inclusion in its invested capital for the year 1917 of the amount of 6x dollars, representing appreciation in the value of its property, which appreciation had been taken up on its books in 1914 and returned as taxable income for that year, should be denied for the reason that such tax was erroneously assessed and collected. The taxpayer is entitled to a claim for refund. Reference is made to the claim of the X Company for the inclusion in its invested capital for the year 1917 of an amount of x dollars repre- senting appreciation in the value of a certain part of its property which was taken up on the books in 1914 and returned as a part of its taxable net income for that year, in accordance with article 107 of Regulations 33, which reads as follows: Art. 107. It will be noted from these definitions that the gross income embrace! not only the operating revenues but also income, gains, or profits from all other sources, such as rentals, royalties, interest and dividends from stock owned in other corporations, and appreciation in values of assets if taken up on the books of account as gain; also profits made from^the saleW assets, investments, etc. This item was brought to the attention of the Bureau during 1918 and was disallowed in the computation of invested capital for the year 1917. An appeal was made to the Advisory Tax Board, but no evidence has been found that would warrant a change in the original decision of this office. Regulations 33, from which article 107 is quoted above, were issued in January, 1914, and in March, 1915, the question of the taxability of appre- ciation of property when taken up on the books of a taxpayer was decided adversely to the Government by the United States Circuit Court of Appeals in the case of the Baldwin Locomotive Works v. McCoach, Collector (221 Fed., 59). This decision was embodied in Treasury Decision 2185, issued April, 1915, which held that an "increase in the valuation of assets on the books of the corporation is not income received during the year, where there is no addition to the plant and all that was done was to revalue the property." It appears, therefore, that the return for 1914 was made in accordance with the regulations of the department, but that shortly after the riling of the return the court decision above mentioned made it neces- sary for the Treasury Department to rescind the provisions of article 107, of Regulations 33, in so far as they related to the taxation of unrealized appreciation. Between April 1, 1915, and the date upon which the tax for 1914 became due and payable a claim might have been filed for abate- ment of the proportion of the tax represented by the item of appreciation, and since the date of the payment of the tax the company was entitled to file a claim for refund. This right continues for a period of five years from date upon which the return was due. The computation of invested capital for the year 1917 is to be determined in accordance with the provisions of the Act of October 3, 1917, and Regula- tions No. 41, issued thereunder. In article 42 of these Regulations it is provided, inter alia, that— If value appreciation of a kind not subject to income tax (other than that allowed under article 55) has been taken up on the accounts, a deduction must be made in respect of such appreciation so taken up. As shown above, the appreciation written up on the books in 1914 was not properly subject to income tax. The exception to this rule as found in article 55 referred to in the quotation above reads as follows: ~ ^Tangible property paid in for stock or shares prior to January 1, 1914, must pe valued Supplementary Bulletin Rulings., Sec. 326. Art. 844.-2. at cither (a) the actual cash value of such property on January 1, 1914, or (b) the par value of the stock or shares specifically issued therefor, whichever is lower. This regulation is based upon the statutory provision defining invested capital, which is found in section 207 (a) (2) of the Act of October 3, 1917: The actual cash value of tangible property paid in other than cash, for stock or shares tn"such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January 1, 1914, the actual cash value of such property as of January 1, 1914, but in no case to exceed the par value of the original stock or shams specifically issued therefor). This provision of the law does not allow for any general appreciation of property as at January 1, 1914, and the inclusion of appreciation in invested capital is limited in effect to cases where capital stock has been issued specifically in payment for tangible assets in an amount which at par ex- ceeded the actual cash value of the property at the date of the transaction, but where between such date and January 1, 1914, the property had appre- ciated in value. In such a case appreciation in an amount not in excess of the difference between the actual cash value of such property at the date of its acquisition and the par value of the stock issued specifically for the property may be included in invested capital. The case does not come within this exception. The claim for inclusion in invested capital of x dollars representing appre- ciation in value of property can not be allowed. I Sttpplen>enttrr Bvlletia Ruling*. 2-20-22. Sec. 326. Art.845.~l. Law Section 326.— Invested Capital (1918 Act— 1[555, ante): (1921 Act— H1035, post). Article 845. — Surplus and Undivided Profits; Reserve for Income and Excess Profits Taxes (Reg. 45—11782, ante): (Reg. 62— 1(1214, post). 5-19-265: T. B. R. 17. Treasury^Decision 2791 and article 845 of Regulations should not be modified. Numerous protests against the validity of the principle first adopted in Treasury Decision 2791, approved February 17, 1919, and subsequently embodied in Article 845 of Regulations 45, have been made. A hearing upon the question was held before the Advisory Tax Board at the request of the X Company, at which time its general counsel appeared and argued against the power of the Commissioner to make this regulation, which requires that surplus and undivided profits as of the end of the preceding year must be reduced as of the date or dates when Federal income and excess profits taxes become due and payable, by the amount of such taxes for that year. In the original and supplemental memoranda filed by the X Company counsel has set forth at length the several arguments of greater or less weight in support of the position urged by that taxpayer. In the opinion of the board the Commissioner and Secretary in pro- mulgating Treasury Decision 2791 and article 845 have placed the whole matter upon what is the only basis which accords with the requirements of the statute and meets the demands of proper accounting, although it is true that the arguments advanced by counsel for the taxpayer in this case are well presented and at first blush seem convincing and persuasive. Article 845 of Regulations 45 provides: For the purpose of computing invested capital, Federal income, and war profits and excess profits taxes are deemed to have been paid out of the net income of the taxable year for which they are levied. It is immaterial, therefore, whether reserves for the pay- ment of such taxes for the preceding year have been set up or not, or if set up whether such taxes when paid have actually been charged against such reserves. Amounts payable on account of such taxes for the preceding year may be included in the computation of invested capital only until such taxes become due and payable. A deduction from the invested capital as of the beginning of the taxable year must therefore be made for such taxes or any installment thereof, averaged for the proportionate part of the taxable year after the date when the tax or the installment is due and payable. The provisions of Treasury Decision 2791 relating to the tax under Title II of the Revenue Act of 1917 are substantially the same. The relevant provisions of the statute are found in section 207 of the Revenue Act of 1917 — As used in this title "invested capital" does not include * * * money or other prop- erty borrowed, and means, subject to the above limitations: * * * (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year, and in section 326 of the Revenue Act of 1918 — Sec. 326. (a) That as used in this title the term "invested capital" for any year means * * * (3) paid in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year; * * * but (b) as used in this title the term "invested capital" does not include borrowed capital. The term "earned surplus and undivided profits'' used in both acts is brief but full of import. In effect, it incorporates into the law by reference the entire body of principles of accounting relative to the determination of surplus. There is in neither act any provision defining this term or modi- fying what must otherwise be accepted as the guiding principle to be applied in determining what is surplus. The statute, therefore, requires that the surplus in any case shall be determined exactly in accordance with the accepted principles of accounting; and it is to those principles that both the Supplementary Bulletin Rulings. Sec. 326. Art 845.-2. — loA tSQt) :(q)si& «6S?.f — ioA 8IQI) laJiqfiD bdtgovnl- -.dSfc nciiidS wbJ taxpayer and the Government must turn for light upon the meaning of this provision of the law. The application of these principles "to the question at issue brings a speedy response and permits of only one answer. A tax levied as these taxes are, for a definite period, must be considered as a liability which has fully accrued at the end of that period; and if not already paid, provision for its payment must be made before there can be any true surplus or undivided profits. This is especially true in the case of an income tax — and excess and war profits taxes are income taxes — which must be considered as a sharing by the Government in the income of the taxpayer for the taxable year. The fact that the tax is in terms of the statute imposed "upon" the net income and that there is no specific provision that it is to be paid "out of" net income can not change its inherent nature. The amount of these taxes for any year can not, therefore, after the conclusion of such year be considered as a part of the surplus, but is rather in the nature of a liability, and if this regulation is open to criticism at all, such criticism might much more properly be directed against its further provision permitting the amount of such tax to be included as surplus until such time as the tax becomes due and payable. It is true that in every case the situation is not such that it will be vitally affected by a failure to apply sound principles, and as a result the develop- ment of the rulings already referred to as unsound was very easy, but when the situation happens to be such that the effect of the application of a wrong principle would be critical the difference between the sound and the unsound principle is apparent at once. A single example will suffice to illustrate what is meant: Thus, if a business continues to be owned from year to year by substantially the same interests it becomes relatively unimportant whether such taxes are charged against the income upon which they are levied or against other funds; but if the control of that business changes hands and it thus becomes important to charge the taxes against the proper funds, there would never be any question but that they are properly charge- able against the income for which levied. The purchaser would never for a moment admit that they might equally as well be charged against his future earnings or that he should become liable to raise them by borrowing from the bank or otherwise, without allowance being made in the considera- tion which he pays for the business. In the opinion of the board the provisions quoted above from section 207 of the Revenue Act of 1917 and from section 326 of the Revenue Act of 1918 are controlling and sustain the interpretation which has been em- bodied in the form of a regulation in Treasury Decision 2791 and in article 845 of Regulations 45. It is accordingly recommended that no modifica- tion in these regulations be made. 11-19-392: O. D. 222 The rule expressed in article 845, Regulations 45, that taxes are deemed to be paid out of earnings for the year for which levied, applies to any year of the prewar period as well as to the taxable year. In such cases the amount or amounts payable in a succeeding year on account of such taxes may be included in the computation of invested capital until due and payable. ^ Supplementary Bulletin Rulings. Sec. 326. Art. 845,— 3. 12-19-411: T. B. M. 51.. Effect of assessment of additional income and excess profits taxes[foi\ prior years upon invested/capital. The rulings contained in Treasury Decision 2791 and article 845 of Regulations 45 require income and excess profits taxes levied for the par- ticular year to be considered as liabilities which have accrued at the end of such year and which must be taken into account in determining the surplus and undivided profits which may thereafter be included in invested capital, and state that such taxes may be included in the surplus until they become due and payable. These rulings are in general applicable to additional assessments. It is the essence of any system of accrued accounting that items of income and outgo be estimated as they accrue and that the proper entries be made upon the books at that time. The books for any fiscal period are deemed to clearly reflect the history of that period and are not changed even though subsequent events demonstrate that certain accruals, to a minor degree, were incorrectly estimated. The necessary adjustments to correct such errors are made in the current accounts. It is only where major adjust- ments are necessary that it is good accounting practice to make adjustments for past errors in the surplus account. For these reasons the Advisory Tax Board recommends that additional assessments of income and excess profits taxes, for prior years which are relatively small or unimportant be considered paid from current earnings; but that where the additional assessment is relatively large and important such assessment be considered a liability of the taxable year in question and that the necessary adjustments of the surplus account be made. In such cases the phrase "due and payable" in article 845, Regulations 45, means the due date for taxes of the taxable year and not the date fixed for the payment of the additional assessment. It is suggested that in all cases in which the additional assessment is less than 5 per cent of the original assessment or is less than $5,000 it be considered paid out of current earnings and that no adjustment of invested capital be made. 3 11-20-788: O. D. 410. Where a corporation has filed a claim for determination of war-profits and excess profits tax for 1918 under section 328 and has made payments on the basis of 50 per cent of the net income, the claim not having been acted upon when its 1919 return is due, the invested capital for 1919 should be adjusted on the basis of the tax payments actually made, subject, however, to readjustment when the correct amount of tax for 1918 is determined. 4 45-20-1299: A. R. M. 87. Held in the case of corporations which filed returns for a fiscal year ended June 30, 1917, under the Revenue Act of 1916, and the tax thereon became due and payable on December 12, 1917, that the additional raxes imposed by the Revenue Act of 1917 shall be deemed to be due and payable on the same date. The Committee is in receipt of a memorandum from the Income Tax Supplementary Bulletin Rulings. Sec. 326. Art. 845.-^1. Unit in which advice is requested as to the basis on which invested capital should be adjusted in connection with a corporation's income and excess profits taxes for the fiscal year ended June 30, 1917. This adjustment is necessary in order to determine the correct invested capital of the cor- poration for the fiscal year ended June 30, 1918. The point On which advice is sought resolves itself into the question of when the income and excess profits taxes for the fiscal year ended June 30, 1917, were due and payable. It appears that under the Revenue Act of 1916 corporations having a fiscal year which ended June 30, 1917, were required to file returns sixty days after the close of the fiscal year and that the taxes became due and payable 105 days after the due date of the return. A corporation having a fiscal year ended June 30, 1917, was required to file a return on Form 1031 under the Revenue Act of 1916 and also an excess profits tax return on Form 1095 under the provisions of the Act of March 3, 1917, sixty days after the close of the fiscal year. The taxes as shown by these returns became due and payable on December 12, 1917, and in deter- mining the invested capital of the corporation for the fiscal year ended June 30, 1918, the invested capital would be reduced by the above taxes prorated from December 12, 1917, to June 30, 1918. In addition to the above returns it was necessary for the corporation to file supplemental returns covering the additional income and excess profits taxes imposed by the Revenue Act of 1917. The time for filing the supple- mental returns in question was extended by various Treasury Decisions to March 1, 1918; hence the question presents itself as to when such taxes should be considered due and payable in adjusting the capital for the fiscal year ended June 30, 1918. In order to pass upon the question presented it is necessary to examine the provisions of the law and regulations on this point. Section 212 of the Revenue Act of 1917 reads as follows: That all administrative, special, and general provisions of law, including the laws in relation to the assessment, remission, collection, and refund of internal revenue taxes not heretofore specifically repealed, and not inconsistent with the provisions of this title are hereby extended and made applicable to all the provisions of this title and to the tax herein imposed, and all provisions of Title I of such Act of September 8, 1916, as amended by this Act, relating to returns and payment of the tax therein imposed, including penalties, are hereby made applicable to the tax imposed by this title. Section 14(c) of the Revenue Act of 1916 reads in part as follows: * * * Provided, That the Commissioner of Internal Revenue shall have authority, in the case of either corporations or individuals, to grant a reasonable extension of time in meritorious cases, as he may deem proper. It was under this provision of the statute that the various extensions were granted by the Commissioner for the filing of the supplemental returns required by the provisions of the Revenue Act of 1917. Section 14(a) of the Revenue Act of 1916 reads in part as follows: All assessments shall be made and the several corporations, joint-stock companies or associations, and insurance companies shall be notified of the amount for which they are respectively liable on or before the ist day of June of each successive year, and said assess- ment shall be paid on or before the 15th day of June: Provided, That every corporation, joint-stock company or association, and insurance company, computing taxes upon the income of the fiscal year which it may designate in the manner hereinbefore provided, shall pay the taxes due under its assessment within one hundred and five days after the date upon which it is required to file its list or return of income for assessment; * * * Reading this provision of the statute in connection with the facts sub- mitted upon which advice is requested, and that part of section 13(a) which fixes the due date for filing returns, it appears that a definite date is fixed upon which the taxes of a corporation filing its returns upon the basis of a fiscal year become due and payable. The question of reserves for taxes and the adjustment of invested capital Supplementary Bulletin Rulings. 7-27-22!. Sec. 326. Art. 845.— 5. on account of such reserves was first considered by the|Tax Reviewers and the following ruling is found in their minutes: Reserves set aside out of surplus or undivided profits of preceding years for payment of Federal or State taxes not yet due can be included in invested capital for the taxable year if and to the extent that such taxes were not allowable deductions in computing net income for the preceding year. Thus, if a taxpayer makes his return on an accrual basis, his State taxes which havt accrued during the preceding year constitute allowable deductions for the preceding year, and hence can not be included in capital. But, if his return is on the cash basis, in which case such taxes are not deductible until paid, then reserves set aside for that purpose may be included in the invested capital. Inasmuch as Federal income and excess profits taxes (irrespective of the accounting basis employed) are not deductible in computing the respective net incomes subject to such taxes, reserves set aside for the payment of such taxes may be included in invested capital. On February 17, 1919, this ruling was, in substance, embodied in Treasury Decision 2791, which reads as follows: For the purpose of determining invested cap tal under Tide II of the Revenue Act of 1917, income and excess profits taxes shall be deemed to have been paid out of the^net in- come for the taxable year for which such taxes are levied. Amounts payable on account of income and excess profits taxes for any year may be included in computing surplus and undivided profits for the succeeding year only for the proportionate part of the year repre- sented by the period of time between the close of the taxable year and the date or dates upon which such taxes become due and payable. The same principle is carried forward and is covered by articles 845 and 845(a) of Regulations 45. The question of reserves for income and excess profits taxes and the effect of such reserves on invested capital was presented to the Advisory Tax Board for consideration. In Tax Board Memorandum 51 (ruling 12-19-411, p. 296, Cumulative Bulletin, December, 1919) the effect of assessment of additional income and excess profits taxes for prior years upon invested capital was discussed. The conclusion reached in this mem- orandum with respect to adjustments on account of additional assessments is, in the judgment of the Committee, sound and should be adhered to by the Unit. Looking further it is noted that article 230 of Regulations 33, revised, provides in part as follows: In the case of returns made on the basis of a calendar year, the corporations against which taxes are assessed shall be notified of the amount thereof on or before June 1 of each successive year, and the taxes shall be paid on or before June 15 of the year in which th« assessment is made. Corporations making returns on the basis of a fiscal year other than the calendar year shall be notified of the amount assessed against them on or before the last day of the 90-day period next following the date when the return was due, and the taxes shall be paid within 105 days from the due date of the return. Any extension granted by the collector or Commissioner of the time within which to file returns will not be construed to correspondingly extend the time for the payment of the tax. If for any reason a return should not be made until the time fixed by law for the payment of the tax has passed, the tax assessed on the basis of such return shall be paid upon notice and demand. Under the above-quoted provisions of the Revenue Act of 1916, it is noted that the Commissioner is authorized to grant extensions of time in certain cases, but nowhere is there found a provision of law whereby the Commissioner may extend the due date fixed by the Statute for the pay- ment of taxes. In all cases where the taxes imposed by the Revenue Act of 1916, and the Excess Profits Tax Act of March 3, 1917, fall due after October 3, 1917, the total amount of such taxes, together with the additional income and excess profits taxes imposed by the Revenue Act of 1917, shall be deemed to become due and payable on the date fixed by the Statute; that 8, 165 days after the close of the fiscal year ended in 1917. Upon the statement of facts presented the Committee, therefore, is of Supplementary Bulletin Ruling?. Sec. 426. Art. 845. -6. the opinion that the taxes imposed by the Revenue Act of 1916, the Excess Profits Tax Act of March 3, 1017, and the additional taxes imposed by the Revenue Act of 1917 were due and payable on December 12, 1917, in accord- ance with the above-quoted provisions of the Statute fixing the due date for the payment of taxes. In view of the foregoing provisions of law and regulations, it is held that the invested capital of a corporation, the fiscal year of which ended June 30, 1918, shall be reduced by the amount of taxes imposed by the various Acts referred to above on December 12, 1917, prorated to the close of the fiscal year June 30, 1918. 5 43-21-1889: O. D. 1079. A taxpayer made an overpayment of income taxes for the year 1917 in 1918, which amount was refunded to him in the year 1921. The question presented is whether the taxpayer may include in its invested capital the amount so refunded for the calendar year 1921. Held, that under the provisions of article 845 of Regulations 45 the amount of tax overpaid for 1917 and refunded may be included in the invested capital of the taxpayer for 1918 and subsequent years. 6 I('22)-13-191: I. T. 1261. Revenue Act of 1921. Invested capital is not reduced in those cases where taxes due on returns for previous years were not determined and assessed within the time limit prescribed by section 250(d) of the Revenue Act of 1921. Where an excess payment of tax is credited or refunded, in accordance with the second proviso of section 252 of the Revenue Act of 1921, the amount of invested capital is increased by the amount so refunded, or, in case of a credit, by the amount so credited up to the date such overpayment is actually applied against additional taxes due. 7 I ('22)-30-432: L T. 1400. Revenue Act of 1921. Ad vice has been requested as to the effect of Treasury Decision 3310 (Bulletin 1-15-214, p. 11) on t lie invested capital of corporations subject to its provisions. A case is cited of a corporation whose fiscal year ended June 30, 1921, and which is subject to additional tax under the Revenue Act of 1921. In- formation is desired as to whether this tax, which is payable in four install- ments commencing with May 15, 1922, has any effect upon the invested capital of the corporation for the fiscal year beginning July 1, 1921. The tax due on the new return is not to be considered as an additional tax due under the Revenue Act of 1918, with reference to its effect upon invested capital, inasmuch as it is an original tax due under the Revenue Act of 1921, and as such has the effect of reducing the invested capital of the corporation for the fiscal year beginning in 1921 to the extent that it is due and payable during such taxable year. A deduction from invested capital as of the beginning of such taxable year must therefore be made for the installments of such tax becoming due and payable within the taxable year averaged in the usual manner. 8 Supplementary Bulletin Rulings. Sec. 326. Art. 845.-7. Revenue Act of 1921. I ('22) 51-643: I. T. 1532. On January 1, 1921, the M Company's business was the property of an individual. On September 1, 1921, a corporation having the same name as that under which this business had been previously conducted took over the entire assets and liabilities of the business. The individual income tax return of the individual owner included the income from the business for the period from January 1 to August 31, 1921, while a corporation income and profits tax returns was filed by the corporation for the period from Sep- tember 1 to December 31, 1921. In preparing an amended return in which the income from the business for the entire year was*to be returned as the income of the corporation, under the provisions of section 229 of the Revenue Act of 1921, it was found that the withdrawal account of the former owner of the business for the period from January 1 to August 31, 1921, included an item paid by him to the collector of internal revenue in settlement of his individual income tax for the year 1920. The question was raised as to whether the entire withdrawal account of the individual owner should be considered as a dividend paid to him by the corporation or whether the Federal income tax item should be eliminated from the withdrawal account and be considered as an item of Federal income tax paid and not as a dividend. Held, that the item of the individual owner's withdrawal account rep- resenting the amount paid in discharge of his individual Federal income tax for 1920 should be prorated so as to represent amounts which will be proportionate to the amount of his net income for 1920 which was derived from the M Company's business and to the remaining amount of his net income which was derived from other sources, respectively. The portion of the withdrawal made for income tax payment which is pro- portionate to the individual owner's net income derived from the M Com- pany's business should not be considered as a dividend received by him from the corporation and it is not subject to tax as such. It is to be con- sidered as a payment from the capital of the M Company's business as at December 31, 1920, and must be excluded from the amount of the assets received by the corporation in determining its invested capital at January 1, 1921. The balance of the withdrawal made for the income tax payment which is proportionate to the individual owner's net income derived from sources other than the M Company's business, if any, is to be considered as a divi- dend paid by the corporation during 1921 and will be taxable as such. All other funds withdrawn by the individual owner for personal use during the period from January 1 to August 31, 1921, must be considered as dividends paid to him by the corporation. 9 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 846.— 1. Law Section 326.— Invested Capital (1918 Act— H555, ante): (1921 Act— If 1035, post). *jqg Article 846. — Surplus and Undivided Profits; Insurance on Officers (Reg. 45—11787, ante): (Reg. 62—^1215, post). 7-19-309: O. D. 179. The cash surrender value of a life insurance policy which, under article 846 of Regulations 45, constitutes surplus as at the beginning of the taxable year for invested capital purposes, retains its character as surplus even though the policy consituting the admissible asset upon the basis of which the surplus was determined, is terminated and paid. 1 41-20-1239: A. R. R. 229. The M Company through its attorney contends that its invested capital should be increased as at December 31, 1916, by the cash surrender value of certain insurance policies carried on the life of its president. In this connection it appears that the corporation has regularly deducted as an operating expense for each year prior to 1917, the amount of premiums paid on such insurance policies and that on January 1, 1917, such policies had a cash surrender value of 1J^# dollars which it is urged should be restored to the invested capital of the corporation inasmuch as such amount, with the exception of x dollars, had been disallowed by the Income Tax Unit. The question here presented for decision is whether the cash surrender value of the insurance policies on the lives of officers of corporations may be included in the computation of invested capital, irrespective of the fact that the premiums paid on such policies have been regularly deducted as an expense in the computation of the net income of the corporation for prior years. In this connection the Income Tax Unit interpreting article 846 of Regulations 45 has held that only the cash surrender value of policies of insurance upon the lives of officers of corporations attributable to premiums paid in prior years which have not been deducted as an expense can be included in the computation of invested capital. The Committee desires to call to the attention of the Unit the following ruling stated in Tax Reviewers' minutes with respect to this question under the provisions of the 1917 Act: As premiums paid by a corporation for insurance on the lives of its officers or employees payable to it can not be deductecPas expenses incomputing taxable income, such insurance policies shall be considered tangible property under article 47 of Regulations 41 and may be included as invested capital of such corporation at their cash surrender value at the beginning of the taxable year. The above-quoted ruling made by the Tax Reviewers has been carried forward and the same, in substance, is stated in article 846 of Regulations 45. Considering the above-quoted ruling made by the Tax Reviewers in connection with article 846 of Regulations 45, the Committee is clearly of the opinion that the total cash surrender value of the policies in question should be restored to the invested capital of this corporation for 1917. On this point the Committee feels that the contention of the corporation is well taken and recommends that the action of the Income Tax Unit in reducing the invested capital by the amount of the cash surrender value of certain insurance policies carried on the life of the president of this corporation Supplementary Bulletin Rulings. Sec 326. Art 846—2. be reversed and the amount of 13^* dollars be restored to the invested capital of the corporation. 2 49-20-1338: O. D. 745. Where insurance is carried by a corporation on the life of an officer or employee, the policy may be included as an admissible asset and reflected in the surplus account at its cash surrender value, or if it has no cash surrender value then its loan value, as of the beginning of the taxable year. 47-21-1938: O. D. 1109. The O Corporation took out a policy of insurance on the life of A, who had guaranteed the accounts of the corporation against the M Company. Subsequently A, by reason of the guaranty, became individually liable for the claims against the M Company. The O Corporation paid premiums on the policy and received a distribution of a 20-year surplus from the in- surer in 1919. Upon the death of A, the O Corporation received the face value of the policy. It is held that where insurance is taken out by a corporation on the life of the guarantor of a debt to the corporation, the surrender value of the policy can not be included in invested capital, but the premiums paid may be deducted as a business expense. The amount received as a distribution of surplus by the insurance com- pany should be treated as income and included in the gross income of the O Corporation for the year in which received, subject to both income and excess profits tax. As the premiums paid are deductible as business expenses, the amount received on the policy in excess of the cash surrender value of the policy on March 1,1913, must be accounted for as income of the year in which received 4 ■4 Supplementary Bulletin Rulings. 4-14-22. Sec. 326. Art 850.— 1. Section 326.— Invested Capital (1918 Act— Tf555, ante): (1921 Act— 1fl035, post). Article 850.— Surplus'and Undivided Profits; Current Profits (Reg. 45— 1f803, ante) f (Reg. 62—^1219, post). (See 42-20-1252; Section 33.1, Article 941.) Current profits of dissolved corporation in connection with invested capital of successor corporation. 1 I ('22)-15-220: A. R. R. 853. Revenue Acts of 1916 and 1917. .Recommended, in the appeal of the M Company, that the action of the Income Tax Unit in assessing the excess profits tax for the fiscal year ended October 31, 1917, upon the basis of the full fiscal year, excluding from invested capital net earnings for the months of November and December, 1916, be sus- tained. The Committee has considered the appeal of the M Company from the action of the Income Tax Unit in assessing the excess profits tax for the fiscal year ended October 31, 1917, upon the basis of the full fiscal year, excluding from invested capital the net earnings for the months of Novem- ber and December, 1916. Owing to a delay in the preparation of the blank forms of returns, the M Company was granted an extension of time for filing its return for the fiscal year ended October 31, 1917, and the original return covering the income for the entire fiscal year filed was on March 30, 1918. An amended return was filed on April 1, 1918, in which the tax upon the profits earned in the months of November and December, 1916, was computed at the flat rate of 2 per cent and for the 10 months of the fiscal year falling within the calendar year 1917 upon the basis of the invested capital shown as of January 1, 1917, including the net earnings for November and December, 1916. The Income Tax Unit computed the tax for the year in question upon the basis of the average invested capital for the full fiscal year and assessed an additional tax in the amount of x dollars. The claim for abate- ment of this additional tax was rejected under date of May 25, 1921, hence this appeal. Under section 13(b) of the Act of September 8, 1916, the return of the appellant was due within 60 days after the close of its fiscal year. Section 207 of the Act of October 3, 1917, provides that the term "in- vested capital" shall include among other things "paid-in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year." Section 200 of the Act of October 3, 1917, defines the term "taxable year" as meaning the 12 months ending December 31, except in case of a corporation or partnership which has fixed its own fiscal year, in which case it is defined to mean such fiscal year, and provides: The first taxable year shall be the year ending December 31st, 1917, except that in the case of a corporation or partnership which has fixed its own fiscal year, it shall be the fiscal year ending during the calendar year 1917. If a corporation or partnership, prior to March 1st, 1918, makes a return covering its own fiscal year, and includes therein the income received during that part of the fiscal year falling within the calendar year 1916, the tax for such taxable year shall be that proportion of the tax computed upon the net income during such full fiscal year which the time from January 1st, 1917, to the end of such fiscal year bears to the full fiscal year; * * *. Supplementary Bulletin Rulings. i Sec. 326. Art. 850.— 2. The Congress in the above section of the Act expressly considered a fiscal year a portion of which fell within the year 1916, and in terms so clearly as to permit of no other construction provided that the tax imposed by that Act should be "computed upon the net income during such full fiscal year," and as clearly provided that "undivided profits earned during the taxable year" should be excluded from the invested capital used in the computation of the tax. The Bureau had, therefore, no option to compute the tax in any other manner than that which is prescribed by the statute and which was followed by it. That such a method of computation results in some instances to the disadvantage of taxpayers having a fiscal year as compared with taxpayers making returns upon the basis of a calendar year is recog- nized, but the evil is one which can be remedied only by the legislative branch of the Government. It can not be cured by construction of an Act so clear as to admit of no construction. The contention of the appellant, at an oral hearing, that its case was not covered by section 200 of the Act of October 3, 1917, for the reason that it did not make its return prior to March 1, 1918, can not be conceded. Under the provision of section 13(b) of the Act of September 8, 1916, which Was not amended by the Act of October 3, 1917, the returns of every corporation having a fiscal year ending within the calendar year 1917 were due prior to March 1, 1918, and it is not to be presumed that Congress intended that a taxpayer who was delinquent in filing his return or toward whom the Bureau had been lenient in this matter should be taxed upon a different basis than those who complied strictly with the letter of the statute. The language of section 200 of the Act of October 3, 1917, "makes a return," must at this time be construed to mean "was due to make a return." The Act nowhere contained any provision for computing the excess profits tax of a corporation having a fiscal year ending in 1917 upon the basis contended for by the taxpayer, and the conclusion that Congress did not intend to grant such a right in any case is strengthened by the fact that section 335(a) of the Act of February 24, 1919, contains a similar provision for computing the tax of a corporation having a fiscal year falling partly within the calendar year 1917 and partly within the calendar year 1918, but makes no reference to the time of filing the return. The Bureau has never recognized any exception to the method prescribed for computing the tax in the case of the fiscal year falling within the calendar years in which the rates of tax were different, either under the Act of 1917 or the Act of 1918, by reason of the fact that the return was filed after the due date. It is, therefore, recommended, in the appeal of the M Company, that the action of the Income Tax Unit in assessing the excess profits tax for the fiscal year ended October 31, 1917, upon the basis of the full fiscal year, excluding from invested capital net earnings for the months of November and December, 1916, be sustained. 2 Sty pj l< meivtm y Liulkiin Rulings 2-2-022. Sec. 326. Art. 851.— 1. Law Section 326.— Invested Capital (1918 Act— 1f555, ante): (1921 Act— 1fl035, post). Article 851— Intangible Property Paid in (Reg. 45—^804, ante): (Reg. 62—H1220, post). 23-19-554: T. B. M. 81. The fact that a corporation issues stock as a bonus to its three principal officers to secure their services and participation in the business is not ipso facto sufficient evidence of the existence of good will for which values can be recognized in connection with the computation of invested capital. Such three principal officers were the principal stockholders and were active salesmen and the only salesmen employed directly by the corporation. Each was allotted certain exclusive territory in which he might employ subagents; all sales made by or through these three principal salesmen con- stituted the basis on which their commissions or bonuses were calculated. There were certain other sales made directly by the house which were not subject to any bonus or commission deduction. The business of the cor- poration appeared to be dependent almost solely upon the personal efforts of these three principal officers and stockholders. The rates of commission and the salaries for their services were properly voted. In this case it was deemed that commission and salary aggregating 50 per cent of the gross margin on the business developed by each was not unreasonable. 1 30-19.644: O. D. 348. Invested capital on account of intangibles bona fide paid in for stock or shares is limited to 25 per cent of stock with par value plus 25 per cent of the amount fixed in articles authorizing no par value stock as the capital with which the corporation may do business. If the laws of any State authorize issuance of true no par value stock with no amount of fixed capital such no par value stock may be taken into consideration in measuring the value of intangibles, at the fair market value as of the date or dates of issue of such stock or shares. 2 1-20-665: A. R. R. 9. A and B, who own most of the stock of the M Company, invented certain machinery, for which patents were issued to them. The cost of obtaining these patents was paid by the company. It does not appear whether at that time the patents were formally assigned to the corporation, but, in all events, the corporation had the use of the patents as though they were its own, without compensation to the inventors. The patents at that time being undeveloped, their value was, of course, problematical, but by 1916 they had been sufficiently developed to prove of considerable value. In 1916 the corporation desired to increase its capital, and in order to do so, the patents in question were put upon the books at a value of 2x dollars and a stock dividend was declared. Upon the basis of the above statement of facts the Committee is clearly of the opinion that the patents were not specifically paid for by the issuance of stock, nor by any payment] of cash. They were apparently treated as Supplementary Bulletin Rulings. Sec. 326. Art 851.— 2. though they belonged to the corporation which had paid the cost of then issuance from the time of issuance, and it is not shown that anything w r as paid for them at the time other than cost, nor that they had any value at that time in excess of cost. Even assuming that they were not formally assigned until 1916, it does not appear that any stock was issued in payment therefor, except such stock as was issued as a stock dividend to all stock- holders, including those who had no interest in the patents, as well as to the original patentees. The conclusion reached, therefore, is that the value of the patents as carried upon the books, 2x dollars, can not be included in invested capital, and that the decision of the Income Tax Unit must be affirmed. 3 9-20-776: A. R. R. 29 RULING UNDER REVENUE ACT OF 1917. Held, that the M Company can not include in its invested capital for 1917 an amount representing secret formulas paid in for stock or shares in excess of 20 per cent of the^outstanding capital stock of the company on March 3, 1917. The M Company was organized in 1909, with an authorized capital stock of lOx dollars, which was issued for — Cash x dollars Secret formulas 9* dollars On July 1, 1917, the company issued additional stock of the par value of 90* dollars for — Cash.. S* dollars Capitalization of good will 40* dollars Appreciation in value of secret formulas 45* dollars The record in the case does not show whether tins increase of 90.r dollars in capital stock was made through the appreciation of assets and the declara- tion of a stock dividend, but it appears that this method of increasing capital stock has been used. The appreciation in the value of the processes was largely due to the further development of the formulas. The cost of this development was paid by the company and deducted as business expenses. In the computation of changes in invested capital, Schedule D. Form 1103, for the year 1917, the company eliminated the item of 40# dollars on account of good will, but claimed that the balance of 50x dollars should be prorated for six months and 25x dollars admitted as an addition to invested capital. The return was prepared on that basis. An examination of the return for 1917 shows that the company sustained a loss for 1911 and made profits in 1912 and 1913 and that the 90* dollars increase in capital stock was made as of July 1, 1917, and distributed pro rata to the various stockholders on the basis of their respective stockholdings, thus indicating that the increase in capital stock was made through the dis- tribution of a stock dividend. In the audit of the return for 1917 the Income Tax Unit rejected the claim for addition to invested capital in the amount of 25* dollars and allowed the prorated amount of 5* dollars cash paid in July 1, 1917. The Unit also allowed 20 per cent of the capital stock outstanding on March 3, 1917, as representing the secret formulas. In the presentation of the case, it was strongly argued that the secret formulas are tangible property; that the Unit was in error in disallowing 7x dollars of the capital account in order to conform with the limitation pre- scribed by the statute and that the total amount of 25x dollars should have Supplementary Bulletin Rulings. Sec. 326. Art. 851— 3. been allowed to stand for che reason that the secret formulas had a value greatly in excess of the value used when they were turned in to the company for stock at the time of its organization. The value can not be Hxed for the secret processes at the time they were paid in for stock; neither can the cost of development be established. The company urges that since A, a stockholder, was able to sell x dollars of stock at par the 9.x dollars retained by him was worth par, thus establishing the value of the processes at the time they were paid in for stock. It should be noted a great deal of stress is laid upon the value of the processes. It is claimed further that the increase in value of secret processes, is due to the fact that they had previously been carried at a low valuation on the books, and that the earnings of the company depend to a very large degree on these secret processes and formulas, which are being constantly improved year after year for the benefit of the business. It was deemed, therefore, only fair that such processes be carried at a value which more truly represents their earning power, as compared with the other tangible assets of the business. While it is not so stated, it would indicate that a stock dividend was declared against the appreciated assets of the company. The conference had with the attorneys tends to substantiate this view. J f this be true, then the principle that the distribution of a stock dividend does not increase nor decrease invested capital would be applicable. The question as to whether or not the secret formulas can be considered as tangible property is presented. Section 207 of the Revenue Act of 1017 provides in part as follows: * * * the good will, trade-marks, trade brands, the franchise of a corporation^or partnership, or other intangible property, shall be included as invested capital if the cor- poration or partnership made payment bona fide therefore specifically as such in cash or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will, trade-marks, trade brands, franchise of a corporation or partnership, or other intangible property, bona fide purchased, prior to March third, nineteen hundred and seventeen, for and with interest or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hundred and seventeen), in an amount not to exceed, on March third, nineteen hundred and seventeen, twenty per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corporation, shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the par value of such stock. Article 47 of Regulations 41 provides: The term "other intangible property" as used in section 207 will be construed to mean property of a character similar to good will, trade-marks, and the other specific kinds of property enumerated in the same clause. * * * ^ticles 57 and 58 of Regulations 41 provide respectively as follows: If good will, trade-marks, trade brands, franchises of a corporation or partnership, or other intangible property has been purchased with stock or shares issued prior to March 3, 1917, the amount that may be included in invested capital must not exceed (a) 20 per cent of the par value of the total stock or shares outstanding on that date, nor (b) the actual value of the asset at the date acquired, not (c) the par value of the stock issued in payment for the asset. The 20 per cent limitation upon intangible property purchased prior to March 3, 1917, for or with stock or shares of the corporation or partnership, applies not to each item or class of intangible property separately, but to the aggregate amount of all such property so purchased. Such intangible property may be included in the invested capital only up to an amount not exceeding 20 per cent of the total stock or shares of the corporation or partnership on March 3, 1917, even though the aggregate amounr of such intantible property be greater in value than such 20 per cent of the par value of the total stock or ■hares. Intangible property bona fide purchased prior to March 3, 1917, with stock having no par value may be included in invested capital at a value not exceeding the actual cash Supplementary Bulletin Rulings. Sec. 326. Art. 851.— 4. value of such intangible property at the time of the purchase and in an amount not exceeding 20 per cent of the total shares of stock outstanding on March 3, 1917, measured by their value as at the date or dates of issue. The Advisory Tax Board in Memorandum 5 (Cumulative Bulletin, December, 1919, page 286), recommended that Ruling 24 issued by the Tax Reviewers, interpreting article 58 quoted above, be amended to read as follows: Twenty Per Cent Limitation upon Intangible Property in Cases where Capital Stock has been Increased or Reduced. — Where since the organization of a corporation its capital stock has been increased or reduced and such change represents an actual acquisition of new property for stock or an actual impairment of original properties, the 20 per cent limitation imposed by section 207 will be based upon the par value of the total stock outstanding on March 3, 1917. It appears to the Committee that the value of the formulas at the time the company was organized was apparently largely speculative and any increase in value through subsequent development could not properly be included by way of an addition to invested capital. After consideration of all the facts presented on the questions at issue and the definition of the term "intangible property" as used in the Revenue Act of 1918, the Committee has reached the conclusion that the secret formulas cannot be considered tangible property, and that additions to invested capital in 1917 through revaluation of the intangible assets cannot be permitted under the law and the regulations. Therefore, it is recom- mended that the decision of the Unit be confirmed. 4 25-21-1698: A. R. M. 131. Held, that intangible property, when acquired for tangible property, must be taken into account at the value of such intangible property at date of acquisition, and that in the case of the M Company such value is measured by the then fair market value of the tangible property exchanged therefor and not by the original cost of such tangible property. It is assumed the fair market value of the lands at time of transfer will be satisfactorily established by the taxpayer. The Income Tax Unit has submitted the following issue for an expression of opinion by this Committee: Whether intangibles can be included in invested capital at a value representing the pre- vailing market value (as at the date of transfer) of tangible property given in exchange for intangible property, or whether the company transferring tangible for intangible property is limited to the cost value of tangible property so transferred. The facts on which the issue is based are expressed by the Unit in the following language: The taxpayer, the M Company, purchased a large tract of land about the year 188- upon which it proposed to establish and operate a certain business. It was absolutely essential to successful operation that business houses of a certain character be established and operated. Therefore the M Company made certain offers and inducements to large owners of such houses to locate on their premises. Contracts were made from time to time with nearly all of these large owners of such business houses who pursuant to their contracts established and operated plants. The M Company agreed among other things to deed to these owners a portion of its lands. The consideration received by the M Company was in the form of an intangible asset, namely, the trade or business that would result to the M Company by the location Df these large plants on their large tract of land above mentioned. The point at issue is whether the intangibles may be included in invested capital at a value measured by the original cost of the land or the market value of the land at time of transfer. The issue first of all involves the question of income resulting from the exchange of property for property. Manifestly there was a conversion of Supplementary Bulletin Rulings. Sec. 326. Art. 851. —5. one asset, land, into another form of asset which had an intangible value. Article 1563 of Regulations 45 provides that: Gain or loss arising from the acquisition and subsequent disposition of property if realized when as the result of a transaction between the owner and another person the property is converted into cash or into property (a) that is essentially different from the property disposed of and (b) that has a market value. In the instant case the intangible has a value measured by the consider- ation paid therefor, viz., tangible property. It is not the cost of this tangible property which measures the value of this intangible asset, but its real market value as of date of transfer. When the value of the intangible asset is so determined the difference between such value and the original cost of the land exchanged therefor is the amount of profit realized in the conversion of the land into another form of asset. Nor does such a transaction involve the question of appreciation because it is not the value of the land itself which is written up on the books of the corporation but the value of an intangible asset measured by the consideration paid therefor. An exchange of this land for cash equivalent to the present market value of the land would have determined a profit over the original cost. This profit would have been reflected in the surplus of the company. In a similar manner the excess of the value of the intangible acquired over the cost of the land given in exchange therefor is a proper credit to the surplus of the corpo- ration. The determination of a current value in the instant case has no relation to original cost because it must be assumed that the land before and after transfer had an immediate realizable value. The Committee is accordingly of the opinion that intangible property, when acquired for tangible property, must be taken into account at the value of such intangible property at date of acquisition, and that in the instant case such value is measured by the then fair market value of the tangible property exchanged therefor and not by the original cost of such tangible property. It is assumed the fair market value of the lands at time of transfer will be satisfactorily established by the taxpayer. 6 44-21-1893: A. R.[R. 520. REVENUE ACT OF 1917. Recommended in the appeal of the M Company that there be allowed as a deduction from gross income in the company's 1917 return a depreciation of patent rights in an amount which bears the same ratio to the established cost of the patent rights as 12 months (the taxable year) bears to 23.5 months (the total period for which the patent rights are to run); and that the valuation assigned to such asset as of January 1, 1917, for invested capital purposes be the cost of the asset, x dollars, minus depreciation for one and one-half months, or an amount not in excess of 20 per cent of the total shares of stock outstanding on March 3, 1917, measured by their value as at date or dates of issue, whichever is lower. (See art. 58, Reg. 41.) The Committee has had under consideration the appeal of the M Com- pany from the action of the Unit in making certain adjustments respecting the valuation of patent rights for the purpose of computing invested capital and respecting the basis of computing allowances for depreciation of such rights. The records in the case indicate that patent rights were acquired^ Novem- ber — , 1916, extending to November — , 1918 (a period of 23.5 months), by the taxpayer for a consideration of x dollars cash value of the corpora- tion's capital stock. On April — , 1917, a new right, to begin November — , 1918, and extend for a period of eight years was secured. It is shown Supplementary Bulletin Rul'ngs. Sec. 326. Art. 851— 6. that the new right extending for the additional period of eight years was given to the corporation gratis. Notwithstanding the receipt of the new right which became effective November — , 1918, the corporation continued during the year 1917 to use and operate under the first right acquired as aforesaid. In the brief submitted by the taxpayer's counsel the following matter is set forth with respect to the treatment accorded this asset (patent right) in the preparation of income and excess profits tax return for the calendar year 1917: In making its income tax return the corporation considered claiming "depreciation" on patent rights at the rate of 12/23.5 per year during the entire year 1917 at which rate in fact its original investment should be amortized, but in a spirit of willingness to stand its fair share of war taxation it conceived that it would take such "depreciation" only up to April ■ — , 1917, when the new right was received and thereafter "depreciate" on the basis that at least the original value of the patent right, viz., x dollars had been restored and "depreciation" should thereafter be claimed upon the basis of a life from April — , 1917, to November — , 1926. With reference to the so-called "appreciation of patents" the corporation simply con- ceived that the gift of April < — , 1917, restored the original value and treated the gift as "paid-in surplus" of the value theretofore lost by "depreciation" for five months from November ■ — , 1916, at the rate of 1/23.5 of cost per month. This sum averaged over the year made an invested capital increase of \/6x dollars which was claimed and used as an element in computing invested capital. In the audit of the return the Income Tax Unit insisted that deprecia- tion should be on the basis of the original cost of x dollars spread over a ten-year life, embracing the two separate periods for which rights were granted, November — , 1916, to November — , 1926, and accordingly dis- allowed all depreciation claimed in excess of amounts determined on that basis. The Unit also eliminated from invested capital such depreciation as had been claimed by the taxpayer from November — , 1916, to April — , 1917, and which was sought to be restored to the value of the asset for the pur- pose of subsequent depreciation allowances. The taxpayer contends that the method adopted by it in treating this asset in the manner heretofore outlined in the preparation of its income tax return for 1917 was both equitable and correct under the law and regu- lations. Action contrary to this contention has been taken by the Unit in adjusting the corporation's tax liability, and it is from such action that the taxpayer appeals. In the opinion of the Committee, both the taxpayer and the Unit have erred in this matter. It is e^ ident from the foregoing statements that the taxpayer acquired on November — , 1916, an intangible asset (patent right) to extend to November — , 1918, a period of approximately 23.5 months, and that such asset was acquired for a consideration of x dollars cash value of the company's capital stock at that date. The record indicates with respect to the stock issue of the corporation that it consisted of y shares of no par value. Article 58 of Regulations 41, pertaining to the valuation for invested capital purposes of intangible property, provides in part: Intangible property bona fide purchased prior to March 3, 1917, with stock having no par value may be included in invested capital at a value not exceeding trie actual cash value of such intangible property at the time of the purchase and in an amount not exceed- ing twenty per cent of the total shares of stock outstanding on March 3, 1917, measured by their value as at the date or dates of issue. There is nothing in the record which indicates the method by which a valuation of x dollars has been fixed and accepted by the Unit, but for the purpose of rendering an opinion upon the point at issue, the Committee Supplementary Bulletin Rulings. Sec. 326. Art. 851.— 7. assumes^ that such value has been determined in accordance with the law and regulations and to the satisfaction of the Unit. Article 163 of Regulations 45, issued under the Revenue Act of 1918, is equally applicable under the Revenue Act of 1917. This article provides in part: If, however, an intangible asset acquired through capital outlay is known from expe- rience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, * * *. In the determination of the depreciation allowance which may be claimed in the 1917 return of the taxpayer, two factors must be known and are apparent in the record, to wit: the cost of the asset, and its life, as deter- mined by the period for which the right under which the company operated in 1917, was to run. These factors as shown by the record are: cost of asset, x dollars; and life of asset, 23.5 months. It is the opinion of the Committee, therefore, that the depreciation allow- ance to which the taxpayer is entitled for the calendar year 1917 is an amount which bears the same ratio to x dollars as twelve months (the taxable year) bears to 23.5 months (the total period or life of the asset). In line with this opinion there appears to be no question as to the measure of value which may be assigned to the asset (patent right) for purposes of invested capital as of January 1, 1917, which necessarily must be x dollars minus depreciation for one and one-half months (November — , to Decem- ber 31, 1916), or an amount not in excess of 20 per cent of the total shares of stock outstanding on March 3, 1917, measured by their value as at date or dates of issue, whichever is lower. It is recommended, therefore, in the appeal of the M Company that there be allowed as a deduction from gross income in the company's 1917 return a depreciation of patent rights in an amount which bears the same ratio to the established cost of the patent rights, x dollars, as 12 months (the taxable year) bears to 23.5 months (the total period for which the patent rights are to run); and that the valuation assigned to such asset as of Jan- uary ;1, 1917, for invested capital purposes be the cost of the asset, x dollars minus depreciation for one and one-half months, or an amount not in excess of 20 per cent of the total shares of stock outstanding on March 3, 1917, measured by their value as at date or dates of issue, whichever is lower. (See art. 58, Reg. 41.) 6 Supplementary Bulletin Rulings. 2-20-22. Sec, 326. Art. 852. -1. Law Section 326.— Invested Capital (1018 Act- if'SSS, ante): (1021 Act If 1035, post). Article 852, — Percentage of Inadmissible Assets (Keg. 45 U 805, ante) : (Reg. 62—^1221, post). 1-19-125: O. D. 86. Since the income derived from Porto Rico bonds is not subject to tax, the bonds are inadmissable assets and can not, therefore, be included in invested capital. 1 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 853.-1. Law Section 326— Invested Capital (1918 Act— 1f555, ante): (1921 Act— H1035, post). Article 853. — Changes in invested capital dining year (Reg. 45 — ^[806, ante): (Reg. 62— 1[1222, post). 27-21-1720: O. D. 969. Inasmuch as trustees in liquidation are required to file a corporate return of annual net income and excess profits for the entire taxable year, including therein the gross income received by the corporation prior to their appoint- ment and also the gross income received under their supervision, thejnvested capital should be computed in the same manner as in the case of an active corporation, making due allowance for any amount of capital assets which have been liquidated and returned to the stockholders during that year. However, if, owing to abnormal circumstances affecting the capital or income of the corporation, the tax computed in the usual manner works upon the corporation an exceptional hardship, evidenced by gross dispropor- tion between the tax so computed and the tax computed by reference to representative corporations specified in section 328 of the Revenue Act of 1918, the taxpayer may file a claim for special assessment in accordance with sections 327 and 328 of the Act. 1 Supplementary Bulletin Rulings. .(taoq t SSSr?—Sd .^951) : (etna" f 7-27-22. Sec. 326. Art. 854. I. Law Section 326.— Invested Capital (1918 Act— ^555, ante): (1921 Act— H1035, post). Article 854.— Computation of Average Invested Capital (Reg. 45 — «!807, ante): (Reg. 62- f 1223, post). 8-21-1473: O. D. 822. Inasmuch as 1920 was a leap year, adjustments of invested capital under schedule H, page 2 of Form 1120 for 1920, should be made on the basis of a year of 366 days. 1 I ('22)-30-433: A. R. R. 979. Revenue Acts of 1917 and 1918. Recommended, in the appeal of the M Company, that in the absence of evidence of error the rates of depreciation used by the Unit in computing allow- able depreciation deductions in 1917 and 1918 be approved; that the action of the Unit in considering this company's prewar period as covering all of the prewar years, and in excluding from invested capital paid-in surplus with respect to intangible assets acquired at date of reorganization in 1916, be sustained; and that because of the exclusion of such intangible assets it be recognized that an abnormality exists in this company's invested capital which entitles it to special assessment for both 1917 and 1918, and that assessment be made on the basis of comparatives carefully selected, provided any relief is afforded thereby. The Committee has had under consideration the appeal of the M Com- pany from the action of the Income Tax Unit in adjusting its returns for 1917 and 1918, and, on the basis of such adjustments, assessing additional taxes for each year. Following an audit of this company's books in December, 1919, by a revenue agent, the Unit in March, 1920, notified the company that additional taxes amounting to Sx dollars for 1917 and 28x dollars for 1918 were proposed. The taxpayer immediately protested the assessment of these taxes, and after considerable correspondence and an oral hearing before the Unit, the letter of March, 1920, was modified by a revised letter dated September, 1920, in which the proposed assessments were reduced to 4x dollars for 1917 and \2x dollars for 1918, and these amounts were assessed. The company has ap- pealed to this Committee on three points, as follows: 1. The rates of depreciation used by the Unit. 2. The deduction allowable under section 203 of the Revenue Act of 1917 and the war-profits credit provided by section 311 of the Revenue Act of 1918. 3. The exclusion of intangible assets alleged to have been acquired for stock at date of reorganization in 1916. 1. In the computation of the allowable deductions for depreciation the Unit used the same rates as the company had used in its original returns, the total allowance being less due to the fact that the company applied the rates to the total asset values at the close of the year while the Unit averaged the assets by taking the sum of the amounts shown on the opening and closing balance sheets and dividing this by two. The company now concedes the correctness of the Unit's procedure, but contends that the rates originally used and allowed by the Unit were too low to cover the depreciation actually sustained, while the Unit states that it has no objection to allowing the full Supplementary Bulletin Rulings. Sec. 326. Art. 354.- -2. amount of depreciation actually sustained but believes that the evidence submitted did not substantiate a greater amount than that allowed. The Committee accordingly requested the appellant's representatives, at a recent oral hearing accorded to them, to submit depreciation schedules for all years from 1912, the year in which the manufacture of its leading line was com- menced, showing the company's past experience relative to normal de- preciation and reasons for claiming accelerated rates in 1917 and 1918. In response to this request the Committee has received a revised depreciation schedule for the years 1917 and 1918 only, which, as to asset values, is identical with the schedule prepared by the Unit, the only difference being that higher rates are claimed. Relative to the company's past experience under normal conditions the following statement is made: This company acquired its original assets in 1916. Its predecessor's records do not disclose sufficient data from which to ascertain depreciation actually accrued under normal working conditions on buildings and machinery used in manufacturing. This appears to be a rather unusual condition, inasmuch as these same books, according to the appellant's contention relative to invested capital adjustments, show to the fraction of 1 per cent the actual assets employed in the manufacture of the product and the exact income received from that branch of the business. The Committee is of the opinion that the rates allowed by the Unit arc fair, and in the absence of evidence to show that the use of such rates does not provide for depreciation actually sustained, recommends that these rates be approved. 2. The appellant was organized in December, 1916, and took over the assets and business of the N Company. The predecessor of the N Company was the O Company, a corporation whose only business was manufacturing another product. In February, 1912, the charter of the last-named company was amended changing its name to the N Company and authorizing it to change its business. The old business was not finally closed out until sub- sequent to the close of the year 1913. Thus, during the year 1911, the pre- decessor of the present corporation was in the business of manufacturing one product and during the years 1912 and 1913 in that of manufacturing two products, in consequence of which the appellant contends that it had only one full prewar year, 1913, inasmuch as the business of manufacturing its present product, its business during the taxable years, is substantially a continuation only of that part of the business conducted during the whole of one prewar year. It has submitted a profit and loss account for the year 1913 which purports to show the allocation of all items of gross income and expenses as between the two kinds of business, a balance sheet as at De- cember 31, 1912, showing similar allocation of all assets and liabilities, and contends that the deduction for 1917 and the war profits credit for 191 S should be computed on the basis of the income and invested capital attribut- able to the present business only in 1913. In passing it may be stated that a cursory examination of the statements submitted shows them to be nothing more than arbitrary estimates and they could be nothing else unless the system of accounting employed was on a very elaborate scale. The tax- payer's statement quoted above relative to depreciation does not indicate the use of such a system. Section 201 of the Revenue Act. of 1917 provides that "For the purpose of this title"— that is, Title II, war excess -profits tax, and this also includes the deduction provided by section 203 — "every corporation or partnership not exempt under the provisions of this section shall be deemed to be en- Supplementary Bulletin Rulings. 7-27-22. Sec. 326. Art. 854. 3. gagied in business, and all the trades and businesses in whieh it is engaged shall be treated as a single trade or business, and all its income from whatever source derived shall be deemed to be received from such trade or business." No exactly similar provision exists in the 1918 Act, but one of the pro- visions for the war-profits credit is based on the net income and invested capital of the prewar period if the corporation was in existence during such period or a part thereof. Section 320(b) provides: The average net income for the prewar period shall be determined by dividing the number of years within that period during the whole of which the corporation was in existence * * *. Section 326 provides: The average invested capital for the prewar period shall be determined by dividing the number of years within that period during the whole of which the corporation was in existence * * *. Section 330 provides: That in the case of the reorganization, consolidation, or change of ownership after January 1, 1911, of a trade or business now carried on by a corporation, the corporation shall for purposes of this title be deemed to have been in existence prior to that date, and the net income and invested capital of such predecessor trade or business for all or any part of the prewar period prior to the organization of the corporation now carrying on such trade or business shall be deemed to have been the net income and invested capital of such corporation. Assuming that it could be done, the Committee knows of no provision of the law which provides that in determining the war-profits credit under the 1918 Act, income and invested capital attributable to certain abandoned branches or departments of a business conducted during the prewar period be segregated and eliminated from prewar data, and in the present case the Committee can not concede that this could be done even with approximate accuracy. In view of the foregoing, it is recommended that the action of the Unit in considering all of the years 1911, 1912, and 1913 as this company's prewar period be sustained. 3. It appears to be unnecessary to discuss at length the third contention raised by the appellant, for the reason that if it were conceded it would in effect be allowing indirectly a paid-in surplus for intangibles, and this Com- mittee has repeatedly and consistently held that no paid-in surplus can be allowed either directly or indirectly with respect to intangible assets acquired. Briefly the facts are: The M Company was incorporated in December, 1916, and acquired the assets and business of the N Company for 80a; dollars common stock and 20x dollars preferred stock and the assumption by the former of liabilities of the latter amounting to 22. 3x dollars. The tangible assets acquired were appraised by an appraisal company at 127.5v dollars. After deducting the liabilities assumed, 22. 3x dollars, the net value of tangibles was 105. 2x dollars, for which stock of the par value of lOOv dollars was issued, resulting in a paid-in surplus of 5.2v dollars. The Unit has allowed this latter amount. The company contends that inasmuch as it acquired a mixed aggregate of tangible and intangible property it is entitled to have an alloca- tion made of the stock issued so as to apply a fair proportion thereof against the intangible property acquired, which amount should be included in in- vested capital subject to the limitations prescribed by law, and a like fair proportion to tangible property which would result in a paid-in surplus with Supplementary Bulletin Rulings. Sec. 326. Art. 854.- 4, respect to such tangible property equal to the difference between the actual value thereof and the par value of the stock fairly allocated thereto. The Committee can not concede this contention, and in line with its uniform practice heretofore must recommend that the action of the Unit on this point be sustained. The company contends, and the evidence in the file abundantly supports the contention, that at date of reorganization in 1916 it acquired very valuable intangible assets. There seems to be no question, therefore, that the neces- sary exclusion of these assets from invested capital created an abnormality therein which justifies special assessment. The excess profits tax assessed for 1917 amounts to — per cent plus of net income and the war and excess-profits taxes for 1918 amounts to — per cent plus of net income. The Committee accordingly recommends that proper comparatives be carefully selected for both 1917 and 1918, with a view to giving effect to the intangible assets excluded in the compulation of this company's invested capital and that assessment of taxes be made on the basis of such comparatives, provided any relief is afforded thereby. Summing up: It is recommended, in the appeal of the M Company, that in the absence of evidence of error the rates of depreciation used by the Unit in computing allowable depreciation deductions in 1917 and 1918 be approved; that the action of the Unit in considering this company's prewar period as covering all of the prewar years, and in excluding from invested capital paid-in surplus with respect to intangible assets acquired at date of reorganization in 1916, be sustained; and that because of the exclusion of such intangible assets it be recognized that an abnormality exists in this company's invested capital which entitles it to special assessment for both 1917 and 1918 and that assessment be made on the basis of comparatives carefully selected, provided any relief is thereby afforded. 2 Supplementary Bulletin Rulings. 2-20-22. Sec. 326. Art. 855.— 1. Law Section 326— Invested Capital (1918 Act— ^555, ante): (1921 Act— If 1035, post). Article 855— Invested Capital for Full Year or Less (Reg. 45—^808, ante): (Reg. 62— 1fl224, post). 15-19-449: O. D. 255. A telephone company should make a 1918 return for its accounting period, either calendar or fiscal year, and all income applicable to such period should be included in the corporation's return irrespective of the portion of the year during which it may have been operated underJGovernment control. The invested capital should be computed on the basis of a 12 months' period and not prorated. Supplementary Bulletin Ruling*. ■~g-2V~22. Sec. 326. Art. 857.— 1. Law Section 326.— Invested Capital (1918 Act— ^555, ante): (1921 Act— 111035, post). Article 857. — Method of Determining Available Net Income (Reg. 45— ^810, ante): (Reg. 62— «f 1226, post). nn&nduz ni wbiwt« ahil-19-124: O. D. 85. The entire amount of Federal income, war profits, and excess profits taxes accrued for the taxable year remains a part of invested capital for the succeeding year (since it is not deductible from gross income in returns) until the taxes become due in the succeeding year. Accrual of taxes for the taxable year does not affect invested capital for the taxable year, except to the extent that the accrual of such taxes will cause dividend payments to draw on surplus as at the beginning of the year. "rf>rn3in airfo batasosfi ,79v^/orf .i^omo artinirnsxd aril svodfi z& pzv 18-19-491: T. B. R. 54. Memorandum accounts of estimated earnings not considered sufficiendy definite to be used instead of the average monthly earnings in computing invested capital underjarticle 857, Regulations 45. In the case of the M Company three points are presented for considera- tion and decision: (1) Whether an accrual of taxes for the months of January, February, and March of 1917 is properly used in computing the invested capital for the year 1917: (2) whether, assuming that the bureau was warranted in taking accrued taxes for those months into consideration, was it not in error in using the monthly earnings instead of the average earnings for the year; and (3) whether any computation can reduce the capital below the actual paid-in capital of the corporation. The situation presented was brought about in the following manner: The corporation apparently had earnings of \\x dollars for the months of January, February, and March, 1917. During the month of March it declared and paid a dividend of 10x dollars, which amount, taken in con- nection with the accrual of taxes on the earnings for the first three months of 1917, exceeds the amount of earnings for that period and the balance was construed to have been paid out of accumulated surplus and capital of the corporation at the close of the year 1916. (Incidentallv it may be mentioned that the corporation was placed in the position of distributing surplus and capital because at the time of the payment of the dividend there were apparently sufficient earnings to pay the dividend and also to take care of the taxes under the laws then enacted.) The argument of the corporation relative to the first point is that to use the accrual of taxes in the manner stated is to create a situation in which .dividends which were actually paid out of current earnings are made to appear to be practically paid out of surplus and undivided profits, thus working a hardship which the law does not seem to impose. It is presented that the accrued taxes were not paid and were not required to be paid until more than one year after the declaration of the dividend. This point may be disposed of by reference to article 857, Regulations 45, which authorizes the method used for determining the aggregate amount of earnings of the taxable year available for all purposes on any given date. The grounds upon which this article rests have been thoroughly re-examined in connection with this case, and no sufficient reason to change the established ruling has been found. The other two points are disposed of by the disposition of the second point at issue, as a settlement on the basis recommended will raise the Supplementary Bulletin RuHntr -.Tc8 .tiA .oSE .398 Sec. 326. Art. 857.-2. invested capital above the actual paid-in capital and thus dispose of point three. The second point presented by the corporation is that, assuming that the bureau was warranted in taking accrued taxes into consideration, it was in error in using the monthly earnings instead of the average earnings for the year. Article 857, Regulations 45, provides in substance that average earnings shall be used "unless the corporation shows from its books or other records that a greater proportion of its earnings for the year was available on such date." The agreed statement as to this is that the cor- poration did not close its books each month, but that it made a fairly accurate memorandum estimate of the earnings of each month for the use of the officers of the corporation. This estimate was not carried into the balance sheet of the corporation, but is asserted to be simply a memorandum for use as above stated. The examining officer, however, accepted this memo- randum as a sufficient record of the earnings of the corporation for the three months in question, which estimate was less than the average for those three months would show. But the corporation does not close its books at the end of each month, and the memorandum in question was an informal approximation, insufficient to overthrow the general presumption in favor of the average or prorating method, which in this and many other similar situations under the law has frequently been applied against the desire of the taxpayer. It is recommended, therefore, that the tax liability be com- puted on the basis of average monthly earnings instead of the figures shown by the memorandum. 2 31-20-1110: O. D. 619. In the last sentence of article 857, Regulations 45, it is recognized that in some cases the computation of the amount of net income available for distribution as dividends will be indeterminate. This will be true in any case in which the amount distributed as a dividend exceed the earnings of the taxable year to the date of the dividend payment plus the accrued Federal income and profits taxes on such earnings. The computation under such conditions is shown in the following illustration: Capital stock, Jan. 1, 1919 $400,000.00 Surplus, Jan. 1, 1919 100,000.00 Invested capital, Jan. 1, 1919 500,000.00 Total earnings for 1919 120,000.00 Dividend paid Apr. 1, 1919 40,000.00 Proportionate part of earnings to Apr. 1, 1919 30,000.00 Income and profits taxes accrued to Apr. 1, 1919, as computed below 7,315.00 8 per cent of invested capital 40,000.00 Specific exemption 3,000.00 Excess profits credit 43,000.00 Proportionate part of credit to Apr. 1, 1919 10,750.00 20 per cent^of invested capital 100,000.00 Proportionate part of $100,000 to Apr. 1, 1919 25.000.00 Tax under bracket, 1, 20 per cent of $25,000— $10,750 ($14,250) 2,850.00 Tax under bracket 2, 40 per cent of $5,000 2,000.00 Supplementary^Bulietin Rulings. Sec. 326. Art. 857.-3. \ccrued excess profit* tax 4,850.00 Net income to April 1, 1919 30,000.00 Excess profits tax $4,850 Proportionate part of specific exemption ... 500 5,350.00 Subject to income tax at 10 per cent 24,650.00 Accrued income tax 2,465.00 Accrued profits tax 4,850.00 Total accrued income and profits tax 7,315.00 Income to Apr. 1, 1919 30,000.00 Reduced by taxes to Apr. 1, 1919 7,315.00 Amount net income available for dividend* 22,685.00 Amount of dividend 40,000.00 Amount of income available 22,685.00 Amount chargeable against surplus 17,315.00 The adjustment on account of this amount ($17,315.00) averaged from April 1, 1919, to the end of the year must be made in Schedule H of Form 1120. s 30-21-1749:0. D. 982. In accordance with the principle set out in article 857 of Regulations 45, dividends are deemed to be paid from true earned surplus. In carrying the earnings for a proportionate part of the year to surplus account for the purpose of declaring a dividend, the earnings so carried should represent the earnings of the current year less accrued expenses. Where the true 'arned surplus of the current year proportioned to the date of dividend pay- ment is not sufficient to cover such payment, the true earnings included in the surplus account as of the beginning of the taxable year will be deemed to cover such payment. This does not conflict with the principle embodied in article 845 of the regulations. It is in accord with the accounting principle that where accounts are kept on the accrual basis, expenses of a year should be charged against the income of that year. In order, therefore, to apply this principle, taxes of the current year should be charged against the income of that year, and only that proportion of the income of the current year is available for divi- dends which is in excess of taxes and other proper charges against such income. 4 l( 3 22j-29-416: 1. T. 1396. Revenue Act of 1918. In computing, under the provisions of article 857, the amount of earnings available for the payment of dividends, ali income for the taxable year over and above expenses, taxes, and other accrued liabilities of such year, regardless of whether or not any part of such income is exempt from Federal income tax, should be considered. In making such computation donations previously paid must be deducted. 5 Supplementary Bulletin Rulings. f f 2-20-22. Sec. 326. Art. 858— 1. Law Section 326.— Invested Capita! (1918 Act— «"555, ante): (1921 Act— •1035, post). Article 858.— Effect of Ordinary Dividend (Reg. 45— " 813, ante): (Reg. 62—^1229, post), 26-19-598: O. 942. The exchange of x shares of common stock for one of preferred stock whereby the capital stock is reduced is a capital transaction and does not result in net income or earned surplus. Whether such a transaction gives rise to a paid-in surplus not decided. An amount taken from capital ox paid-in surplus to meet dividend require- ments is deemed a liquidation of capital to that extent and necessitates a reduction in the invested capital. The sum so received by a stockholder is to be regarded as a return of capital so' far as it does not exceed the cost of the stock to him, or if acquired prior to March 1, 1913, its fair market value on that date, any excess being taxable as a gain or profit. In case of subsequent payments from capital or liquidation payments upon dissolution, all prior distributions from capital should be considered in determining whether there has been a gain over the cost of the stock or its fair market value as of March 1, 1913. Dividends paid while there is an operating deficit shall be deemed to be from capital or paid-in surplus, even though there are earnings of the taxable year sufficient to pay the dividend in whole or in part. The taxpayer, the M Company, is a holding company owning the stock of about y companies. On December 31, 1917, the taxpayer had a surplus. Such surplus was produced in past years largely by the cancellation of common stock in this manner — x shares of common exchanged for one of preferred. An analysis of the surplus account, it is stated, will show that most of the surplus is the result of the exchanges of stock, and if such items were eliminated there would be a deficit. The questions to be decided are: (1) What is the nature and the result of the transaction by which x shares of common stock were exchanged for one of preferred? (2) What is the effect of pajmnents to stockholders from capital or paid-in surplus? (3) What is the nature and effect of the divi- dend payment in this case? (4) Does the fact that an operating deficit would exist if the items in the surplus account resulting from such exchange of stock were eliminated affect the result in this case? (5) Whether invested capital can be increased by the accumulation of an earned surplus when an operating deficit exists, or whether current earnings must first be applied to repair the deficit? (1) Wriat is the nature and the result of the transaction by which x shares of common stock were exchanged for one of preferred stock? Such a transaction whereby the capital stock is reduced is a capital transaction and does not give rise to net income or earned surplus. (Article 542, Regula- tions 45.) Whether such a surrender of stock gives rise to a paid-in surplus or not is a question depending upon facts which are not disclosed by the taxpayer, and no decision is made upon this question. (Article 561, Regula- tions 45.) (2) What is the effect of payments to stockholders from capital or paid- in surplus? A distribution of any part of the capital or paid-in surplus is to be regarded as a return to the stockholder of part of the capital represented by his shares of stock. Upon a subsequent sale of such stock, his profit wilt be the excess of the selling price over the cost to him of such stock or its fair market value as of March 1, 1913, after applying on such cost or value the amount of any such capital distribution. (See article 1549, Regulations 45.) Profits are the only proper source of dividends, and the declaration of dividends when there are no profits is contrary to law. (Conyington,. 1 Corporate Organization and Management, p. 399; Thompson on Corpora- tions, Article 5312.) That a surplus such as here considered is capital and not subject to distribution as dividends has been expressly held many tsmes. Supplementary Bulletin Ruling*. Sec. 326. Art. 858.-2. {See Roberts v. Roberts-Wick Co., 184 N. Y. 257, 77 N. E. 13, and cases therein cited.) See also section 201 (a) (1) of the Revenue Act of 1918. ( 3 ) What is the nature and effect of the dividend payment in this case? Ihe dividend paid in February, 1918 (assuming that the taxable year of this corporation is the calendar year), is deemed to have been paid, first, from earnings and profits accumulated since February 28, 1913, and on hand at the beginning of the year; second, if that fund is insufficient, from earnings of the taxable year available on the date that the dividend is paid; third, if those funds are insufficient, from earnings and profits accumulated prior to March 1, 1913; fourth, if those funds are insufficient, from capital or paid-in surplus. (See section 201, Revenue Act of 1918; article 858, Regulations 45.) In this case there is no earned surplus on hand at the beginning of the year, so that the only question is whether the earnings of the taxable year (class 2) are available for the payment of dividends when there is an operating deficit, or whether such dividends must be deemed to be a distribution of capital. This is not a question which should turn upon the legality of such a dividend in the particular jurisdiction, but is a question depending largely on accounting principles and business practice. From that standpoint there is no doubt but that current profits should be applied to make good the existing deficit before any dividends are distributed. (Dickinson, Accounting, p. 73.) It is the weight of authority in the United States, moreover, that the declaration of a dividend out of current profits, while there is an operating deficit, is contrary to law. (Conyington, Corporate Organization and Managment, p. 399.) It is, therefore, held that the dividend in this case was the distribution of capital. It reduces the invested capital and should be treated as a return of capital to the stockholder. This decision is based on the fact, as stated by the taxpayer, that the M Company is a holding company, owning the stocks of y different corpora- tions. Whether this principle is applicable to a corporation operating a property where the investment of the capital in wasting assets is contem- plated, is not decided. (4) Does the fact that an operating deficit would exist if the items in the surplus account resulting from such cancellation of stock were eliminated affect the result in this case? The Regulations do not require a reduction in invested capital because of an operating deficit. (Article 860, Regula- tions 45.) They do require, however, a reduction in invested capital where there has been a distribution in liquidation, or a return of capital to the stockholders. The existence of an operating deficit, therefore, does not directly affect the invested capital and is significant in this case only as it throws light upon the sources from which the dividend here in question was paid. (5) May invested capital be increased by the accumulation of an earned surplus when an operating deficit existed, or must the earnings of the tax- able year be applied to repair the deficit? The law defines invested capital as cash or property paid in for stock, earned surplus, and undivided profits and paid-in surplus. The act does not require a reduction of invested capital on account of an operating deficit. It is obvious, however, that no earned surplus can be accumulated until the deficit or impairment of paid-in capital has been made good. (Article 838, Regulations 45.) It is held, therefore, that the exchange of 4# shares of common stock for one of preferred stock whereby the capital stock is reduced is a capital transaction and does not result in net income or earned surplus. Whether such a transaction gives rise to a paid-in surplus not decided. An amount taken from capital or paid-in surplus to meet dividend Supplementary Bulletin Rulings. .858 JtA .dil .098 Sec. 326. Art. 858.-3. requirements is deemed a liquidation of capital to that extent and necessitates a reduction in the invested capital. The sum so received by a stockholder is to be regarded as a return of capital so far as it does not exceed the cost of the stock to him, or if acquired prior to March 1, 1913, its fair market value on that date, any excess being taxable as a gain or profit. In case of subsequent payments from capital or liquidation payments upon dissolu- tion, all prior distributions from capital should be considered in determining whether there has been a gain over the cost of the stock or its fair market value as of March 1, 1913. Dividends paid while there is an operating deficit shall be deemed to be from capital or paid-in surplus, even though there are earnings of the taxable year sufficient to pay the dividend in whole or in part. 1 20-20-943: A. R. M. 51. REVENUE ACT OF 1917. The Committee is in receipt of a request for advice upon certain points, which have been raised in connection with the audit of the return of the M Copper Company, and in connection with the audit of other copper companies. It appears that during the year 1917, and prior to August 6, 1917, the M Company paid a dividend of approximately x dollars, which was declared to have been paid out of earnings accumulated prior to March 1, 1913. At the date of the dividend payment the excess of depletion allowable for 1917 on the basis of March 1, 1913, over the depletion actually sustained on the basis of cost, was an amount in excess of the dividend declared to have been paid out of earnings accumulated prior to March 1, 1913. The M Company therefore contends that before any impairment of invested capital as of December 31, 1916, is determined because of the dividend payment, there should be taken into consideration the realization of the appreciation in values as of March 1, 1913, which has been converted into cash and reflected on its books during the current year. The question in connection with the other copper companies involves essentially the same point without the complication of the dividend. In the opinion of the Committee, neither contention is well taken. The M Company having by appropriate action declared the dividend out of earnings accumulated prior to March 1, 1913, and so advised its stockholders, will not now be heard to say that the dividend was actually paid out of earnings of the current year, and as will be subsequently developed in this memo- randum the Committee is clearly of the opinion that appreciation prior to March 1, 1913, realized in the taxable year, is an earning of the taxable year and not an earning accumulated prior to March 1, 1913. In the Baldwin Locomotive case (Baldwin Locomotive Works v. McCoach, 221 Fed. 59) it was held that appreciation in values is not earnings or profits until realized. This decision was rendered under the Act of 1909, and follow- ing it no appreciation in the value of corporate properties to March 1, 1913, was reported or tax pakl as income or earnings notwithstanding the Act of October 3, 1913, gave to such corporations the right to fix value as of March 1, 1913, including appreciation, as thejbasis for any subsequent gain or loss. Following this decision and the decisions of the Supreme Court as to the 'taxation of appreciation to March 1, 1913, it is clear that the realiza- tion of such appreciation is an earning of the year in which such apprecia- tion is realized, although under the latter decisions it is not a taxable earning. Supplementa.ry Bulletin Rulings, Sec. 326. Art. 858.-4. Since the excess profits tax law definitely holds that earnings of the taxable year are not to be included in earned surplus or undivided profits, realization of appreciation in values to March 1, 1913, is not a proper addition to invested capital as the realization takes place, as contended for by the companies. It is therefore held that the dividend payment of the M Company must be deemed to have been paid from earnings or profits realized prior to March 1, 1913, and therefore that the invested capital of the company must be reduced by that amount; and secondly, that realization during the taxable year of appreciation in values to March 1, 1913, can not be included in the invested capital of the taxable year. 2 9-21-1488: A. R. R. 408. Held, that the expression, in a declaration by the directors of a corporation, that a dividend is "payable as convenient to the funds of the company" creates a condition precedent. Dividends so declared are not necessarily to be considered payable as of the date of the declaration. The Committee has under consideration the appeal of the M Company from an additional assessment made by the Income Tax Unit for the years 1917 and 1918. The single question at issue is: Whether the declaration of a dividend expressed in terms to be payable as convenient to the funds of the company of necessity imported a diminution of invested capital and surplus to an amount commensurate with the gross sum of the contem- plated dividend, required to be adjusted as of the date of the dividend's declaration instead of as of the time or times of its actual payment. Dividends were declared by this corporation in January, April, and July, 1917, and in the year 1918 in June, July, and October. In each instance the resolution of the board of directors was expressed in the terms to be "payable as convenient to the funds of the company." The first dividend in 1917 was actually paid in 10 installments between the dates of January 23 and May 29, inclusive, and the payments of the remaining dividends declared were, with the exception of that of October, 1918, made over similar extended periods of time and in varied amounts. The dividend declared October, 1918, was paid November, 1918. In the current adjustment of invested capital in each of the taxable years the Income Tax Unit used the date of declaration of the dividends as the date of payment. The corporation contends that the actual dates of payment should govern. It is not shown in the facts submitted in this case whether the dividends were actually accrued on the books of the corporation as of the dates when declared, or whether the charge was made against income of the taxable years at the time the payments were made. Article 858 of Regulations 45, on which the Income Tax Unit relied in making its adjustment, reads as follows: A dividend other than a stock dividend affects the computation of invested capital from the date when the dividend is payable and not from the date when it is declared, except that where no date is set for its payment the date when declared will be considered also the date when payable for the purpose of this article. The regulations, as above quoted, clearly contemplate that a dividend must not affect the computation of invested capital, except from the date when the dividend is payable. In the instant case, the date payable is when the funds of the company are convenient. It is considered by the Committee that the expression "except where no date is set for its payment Supplementary Bulletin Rulings. ft-10-22. .d -.828 Sec. 326. Art 858. — 5. the date when declared will be considered also the date when payable" is on the assumption that the corporation has resources to pay and does immediately intend to pay. When the corporation can conveniently pay the dividend, so declared out of the funds of the company, is a matter of admin- trative decision by the officers of the company and until such decision, as a condition precedent, is reached there is, in effect, no dividend to be paid and no reciprocal right on the part of stockholders to immediately exact payment. The dividend resolutions were merely tentative declarations of the corpora- tion's intent to pay certain dividends at a subsequent date to be determined by the condition of the company's treasury. The Committee is accordingly of the opinion that the Income Tax Unit erred in considering the dates of the resolutions of the directors as determining the dates when the dividends were payable and recommends that compu- tation of invested capital be revised to give effect to the condition pre- cedent which makes the dividend, in each instance, payable when the funds are convieniently available. 3 (See 34-21-1786; Sec. 325, Article 813-9 (6).) Dividend credited to stockholder left in the business. 4 42-21-1876: O. D. 1070. Where a corporation issues interest-bearing notes to its stockholders in lieu of a cash dividend, invested capital should be reduced as of the date of the notes, provided the dividend was not declared from current earnings. 5 I f22)-15-221: I. T. 1279. Revenue Act of 1918. The payment of taxes by a bank on behalf of its shareholders should be treated, as respects invested capital, in the same manner as other distribu- tions by a bank to its shareholders, and if the payment of such taxes is in an amount sufficient to have caused an adjustment in invested capital during the year in which paid, if such payment had been in the form of a dividend, an adjustment should be made in invested capital on account of the taxes paid as of the date of payment. 6 Revenue Act of 1918. (See t T. 1286; Sec. 326, Art. 838-8 (8).) Dividends paid during the existence of an operating deficit. 7 Supplementary Bulletin Rulings. Sec. 326. Art. 858.-6. I ('22)-19-263: Sol. Op. 140 Revenue Act of 1918. Dividends. Invested Capital. Where earnings and profits accumulated from March 1, 1913, to the begin- ning of the taxable year are insufficient to cover dividends during the first 60 days of the taxable year but there are available for payment of such dividends not only sufficient earnings and profits of the taxable year but also sufficient undivided profits accumulated prior to March 1, 1913, any such dividends in excess of earnings and profits accumulated from March 1, 1913, to the beginning of the taxable year shall be considered as paid from earnings and profits of the taxable year and, accordingly, invested capital of the corporation as of the beginning of the taxable year shall not be reduced by the amount of such excess. An opinion has been requested upon the question whether dividends paid by the M Company during the first 60 days of the taxable year 1918 should be treated as paid out of the accumulated earnings and profits of previous taxable years. This corporation had on December 31, 1917, outstanding capital stock fully paid up of the par value of 8x dollars and undivided profits amounting to 87x dollars. It paid dividends during the first 60 days of 1918 as follows: January 12, 1.2* dollars; January 18, l.2x dollars; February 4, 1.2x dollars; February 13, l.2x dollars; February 21, 1.2* dollars; and February 28, 1.2a; dollars; a total of 7 .2x dollars. March 1, 1913, it had undivided profits amounting to approximately 82x dollars. It has been the practice of this corporation since 1911 to distribute dividends as fast as its profits were earned. The dividends have been uniformly 1.2* dollars and have been paid at intervals varying from one week to one month. The president of the corporation has filed an affidavit stating that the divi- dends above enumerated were paid out of profits earned in 1918. The cor- poration seeks exceptions from the rule stated in article 858 of Regulations 45 (1920 edition) that— * * * The surplus and undivided profits as of the beginning of the taxable year will be reduced as of the date when the dividend is payable by the entire amount of any dividend paid during the first 60 days of the taxable year. * * * on the ground that the dividends in question were in fact out of current earnings. Section 201(e) of the Revenue Act of 1918 provides: Any distribution made during the first 60 days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period. The question is whether the phrase "shall be deemed" as used in the first clause of section 201(e) creates a conclusive presumption. It will be observed that the phrase is used three times in the subdivision. It is used six times in section 201, and many times in other parts of the statute. Nowhere does it appear to be used to create merely a rebuttable presumption, except in section 402, where the language is "shall, unless shown to the contrary, be deemed." The presumption, therefore, must be held to be conclusive. While the presumption is held to be conclusive, the statute must be con- strued so as to give effect to all its provisions. The intention of section 201 of the Revenue Act of 1918 was to relieve from the tax dividends paid by a corporation out of earnings and profits accumulated prior to March 1, 1913. The Act provides, however, that before such earnings and profits may be distributed (free from tax) the corporation must first distribute its earnings and profits accumulated since March 1, 1913. This result is reached by section 201(b), which provides: Supplementary Bulletin Rulings. Sec. 326. Art. 858.-7. * * * Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, * * * but any earnings or profits accumulated prior to March 1, 1913, may be distributed * * * exempt from tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. To construe the language of section 201(e) so as to hold that a distribution was made from earnings or profits accumulated prior to March 1, 1913, while there was still on hand earnings or profits accumulated since March 1, 1913, would be holding that this paragraph was in conflict with the language just quoted from paragraph (b) of the same section. However, construing the two paragraphs together, they provide that any distribution made during the first 60 days of the taxable year shall be deemed to have been made from earnings and profits accumulated during preceding taxable years, but all earnings and profits accumulated since March 1, 1913, must be distributed before earnings and profits accumulated prior to March 1, 1913, may be distributed free from tax. The presumption contained in the first part of section 201(e) therefore applies only to earnings and profits accumulated between February 28, 1913, and January 1, 1918, and has no application to earnings accumulated in any other period. If the earnings or profits ac- cumulated for the period from March 1, 1913, to January 1, 1918, are not sufficient to pay the dividends declared during the first 60 days of the taxable year, and there are other profits accumulated after March 1, 1913, such earn- ings and profits are to be applied to the dividends so declared. In Advisory Tax Board Recommendation 43 (C. B. 1, pp. 26-27) the case considered was that of a corporation paying dividends during the first 60 days of 1918. It had no surplus earned between March 1, 1913, and January 1, 1918, but had surplus earned prior to March 1, 1913, and also sufficient earnings accumulated after January 1, 1918, and prior to each of such dividends out of which to pay it. It was held that the 60-day pre- sumption was inapplicable and that the dividends were paid out of the earnings of 1918. In Law Opinion 942 (C. B. 1, pp. 300-302) a case was considered where a corporation paid a dividend during the first 60 days of 1918. In the course of the opinion it was ruled, following Advisory Tax Board Recommendation 43, that if earnings and profits accumulated since February 28, 1913, and on hand at the beginning of the taxable year were insufficient to cover such dividend, a dividend paid during the first 60 days of the taxable year is deemed to be paid out of earnings of the taxable year. In the present case there is no compelling reason for departing from pre- vious rulings. It is held, therefore, that the dividends paid by the taxpayer during the first 60 days of 1918 were paid out of earnings and profits accumu- lated during the period from March 1, 1913, to January 1, 1918, to the extent of such earnings and profits on hand on January 1, 1918, which sum is to be determined by deducting from the earnings and profits of that period the dividends paid during that period, and that the balance of dividends paid during the first 60 days of 1918 were paid from earnings and profits of 1918. The invested capital of the taxpayer should be reduced by prorating such dividends paid out of earnings and profits accumulated from March 1, 1913, to January 1, 1918, but not such dividends paid out of earnings and profits of 1918. CARL A. MAPES, Solicitor of Internal Revenue. 8 Supplementary Bulletin Rulings, Sec. 326. Art. 858.-8. I ('22)-20-283: I. T. 1314 Revenue Act of 1918. The M Company, a foreign corporation, is a subsidiary of the O Company (known as the parent company), a domestic corporation. All of the stock of the former company is owned by the latter. The stock of the foreign company is being distributed to the stockholders of the domestic company. The question is presented as to whether the distribution of the stock of the sub- sidiary company among the stockholders of the parent company reduces the capital and surplus account of the parent company by the amount of the value of the stock so distributed. Held, in view of the conclusive presumption in section 201 of the Revenue Act of 1918 that any distribution made by a corporation after the first 60 days of any taxable year shall be deemed to have been made out of earnings and profits accumulated since the close of the preceding taxable year, that such distribution will not affect the invested capital of the parent company, provided the earnings for the current year as of the date of the distribution available for dividend purposes equaled the amount at which such stock was included in the invested capital of the company as of the beginning of the current year. If the available earnings for the current year as of the date when the dis- tribution took place were not sufficient, the invested capital as of the beginning of the year would be reduced accordingly. 9 I('22)-26-377: I. T. 1375 Revenue Act of 1921. With reference to a corporation having a fiscal year ending November 30, which discontinued its business and sold its plant in December, 1920, and which went into liquidation and paid a dividend on December 15, 1920, from the profits in part from the sale of the plant, it was held: That under the provisions of section 201(f) of the Revenue Act of 1921 a dividend paid during the first 60 days of a taxable year is presumed con- clusively to have been paid from earnings or profits accumulated during the preceding taxable years, so far as they are available, and that this presump- tion can not be rebutted by showing that earnings were accumulated during the first 60 days of the taxable year in an amount sufficient to pay the divi- dends in whole or in part. That the surplus and undivided profits of the corporation on hand at November 30, 1920, which represented earnings accumulated during the period from March 1, 1913, to November 30, 1920, must be first applied against the amount of the dividend paid December 15, 1920. That in case this dividend exceeded the amount of the surplus and un- divided -profits available for its payment, the excess will be deemed to have been paid out of the earnings of the taxable year available at the date when the dividend was paid, and that to the extent that such earnings are insuffi- cient, the dividend will be deemed to have been paid out of the earned surplus accumulated prior to March 1, 1913, or to be a liquidation of paid-in surplus or capital. The above methods of allocating the dividend must be followed, although profits were realized by the corporation through the sale of its plant December 1920, which were actually applied to the payment of the dividend. 10 Supplementary Bulletin Rulings. 2-2C-22. Sec. 326. Art. 859.-1. Law Section 326.— Invested Capital (1918 Act— ^555, ante): (1921 Act— 111035, post). Article 859.— Effect of Stock Dividend (Reg. 45— f [ 814, ante) : (Reg. 62— x dollars and claimed in the appellant's 1917 income and profits tax return. The transaction giving rise to the point at issue may be briefly summar- ized as follows: The M Company was the operator of several stores which were located in different cities. The several stores were merely branches of the business, and were not separately incorporated. According to the records in the case, and the statements made by the appellant therein, the branch store located in Z was not operated with satisfactory results, and i it had been the desire of the concern for some time prior to 1917 to divest itself of this branch business. It is shown that in October, 1917, agre«ment Supplementary Bulletin Rulings. Sec. 326. Art. 862.-2. was made and contract entered into whereby the appellant transferred to A (one of its stockholders) the entire assets, business, good will, etc., of the branch store located in Z in consideration of y shares of its own capital stock, which at that time were owned and held by said A. The taxpayer submits that book values as of January 1, 1917, as shown by its books on that date, were 67x dollars for the branch store at Z and 53x dollars for the y shares of stock held on that date by A. It is the tax- payer's contention that the transaction was one of sale wherein it sold cap- ital assets (the Z business including physical assets, fixtures, inventory, good will, etc.), having a value of 67x dollars, which was in excess of the consideration received therefor (y shares of capital stock valued at 53x dollars), and consequently sustained a loss to the extent of such difference between values as might properly be deducted in computing taxable net income under the provisions of the Revenue Act of 1916, as amended by the Revenue Act of 1917, section 12(a)2. This provision of law reads that in the ascertainment of net income there shall be deducted: All losses actually sustained and charged off within the year and not compensated by insurance or otherwise. * * * The Income Tax Unit in its consideration of this question has held that the transaction was a capital one, i.e., one in which the appellant had pur- chased its own capital stock for a consideration, and that under such trans- action, whether the consideration for such purchase of stock be in money or money's worth, there results no taxable gain or deductible loss for tax purposes. Accordingly, the amount deducted by the appellant has been restored to taxable net income and the necessary adjustment of invested capital has been made, resulting in an additional tax which the Unit pro- poses to assess. It is from such holding and proposed action on the part of the Unit that the taxpayer appeals. It is apparent, therefore, that the question for determination by the Committee is whether the transaction is a capital one involving no gain or loss as contended by the Unit or one of sale consummated by the ap- pellant wherein was sustained a loss which may properly be deducted in the computation of taxable net income as contended by the taxpayer. The taxpayer in contending for the latter view makes the following comments: The Government takes the position that this was not a sale of the Z store, but a pur- chase of the shares in the corporation and that the excess of the value of the assets sold over the value of the stock received in payment therefor is a premium paid for the return of the shares to the corporation. This is entirely unjustified and we are unable to see upon what theory the Government ran so distort the facts as to change a legitimate trans- action from a sale into a purchase. The store in Z was the least successful of the stores owned by the corporation and was the subject of the most care and trouble. The motive which prompted the entire transaction was to be rid of the Z business. The sale was a legitimate one and the stock would not have been purchased under any circumstances had it not been taken in payment for the Z store. The transaction is closed and there is no reason why the loss can not be deducted. The return in question was filed under the Act of September 8, 1916, as amended by the Act of October 3, 1917, and the loss is properly deductible under section 12(a) second, which provides for the deduction of "all losses actually sustained and charged off within the year and not compensated by insurance or otherwise." Attention is called to arti- cles 101 and 124 of Regulations 33, revised, interpreting the Act under which this return was filed. The taxpayer is supported by the wording of the regulations in question. If the M Company had taken in exchange for the Z store capital stock in its own company having a book value of 80x dollars, would the Government hold that the M Com- pany was not obliged to return as income for the year 1917 the difference between 80* dollars and 67* dollars? We think not; and if a profit from such a sale is taxable and must be included in a return, then it follows that a loss is deductible. If the M Company had taken from A, the purchaser of the Z store, a check for 53x dollars and had immediately purchased from A his y shares in the M Company for 53x Supplementary Bulletin Rulings. Sec. 326. Art. 862. -3. dollars, giving him a check therefor, the Government would not have objected to the M Company claiming as a loss the difference between the value of the capital assets sold and the 53x dollars, but because the M Company dealt openly and above board and did not resort to an exchange of checks in the manner indicated, they arc penalized for their honesty. If the M Company had taken in exchange for the sale of the assets in question Liberty bonds or other securities of the value of the stock of the M Company taken in exchange, the Government , would raise no objection to the deduction of the loss in question, and it is seriously contended that the medium of payment can make no difference in the prin- ciple involved in the transaction in question. We call the Government's attention to the regulations on dividend disbursements in which it is distinctly held that the medium of payment makes no difference. It is observed that the appellant attempts to justify its position in this matter by applying article 101 of Regulations 33, revised, which provides: Income from sale of capital assets. — If a corporation sells its capital assets in whole or in part, it will include in its gross income for the year in which the sale was made an amount equivalent to the excess of the sales price caver the fair market price or value of such assets, as of March 1, 1913, if acquired prior to that date, or over cost, if acquired subsequent to that date. * * * It is noted also that the taxpayer submits that had the book value of its own stock acquired in this transaction been in excess of the book value of the assets transferred therefor, the Government would have sought to tax such excess as a taxable gain or profit. The Committee has given thor- ough consideration to all of the arguments, briefs, and data submitted re- garding the character of the transaction and the respective values of the assets and capital stock involved therein, and finds itself unable to sustain •the view of the taxpayer. It is the opinion of the Committee that as contended by the Unit the transaction was a capital one within the meaning of the law as defined by the regulations and not a sale of capital assets as argued by the taxpayer. That this transaction was one in which the appellant purchased its own stock rather than sold capital assets, seems to be borne out by the language of the contract entered into by it and A in 1917. The pertinent portion of that contract is here quoted: This contract entered into this — day of October, 1917, between the M Compnny and A, witnesseth: A sells to the M Company y shares of the capital stock of the M Company. In pay- ment of said shares the M Company agress as follows: * * * (In the contract there follow certain stipulations relating to the payment and other things to be done by the M Company as considerations for the acquisition of y shares of its capital stock.) The position taken by the Committee in this connection seems to be borne out further by articles of the regulations, legal opinions, and account- ing authorities hereinafter quoted. Article 98 of Regulations 33, revised, issued under the Revenue Act of 1916, as amended by the Act of 1917, provides: Treasury stock — When taxable. — Treasury stock wherever and whenever that term is used in connection with the accounts of the corporation or for income tax purposes, will be held to mean stock which had been previously issued by the corporation and which had been repossessed by it through purchase or otherwise, and then carried on its books as an asset. . If such stock is resold at a price in excess of its cost upon repossession, such excess shall be returned as income for the year in which resold. * * * Article 542 of Regulations 45 issued under the Revenue Act of 1918 provides in part as follows: Sale of capital stock. — * * * If the corporation purchases any of its stock and holds it as treasury stock, the sale of such stock will be considered a capital transaction, and the proceeds of such sale will be treated as capital and will not constitute income of the corporation. A corporation realizes no gain or loss from the purchase of its own stock. See articles 563, ,861, and 862. Supplementary Bulletin Rulings. Sec. 326. Art. 862.-4. It should be here noted that the regulations issued under the two Acts materially differ so far as concerns the subsequent sale of treasury stock acquired by the issuing corporation after originally issued. This question, however, is not germaine to the case under consideration and may be passed by merely stating that the provisions of article 542, Regulations 45, super- sede article 98 of Regulations 33, revised, and should control in all cases involving such circumstances. While article 542 of Regulations 45 is issued under the Revenue Act of 1918 and applies primarily to returns filed under that Act, it is equally applicable to returns under prior Acts and is controll- ing in the instant case in that portion thereof which reads: A corporation realizes no gain or loss from the purchase of its own stock. As before stated, the Committee is of the opinion that the transaction involved is a capital one, and that for the purpose of determination it is immaterial that the consideration given in exchange for the capital stock repossessed was not money but money's worth, such as in the instant case. The Solicitor of Internal Revenue stated in his Law Opinion 296 (not published), issued under the Revenue Act of October 3, 1913, that: A corporation does not derive income from the acquisition of its own capital stock for cancellation. In the discussion of the case under consideration at that time the Solicitor stated that: The O Company was doing a prosperous business, and a syndicate was formed which secured control of all of its capital stock. The P Company was then organized which purchased for cash from the syndicate all of the shares of the company except directors' or qualifying shares. The P Company then had the O Company deed to it approximately 90 per cent of its assets in payment for which the P Company surrendered to the 0 Com- pany 90 per cent of the capital stock of the O Company. The transaction was carried through, and the 90 per cent of the stock surrendered was canceled. * * * In the argument of the question under discussion the Solicitor stated: The stock of a corporation held by any person other than the corporation whuh issued it of course constitutes an asset and one receiving in exchange capital stock of as Cereal ..ed market value greater than the cost to him of the asset given in exchange might realize a taxable profit from the transaction, but when stock is acquired by the corporation which issued it, in exchange for assets of the corporation, the transaction has an entirely differ- ent character. The stock is then necessarily diminished in value by the amount of the assets which the corporation has exchanged for it. In the instant case, when the O Company acquired substantially all of its stock in exchange for 90 per cent of its assets, the stock immediately ceased to represent any- thing like its former value. The whole exchange from the standpoint of the O Company was a capital transaction; capital stock, a bookkeeping capital liability, was acquired and extinguished by a surrender of assets including capital assets, the beneficial interest in which was previously represented by the stock acquired. No income could or did accrue to the O Company from this transaction. Its capital account alone was affected. * * * It is observed that the Solicitor's law opinion just cited has to do with the question of taxable profit rather than a deductible loss as involved in the instant case, but it logically follows from the language of that opinion that the converse of the proposition would be true, and that under such circumstances where a taxable gain could not be realized, no deductible loss could be sustained. This latter view is supported by Solicitor's Law Opinion 426 (not published), issued under Revenue Act of 1916, in which the Solicitor held that: '* * * Amounts paid by a corporation for the purchase of its capital stock for cancellation constitute capital transactions, and no part of the amounts paid is an allow- able deduction from income as a loss sustained. In the argument of the case under consideration at that time, the Solicitor states that: * * * This office has consistently held that where a corporation purchases its capital stock at a premium, it is not entitled to deduct the premium paid as a loss. Under Supplementary Jsuuetin Ruling?/ 8-16-22. Sec. 326. Art. 862.-5. date of April 11, 1917, this office wrote a letter to an inquirer in which it was held: "You ate informed that this office will hold that the redeeming of stock at a price in excess of par represents a capital transaction in which there can be no gain or loss to the corpora- tion, and therefore, the difference between the selling price of the stock and the price at which it was redeemed will not be taken up in the return of annual net income." Each of the above cases had to do with the acquisition and cancellation of its stock by the company issuing such stock, while in the instant case, the stock acquired was carried as "Treasury stock." In the judgment of the Committee this difference is not material in the disposition of the ques- tion involved, and the rule laid down by the Solicitor is applicable to the appellant case. It does not appear necessary to enter into a discussion of the analyses of book values of the corporate assets transferred or of the capital stock reacquired in view of the position taken by the Solicitor. It has been here- tofore shown in this opinion that the contract entered into by the M Com- pany and A refers in no uncertain terms to a sale by A to the appellant of y shares of its capital stock for certain considerations named in payment therefor. It is also shown by a statement taken from the books of the ap- pellant that this transaction was treated primarily as a capital transaction and that there has been set up a treasury stock account with appropriate debits and credits thereto. Esquerre in his work entitled, "Applied Theory of Accounts," in speak- ing of accounting for treasury stock, states in part as follows: * * * No matter what the financing scheme may have been which suggested the purchase of stock, its purpose should have been accomplished without affecting the income since the question of reducing the capital stock liability was never at issue. It would undoubtedly be better accounting to accept the view that premiums on capital stock constitute liabilities while discounts constitute assets, or, at all events, that they repre- sent facts which should be permitted to remain on the books until offset by subsequent transactions. Nor can it be said that such a treatment would be good financing since it would compel the supposed gains on discounts to remain in the business, while it would prevent the supposed losses on premiums from being charged to the present stockholders to the possible advantage of future stockholders. In view of the foregoing matters, the Committee concludes that the transaction in the instant case was a capital one and not one in which there resulted a loss from the sale, exchange or other disposition of property such as may properly be deducted in the computation of taxable net income; therefore it is recommended, in the appeal of the M Company that the action of the Income Tax Unit in disallowing as a deduction from gross income the excess of the book value on January 1, 1917, of certain assets transferred over the book value as of that date of y snares of its capital stock acquired in such transfer and carried to treasury stock account, be sustained, and accordingly that the taxpayer's appeal be denied. Z I('22)-ll-146; A. R. R. 799 Revenue Acts of 1917 and 1918. Recommended, in the appeal of the M Company, (1) That the value of patents acquired by said company at date of organization be placed at 1443^a: dollars and the value of good will, trade-marks, etc., be placed at 37x dollars (these figures being subject to verification by the Unit under the principles of valuation herein stated); (2) that the corporation be allowed to amortize its patents in the taxable year 1918 on basis of 1/17 of the values recommended herein; (3) that the pre- ferred stock purchased by the corporation and held as treasury stock be excluded in determining the statutory limitation on intangibles for purposes of invested capital; (4) that the corporation be denied its inventory adjustment at December 31, 1918, because net inventory loss has not been established; (5) that the cor- Supplementary Bulletin Rulings. Sec. 326. Art. 862.-6. poration be allowed the value of patents of A in the computation of prewar invested capital in accordance with the provisions of section 330 of the Revenue Act of 1918 and article 934 of Regulations 45; (6) that the corporation be allowed in- come from royalties on patents owned by A in computing prewar income in accord- ance with the provisions of section 330 of the Act. The Committee has had under consideration the appeal of the M Com- pany from the action of the Income Tax Unit in adjusting its tax returns for the taxable years 1917 and 1918. The exceptions taken by the taxpayer are summarized as follows: 1. That the Income Tax Unit did not give proper value to patents acquired at date of incorporation of the M Company. 2. That the Income Tax Unit was in error in refusing to allow the appellant to depreciate its patents for the year 1918. 3. That the Income Tax Unit was in error in refusing to take into con- sideration (in determining the value of intangible assets for purposes of invested capital) the proper value of the preferred stock originally issued and aggregating 2Cbc dollars. 4. That the Income Tax Unit was in error in refusing to allow the appellant the right to correctly value its inventory at December 31, 1918. 5. That the Income Tax Unit was in error in failing to compute the in- vested capital for the prewar period in the same way as that employed in computing invested capital for the taxable year, as required by section 330 of the Revenue Act of 1918. 6. That the Income Tax Unit was in error in excluding from the war profits credit, in violation of section 330, the net profits of one of the businesses acquired by the appellant at time of its organization, January, 1913. The M Company was incorporated about January — , 1913. It im- mediately acquired the patents, assets, and business of the O Company, and of the P Company, and of one A. The O Company was, prior to that time, engaged in manufacturing an automobile fixture and owned certain patents relating to the same. A, prior to 1913, was also the owner of a number of patents relating to the manufacture of a similar fixture. He had given an exclusive license to the P Company under these patents and that company likewise owned some patents relating to and was in the business of manu- facturing and selling the same kind of fixtures. Just prior to the organization of the M Company, the O Company, on the one hand, and A together with the P Company on the other, were in serious patent litigation. Countersuits had been brought for infringement and it is stated that under such conditions the business of each of the corporations was being seriously injured. In fact, patent counsel advised at the time that the pending litigation might not only but probably would result in absolute destruction of the particular business by virtue of the fact that each of the litigants could not only prevent the other from manufacturing the fixtures which they then manufactured, but there was then no known method by which commercially satisfactory fixtures could be manufactured without uniting in one owner the patents in con- troversy. It was thereupon determined that the M Company be organized with an authorized capital stock of 220* dollars, made up as follows: Y shares of preferred stock of the par value of 5z dollars each and lOy shares of common stock of the par value of 5z dollars each, making a total capitalization of 220x dollars. All of this stock was immediately issued in consideration of the acquisition by the corporation of the patents and other assets of the 0 Company and of the patents and other assets of the P Com- pany and all of the patents of A with respect to which he had previously given exclusive licenses to the P Company. Inventories made at the time show that Supplementary Bulletin Rulings. 3-16-22. Sec. 326. Art. £62.— 7. cash and other tangible property acquired by the M Company were of the value of 37 1-5at dollars. The tangible assets to the amount thus determined were accordingly entered on the books of the new corporation, and all of the rest of the capital stock in excess of the par value of this amount, or lS2x dollars, was entered upon the books of the corporation under the asset "patents, trade names, trade-marks and good will." The corporation, how- ever, subsequently claimed that the value of its patents was really in excess of this amount and for the purpose of taxation reported this asset at a value of 182 1-5* dollars. The Income Tax Unit, as a result of an examination of the taxpayer's books, determined that the value of patents, trade names, trade-marks, good will, etc., should have been stated as follows: Dollars On basis of excess of par value of stock over tangible assets acquired by the corporation 182* The value of patents on the books of the P Company when acquired by the corporation l/50x The value of patents on the books of the 0 Company when acquired by the corporation 1/2* Total 182 13/25* Less credits 1 1/5* Total 181 8/25* The corporation has accepted these figures, but contends they exclusively represent the value of patents acquired at date of organization, namely, January ■ — , 1913. The Income Tax Unit arbitrarily reached the conclusion that this amount should be allocated on a basis of 50 per cent for the value of patents and 50 per cent for the value of good will, trade names, etc. This conclusion resulted in an exclusion from invested capital of the appellant at the beginning of the taxable year 1917 of 50a- dollars. Argument was made before the Committee to show, on the facts above stated, that the organization of the M Company was determined upon solely because of the value and protection of the patents owned by its predecessor companies and by A; that the value of these patents at that time was deter- mined by the earnings of the corporations for a period of years prior to Jan- uary 1, 1913, and that since January, 1913, the reorganized company has con- tinued to demonstrate the value of these patents by its earnings resulting in an earned surplus of something over 80x dollars at December 31, 1917, after the consistent payment of dividends on the entire issue of preferred and com- mon stock. It is stated that prior to January 1, 1918, the company was engaged exclusively in the manufacture of the fixtures under these patents and that at the present time at least 70 per cent of all of the fixtures in use in this country are under the M Company patents. The Income Tax Unit, in support of its position in allocating 50 per cent of the adjusted capital stock issued in excess of net tangible assets to good will, trade names, etc., refers to this Committee's Memorandum 34 (C. B. 2, p. 31). After deducting 10 per cent of the net tangible assets of the P Company and the 0 Company to cover earnings from such assets, the Unit attributed the remaining earnings to patents, good will, etc., which, capital- ized on basis of five years' purchase, resulted in a value of 60x dollars. It must be borne in mind, however, that the Committee's recommendation above referred to dealt exclusively with such intangible assets as good will, trade- marks, trade brands, etc. Patents, under the 1917 law, had a somewhat different status. Supplementary Bulletin Rulings. Sec. 326. Art. 862.-8. The taxpayer has submitted the earnings for the years 1909 to 1912, inclusive, for the P Company and the average earnings for these years amounted to I3x dollars, while the average invested capital for the same years was 3%x dollars. This would indicate that the corporation earned more than $3.71 for every dollar of capital employed in the business. There were no intangible assets on the books of this company and the only asset in the nature of an intangible was patents at l/50x dollars. Accordingly, the taxpayer submits that out of a return of 37 1 .4 per cent on the average invested capital of P Company, 9 per cent of this return may reasonably be considered a manufacturing profit, although, as above stated, it manufactured no other commodities except the patented fixtures. It further claims that the balance of this percentage return of 371.4 per cent on this average invested capital should be assigned to patent earnings and the earnings so determined should be capitalized on basis of 6 per cent in order to arrive at the value of the patents acquired by M Company from P Company, Similar calculations are made on the average capital and yearly earnings of the O Company, but the period is necessarily limited to two years prior to the organization of the M Company. There were no intangibles on the books of O Company and the only asset in nature of an intangible was patents at }/2pc dollars. In this case the return on average invested capital is 17.25 per cent, and it is claimed that 8.25 per cent of the same should be applied to the average invested capital of the O Company on account of patent earnings. This amount of earnings it has also capitalized on a 6 per cent basis to deter- mine the value of patents acquired from the O Company. In the instant case the Committe recognizes that 9 per cent is a fair return on average invested capital for manufacturing profit when there stand behind the invested capital substantially only tangible assets and the nature of the business is exclusively the production of patented articles. It can not, however, give sanction, in the instant case, to the capitalization of patent earnings on basis of 6 per cent when apportioned as above stated. It considers that a capitalization on basis of 10 per cent gives recognition to the value of the patents as indicated not only by the earnings of the companies prior to the reorganization of January, 1913, but also subsequent thereto. The Committee also has in mind the emphasis which was placed on the value of the patents when the two predecessor companies were in litigation. The Committee can not, however, ignore the fact that the trade names used on the patents of the predecessor companies had a good will or trade-mark value. This was recognized by the corporation in the trade name. Accordingly, using the average invested capital and the average earnings as submitted by the taxpayer for the years prior to organization of the M Company (these figures being subject to verification by the Unit), the Committee finds the value of the patents of P Company to be 133 S/25x dollars and the value of the patents acquired from the O Company to be llx dollars or a total valuation for the patents acquired by the M Company of 144 8/25* dollars in lieu of the value of 181 8/25* dollars, as claimed by the taxpayer. The difference, 37 \/5x dollars, fairly covers the value of the good will, trade-marks, etc., acquired by the M Company at the date of organization. This value of 37 l/5x dollars applicable to good will, trade-marks, etc., is, however, within the 20 per cent limitation prescribed by the statute for the inclusion of good will in invested capital. This, therefore, gives the M Company its full claim of 181 8/25x dollars for invested capital but not without due recognition on a sound basis of the value of the patents acquired from its predecessor companies. Supplementary Bulletin Ruling*. 3-16-22. Sec. 326. Art. 862.— 0. In the consideration of the second exception taken by the appellant, to the effect that the Unit was in error in refusing to allow depreciation on patents for the year 1918, it is noted the following entries were made on the books of the corporation before they were closed for the taxable year ended December 31, 1918: December 31, 1918. Dollars Dollars Good will 10 7/10* To surplus 10 7/10* To set up on books as of Dec. 31, 1918, a value for good will arising from advertising, ownership of patents, etc., in a sum equal to 1/17 of the book value of patents as at Dec. 31, 1917. This entry is made per instructions of president. Amortization of patents 10 7/10* To reserve for amortization of patents 10 7/10* To set up on books as at Dec. 31, 1918, a reserve for the amortization of patents equal to 1/17 of the book value of these assets as shown by books Dec. 31, 1917, to wit, 18234* dollars x 1/17 = 10 7/10* dollars. This entry is made per instructions of president. Surplus 10 7/10* To amortization of patents 10 7/10* To close the latter account into surplus. The last entry above noted closes a nominal account (amortization of patents) into surplus without carrying the entry through the profit and loss account. Because the entry was made against surplus the corporation admits that its books do not show a deduction from income for amortization of patents. The Committee considers this merely a technical question of book- keeping and that the explanatory entries in journalizing these accounts clearly show the true intent of the corporation to amortize its patents on basis of 1/17 of the value as shown by the books at December 31, 1917, to wit, X&l^x dollars. It has been pointed out and confirmed that the item of good will is nothing more than an item of appreciation, and the taxpayer accordingly deducted under Schedule G in its 1919 tax return the surplus item of \0]^x dollars as an unallowable surplus adjustment of the prior year for invested capital purposes. The amount of allowable amortization must be adjusted to conform with the valuation of patents as determined by the Committee in this recommendation. With respect to the adjustment for prior years affecting invested capital at the beginning of the taxable year 1918, attention is directed to the following provision in article 843 of Regulations 45: It can not be said that the correct computation of surplus and undivided profits necessarily requires a deduction in respect of the expiration of patents. It follows, therefore, that where a corporation in the exercise of its option has not written down the cost of patents, it is not ordinarily necessary to reduce the surplus and undivided profits in com- puting invested capital, whether the patents have been acquired for stock or shares or for cash or other tangible property. Due consideration will be given to the facts in any case in which this rule seems obviously unreasonable. Article 167 of Regulations 45 reads, in part, as follows: The fact that depreciation has not been taken in prior years does not entitle the tax- payer to deduct in any taxable year a greater amount for depreciation than would otherwise be allowable. It is, therefore, clear that the corporation was within the provisions of the regulations in claiming amortization for the taxable year 1918 under article 167 without reducing its surplus at the beginning of the taxable year. In consideration of the third exception taken by the appellant, to the effect that the Unit was in error in refusing to take into consideration (in Supplementary Bulletin Rulings. Sec. 326. Art. 862.— 10. determining the value of intangible assets for purposes of invested capital) the proper value of the preferred stock originally issued and aggregating 20* dollars, it is noted that prior to January 1, 1917, the entire issue of preferred stock had been purchased by the corporation and was held in its treasury. It was so held until the company amended its charter in the year 1919, at which time the stock was canceled. In the computation for the allowance of intangibles, as prescribed by section 207 (a) of the Revenue Act of 1917 and section 326(a)4 of the Revenue Act of 1918, the Unit declined to take into consideration this preferred stock. Section 207(a) of the Revenue Act of 1917 provides, in part, as follows: * * * Good will, trade-marks, trade brands, franchise of a corporation * * * or other intangible property, bona fide purchases, * * * for and with shares in the capital stock of a corporation * * * in an amount not to exceed * * * 20 per centum * * * of the total shares of the capital stock of the corporation, shall be included in invested capital * * *. Article 57 of Regulations 41 prescribes the limitation to be: Twenty per cent of the par value of the total stock or shares outstanding on that date (Mar. 3, 1917). Section 326 (a)4 of the Revenue Act of 1918 reads as follows: Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, \b) the par value of the stock or shares issued therefor, or (c) in the aggregate of 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest. In an informal opinion the Solicitor of Internal Revenue has held: The company's contention is that by the purchase the stock in question became treasury stock and as such it was an asset, in that the company might have at any time sold the same for a consideration. Treasury stock as generally defined in the decided cases has usually been held to mean such portion of the shares of capital stock originally issued in consideration of property or cash contributed to the corporation as have been returned to the corporation by way of a gift or a loan in order to enable the corporation to raise working capital with which to operate. Having once been issued as paid-up shares, such stock, when returned to the corporation after it has been issued in the manner specified, becomes a part of the general assets of the company and may be sold or disposed of in the same manner as other personal property. The essential feature is, however, that it is paid-up stock, which by its transfer back to the corporation has not been changed in character. With reference to such stock it may be said that the same object could be attained in the usual case by the sale by the stockholder of such shares and thereafter turning over to the corporation the pro- ceeds of such sale. The original number of shares of stock issued in such a case remains constant and the capital stock liability of the corporation likewise remains the same. (Crosby v. Stratton, 17 Colo. Appeals, 212; 68 Pac, 130, 133; Machey v. Burns et al, 16 Colo. Appeals, 6; 64 Pac, 485, 490; Enright v. Heckscher, 240 Fed., 863, 874; Davies v. Ball, 64 Wash., 292; 116 Pac, 83; Camden Land Company v. Lewis, 63 Atl., 523; Davis v. Mont- gomery Furnace \3 Chemical Company, 101 Ala., 127; 8 So., 496, 497; Mosher v. Sinnott, 20 Colo. Appeals, 454; 79 Pac, 742.) It will be seen that the above definition can not include a corporation's own stock which it has purchased from its stockholders in the open market for the simple reason that whatever the corporation pays to the stockholder for his share of stock is a withdrawal by such stock- holder of the amount of capital originally contributed to the capital stock of the company. By such withdrawal the share which his interest represented is extinguished because it has been so withdrawn. The amount of capital originally contributed still in the hands of the corporation constitutes the remaining capital stock, of which it can not be said that the interest formerly represented by the share of the withdrawing stockholder is a part. In considering a case very similar to the present one, the Supreme Court of Louisiana, in Belknap v. Adams (49 La. Annual, 1350; 22 So., 382, 383), said: But, instead of a division of property, we have in this case the division of purchased stock, which, by the purchase, was canceled and remained canceled for all purposes until reissued. (1 Mor. Priv. Corp., sees. 112, 114; Cook, Corp., sec 282.) This is the well- defined result when the corporation purchases its stock. The purchase is an unauthorized use of the corporate funds, but, when permitted to stand or is unassailed, the purchase simply extinguishes the stock, increases the rights of the remaining stockholders. This division or donation of the purchased stock was not, in any sense, a distribution of corporate property. Supplementary Bulletin Rulings. 3-16-22. Sec. 326. Art. 862.— 11. in Steel v. Farmers & Merchants Mutual Telephone Association (Supreme Court,- Kansas, May 8, 1915; 148 Pac, 661) the court said: The use of the means or assets of a corporation to buy up its own capital stock permits the withdrawal of a stockholder without substituting another in its place, repays to the withdrawing member his share of the capital, reduces the amount of the fund contributed to the common venture, and to that extent injures the continuing stockholders and creditors and opens the door to mismanagement and unfairness. See also Bank v. Fox (Federal case 2683), wherein the court speaks of the purchase by a corporation of its own stock as being an extinguishment of such stock. In any view of the case, this is the logical legal result of the purchase by a corporation of outstanding shares of its own capital stock, for it is but returning to the stockholder the original contribution advanced by him and for which advance he was entitled to an interest in the capital stock of the corporation represented by his share of stock. This also appears to be the correct view from the standpoint of accounting principles. Dickinson, "Account- ing, Practice and Procedure," at page 130, says: An important question arises as to the treatment of stock of a corporation held in its own treasury. Many corporations still treat this as an investment asset, either under a 'special division of the balance sheet or among the current assets. * * * A little consideration will show that such a practice is entirely erroneous and misleading, and, moreover, that it also raises difficult questions of valuation. The capital stock represents the manner in which its property and assets are distributed among those who constitute the corporation. If one of these owners disposes of his share of the corpo- ration, he withdraws therefrom taking with him what he considers his fair proportion of the asset value, and leaving the rest to be divided among the remaining owners. Assuming that the seller gets full value, the value remaining to the others is neither more nor less in fact than it was before, although if the stock is actually worth more or less than its par value, there will be an apparent profit or loss on the transaction; the effect of which may be thus illustrated: A corporation has a capital stock of $1,000,000, divided into 10,000 shares of $100 each, and represented by assets of equal value. The holders of 1,000 shares with- draw, i. e., sell their shares to the company at the book value, which in this case is par. The stock is thereby reduced to 9,000 shares, i. e., $900,000, and the assets are similarly reduced by the payment of $100,000 to $900,000. There is clearly no reason whatever for pretending that there are still 10,000 shareholders and assets of $1,000,000, when as a matter of fact there are only 9,000 with assets of $900,000, and the position of those 9,000 is entirely Wfufangad^^ p«v,zrti In rtrtitfi-tncimm r -)i\i nr [ «*;>ii a On page 132 of Dickinson, "Accounting, Practice and Prodecure," the author continues as follows: As a matter of convenience small amounts of such stock are carried as marketable investments when the same are held temporarily; but even this practice is open to criticism as lending itself to a use of the funds of a corporation for influencing the market in its own stock, which is not one of the purposes for which it is permitted to exist. See also Montgomery, "Income Tax Procedure, 1921," page 386. In the instant case it appears quite clearly that this corporation did not purchase this stock for temporary purposes, but that such purchase was actually a part of a scheme to retire such stock in a general plan to rearrange the stockholdings in the corporation. The purchase was a retirement of the stock for all purposes. It is immaterial for our purposes that the corporation was required to pay taxes to the State upon the basis of the original capitalization (as they state in their brief they were required to do), for such payment may have been required by the State because of failure on the part of the corporation to give proper notice of the reduction in its capital stock as provided for by the State statutes. At any rate, it is not a point of importance in this case. In view of the above, it is the opinion of this office that the action of the Income Tax Unit in refusing to recognize the preferred stock so purchased by the corporation for the purposes of its computation with respect to the allowance of intangibles for invested capital purposes was correct. In this opinion the Committee concurs. In consideration of the fourth exception taken by the appellant, to the effect that the Unit was in error in refusing to allow the right to correct the value of its inventory at December 31, 1918, it is noted that certain products were included in its inventory of December 31, 1918, priced at the market as of January 22, 1919, as quoted by the market report, the first market quota- tions after the Government's release of control of prices for these products. This adjustment decreased the profits for 1918 in the sum of x dollars. It is admitted by the taxpayer that the prices so fixed did not cover the entire Supplementary Bulletin Rulings. Sec. 326. Art. 862. -12. slock on hand at December 31, 1918. In view of this appellant's contention that it suffered an inventory loss under section 234(a) 14 of the Revenue Act of 1918 can not be sustained. The Advisory Tax Board, in passing opinion July 24 in its Memorandum 52 (C. B. 1, p. 155), gave reference to article 267 of Regulations 45, which provides, inter alia, that: Not later than 30 days after the close of the taxable year 1919 a taxpayer who has filed either a claim in abatement or a claim for refund, or both, shall submit to the Com- missioner a descriptive statement showing the quantity and kind of all goods included in the 1918 inventory which have been (a) sold at a loss in the taxable year 1919, (b) sold at a profit during the taxable year 1919, or (c) not sold or otherwise disposed of during the taxable year 1919 * * *. Commenting on these provisions, the Advisory Tax Board said: The regulations thus clearly require a statement showing the disposition of all the inventory, and the regulations conform to the statute which speaks of the inventory. An inventory is a well-understood concept and where the term is used without qualification it means the inventory as a whole, and not merely some part of the goods included in the inventory. The Advisory Tax Board is, therefore, of the opinion that an inventory loss can not be proved by a submission of evidence showing that a loss has been sustained in respect of a part of the inventory, without showing at least that the amount of the loss for which claim lias been filed has not been offset by profits made on the remainder of the inventory. If, therefore, a claim can only be sustained on basis of^net loss in the inventory of the appellant, the adjustment which the taxpayer made in the inventory as of December 31, 1918, can not be sustained, because it does not reflect a net loss. The opinion of the Advisory Tax Board has been con- firmed by this Committee in its Recommendation 487 (C. B. 4, p. 205), dated March 1, 1921. The fifth and sixth exceptions taken by the appellant are to the effect that for the purpose of computing prewar income and invested capital the earnings of A from royalties on patents must be included and that under section 330 the value of patents as used in the computation of invested capital for the taxable year must be included in prewar invested capital in the same amount. It is noted that A, in 1906, gave the P Company the exclusive right to use his patents subject to the payment to him of certain royalties. These royalties were regularly paid him by the company, such payments constituting a deduction from the income of the P Company. The cost to A of procuring and developing the original patents is not in evidence. The M Company acquired, on the date of its organization — (a) The assets of the O Company; (b) The assets of the P Company; and (c) The business of A in so far as it related to owning and licensing patents to the P Company. In the computation of prewar income and invested capital the Income Tax Unit did not take into consideration the income or the invested capital of A as owner of a portion of the patents acquired. The Unit, however, in submitting the case for consideration by this Committee, gives approval under section 330 of the Revenue Act of 1918 to the claim of the appellant, but makes the point that under article 934 of Regulations 45 the excess of the valuation of any asset in existence during both the taxable year and any prewar year, but included in invested capital for the prewar year at a lesser value than for the taxable year, shall not be included in determining the difference, 10 per cent of which is added to or deducted from the war profits credit. The Committee concurs in this conclusion and considers that the excess value of patents for the taxable year over the value at which they were carried on the books of the predecessor corporations and A should be eliminated for Supplementary Bulletin Rulings. 3-16-22. Sec. 326. Art. 862.— 13. computation of the increase in invested capital for the war profits credit. It is not considered that the income of A from royalties on patents can be capitalized to determine the invested capital of A for the prewar period. Summing up, the Committee recommends: 1. That, in the appeal of the M Company, the value of patents acquired by said company at date of organization be placed at 144J/2* dollars and the value of good will, trade-marks, etc., be placed at 37 l/5x dollars (these figures being subject to verification by the Unit under the principles of valua- tion herein stated). 2. That the corporation be allowed to amortize its patents in the taxable year 1918 on basis of one-seventeenth of the value recommended herein. 3. That the preferred stock purchased by the corporation and held as treasury stock be excluded in determining the statutory limitation on in- tangibles for purposes of invested capital. 4. That the corporation be denied its inventory adjustment at December 31, 1918, because net inventory loss has not been established. 5. That the corporation be allowed the value of patents of A in the computation of prewar invested capital in accordance with provisions of section 330 of the Revenue Act of 1918 and article 934 of Regulations 45. 6. That the corporation be allowed income from royalties on patents owned by A in computing prewar income in accordance with the provisions of section 330 of the Act. 3 Supplementary Bulletin Rulings. Sec. 326. Art. 869.— 1. Section 326. — Invested Capital (H555). Article 869. — Affiliated Corporations: Invested Capital for Prewar Period. (11828). (See 12-21-1526; sec. 320, art. 802.) Basis for determining average pre- war income and invested capital. 1 Supplementary Bulletin Rulings. -.0d8 MA .d$fc .ttZ JjJJiqfiO bsJzsvnl — .dS6 nortoaS 1^4 iol: IsjiqeD b9t33vnl :3noijjnoqicO boJcilfftA— .Qd8 9lohhtA [ 3^£13Vfi ^nifIIfmf)J3D "IOT 818BC1 ( >-WO .Jib t U\C .332 ,0-CI — 1V~ \1 .[ctrqBO b^Jc^vxii bns smoDnt isw t 2-20-22. Sec. 326. Art. 871.— 1. Section 326.— Invested Capital (1918 Act— e !555, ante): (1921 Act— «[ 1035, post). Article 871. — Foreign corporations (Reg. 45 — 1[830, ante): (Reg. 62 — ^1242, post). 9-21-1486: A. R. R. 397. REVENUE ACT OF 1917. The M Company, a foreign manufacturing corporation, is said to be in reality no more than a branch of the N Company, a very much larger foreign corporation. The facts with regard to the corporate organization and business of the taxpayer and the parent corporation are shown in the record to be as follows: The parent corporation was organized about 1877 to take over the business established many years ago and continuously conducted by members of an English family. This corporation has, on a very large scale, continued down to the present time the manufacture and sale of the goods and had outstanding, in 1917, ordinary shares of the par value of 66* pounds, which had then a market value of 297* pounds, or nearly 1,450* dollars. The parent company and its subsidiaries then, as they do now, manu- factured and marketed this product in many parts of the world. Previous to 1901, the parent company had sold its products in the United States through an agent; but, in or about that year, the company established its own agency in this country and continued to sell its products through that agency down to 1908. In the year 1908, the company purchased a factory in this country, and then began the manufacture of its goods in this country. Late in 1907 it was found desirable to organize a new English corporation which should carry on the American business of the company. Accordingly, the M Com- pany, this taxpayer, was organized under the English Companies Act with an issued capital of x pounds, equivalent in dollars at $4.86 in the pound to 4.86* dollars, and the new company immediately took over the parent company's plant and entire assets in this country. The amount of this capitalization is said to have been approximately equivalent to the net income from the American business for one year at that time, and it is asserted and insisted upon that such capitalization bore absolutely no relation what- ever to the value of the assets acquired by the new company, "for (so asserts the taxpayer's brief) in these assets were included, at a nominal valuation, the trade-marks and good will of the parent company, which had a real value of say 100* dollars." It is further asserted that the entire capital stock of the taxpayer which, ever since 1908, has nominally carried on the American business, is and always has been owned by the parent company. It is said that the majority of the board of directors of taxpayer company are all members of the said English family, as are the directors of the parent corporation, and the entire net income from the operations of the business goes into the treasury of the parent company, no appreciable portion of such income being retained for any considerable period of time in the treasury of the taxpayer; and that the taxpayer is only able to carry on its business and finance itself, without accumulating a surplus, because it can depend upon the vast resources of the parent company. In filing its income and excess profits tax return for the taxable year ended November .30, 1917, the taxpayer, in its excess profits tax return, set forth that the income for that year was 103/2* dollars, which was subsequently amended and fixed by the Commissioner of Internal Revenue at 10* dollars. Supplementary Bulletin Rulings. Sec. 326. Art. 871.— 2. In this return it was suggested to the Department by the taxpayer that a fair constructed capital should be fixed after giving due weight to the foreign invested capital and taking into account the very great value of the foreign trade marks; a transfer of which, so far as they were used in America, had been made to the taxpayer in 1908 at the time of its incorporation. In May, 1918, the taxpayer was notified by the Commissioner, of a tax of \}Ax dollars; which was promptly paid and nothing further was heard by the taxpayer from the Government until March 8, 1920, when the com- pany was notified of the proposed assessment of an additional tax in the sum of 2%x dollars. In arriving at this additional tax, the Income Tax Unit recognized that the assessment should be made under section 210 of the Revenue Act of 1917 and gave to the taxpayer a total constructed capital of 2Sx dollars, being an additional allowance of approximately lOx dollars above the invested capital as shown by the books of the taxpayer; and it is from this action on the part of the Unit that the taxpayer now appeals. It is the understanding of this Committee that there is no controversy as to the correctness of the facts substantially as advanced by the taxpayer in his brief submitted upon appeal to the Committee, and which are set forth above. It is the contention of the taxpayer that no fair comparison can be made for the purpose of computing the tax under section 210 of the Revenue Act of 1917, except with the parent corporation, and the taxpayer prays that under such circumstances it should be assessed under that section on the same basis on which it would be assessed if it were a branch of the parent company; or, if not on that basis, then directly as a branch of the parent company, and that an estimate of the capital of the parent company employed in this country be made under article 48 of Regulations 41 relative to the war excess profits tax imposed by the War Revenue Act approved October 3, 1917. This case is unique, at least in the experience of the Committee, in that the taxpayer is a foreign corporation, of which the entire business is trans- acted and the profits therefrom earned in the United States, and in that it is also a subsidiary of another foreign corporation which owns or controls all of the taxpayers' capital stock. A situation is here presented which does not seem to have been contem- plated or exactly provided for by the framers of the Act. Nevertheless, the Committee finds no warrant in the law or regulations which would permit or justify the disposition of the case which is sought by the taxpayer; nor is it all certain that such consideration, if possible, would afford to the tax- payer any further relief than that which has heretofore been granted to it by the Commissioner, acting through the Unit. Treasury Decision 2662 reads in part as follows: Pursuant to article 78 of Regulations 41, relative to war excess profits tax, affiliated corporations as limited and defined in paragraphs C and D below are hereby directed to make consolidated returns for the purpose of excess profits tax. Atftiiated corporations other than those falling within the provisions of paragraphs C and D may make a con- solidated return only after having secured permission in writing from the Commissioner of Internal Revenue. The Treasury decision then proceeds to quote article 77 of the regulations in definition of "affiliated corporations," and in paragraphs A to H enlarges upon the definition contained in that article of the regulations. It seems unnecessary to refer more in detail, either to this Treasury decision or to articles 77 and 78 of Regulations 41, for the reason that, as has already been said, the instant case presents a feature apparently not contemplated or provided for in either the law or the regulation, namely, Supplementary Bulletin Rulings. Sec. 326. Art. 871.— 3. that both the taxpayer and its parent company are foreign corporations, while the taxpayer alone does business within the United States. It has been consistently held by the Department that the privilege of riling a consolidated return can not be granted to a taxpayer in cases where the Department would be without power to require such a return. Clearly this is such a case, for it is obvious that the Department has no such authority in the case of the two foreign corporations. It would seem, therefore, that the request of the taxpayer for the privilege of filing such a consolidated return must be denied, if upon no other ground than the sufficient one that the Department is entirely without power to grant such a privilege. But it is doubtful, even though the Department had the power, and the privilege were granted, that the taxpayer would experience the anticipated relief, for it seems to the Committee that the application by the Unit to this case of section 210 of the Revenue Act of 1917 produces substantially the situation that the taxpayer seeks to attain, through article 48 of Regulations 41, which provides that: When used in reference to a foreign corporation or partnership, or a nonresident alien individual, the term "invested capital" means that portion of the entire invested capital as defined and limited by these regulations which the net income from sources within the United States is of the entire net income. This is substantially the condition produced by the application of section 210 to the taxpayer's case under consideration, and it does not appear to the Committee, therefore, that any further relief can be granted to the tax- payer than has already been afforded by the Unit; nor, as a matter of fact, that any hardship or injustice has been done to the taxpayer by such appli- cation, since the taxpayer's earnings, based on its actual investment, were 215 per cent, and its excess profits tax, computed under the provisions of section 210, is 38.25 per cent of its net income. 1 Supplementary Bulletin Ruling6 MA .dSfc .398 alidw t 8noitBioqiOD ngbiot sib x nBC l mo;) ^naisq zi\ bnB ti rril oJ i3Woq jaofljtw ^mun tfrtmruxpG arfj dsuodJ bluow laxsqxBi Dill tr,H) arrf J- JsdJ D^JJCfflfncO 9..fi.t \ I " i tO JOPl 9Ufl9V2»/l 3f! J It dswoidJ c qifiJjic»8^s-i3 aawis lajblttmoti & ~io ,qiHaT3r UiiqsD bmwni nil as sAiW nirf>»w g'jrnwo?. molt srrtoom J no&ddi lo rtoiJtiDilqqB sdJ oJ i£ 9 qq£ Jon 8*ob *i bri -xsl t>dJ oj bdJitms nB ' 3ie rtq TIB >no3 adi vlUbfu Mil dT Oil ;cq id J r&3 ">38 r 2-20-22. Sec. 327. Art. 901.— 1. Section 327.— Special Cases (1918 Act— r 565, ante): (1921 Act— a 1044, i9bnu 'ndmpefi^.-xol t k lo nobollqit tffe.lo^tt? snJ ni BOtr«bflMBtn dollars. Liquor license \5x dollars. 175* dollars. In the merchandise account was included the actual cash surrender value of the liquor license under which the business was operated, or 3j^* dollars, which license had been taken out September, 1914, at a cost of 10* dollars to run for one year. The additional value of 15* dollars placed upon this license was its estimated selling value over its cash surrender value at the time the capital stock of the corporation was purchased from C. At that time local laws restricted the number of licenses that could be out- standing and operative in the city. Each license was for the operation of a liquor business at a certain specified street address and was renewable from year to year. It could not be transferred to another address but was trans- ferable from one holder to another. This created a ready market for each such license outstanding and license sales were being made at from 15* Supplementary Bulletin Rulings. Sec. 327. Art. 901.-30. i dollars to 30* dollars over and above the cash surrender value of the licens Immediately after their purchase of the capital stock of the M Company D and E installed a new set of corporate books and in opening same they had set up a license account showing a value of I5x dollars. In 1917. due to the enactment of prohibition laws, it was considered that this license right had become worthless and the item of 15# dollars was charged off as a loss and claimed as a deduction against gross income for that year, which deduction was disallowed by the Income Tax Unit. In the opinion of the Committee the action of the Income Tax Unit in disallowing the said deduction of I5x dollars should be sustained for the following reasons: The transaction in which B sold her holding of capital stock in the M Company to C was a transaction solely between two indi- viduals and not one between an individual and a corporation. It resulted in the sale of the said capital stock and not in a sale of the corporation's assets. It was a transaction to which the corporation itself was not a party. The same is true of the transaction in which C sold the same stock to D and E. The latter paid 175* dollars for the capital stock of the M Company. They did not purchase that corporation's assets as such and neither trans- action effected any change in the corporation's invested capital. The only amount the corporation ever had invested in the license was the amount paid therefor, or lOx dollars, and inasmuch as that license was taken out Septem- ber, 1914, and ran for only one year, the corporation was entitled to claim the proportionate part of that amount properly chargeable to the period September to December 31, 1914, as an expense deduction for the year 1914 and the balance as a deduction for the succeeding year. In a similar manner the amount paid for a renewal of the license in 1915, 1916, and 1917 could have been and probably was claimed as a deduction. Even though the license had been regarded as a capital asset and not as an expense deduction, appreciation in its value over cost was not properly returnable as income for tax purposes nor allowable as a deduction when wiped out by subsequent events. The Revenue Act of 1917 provides that if the Secretary of the Treasury is unable in any case to satisfactorily determine the invested capital the pro- visions of section 210 of that Act shall apply. The taxpayer in the instant case claims assessment under that section, and, in the opinion of the Com- mittee, that claim should be granted. It appears clear from the records in the case that at the time the business of A was incorporated the assets trans- ferred in exchange for capital stock of the par value of 50* dollars were worth approximately 150* dollars or more. B when selling her stock retained the books of the corporation and has since refused to surrender them. C, as sole owner of the corporation's capital stock, apparently conducted the business more or less as his own individual business and kept very incomplete corporate records. When disposing of his stock in the corporation to D and E, he turned. over to them the corporation's stock book, stock ledger, and corporate seal, and a statement showing the names of the corporation's debtors and creditors and the amounts due and payable. None of the account books, with the exception of a cash book, were turned over to the purchasers of the stock, and the corporation is not now in possession of sufficient records to clearly establish its statutory invested capital. The Unit in its final audit of the appellant company's return for 1917, established a statutory invested capital as of the beginning of that year on the following basis: Supplementary Bulletin Rulings. 8-16-22. Sec. 327. Art. 901.— 31 Capital stock 50x dollars. Surplus (undivided profits) 85 dollars. I35x dollars. Less 1916 income tax prorated x dollars. Adjusted invested capital 134* dollars. No consideration was given to the fact that at the time the business was incorporated the value of the assets taken over by the corporation in exchange for its stock was greater than the par value of the stock issued therefor. Article 63 of Regulations 41 provides that — Where it can be shown by evidence satisfactory to the Commissioner of Internal Revenue that tangible property has been conve3'ed to a corporation or partnership by gift or at a value, accurately ascertainable or definitely known as at the date of the conveyance, clearly and substantially in excess of the casn or the par value of the stock or shares paid therefor, then the amount of the excess shall be deemed to be paid in surplus. * * * It is clearly evident from the records in the case that tangible property of a value substantially in excess of the par value of the stock paid therefor was conveyed by B to the M Company and that the corporation would be entitled to an allowance of paid-in surplus if it were now in possession of records showing the actual cash value of the tangible property at the time of conveyance. However, such records are not now available nor are there any records available from which a complete history of the corporation's invested capital from time of incorporation to the beginning of 1917 may be obtained and the amount of statutory invested capital allowable to the corporation for that year clearly established. In view of the foregoing the Committee recommends that the action of the Income Tax Unit in disallowing a deduction of 15a? dollars claimed by the M Company for the year 1917 to cover depreciation in the value of liquor license be sustained, and that the corporation be granted assessment of excess profits tax for the year 1917 under the provisions of section 210 cf the Revenue Act of 1917. 27 I ('22)-l 1-147; L. O. 1090 Revenue Act of 1918. 1. The phrase "abnormal conditions affecting the capital or income of the corporation" is defined to include the following: (a) Where a corporation is placed in a position of substantial inequality because of the time or manner of organisation; (/;) where the capital employed, although a material income- producing factor, is very small, or in large part borrowed; (c) where there is excluded from invested capital under section 326 intangible assets of recognized value and substantial in amount which have been developed by the taxpayer (in view of the specific limitations upon the admission of intangibles into invested capital contained in sec. 326 of t!:e Act applications for assessments under sec. 328 upon tins ground should be carefully scrutinized and the application denied where its allowance would result in defeating the avowed purpose of the limitations contained in sec. 326); (d) where the net income for the year is abnormally high, due to realisation in one year of income earned during a period of years; (e) where extraordinary gains are derived from the sale of property where its principal value has been demonstrated by prospecting or exploration: and (/) where proper recognition can not be made for amortization, obsolescence, or exceptional de- pletion due to the World War. 2. Where application is made under section 327(d) for assessment under section 328 of the Act of 1918, the abnormal conditions affecting the capital or income of the taxpayer must be established by proof. Abnormal conditions affecting capital or income in the present case have been established. Supplementary Bulletin Rulings. Sec. 327. Art. 901.— 32 3. The term "exceptional hardships," as used in section 327(d) of the Revenue Act of 1918, means the hardship of inequality evidenced by gross disproportion between the tax computed without the benefit of sections 327 and 328 and the tax computed by reference to the representative corporations specified in section 328, but inequality alone is not sufficient to grant relief under section 328; the inequality must be due to abnormal conditions affecting capital or income. 4. In selecting corporations with which to compare the taxpayer in a given case, great care should be exercised, and only corporations which are truly rep- resentative should be used. The word "representative," as used in the Act, means "typical" or "symbolical," and the Act requires the comparatives used to be typical as near as may be in respect to capital employed, gross income, net income, profits per unit of business transacted, amount and rate of war and excess profits tax, and all other relevant facts and circumstances. The corporations used as com- paratives must not only be in the same general line of business, but as nearly as possible representative in all the particulars mentioned in the Act. In the present case, comparatives Nos. 1 and 2 are not representative within the meaning of section 328 of the Revenue Act of 1918. Their use in this case creates and does not correct an inequality. Reference is made to the claim filed by the M Company for the abatement of 71 dollars excess profits taxes for the year 1918. The claim is based upon the application for assessment under sections 327 and 328 of the Act of 1918. The Unit allowed relief under the above sections, and after selecting com- paratives provided for in the last paragraph of section 328, computed the tax thereunder and found the corporation entitled to an abatement in the sum of 71j^* dollars and, in addition thereto, has suggested a refund of 40* dollars of the taxes already paid. The question is whether the corporation is entitled to relief under these sections, and, if so, whether the proper comparatives have been used in com- puting the tax. The M Company appears to have begun business about 1901 and to have organized under its present name in 1905 with a cash capital of 60* dollars. In 1909 it took over the assets of the O Company and the P Company and increased its capital stock to 600* dollars. Under the plan of reorganization the par value of the stock was $100, and 15%y shares appear to have been issued for tangible assets and 14)4/y shares for intangible assets, making the total outstanding shares 30y. In its early years and up until 1916 this corporation's earnings were small, and it was its policy to reinvest its earnings and surplus in plant property. From 1917 on its earnings have been very large, due no doubt in large part to war conditions. In 1918 its invested capital was over 1,200* dollars and its net income approximately 700* dollars. Over 200* dollars written up on the books as good will has been disallowed as invested capital, and the company bases its claim for relief under sections 327 and 328 on the fact that it has spent large sums in experimental work, and that as a result thereof it has developed secret formulas for the man- ufacture of . . . ., which gives it a practical monopoly in certain kinds of That none of the amounts spent in experimental and discovery work has been capitalized, and it now has valuable intangible property which is not shown in its invested capital, which by the proper method of bookkeeping should be so included, and that by reason thereof it is subject to an exceptional hardship when compared with other corporations in its class which have capitalized such expenditures. In order to determine whether or not the corporation in question is entitled to relief under section 327 and 328 of the Act of 1918, and if so whether the proper comparatives have been used, it is necessary to refer to the Act and its history and examine the case and the comparatives used in the light Supplementary Bulletin Rulings. S-16-22. Sec. 327. Art. 901.-33 of the language of the Act. The sections of the Act in so far as material are as follows: Sec. 327. That in the following cases the tax shall be determined as provided in section 328: (a) Where the Commissioner is unable to determine the invested capital as provided in section 326; (b) In the case of a foreign corporation; (c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively; (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax is determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corpo- ration earned within the taxable year a high rate of profits upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the tax- able year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. Sec. 328. (a) In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. In the case of a foreign corporation the tax shall be computed without deducting the specific exemption of $3,000 either for the tax- payer or the representative corporations. In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily de- termined under section 326 and which are, as nearly as may be, similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances. The provisions of the bill as first introduced in the House of Repre- sentatives were very different from the Act as it finally passed. Section 327 as originally introduced was as follows: (a) That in the following cases the invested capital shall be determined as provided in subdivision (b) of this section; (1) where the Commissioner is unable satisfactorily to determine the invested capital as provided in section 326; or (2) where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively; or (3) where capital is a material income-producing factor, but where, because of the fact that the capital employed is in large part borrowed, there is no invested capital or the invested capital is materially dis- proportionate to the net income as compared with representative corporations engaged in a like or similar trade or business. This section shall not apply in the case of a corporation 50 per centum or more of whose gross income (as defined in section 213 for income tax purposes) consists of gain, profits or commissions derived from Government contracts, unless the Commissioner is satisfied that such corporation is overcapitalized. [b) In the cases specified in subdivision (a) the invested capital shall be the amount which bears the same ratio to the net income of the corporation for the taxable year as the average invested capital for the taxable year of representative corporations engaged in a like or similar trade or business bears to their average net income for such year. After much discussion, the bill was amended, passed the House, and was transferred to the Senate. When section 327 passed the Senate it read as follows : That in the following^ cases the tax shall be determined as provided in section 328: (a) Where the Commissioner is unable (satisfactorily) to determine the invested capital as provided in section 326; Supplementary Bulletin Rulings. Sec. 327. Art. 901.— 34 (b) In the case of a foreign corporation; _ (c) Where a mixed aggregate of tangible property and intangible proeprty has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively; (d) Where, as compared with representative corporations, engaged in a like or similar trade or business, the taxpayer would (under section 326) be placed in a position of sub- stantial inequality, because of the time or manner of organization, or because the actual value of the assets on March 1, 1913, was substantially in excess of the amount at which such assets would be valued for the purpose of computing invested capital under the provisions of section 326; (e) Where the invested capital is materially disproportionate to the net income as compared with representative corporations engaged in a like or similar trade or business because: 1. The capital employed, although a material income-producing factor, is very small or is in large part borrowed; 2. There are excluded from the invested capital as computed under the provisions of section 326, intangible assets of recognized and substantial value built up or developed by the taxpayer; 3. The net income for the taxable year is abnormally high due to the realization in one year of (a) gains, profits, or income earned or accrued during a period of years, or (b) extraordinary gains or profits derived from the sale of property the principal value of which has been demonstrated by prospecting or exploration and discovery work done by the taxpayer. When the tax is determined under this paragraph proper allowance shall be made for the taxes which would have been payable in prior years if the gains, profits, or income earned or accrued in such years has been taxed at the rates then applicable; 4. Proper recognition or allowance can not be made for amortization, obsolescence, or exceptional depletion due to the present war, or to the necessity in connection with the present war of providing plant which will not be wanted for the purpose of the trade or business after the termination of the war. In the conference committee, composed of House and Senate members, the section was again very materially altered, and was finally passed in the form in which it is now contained in the Act. Mr. Kfachin, who was in charge of the bill in the House and who was a member of the committee composed of House and Senate members, in his report from the committee to the House referred to the changes made in the Senate and in the conference committee as follows: The House bill in the so-called relief provisions provided that in certain specified cases the invested capital of a corporation shall be the amount which bears the same ratio to the net income of the corporation for the taxable year as the average invested capital for the taxable year of representative corporations engaged in a like or similar trade or business bears to their average net income for such year. The Senate amendment increases the classes of cases in which the tax is to be fixed by reference to the experience of representative corporations; included therein all foreign corporations, and provides that in such cases the tax shall be the amount which bears the same ratio to the net income of the taxpayer for the taxable year as the average'tax of rep- resentative corporations engaged in a like or similar trade or business bears to their average net income for such years. The House recedes with amendments: (1) Making clerical changes; (2) Consolidating a number of separate classes of cases differentiated in the Senate amend- ment into a single class of cases in which upon application by the corporation * , and -continues in the same language of the Act. Mr. Kitchin later, in a speech before the House, stated what the committee intended by the use of the language used in section 327. After reading paragraph (d) of section 327, he proceeded as follows: The bill provides that in the cases specified in section 327 the tax shall be an amount which bears the same proportion to the net income of the taxpayer, in excess of the spcahc exemption of $3,000, for the taxable year as the average tax of representative corporations engaged in a like or similar trade or business bears to their average net income, in excess of the specific exemption of $3,000 for such year. Under the specific provisions no official had any particular responsibility, and one could take any case he desired, whether it was an Supplementary^Bulletin^Rulings. 8-16-22. Sec. 327. Art. 901.— 35 exceptional hardship or not, and pake application that the tax should be computed on the basis of representative corporations. The conferees, as I said a while ago, as a matter of safety to the Government, without doing any injustice to the taxpayer, in case he is actually entitled to relief, provide that the taxpayer, in order to get relief under this representative corporation section, must apply- to the Commissioner and must show to the Commissioner that it is an exceptional hardship; not that he is making an exceedingly large profit on invested capital and therefore his tax is exceedingly large, but it must be an exceptional hardship owing to the peculiar and excep- tional conditions surrounding the taxpayer's business, income, invested capital, and so forth; and the Commissioner must find, and so declare of record, that the case is one of exceptional hardship before it can be considered under section 328. This provision gives a taxpayer only that to which he is entitled, because he ought not to have relief unless, owing to the peculiar situation of his business or capital or income or something, the payment of the tax would be an exceptional hardship upon him without the benefit of the relief provision. This language leaves a very vague ?nd indefinite idea in the mind as to what was intended by "abnormal condition" but it is a very definite statement that no relief is to be given under the section unless there is "exceptional hardship." The language indicates also that it is not an "exceedingly large tax" to be paid upon "exceedingly large profits" which gives the taxpayer right to relief under the section, but "exceptional hardship" due "to the peculiar situation" of the "business or capital or income or something" so that "the payment of 'the tax would be an exceptional hardship * * * without the benefit of this section." Senator Simmons, of North Carolina, who was in charge of the bill in the Senate, in his speech on Tuesday, December 10, 1918, Congressional Record, page 529, had the following to say in connection with relief measures: We have also recommended a series of relief amendments relating to amortization, depletion, and shrinkage in inventories, which, if ratified by the Senate and not eliminated in conference, I think will answer to a very large extent the criticisms of the present law and correct many discriminations and inequalities which have confronted the department in the administration of the existing law. In addition, the committee has prepared a general amendment which we have been in the habit in the committee of speaking of as the relief amendment, authorizing the Commissioner to classify in groups certain exceptional cases which seemed to require special treatment to safeguard the taxpayer against injustice. Every corporation which brings itself within the provisions of these classifications is given the benefit, in computing its deductions, of the like or "similar business" section of the bill; that is to say, it will be entitled to the same percentage of deductions that representative concerns in the same line of business are found to be entitled to. Senator Penrose, in a speech delivered Wednesday, February 12, 1919, after the meeting of the conferees of the Senate and House, made the fol- lowing statement in connection with the relief provisions: A similar change was made in the conference in connection with the war profits credit or deduction for new corporations; that is, corporations organized after January 1, 1913. The House gave new corporations a deduction of 10 per cent of their invested capital for the taxable year. The Senate liberalized this and made the deduction of new corporations the same percentage of their invested capital for the taxable year as was earned by corpo- rations in the same general class of trade or business during the prewar period. The conferees adopted the Senate method, but excepted newly organized subsidiaries and cor- porations whose principal income is derived from war contracts. Similar action was taken with respect to the so-called relief provisions, which permit the profits tax in any case of exceptional hardship to be fixed by reference to the experience of representative concerns. This amendment, to my mind, is a most admirable one. The Senate greatly increased the classes of cases entitled to this relief. The conferees amalgamated all these classes into a single general class, but denied the relief to corporations whose principal income con- sists of profits derived on a cost-plus basis from war contracts. Relief also was granted to certain partnerships doing business with invested capital which reorganize as corporations prior to July 1, 1919. Such partnerships are authorized to pay income taxes, profits taxes, and capital-stock taxes for 1918 as corporations in lieu of the income taxes to which, under existing law, the members of the partnership would be liable. This extends im- mediate relief to a class of partnerships in which the exigencies of business require most Supplementary Bulletin Rulings. Sec. 327. Art. 901.-36 of the profits to be reinvested and which, under existing law, have been taxed much more severely than their competitors organized in the corporate form. This amendment, Mr. President, put into the bill at the last hour, furnishes, in my opinion, a striking illustration of the relief provisions abounding in the measure. There was a particular case, typical of many others, in which it was discovered that some seven or eight hundred thousand dollars of taxes would have had to have been paid by a certain partnership in excess of that required under the corporate form, thereby involving a most rank and indefensible discrimination between one concern as a partnership and, perchance, a competitor as a corporation. This amendment was put in giving such a partnership the option of becoming incorporated and paying the profits taxes as a corporation. I only refer to this as a fine illustration, to my mind, of very many similar provisions put in the bill to correct inequalities; not put in to favor any individual, but to relieve the hardship of inequality which the legislator can not defend or explain to the injured taxpayer. The above-quoted statements indicate that Congress intended to retain the relief provisions of the Senate in the bill as finally passed, but that it intended to consolidate all the provisions into one general class. The Senate greatly increased the classes of cases entitled to this relief, and the conferees amalgamated all these classes into a single general class. A better idea may be gained of the relief intended, therefore, when a comparison is made of the bill as it passed the House, as it passed the Senate, and as it finally passed after conference. If all the classes of cases which were embodied in the bill as it passed the Senate were "amalgamated" or "consolidated" into one general class, we receive some idea of what was intended by the use of the phrase "abnormal conditions affecting the capital or income of the corpo- ration" by referring to the bill as it passed the Senate. By this reference the phrase may be defined to include the following: (a) "Where a corporation is placed in a position of substantial inequality because of the time or manner of organization; (b) where the capital employed, although a material in- come-producing factor, is very small or in large part borrowed; (c) where there is excluded from invested capital under section 326 intangible assets of recognized and substantial value developed by the taxpayer (in view of the specific limitations placed upon the admission of intangibles into invested capital contained in section 326 of the Act, applications for assessment under 328 for this reason should be closely scrutinized and the application denied where allowance of the application would result in defeating the avowed purpose of the limitations contained in sec. 326); (d) where the net income for the year is abnormally high, due to realization in one year of income earned during a period of years; (e) where extraordinary gains are derived from the sale of property where its principal value has been demonstrated by pros- pecting or exploration; and (/) where proper recognition can not be made for amortization, obsolescence, or exceptional depletion due to the World War. One other, "where the invested capital is materially disproportionate to the net income," was included in the Senate bill but was excluded by the conferees by the use of the following: "This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is 'high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital." This provision was inserted in the Act by the conferees and was evidently for the purpose of restricting the section to a smaller class of cases, because without this provision the Act as amended in the Senate would clearly have applied to such a case. The phrase "exceptional hardship" is defined in the above quotations more clearly than the provision as to "abnormal conditions." Senator Simmons, in speaking of "certain exceptional cases," used the words "to safeguard the taxpayer against injustice" and Senator Penrose in speaking of the relief provisions in the bill used more emphatic language, such as "to Supplementary Bulletin Ruling*. 8-16-22. Sec. 327. Art. 901.-37 correst inequalities" and "most rank and indefensible discrimination, " and directly defines what he means by "exceptional hardship" as the "hardship of inequality which the legislator can not defend or explain to the injured tax- payer" The plan evidently was to give the Commissioner the power to administer the excess profits tax law with as few inequalities as possible to taxpayers falling in the same class. If, due to abnormal conditions, an exceptional hardship of inequality appears to have been imposed upon any taxpayer by computing its invested capital under section 326, such taxpayer has the right to appeal to the Commissioner and show that it is having to pay a higher rate of tax than other corporations which are similarly cir- cumstanced and ask that it be allowed to pay a tax equal to the average rate of tax paid by other corporations which are in its class and similarly cir- cumstanced. Such a taxpayer, to be entitled to the provisions of section 328, must be able to show that when compared to other corporations which are similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the rate of war profits or excess profits tax imposed upon it is higher than the rate imposed upon such other corporations. However, when it has shown the inequality, before it is entitled to the relief sought it must go further and show that the inequality is due not merely to large profits earned upon a normal capital, but to ab- normal conditions affecting its income or invested capital. The thought in the minds of those in charge of the bill was centered upon preventing inequalities and unjust discriminations. If the corporation's tax is high merely because it made large profits upon a normal invested capital, no relief is to be granted. If, however, owing to some abnormal condition affecting its business it is compelled to pay a higher rate of tax than other corporations in its class, then it may show that it is under the "hardship of inequality" and gain relief under sections 327 and 328. The power placed in the hands of the Commissioner is first to determine whether the "hardship of inequality" exists, and if it does and it is due to abnormal conditions, he is to average the taxpayer's tax with comparatives selected according to the Act. Manifestly, if the discriminations referred to in the debates are to be avoided, the greatest care should be exercised in selecting the comparatives. It is easy, without effort or intent, to select comparatives so differently cir- cumstanced as to cause rather than correct glaring inequalities between tax- payers of the same class. Granting one taxpayer relief under section 328 and comparing it with corporations which are not similarly circumstanced in all of the particulars mentioned in the Act, and giving it a lower rate of tax than corporations so circumstanced, is creating, not correcting, the "hardship of inequality." Congress has provided that the comparatives shall be rep- resentative corporations similarly circumstanced as to gross income, net income, and profits per unit of business transacted, "the amount and rate of excess profits and capital employed and all other relevant facts and cir- cumstances," and that the taxpayer seeking such relief shall be compared only with such representative corporations. The term "capital employed" as used in section 328, as applied to the taxpayer, means total capital employed as distinguished from statutory invested capital. The word "representative," as used in this section, means "typical" or "symbolical," and the Act requires that the comparatives used be as nearly as possible representative in all the particulars mentioned therein, and where it is not possible to find com- paratives which are representative in all the particulars named in the Act it should be kept in mind that the intention of Congress was to equalize taxes rather than reduce any particular taxpayer's taxes. Supplementary Bulletin Rulings. Sec. 327. Art. 901.— 38 It does not appear to this office that the comparatives used in the present case meet with the requirements of the Act. Comparatives 3, 4, 5, and 6 appear to have been well taken. These comparatives are all located in , their capital employed is very nearly the capital of the claimant, and while their gross sales are less, their net income compares favorably with that of the taxpayer. Their ordinary expense accounts, repairs, interest and taxes, and rate of excess profits compare favorably with the taxpayer's. The tax- payer's rate of tax computed under section 326 is a little higher than any one of them, but the tax rate of three of these comparatives ranges from per cent to per cent. The other one is below per cent. The taxpayer's rate is per cent. Comparatives 1 and 2, however, do not compare with the taxpayer in hardly any particular, and are so unlike the taxpayer that the impression might be gained that they have been used for no other purpose than to reduce the taxpayer's rate of tax. Their invested capital is approximately four times as large as the invested capital of the taxpayer; their gross income is nearly twice as much; and their expense accounts compare in no particular favorably with the taxpayer. The item of repairs alone should cause these comparatives to be closely scrutinized. The taxpayer's repairs are consid- erably less than 200x dollars. Each of the repair accounts of comparatives 1 and 2 is nearly 700x dollars, or over three times as much as the taxpayer's. Their taxes and interest accounts are much larger, and in comparative 2 nearly thirty times as large as the taxpayer's. Their excess profits tax rate is only one-third to one-half as high as the other comparatives. They are not similarly circumstanced with respect to gross income, net income, profits per unit of business transacted, as to capital employed, as to the amount and rate of war profits or excess profits, nor in any other particular. They produce, and do not correct, an inequality. When used in this case, they reduce the taxpayer's rate of tax to per cent, while the comparatives which are similarly circumstanced to the taxpayer must pay their taxes at rates ranging from per cent to per cent. Senator Smoot, when he was speaking on the subject on the floor of the Senate, December 14, 1918 (Congressional R.ecord, p. 666), foresaw what might happen if these sections were not administered with great care, and said: Mr. President, those are the relief provisions as provided in the bill. Some of them are very sweeping in their scope, and if not administered by the department in absolute fairness will work an unjust discrimination against the business of the country. I want Senators to know tha*. in these provisions there is placed in the hands of the Commissioner of Internal Revenue or the Secretary of the Treasury, as the case may be, a power that has never been granted to department officials before. If exercised wisely it will be a relief to the insti- tutions of the country, and many of them will need it, but if exercised unjustly or unwisely there will be a frightful discrimination between business concerns and industries of the country. From the foregoing it follows that the taxpayer in this case has established an abnormal condition within the meaning of section 327 of the Revenue Act of 1918 by showing that it has developed in connection with its business intangible assets of recognized value and substantial in amount which are excluded from its invested capital under section 326 of the .Vet, and is there- fore entitled to relief under the provisions of sections 327 and 328 of the Rev- enue Act of 1918, if comparatives selected in accordance with the provisions of section 328 show the existence of an exceptional hardship as defined herein; that comparatives Nos. 1 and 2 should be eliminated from the comparative data and other comparatives selected which meet the requirements of the Act. Carl A. Mapes, 28 Solicitor of Internal Revenue. Supplementary Bulletin Rulings. A k | Sec. 327. Art 901 .—30. I('22)-14-205: A. R. R. 845 Revenue Act of 1918— Sections 327 and 328. Recommended, in the appeal of the M Company, that the action of the Income Tax Unit in denying assessment under the provisions of sections 327 and 328 of the Revenue Act of 1918 be affirmed, and, accordingly, that the appeal of the taxpayer be denied. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in denying application for assessment of the 1919 tax under the provisions of sections 327 and 328 of the Revenue Act of 1918. The attorneys for the taxpayer contend that the contracts entered into between the M Company and the United States Government are not "cost plus" contracts within the meaning of that term as used in section 327 of the Revenue Act of 1918. Inasmuch as the question presented is one of law rather than of fact, the entire file was referred to the Solicitor with request for an opinion. Under date of February 2, 1922, the Committee is in receipt of an opinion from the Solicitor, which reads as follows: The pertinent provisions of the contract may be summarized as follows: 1. The contractor agreed to construct for the United States a manufacturing plant to consist of nine sections of the aggregate capacity of y pounds per day of 24 hours, capable of being operated for 27 days per month. The total cost was estimated at 75x dollars. The United States agreed to reimburse the contractor for all costs and expenses of every char- acter and description incurred or made in connection with the construction and equipment of the plant. 2. The contractor agreed upon the completion of each section of the plant to operate it and to do all things necessary or convenient in this connection, including the purchase and procurement of all necessary materials and labor therefor. The United States agreed to bear all the cost and expenditures of every character and description incurred or made in connection with the operation of the plant or any part thereof. In addition to reimburse- ment by the United States for all costs and expenditures incurred in operating the plant, or any part thereof, it was agreed that the United States should pay the contractor z cents per pound for each and every pound of the product delivered and accepted under the contract; and in addition thereto, one-half of the difference, if any, between the estimated eost of producing each pound, determined in accordance with the provisions of the con- tract, and the actual cost of production, as ascertained in paragraph (a) of such article, where such actual cost was less than the estimated cost so determined. It will be noted that there was to be paid to the contractor as a guaranteed fixed profit % cents per pound for the product delivered and accepted and that reimbursement was to be made by the United States to the contractor for "all costs and expenditures of every character and description." For the purpose of determining the amount of additional compensation, if any, to be paid over and above the guaranteed profit of z cents per pound of the product delivered and accepted, one article sets forth an estimated price list per pound of five component materials. Upon the basis of this price list estimated base prices per pound were fixed for five grades of the product to be manufactured under the contract (that is, an estimated cost of manufacturing a pound of product of the respective grades). Of the several grades specified only one grade has been manufactured at the time of the suspension of work under the contract after the signing of the armistice, of which approximately 2>9 l /iy pounds were manufactured. The estimated price of this grade was originally fixed at 12.7s cents per pound. It was provided, however, that if the cost of any of the component mate- rials should so change as to increase or decrease the actual cost of the product, then the estimated price per pound should be increased or decreased accordingly. As stated, this estimated price was fixed only for the purpose of measuring the additional profit to be paid to the contractor, if it should be able to produce the product at an actual cost less than the estimated price so fixed. Paragraph (a) of article — — ■ provided that the actual cost per pound of the product should be all the costs and expenditures incurred or made in operation, excluding, how- ever, (1) the cost of placing finished product in storehouses, (2) the cost of boxes, and (3) the expense of maintaining guards at the plant. These latter costs, although not included in the computation for ascertaining the actual cost of the product for the pur- pose stated, were nevertheless a part of the actual cost of operation to be borne by the Government. Supplementary Bulletin Rulings. Sec. 327. Art. 901.— 40. In the actual working out of the contract it was necessary to make an adjustment of the estimated price of 12. 7z cents per pound for the product delivered and accepted, because the contractor was compelled to pay higher prices for certain component materials than the estimated prices specified therefor. The estimated price was, therefore, increased to approximately 13. lz cents per pound. The actual cost per pound of the product manu- factured was 11. 6z cents per pound, resulting in a so-called saving of 1.5z cents per pound under the readjusted base price of 13.1 cents per pound. The actual cost of producing such product upon this basis was approximately l%x dollars less than the estimated cost upon the basis of the readjusted estimated base price per pound. Pursuant to the terms of the contract, the contractor became entitled thereby to one-half of the so-called saving, or %x dollars, which, as stated, was in addition to the guaranteed profit of z cents per pound for each pound of the product delivered and accepted. The taxpayer has applied for the assessment of its 1919 taxes under section 328 of the Revenue Act of 1918. Section 327 of the Revenue Act of 1918 provides in part as follows: "Sec. 327. That in the following cases the tax shall be determined as provided in section 328: (d) Where upon application by the corporation the Commissioner finds and so de- clares of record that the tax if determined without the benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the repre- sentative corporations specified in section 328. This subdivision shall not apply to any case * * * (2) in which 50 per centum of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commis- sions or other income derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive." The contract in question was made on March - — , 1918, and is within the time prescribed by clause (2) of subdivision (d) of the section quoted. The question for determination is whether the income from the product manufactured under the contract here in question is derived on a cost-plus basis. Words in a statute are to be construed in their ordinary and generally accepted sense, unless the context in which they are used implies that a different meaning was intended. On behalf of the taxpayer it has been contended that the phrase is equivalent in meaning to the phrase "income derived on a cost basis," that is to say that income derived on a cost basis must bear some relation to total cost, the amount thereof being arrived at by a computation based upon the amount of such total cost. In other words, that cost is the measure of income derived, computed at some rate upon the basis of the total cost. It has, there- fore, been contended that the application of the phrase "income derived on a cost-plus basis" must be limited to income derived upon a cost plus a percentage basis from a Government contract within the time prescribed by the statute. In my opinion "income derived on a cost-plus basis from a Government contract" means simply income derived from such a contract wherein the method of compensating the contractor is by way of reimbursing him the total actual cost of the work done or the article furnished and the payment to such contractor in addition thereto of a guaranteed profit, consisting either of (1) a fixed percentage of total cost, (2) a fixed profit of a definite sum agreed upon at the time of the closing of the contract, or (3) such fixed profit of a definite sum plus a percentage of any so-called saving effected by the contractor by the doing of such work or the production of such article at a cost below an agreed estimated cost of production fixed at the time of the closing of the contract. In common usage the term "cost-plus basis" has been used merely as a means of distinction from the term "lump- sum basis," which is a method of compensation whereby the parties agree that the con- tractor will do certain work at. an agreed total cost to the owner of a lump or fixed sum fixed at the time of the closing of the contract. See Kester, "Accounting, Theory and Practice," volume 3, pages 318 and 319. See also Crowell, "Government War Contracts," volume 25, "Preliminary Economic Studies of the War," published by the Carnegie En- dowment for International Peace. In prewar days the "cost-plus basis" of contracting was used in order to assure good workmanship and good materials in connection with building contracts and to prevent the restricting of costs by the contractor. It consisted • imply of the assumption of costs by the owner and the payment of a fee as the contrac- tor's compensation, determined in either of the three ways mentioned above. During the recent war it was used in Government war contracting where speed and a quantity production were required and where there were no ready estimates at hand to enable the parties to fix a lump-sum contract-price. It was also used in letting contracts to some contractors of proven ability, but who could not finance operations upon as large a scale as the Government required. The "cost-plus basis" of contracting has, therefore, been used as indicating a method of making compensation rather than as a basis for the deter- mination of the amount of compensation to be paid. Such compensation may or may Supplementary Bulletin Rulings. 11-22-22. Sec/327.1 Art 901.-41. not be computed upon the basis of or in direct relation to cost, but in either case it satisfies the term "plus." This interpretation appears to be in accord with the common under- standing of the term "cost-plus basis" by the governmental departments charged with war contracting, as appears from the recommendations of the Interdepartmental Cost Conference held on July 31, 1917. (See full reprint of such recommendations in Nicholson & Rohrbach on Cost Accounting, p. 488, et seq.^ Accordingly, this office holds that the "cost-plus basis" of contracting within the meaning of the statute applies to those cases wherein the contractor is to be reimbursed the actual cost of operations and is to be paid in addition (or "plus") an assured profit, determined by any of the methods above men- tioned, whereby the burden of the cost of, production is put upon the Government. As appears above, the method of compensation agreed upon by the parties to the contract here considered consisted of a reimbursement to the contractor of its total actual cost of operations and the payment in addition thereto of a fixed profit of a definite sum for each and every pound of product delivered and accepted, with a provision for the payment of an additional profit of 50 per cent of a so-called saving in case the contractor produced the product at an actual cost of production in an amount less than the estimated cost of production as determined under the contract. Income derived upon this basis or method of compensation is "income derived on a cost-plus basis." In view of the foregoing opinion of the Solicitor, in which the Committee concurs, it is recommended that the action of the Income Tax Unit in rejecting the corporation's application for assessment of the profits tax for 1919 under the provisions of sections 327 and 328 of the Revenue Act of 1918 be affirmed, and accordingly that the appeal of the taxpayer be denied, inasmuch as 50 per cent or more of the gross income of the corporation for the taxable year consists of gains, profits, commissions, or other income derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. 29 I ('22)-47-606: L.O. 1109. Excess-Profits Tax— Sections 327 and 328, Revenue Act of 1918. U The phrase "abnormal conditions affecting the capital or income of the corporation" includes the following cases, among others: (a) Where a corporation is placed in a position of substantial inequality because of the time or manner of organization; (b) where the capital employed, although a material income-producing factor, is very small or is in a large part borrowed; (r) where there are excluded from invested capital computed under section 326 intangible assets of recognized value and substantial in amount, built up or developed by the taxpayer; (d) where the net income for the year is abnormally high, due to the realization in one year of (1) income earned during a period of years, or (2) extra- ordinary profit derived from the sale of property the principal value of which has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, or (3) gain derived in one year from the sale of property the increase in value of which had accrued over a period of years; (e) where proper recognition or allowance can not be made for amortization, obsolescence, or exceptional depletion due to the World War. 2. W T here application is made under section 327(d) for assessment under section 328 of the Act of 1918, the abnormal conditions affecting the capital or income of the taxpayer must be established by evidence. Abnormal conditions affecting capital or income in the present case have been established. 3. The term "exceptional^hardship," as used in section 327(d) of the Revenue Act of 1918, means the hardship of inequality evidenced by gross disproportion between the tax computed without the benefits of sections 327 and 328 and the tax computed by reference to the representative corporations specified in section 328, but inequality alone is not sufficient to entitle a taxpayer to assessment under section 328; the inequality must be due to abnormal conditions affecting the capital or income. 4. In selecting corporations with which to compare the taxpayer in a given case, great care should be exercised and only corporations which are truly representative should be used. The word "representative," as used in the Act, means "typical" or "average," and the Act requires the comparatives used to be representative and to be similarly cir- cumstanced as nearly as may be in respect to gross income, net income, profits per unit of business transacted and capital empjoyed, amount and rate of war profits or excess profits, and all other relevant facts and circumstances. The corporations used as compara- tives must not only be engaged in a like or similar trade or business, but as nearly as possible Supplementary Bulletin Rulings. Sec. 327. Art. 901.- 42. similarly circumstanced in all the particulars mentioned in the Act. In the present case the comparatives selected comply with the provisions of the statute. 5. Law Opinion 1090 (C. B. 1-1, p. 383) [Sec. 327. Art. 901-31, herein] is hereby revoked. Due to the difficulty which has been experienced in interpreting and apply- ing Law Opinion 1090, it appears advisable to reconsider that opinion. Furthermore, it is necessary to give further consideration to the question of what constitutes proper comparatives for the M Company, the case which was under consideration in Law Opinion 1090. The facts in the case of the M Company are as follows: The M Company appears to have begun business about 1901 and to have organized under its present name in 1905, with a cash capital of 60x dollars. In 1909 it took over the assets of the O Company and the P Company and increased its capital stock to 60Qx dollars. Under the reorganization, 15%/y shares of stock of the par value of $100 were issued for tangible assets, and 14}4y shares of the same par value for intangible assets. Until 1916 the cor- poration's earnings were small, and it was its policy to reinvest its earnings and surplus in plant property. Since 1917 the company's earnings have been very large, due, no doubt, in a large part to war conditions. In 1918, its statutory invested capital was over $1200* dollars and its net income approxi- mately 700x dollars. The company has made claim for the abatement of 71.3a: dollars excess- profits taxes for the year 1918, the claim being based upon an application for assessment under sections 327 and 328 of the Revenue Act of 1918. The Income Tax Unit allowed relief under the above sections and computed the tax by means of comparatives under section 328, and found the corporation entitled to an abatement in the sum of 7l.3x dollars and a refund in the amount of 40* dollars. The claim of the taxpayer for assessment under sections 327 and 328 is based on the fact that it has spent large sums in experimental work and that as a result thereof it has developed secret formulas which give it a practical monopoly in the manufacture of certain types of high-grade ; that none of the amounts spent in experimental and discovery work has been capitalized; that it now has valuable intangible property which is not reflected in its invested capital, and that by reason thereof it is subject to an exceptional hardship when compared with other corporations in its class which have capitalized such expenditures. The question presented is whether the M Company is entitled to relief under the provisions of sections 327 and 328, and if so, whether the compara- tives used in computing the tax under section 328 are proper. The pertinent^ provisions 1 ' of the Revenue'Act of 1918 follow: Sec. 327. That in the following cases the tax shall be determined as provided in section 328: (a) Where the Commissioner is unable to determine the invested capital as provided in section 326; (b) -In the case of a foreign corporation; (c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable to satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively; (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which Supplementary Bulletin Rulings. 11-22-22. Se . 327. Ait. Q01.-43. 50 per centum or more of the gross income of the corporation for the taxable year (com- puted under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. Sec. 328. (a) In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. In the case of a foreign corporation the tax shall be computed without deducting the specific exemption of $3,000 either for the tax- payer or the representative corporations. In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily deter- mined under section 326 and which are, as nearly as may be, similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances. While it is manifestly impossible to enumerate all the classes of cases in which there exists an abnormality affecting the capital or income of a corporation which may entitle the corporation to assessment under section 328, it is thought advisable to set out some of the more usual conditions or circumstances which result in such an abnormality as may form the basis for assessment under that section. The following enumeration is by no means an exclusive one; no attempt .is made to enumerate all the conditions or circumstances which result in an abnormality under the statute. However, a statement of the typical and usual cases in which an abnormality exists affecting income or capital is of value in that it shows the type of cases con- templated by the statute and answers some of the questions which most often arise regarding the construction and application of the section of the statute. It should be borne in mind, however, in determining a specific case whether there exists such an abnormality as to entitle the corporation to assessment under section 328, that sections 327 and 328 are obviously relief sections and should be construed and applied so as to carry into effect the clear intention of Congress. It is my opinion that the following represent the typical and common cases in which there is present an abnormal condition affecting capital or income of a corporation: (1) Where a corporation is placed in a position of substantial inequality because of the time or manner of organization; (2) where the capital employed, although a material income-producing factor, is very small or is in a large part borrowed; (3) where there are excluded from invested capital computed under section 326 intangible assets, of recognized value and substantial in amount, built up or developed by the taxpayer; (4) where the net income for the year is abnormally high, due to the realiza- tion in one year of (a) income earned during a period of years, or (b) extra- ordinary profit derived from the sale of property the principal value of which has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, or (c) gain derived in one year from the sale of property the increase in value of which had accrued over a period of years; and (5) where proper recognition or allowance can not be made for amortization, obsolescence, or exceptional depletion due to the World War. The above alone, however, is not sufficient to entitle the taxpayer to the benefit of assessment under section 328. The circumstances outlined above must work upon the corporation an exceptional hardship, evidenced by gross disproportion between the tax computed without the benefit of sections 327 and 328 and the tax computed under section 328, in order that the tax- payer may be entitled to special relief. "Exceptional hardship," which is a prerequisite to assessment under section 328, must be evidenced by gross Supplementary Bulletin Rulings. Sec 327. Art. 901.— 44. disproportion between the tax computed without the benefit of the relief sections and the tax computed under section 328 by a comparison with repre- sentative corporations engaged in a like or similar trade or business and similarly circumstanced with the taxpayer as nearly as may be with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits br excess profits, and all other relevant facts and circumstances. In determining whether a taxpayer is entitled to assessment under section 328 because of any of the reasons given above, the limitation contained in section 327 (d) should be constantly borne in mind. A taxpayer is not entitled to relief if its tax is high merely because it earned within the taxable year a high rate of profit upon a normal invested capital. The distinction between those cases in which the tax, computed without benefit of the relief provision, is exceptionally high because of abnormal conditions affecting invested capital or net income and those cases in which the tax is high merely because the corporation earned exceptionally high profits upon a normal invested capital, is an important one; in the first case, the corporation may be entitled to relief; in the second case, it is not entitled to relief. Applying the above to the instant case, it is my opinion that the M Company is entitled to assessment under the provisions of section 328, since the tax, if determined without the benefit of the relief section, would, owing to the existence of an abnormal condition affecting the capital of the company, work upon the company an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of the relief sections and the tax computed by reference to the representative corporations specified in section 328. Under sections 327 and 328, where an abnormality exists affecting the net income or invested capital of the corporation, so that the corporation is entitled to special relief, the rate of tax of the corporation shall be based upon the average rate of tax of representative corporations engaged in a like or similar trade or business and similarly circumstanced as nearly as may be with the taxpayer. Representative corporations, within the meaning of this section, are the typical: or average ones in that trade or business, as distinguished from the ones having peculiar characteristics. The intent of the section, therefore, is that the rate of tax of a corporation entitled to special relief shall be based upon the average rate of tax of the typical or average corporations in that trade or business which are similarly circum- stanced, as nearly as may be, with the taxpayer. Great care should be exercised in the selection of these comparatives, because the granting of relief under Section 328 and the comparison with other corporations which are either not representative of the trade or business or not similarly cir- cumstanced in all particulars specified in the Act, may create inequalities rather than correct them. However, it must be recognized as a practical matter that it is not always, and in fact is seldom, possible to find comparatives representative of the trade or business which are similarly circumstanced with the taxpayer in all particulars specified in the Act. In fact, the statute expressly recognizes this fact by providing that the corporations with which the taxpayer entitled to special relief is compared must be similarly circumstanced "as nearly as may be" with respect to the various facts and circumstances specified. These six comparatives given on the data sheet, I am advised, comprise the corporations representative of the same trade or business as the M Company, which are most similarly circumstanced with respect to the items specified in section 328, with the taxpayer. It may be noted, however, that Supplementary Bulletin Rulings. 1 1-22-22. Sec. 327. Art. 901.- 45. none of these six corporations is in exactly the same position as the taxpayer. The invested capital of comparatives 1 and 2 is approximately four times as large as the invested capital of the taxpayer; their gross income is nearly twice as large; their expense accounts do not compare favorably with that of the taxpayer. The amount of gross sales of comparative 6 is less than one- half that of the taxpayer. Its cost of goods sold is less than one-third that of the taxpayer, as is its expense account; its net income is considerably less than that of the taxpayer, while the proportion of its net income to gross sales is approximately twice that of the taxpayer. Furthermore, comparatives 3, 4, and 5, as may be seen, are circumstanced in many respects quite differ- ently from the taxpayer. Thus, none of the six comparatives which are most nearly similarly circumstanced with the taxpayer is ideal. Neverthe- less, the taxpayer is entitled to relief under section 328, and corporations must be used as comparatives which are similarly circumstanced as nearly as may be with the taxpayer. The six corporations used as comparatives in this case are those, I am advised, most similarly circumstanced with the taxpayer with respect to the items specified in section 328. Furthermore, the items of sifcae which are dissimilar to the taxpayer are balanced by the corres- ponding items of the other comparatives, and the correctness of the result reached by the use of these comparatives is shown by the fact that the average obtained by grouping the six comparatives compares very closely with the taxpayer. In the instant case the comparatives used are the ones most comparable to the taxpayer with respect to the items specified in section 328 and the average of these comparatives compares in every respect favorably with the taxpayer. It is my opinion, therefore, that the comparatives used in the data sheet prepared in this case comply with the provisions of section 328. Law Opinion 1090 [Sec. 327. Art. 901.-31, herein.] is hereby revoked. Carl A. Mapes, Solicitor of Internal Revenue. 30 Supplementary Bulletin Rulings. ( 2-20-22. Sec. 328. Art. 911. — 1. Section 328.— Computation of Tax in Special Cases (1918 Act— ^[570, ante) : (1921 Act— H1049, post). Article 911. — Computation of Tax in Special Cases (Reg. 45 — 1f832 r ante): (Reg. 62— 1f 1244, post). (See 5-20-723; Section 337, Article 971.) Application of the provisions of this section in case of a corporation which is also entitled to the benefit of the provisions of section 337. 1 (See 11-20-788; Section 326, Article 845.) Adjustment of invested capital for taxable year when claim for assessment of tax for previous year under section 328 remains unsettled. 1 Supplementary Bulletin Rulings. 2-20-22. Sec. 328. Art. 912.— 1. Section 328.— Computation of Tax in Special Cases (1918 Act— If 570, ante): (1921 Act— H1049, post). Article 912. — Determination of First Installment of Tax in Special Cases (Reg. 45— 1f833, ante): (Reg. 62— 1f 1245, post). 1-19-136: O. D. 94. Computation of tax on the basis of 50 per cent of the net income under section 328, Revenue Act of 1918, relates only to war excess profits tax. It is not permissible to file bond in lieu of cash payments of tax determined on 50 per cent basis pending final determination of tax due. 1 6-19-285: T. B. M. 30. The application of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918 to fiscal year returns. A corporation having a fiscal year ending June 30, 1918, filed income and excess profits tax returns for that period under the Revenue Act of 1917. Its tax was finally assessed under section 210 of the Revenue Act of 1917. The taxpayer in making its supplemental return for the same fiscal year under the Revenue Act of 1918 wishes to use the same constructive capital as a basis for computing its excess profits tax under the Revenue Act of 1918, and appeals from a decision of the Unit advising it that this can not be done. Section 335 of the Revenue Act of 1918, which levies the war profits and excess profits taxes for a fiscal year ending in 1918, reads in part as ollows. Sec. 335 («). That if a corporation (other than a personal service corporation) makes return for a fiscal year beginning in 1917 and ending in 1918, the tax for the first taxable year under this title shall be the sum of: (1) The same proportion of a tax for the entire period computed under Title II of the Revenue Act of 1917 which the portion of such pariod falling within the calendar year 1917 is of the entire period, and (2) the same pro- portion of a tax for the entire period computed under this title at the rates specified in subdivision («) of section 301 which the portion of such period falling within the calendar year 1918 is of the entire period. In the opinion of the Advisory Tax Board the effect of this section of the statute is that the excess profits tax for a fiscal year ending in 1918 is computed in two ways. First, it is computed as if the entire income had been earned during the calendar year 1917. This involves in some cases an assessment under section 210. Second, it is computed as if the entire net income had been earned during the calendar year 1918. This involves in some cases an assessment under section 328. The proper pro- portions of the resulting taxes are used to determine the tax for the fiscal year. Where possible, it would be desirable to consider the application for assessment under section 210 and the application for assessment under section 327 together. Where, as in this case, the assessment under section 210 has already been made, the taxpayer should be notified to file with its supple- mental return an application for assessment under section 327. Pending decision upon its application it will be necessary for the taxpayer to compute the additional tax due upon the assumption that the excess profits tax computed under the Revenue Act of 1918 will be not more than 50 per cent of its net income, as is provided in section 328 and article 912-914, Regula- tions 45. In no case would the constructive capital determined under section 210 be used in making the assessment under section 328, 2 Supplementary Bulletin Rulings. .1 — .SIQ .irk .8S€ .398 Sec. 328. Art. 912.— 2. : (sina t 0Y£?— fc>A 8X011 2d8RD Ifiioeqg m xbT lo aottBtuqmoO — 8S£ nortos^ I ('22)-7-97 I. T. 1210 Revenue Act of 1918. The installments of the tax in the case of a corporation coming within the provisions of article 912, Regulations 45, and which made its^return on the basis of a fiscal year ended in 1919, should be determined as follows: (1) Compute the tax at 1918 rates upon the entire net income forfthe taxable year; that is, 50 per cent of the net income. (2) Compute the tax at the 1919 rates upon the entire T net income for the taxable year; that is, 20 per cent of the net income in excess^of $3,000'but not in excess of $20,000 plus 40 per cent of the net income in excess of $20,000. (3) Ascertain that proportion of item 1 which thefnumber of months within the calendar year 1918 is of the number of months infthe*entire*period. (4) Ascertain that proportion of item 2 which the number of months in the calendar year 1919 is of the number of months in the entire period. (5) /The total tax equals the sum of item 3 and item 4. £t°I lo loA 9Ufi3V9# arta i9bnu bonoq icrta iol 2mul9i xe) aiftoiq 2290x9 ban . wQi to jdA 3un9V9>I srta to 0I£ nobo92 i9bnu b322922E yjknr} 2ev/ xe? 2*1 kozft 9tfiE2 9fh iol mutsi lEln9m9lqqu2 zti ga'rA&in ni lavfiqxci 9dT lEtiqBD svhoumnoo 9mK2 9dl 92u ot asrlaiw 8101 lo 1oA 9un9V9# arfj i9bnu ,8!Qi lo Jo A 9uri9V9# 3t\t lobnu xe* ?.}ftoiq 2290x9 2ir gnbuqmoo iol 2i2Ed b 2E .9nob Jon ci£3 zidi jsrh ti gnmvbz jinU 9d} lo noi 2 b 3 b e moil 2lE9qq K bnc strtoiq ibw 9fb sdivsl rbidw <8IQt lo JoA 3un3V3# sd* lo III nob*>32 8E ttsq ni 2bE9i «81Q1 ni ^nibns iE9y IeozB e iol 29xe* zirknq 2299x9 bnc Mitin (noijnoqioa mWim Isnoauq s n«Hj wrtoo) nohtioqioD * It i«riT .(a>) fctE .9tl •U*Zt) mil adt iol x« sri* ,81Qi ni anibn* bns TtQI ai ininnnsd lot ft s iol mu j»i mtd» sHj iol x« s lo aoinoqoiq saica 9dT (!) :lo mut 9d» 9d Ucrfa sbb iiHt i»bnu n»t Houa lo nobioo srft fi^irfw tlQl lo jdA 9ua9V9# odl lo II sbiT isbnu bsjuqaioo bohsq -oiq amta 9d* (£) bn* ,boii9 ■■• sifcno ad* lo ai Vl°f nsy ltbiufa 9di nidinr tniflal bohcq m boooaqa mj«i 9di J* abb aid* idbnu D93uqmo9 boruq nilns sdj iol Xf i * lo nomoq itbnsfa *ib nirfsiw jniHa* borwq daua lo noinoq 9di rfairiw X0£ nomw lo (fc) nobmbdua .bohsq 9ibn9 »dt lo ti 81QI i«»y lo noiJD38 2idi lo JD9U9 9dt biEoO xeT viodWbh 9H3 lo noiniqo 9dj ni di 8IQ1 ni gnibn9 ib9v Izozft l iol zej gjrioiq 2293x9 9dj jeHj zi 9tujEJ2 9di 9mooni 9iijn9 9iji It 2E bdjuqmon 21 j'r ^lil .z^bw owl ni b9)uqmoo 90102 ni advlo'/ni zirfT .UQI iB9y ifibn9i£o Mfa ^nnub bsnifis n99d bsd arfj ti 2£ b9iuqmoD 21 ji ,bnoo92 .0IS nomgg i9bnu Jn9m22322£ nB 292E9 ?iHT .8IQi 1B9V iBbn9lE9 9di yifinb fuminil ii99d bfid 9rnooni J9n 9iitn9 -oiq i9qoiq 9fiT noii992 igbnu Jn9ni229226 ns 292ED 90102 ni 29vIovni Ifi92n 9rfo iol xej 9dt 9nirm9}9b 05 b92u 9ie 29xej snblu29i 9H1 lo znoirioq .1E9Y lOl floijEOlIqqE 9fb 19bl2fI09 Ol 9ldEli29b 9d bluow V t 9ldl220q 919HV/ noi}992 i9bnu in9ni22922E iol noiiEoilqqE 9fb bnr. 0I£ noij'j92 i9bnu in9rn22922B 2fiH (11£ nO»092 19bnU Jn9m22922E 9dj t 92E9 2lHj ni 2E t 919HW .19HJ930J \££ -9iqqu2 2J1 riliw 9IB oj b9ni)on 9d bluodz i9YEqxEJ 9dj t obuin n99d vbb3ilB 8nibn9 < ? .TS^ nobD92 i9bnu jn9m22922B iol nobsoilaqB ns mimi iBindm 9Juqmoo oj i9yEqxBJ 9fb iol yiE229D9n 9d Hiw ji nobE'jiIqqE 2ji noqu noi2iD9b xbJ 2)Boiq 2299X9 9d) JeHj nobqmu22E 9H) noqu 9ub xeJ knobibbfi 9rt*J Jn99 i9q Or. nfirb 3iorn Jon 9d Iliw 81QI lo JoA 9un9V9H 9rb i9bnu baJuqrnoo -Blug9^ 9foiriB bnB 8£f, noi)998 ni b9bivoiq 21 2B ,9rno9ni J9n 2ti lo nobo92 i9bnu b9nirm9J9b Ifiiiqso 9vinuiJ2noj 3d} bluow 92ed on ni .1$ 2noij noijo92 lsbnu )n3m2a922c 3d? aniiE^m ni b9au 3d Oil Supplementary Bulletin Rulings. 2-20-22. Sec. 328. Art. 913.— i Law Section 328.— Computation of Tax in Special Cases (1918 Act — 1[570, ante): (1921 Act— 1f 1049, post). Article 913. — Determination of First Installment of Tax in the Case of Foreign Corporation, or a Corporation Entitled to the Benefits of Section 262 (Reg. 45— H834, ante) : (Reg. 62— 1f 1246, post). 6-20-735: O. D. 402. The instalments of the tax for 1919 of a foreign corporation shall be determined upon the basis of an excess profits tax computed by using its invested capital for the taxable year 1917 properly adjusted by reason of subsequent changes. Because of the provisions of section 302 this tax can in no case be more than 20 per cent of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 40 per cent of the amount of net income in excess of $20,000. Final determination of the tax will be made according to the provisions of sections 327 and 328. 1 Supplementary Bulletin Rulings. .8S£ aoi 2-20-22. Sec. 328. Art. 914.— IV Law Section 328.— Computation of Tax in Special Cases (1918 Act — 1(570, ante): (1921 Act— 1[1049, post). Article 914.— Payment of Tax in Special Cases (Reg. 45 — 1f835, ante) : (Reg. 62— 1T1247, post). 26-19-599: 0. D. 321. The provisions of section 327 (d) of the Revenue Act of 1918 will not debar a corporation deriving income from Government contracts on the "per unit" basis from filing a claim for assessment under the provisions of section 328. If the claim is filed prior to the due date of the fourth install- ment of tax and the three installments already paid are equal to the sum of the normal tax plus a war profits and excess profits tax equal to 50 per cent of the net income of the corporation, it will not be necessary to pay the fourth installment, but the additional payments of tax, if any, with interest, may be made when the claim for readjustment of the tax is finally disposed of. The corporation should file a claim for abatement of any taxes assessed; in excess of the tax computed. 1 31-19-655: O. D. 356. In cases where application has been made at the time of filing the return for assessment of war profits and excess profits tax in accordance with section 328, Revenue Act of 1918, and the installments of tax determined and assessment made on the basis of 50 per cent of the net income for the taxable year, no abatement claim is required to cover the difference between the tax so computed and the tax computed without the benefit of section 328. If the tax has been computed and assessment made without reference to section 328, and application is made subsequently for assessment of the tax in accordance with section 328, payment of the entire tax as originally computed will be required unless a claim is filed for the abatement of the amount assessed in excess of 50 per cent of the net income. 2 consolidating cprporations, or a, new eorpoasafcioij W. Supplementary Bulletin Rulings. .ss-os-s ,1— .HQ JiA ,8££ .398 <0XZ]!— ioA SiQt) a^afiD ImoeqZ ni xbT \o noitBtoqraoD - .8SX noboeS wbJ .(iaoq pcn?e or otherwise on or after March 1, 1913, in computing the net income of such pre\ ; u for purposes of taxation. Article 941 of Regulations 45, which interprets section 331, reads: Art. 941. Where a business is reorganized, consolidated, or transferred, or property is transferred, after March 3, 1917, and an interest or control of 50 per cent or greater in such business or property remains in any of the previous owners, then for the purpose of determining invested capital each asset so transferred is valued (a) as if still in thp posses- sion of the previous owner, if a corporation, or, if not a corporation, (b) at its <^ost to such previous owner, with proper adjustments for losses and improvements. This provision is accordingly concerned with the computation of invested capital for the taxable year, while section 330 of the statute is chiefly concerned with the determination of invested capital tor the prewar period. 1 Treasury Decision 3259 (Bulletin 51-21, p. 17), amending article 041 of Regulations 45, is based on Law Opinion 1081. Supplementary Bulletin Rulings. 4-6-22. Sec. 331. Art/941.— 15. The validity of article 941, in so far as it provides that section 331 applies only when an interest or control of 50 per cent or more remains "in any of the previous owners," has been questioned. The following hypothetical case, which is merely illustrative of actual cases which have arisen, has been presented. The N corporation transfers to O corporation, subsequent to March 3, 1917, tangible property in exchange for 20 per cent of its stock. Seventy-five per cent of the stock of corporations N and O is owned by the same individual but the corporations are not affiliated. It is apparent in this case that an interest or control of 50 per cent or more in the property does not remain after the exchange "in any of the previous owners," inasmuch as the N corporation, the previous owner of the asset, owns only a small proportion of the outstanding stock of the 0 corpo- ration. Thus, if article 941 correctly interprets this section of the statute, the O corporation can include in invested capital the actual value of the prop- erty exchanged, subject to the limitations contained in section 326, even if such value is in excess of the allowable value for invested capital purposes of the property to the N corporation. Section 331, however, limits the amounts to be included in the invested capital of the new owner if an interest or control in the property of 50 per cent or more "remains in the same persons or any of them." In the case stated above it is apparent that, by virtue of stock holdings, a control in excess of 50 per cent in the property transferred "remains in the same persons," i. e., the stockholders of the N and O corporations. Article 941 of Regulations 45, therefore, is incorrect, in so far as it provides that in order that section 331 be applicable an interest or control of 50 per cent or more in the property exchanged must remain in the previous owners. Article 941 provides further that where section 331 applies the property transferred, if transferred by a corporation, is valued, for the purpose of determining invested capital, as if still in the possession of the previous owner. The provisions of article 941 on this point can be most clearly shown by application to a specific case: The N corporation, which owned 50 per cent of the outstanding stock of the O corporation, transferred subsequent to March 3, 1917, unimproved real estate, which cost it $100,000 but which at the time of the exchange, due to a decrease in market value, was worth only $20,000, to the O corporation in exchange for stock. Under the provisions of article 941 the asset so transferred should be valued, for the purpose of determining the invested capital of the O corporation, "as if still in the possession of the previous owner." That is, the O corporation should include in invested capital, on account of the asset transferred, $100,000, the allowable value of the asset, provided for invested capital purposes, to the N corporation, in spite of the fact that the actual cash value of the asset at the time of the exchange was oniy $20,000. Section 326 provides that invested capital includes "the actual cash value of tangible property other than cash, bona fide paid in for stock or shares, at the time of such payment * * *." Section 331 makes an exception to this general rule in the case of a change of ownership of property between corpo- rations subsequent to March 3, 1917, where an interest or control of 50 per cent or more remains in the same persons, and provides that in such case the property transferred shall not be allowed a greater value, for invested capital purposes, "than would have been allowed * * * in computing the in- vested capital of such previous owners * * *." In the case stated above, Supplementary Bulletin Rulings. Sec. 331. Art. 941.— 16. the asset paid into the O corporation for stock should be included at its actual cash value at the time paid in, under the provisions of section 326 unless the case falls within the exception covered by section 331. This latter section merely provides, however, that an asset so transferred shall not be allowed a greater value than would have been allowed the previous owner, if a corporation, and is, therefore, by its own terms, inoperative unless the actual cash value of the property at the time of the exchange is in excess of the allowable value of the property, for invested capital purposes, in the hands of the previous owner. Inasmuch as the actual cash value of the asset trans- ferred, in the instant case, was $20,000, a lesser amount than the allowable value of the asset, for invested capital purposes, in the hands of the N corpora- tion, section 331 is not operative. Therefore the O corporation should include in invested capital, under section 326, $20,000, the actual cash value of the asset at the time paid in for stock. It is concluded that: (1) Section 331 of the Revenue Act of 1918 is not made inapplicable because of the fact that a control of 50 per cent or more, in the trade, business, or property reorganized, consolidated, or exchanged, subsequent to March 3, 1917, does not remain in any of the previous owners, provided such control does remain in the same persons, or any of them. (2) Where section 331 applies to the transfer of assets from one corpora- tion to another, the assets transferred shall be valued, for invested capital purposes, in accordance with the provisions of section 326, provided such value does not exceed the allowable value, for invested capital purposes, of the assets, if such assets had not been transferred. Article 941 of Regulations 45 should be amended to conform herewith. Carl A. Mapes, Solicitor of Internal Revenue. 14 (See I ^22)-4-48; Section 326, Article 831. Ruling No. 32.) Exchange by domestic corporation of tangible property for majority of stock of foreign corporation. Revenue Acts of 1917 and 1918. 15 I('22)-14-206: A. R. R. 844. Revenue Act of 1917. Recommended, in the appeal of the M Company, that the action of the Income Tax Unit in holding that the reincorporation of the appellant company in 1914 under the laws of the State of Y did not constitute such a reorganization as would permit that company to claim a greater amount of statutory invested capital for the year 1917 than would have been allowed had that company continued to operate under the charter granted by the State of Z, be sustained, and that it be held that such a reorganization did take place in 1902 and the appellant com- pany's statutory invested capital for the year 1917 be recomputed upon the basis of the values existing at the time of such reorganization. The Committee has had under consideration the appeal of the M Com- pany from the action of the Income Tax Unit in reducing the amount of invested capital claimed by the appellant for the year 1917. The question at issue and the facts in the case are stated in a memorandum of the Unit as follows : The question is: Shall the taxpayer be permitted to include in invested capital a paid- in surplus of 15* dollars (net) representing the excess of actual value of tangible assets over the par value of stock issued therefor at the time of the alleged reorganization De- Supplementary Bulletin Rulings. 4-6-22. Sec. 331. Art. 941.-17. cember — , 1914, and also include in invested capital good will in the amount of 20 per cent of the outstanding stock on March 3, 1917? Facts: The business was established in 187- by A. He conducted it individually until 189-, when the M Company (the first M Company by that name) was organized with an author- ized capital stock of 4x dollars. In July, 1902, the M Company (of Z) was organized, with an authorized capital stock of 40# dollars, acquiring the business and good will of the first M Company of Y. It was at the time immedately prior to the organization of the M Company of Z that the item of good will made its appearance on the books of the old M Company. The item of good will did not appear in the balance sheet of the M Company of Y in January, 1902, but was set up in the July balance sheet at 183^# dollars. Immediately thereafter the busi- ness was transferred to the M Company af Z. At the time of creating the item of good will on the books of the old M Company the stock was not increased but an asset of good will was created and a corresponding credit was made to surplus. The M Company of Z continued in business until 1914, in the meantime increasing its capital stock to 50x dollars. Under date of December — , 1914, the present M Company of Y was organized, with an authorized capital stock of 50x dollars. This stock was issued to the shareholders of the predecessor M Company of Z share for share. The assets of the old company were transferred to the new company and continued on its books without change in value. In its return the taxpayer claimed invested capital computed as follows: Dollars. Capital stock j 50x Surplus earned since 1902 12* Add under Schedule B — Paid-in surplus at date of organization of second M Company of Y in 1914 based on excess of actual value of tangible assets over book value at that date I5}^x 77V 2 x Deduct under Schedule C — Excess of book value of good will over 20 per cent limitation Depreciation not charged off %x 9 Mat 68M* Add under Schedule D — Additional issues of stock during taxable year I6x Invested capital . 84%* The Income Tax Unit, by letter of April — , 1919, recomputed the invested capital as follows : Dollars Capital stock 50x Surplus earned from December, 1914, to Dec. 31, 1916 tyix Additions under Schedule D for additional capital stock issued during taxable year 16* The elimination of paid-in surplus was based on the theory that, granting the values claimed by the company for its tangible assets at date of organization in 1914, it followed that the entire stock of 50x dollars was issued for tangible property and that the paid-in surplus, therefore, represented intangible assets and could not be allowed. See article 63, Regulations 41, which permits a paid-in surplus only with respect to tangible property. The Income Tax Unit, by letter of June — , 1920, made a further adjustment in the company's invested capital, the reason therefor not being pertinent to the present iniquiry. Said letter adhered to the former action in the disallowance of good will. It is appropriate at this step to invite attention to the fact that the record indicates that the Advisory Tax Board passed upon the item of paid-in surplus, the decision being adverse to the taxpayer. A formal ruling by the Board, however, does not appear in the record. The company has rebutted the finding that the paid-in surplus represented intangible assets. In this connection see pages 8 and 9 of the brief showing that the opening entries on the books in 1914 recite that the capital stock of the M Company, then organized, was issued specifically for good will in the amount of 1834* dollars, and furtherwore that the certificate of issue of capital stock filed with the State of Y discloses that 18^* dollars of the 50* dollars of capital stock was specifically issued for the asset good will. Supplementary Bulletin Rulings. .Xt~,m MA Alt. .093 Sec. 331. Art. 941.— 18. In rendering its tax returns for the year 1917 the appellant took the position that there had been a reorganization of the company in 1914 and that the value of the assets transferred to it by the M Company of Z at the time of such transfer should be taken as a basis for the establishment of the amount of statutory invested capital allowable in the computation of its profits tax liability for the year 1917. The Unit in disallowing a portion of the amount of invested capital claimed for that year took the position that inasmuch as the assets of the M Company of Z were taken over by the new M Company of Y without any change in value and without any change in business or amount of capitalization, with the stockholders of the new M Company of Y the same as those of the M Company of Z, there was no such reorganization in 1914 as would permit the M Company to value its assets for invested capital purposes at a greater amount than would its pre- decessor company be permitted to have valued its assets had it continued to operate under the charter granted by the State of Z. As appears from the records in the case, the surrender of the M Com- pany's Z charter and its acquirement of a Y charter effected merely a change in domicile and charter without any accompanying change in business, capitalization, surplus, or stock ownership, and therefore the Committee, adhering to the opinion expressed by it relative to a very similar case pre- viously considered, as set forth in A. R. R. 16 (C. B. 2, p. 312), recommends that the action of the Unit in holding that the reincorporation of the M Company in 1914 under the laws of the State of Y did not permit that com- pany to claim a greater amount of statutory invested capital for the year 1917 than would have been allowed had that company continued to operate under the charter issued by the State of Z, be sustained. However, as shown by the records, there was a decided change in capital- ization as well as a change in domicile and character in 1902 when the M Company surrendered its first Y charter and reincorporated under the laws of the State of Z. At the time of such surrrender the company was capital- ized at 4x dollars, and it was reincorporated with an authorized capital of 40x dollars. Taking this fact into consideration, the Committee is of the opinion that a reorganization took place in 1902, and that the company's statutory invested capital for the year 1917 should be recomputed upon the basis of the values existing at the time of such reorganization, with par- ticular care given to the ascertainment of the value of the good will of the company as of July — , 1902, the date upon which it appears the said reorgan- ization was effected, and to the ascertainment of the value of the leaseholds, if any, which were transferred by the first M Company to the M Company of Z on that date. In view of the foregoing, the Committee recommends that the action of the Income Tax Unit in holding that the reincorporation of the M Company in 1914 under the laws of the State of Y did not constitute such a reorgan- ization as would permit that company to claim a greater amount of statu- tory invested capital for the year 1917 than would have been allowed had that company continued to operate under the charter granted by the State of Z, be sustained, and that it be held that such a reorganization did take place in 1902 and that the company's statutory invested capital for the year 1917 be recomputed upon the basis of the values existing at the time of such reorganization. 16 Supplementary Bulletin Rulings, 7-20-22. Sec. 331. Art. 941.— 19. I('22)-29-417: A. R. R. 988 Act of October 3, 1917, Section 208. Act of February 24, 1919, Section 33 1 . Recommended, in the appeal of the M Company, that the action of the Income Tax Unit in requiring the appellant to file amended returns for the taxable years affected pursuant to Treasury Decision 3220 (0. B. 5, p. 285), be sustain. ,:. The Committee has carefully considered the oral appeal of the A! Company from the action of the Income Tax Unit in requiring it to file amended returns for the taxable years affected, pursuant to the provisions of Treasure Decision 3220. [If 865 herein]. The M Company was organized under the laws of the State of Y in 1897 and its charter expired in accordance with its terms in September, 1917. The corporation commissioner of the State of Y having held that under section 6705 of the State of Y Laws the existence of a corporation could not be continued by the filing of supplemental articles of incorporation, the M Company was organized September, 1917, with an authorized capital stock of 30x dollars, which was the same as that of the original company. The stock of the new company was issued to the stockholders of the original com- pany share for share, and all the assets of the old corporation were thereupon transferred to the new corporation at their market value as of September, 1917, and such value was utilized in the preparation of the tax returns of the company. Under date of February — , 1922, demand was made upon the company that it file amended returns for the taxable years affected by the use of such increased invested capital in accordance with the provisions of Treasury Decision 3220 (C. B. 5, p. 285). Owing to the peculiar circumstances existing in this case the appellant was allowed to file an oral appeal, and argument by its representatives yrfcs heard by the Committee on April 1922. It is contended by the appellant that the purpose and intent of section 208 of the Act of October 3, 1917, and section 331 of the Act of February 24, 1919, were to prohibit the inflation of the invested capital of a corporation through a voluntary reorganization, and that these sections should not apply to a case like the present, in which the reorganization or change of ownership was wholly involuntary and due solely to the expiration of the charter of the original corporation. It was admitted by the representatives of the appellant at the oral hearing that the assets of the original corporation were never actually distributed to the stockholders but were transferred directly by deed of the original corporation to the new corporation. Section 208 of the Act of October 3, 1917, provides: That in the case of the reorganization, consolidation, or change of ownership of a trade or business after March 3, 1917, if an interest or control in such trade or business of 50 per centum or more remains in control of the same persons, corporations, associations, partner- ships, or any of them, then in ascertaining the invested capital of the trade or business no asset transferred or received from the prior trade or business shall be allowed a greater value than would have been allow cd under this title in computing the invested capital of such prior trade or business if such asset had not been so transferred or received, unless such asset was paid for specifically as such, in cash or tangible property, and then not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment. The same provision, with certain modifications which are not here material, was enacted as section 331 of the Act of February 24, 1919. Section 6699 of the State of Y Laws provides that: All corporations that expire by limitation specified in their articles of incorporation, * * * continue to exist as bodies corporate for a period of five years thereafter, if necessary for the purpose of prosecuting or defending actions, suits, or proceedings by or against them, settling their business, disposing of their property, and dividing their capital stock, but not for the purpose of continuing their corporate business. Supplementary Bulletin Rulings. Sec. 331. Art. 941 — 20. An examination of section 6705 of the State of/Y .Laws leads the Com- mittee to concur in the opinion of the corporation commissioner of the State of Y that the existence of the original corporation could not have been con- tinued by the filing of supplemental articles of incorporation, and that, therefore, the M Company constituted a new and separate corporation, but under the provisions of section 6699 the assets of the original corporation did not upon the expiration of its charter automatically revert to the stock- holders, but the corporation continued for the purpose of winding up its affairs, and in accordance with the powers thus continued to it, its assets were conveyed to the new corporation. Without attempting to characterize the proceedings in this case, it is clear that there was a "change of ownership of a trade or business" or "a change of ownership of property," occurring after March 3, 1917, and not only 50 per centum but 100 per centum of the interest or control remained in the same persons. This case, therefore, clearly falls within the language of both sections 208 of the Act of October 3, 1917, and section 331 of the Act of February 24, 1919, and it does not appear to the Committee that it is outside the purpose and intent of those sections. The sections of the statutes themselves contain no exception in the case of an involuntary change of ownership and it seems clear the intent of Congress was to prevent the increase of the invested capital of a corporation by including therein apprec- iation in the value of its assets upon a change of ownership which was nominal and not substantial. The Committee, therefore, finds that the appeal in this case is without merit and accordingly recommends that the action of the Income Tax Unit in requiring the M Company to file amended returns for the taxable years affected, pursuant to Treasury Decision 3220, be sustained. 17 Supplementary Bulletin Rulings. 2-20-22. Sec. 335. Art. 952.— 1. Law Section 335— Fiscal Years Ending in 1018 or 1919 (1918 Act— -1[580, ante): Ending in 1921 or 1922 (1921 Act— 1[1054, post). Article 952. — Fiscal Year of Corporation Ending in 1918 (Reg.f45— 11843, ante): Ending in 1921 (Reg. 62— If 1250, post). (See 6-19-285; Section 328., Article 912.) Application of section 210 of the Revenue Act of 1917 and sections 327 and 328 of the Revenue Act of 1918 to fiscal year returns. 1 Supplementary Bulletin Rulings. AZQ .irk All .098 .SS-OS-S pal*!— .266 noitos8 wbJ 9tna <££8p 2-20-22. Sac 1*7. Aft 97L—1. Law Section 337.— Sale of Mineral Deposits (1918 Act— 1[586, ante): (1921 Act— 1f 1057, post). Article 971.— Tax on Sale of Mineral Deposits (Reg. 45—^853, ante): (Reg. 62— H1260, post). 5-20-723: O. D. 395. The fact that a company is entitled to the benefit of section 337 will not disqualify it for special treatment under section 328, neither can the fact that it is entitled to the benefit of section 337 be used as a basis for claiming special treatment under section 328. If a corporation falls within the class specified in section 327, the tax will be determined under the provisions of section 328. The effect of section 337 is to limit the amount of tax attribut- able to the profit made on the sale of mines, oil and gas wells discovered by the taxpayer and can only be applied after the tax computed on such profit has been computed without the benefit of this section. 1 37-20-1190: O. D. 658. The limitation provided in section 211 (b) of the Revenue Act of 1918, with respect to the tax attributable to the sale of mines, oil or gas wellt, s or any interest therein has no application to the tax on profits realized from the sale of oil and gas produced in the operation of such wells, t Supplementary Bulletin Ruling*. »fb "to (d) ItS nob392 nr babivoiq nohsiirnii adT m 1o dlfig sd* ot dldBJudnus xfi* ddj oJ iDsqan diiw no xa) ad* ol nobsDtfqqfi on zbH niawd* JzraJm yan doun 1o notttisqo ad* m b^uboiq as^ bns Iio 1o aUs t 1-4-23. Perpetual Check List Supplementary Rulings Reprinted from the Internal Revenue Bulletins. The Supplementary Rulings are printed on the pages immediately preceding The Foreword to the Supplementary Rulings should be read. Key. — The word "none," in the column headed "Last Ruling/' signifies in each case that there are no special rulings bearing on the particular Article of Regulations 45 (1918 Act) or of Regulations 62 (1921 Act). The numeral, in each case, shows how many serially numbered special rulings bearing on the particular Article have been reproduced, and indicates the last serial number of the group. These serial numbers appear in bold face type at the end of the special rulings themselves, within the Supplement. Caution. — To the extent of the imposition of the excess-profits tax for 1921, the 1918 and 1921 laws are identical, except that domestic corporations entitled to the benefits of Section 262 of the 1921 Act (If 1083) are grouped with foreign corporations for the purposes of the 1921 excess-profits tax. To much the same extent, with like qualifications, the provisions of Regula- tions 62 (1921 Act) are essentially identical (there are frequent verbal changes) to the provisions of Regulations 45 (1918 Act). The numbering of the Articles of Regulations 62 (1921 Act) is the same as that of the respec- tive corresponding Articles of Regulations 45 (1918 Act), except as noted below. It follows then, that, except as noted below, for the purposes of the Supplementary Bulletin Rulings, the Article reference number is the same under either Act. Reg. 62 (1921 Act) Reg. 45. (1918 Act) No corresponding Article to Article 712 Article 712 is the same as, therefore refer to, Article 713 " 713 " " " " " " " " 714 << J 14 " " " << << « << << tt yjcj tt tt tt tt tt tt tt tt No corresponding Article .to Article 717 Article 716 is the same as, therefore refer to, Article 719 tt 7X7 " " " <( *' " << « 718 " 718 " " " " " " " " 720 No corresponding Article to Article 869 Article 869 is the same as, therefore refer to, Article 870 " 870 " " " " " M " " 871 Otherwise Art. of Reg. 62 is same as, therefore refer to, same numbered Art. of Reg. 45 ( The list is always up-to-date*) Law Section 300. . . . 301 ... . 302 Article Number ..701.... . .711.... 712.... 713.... 714.... 715.... 716.... 717.... 718.... 719.... 720.... ..731.... Last Ruling . . None ..1 . .None . . None ..11 ..2 . . None . . None . .None ..1 . .None ..1 Law Section 302 ... . 303 304 305 310 311 Article Number ..732... 733... .741... 742... 743... ..751... 752... 753... .761 . ..771... ..781... 782... Last Ruling 1 None 2 None None None None None None 1 3 . None (Ow) Law Article Last Section Number Ruling 311 783 1 784 None 785 None 312 791 3 320 801 1 802 1 325 811 2 " 812 3 813 9 814 None 815 9 816 1 817 1 " 818 3 326 831 41 832 None 833 5 " 834 1 835 3 836 16 837 5 " 838 10 839 4 " 840 10 841 5 842 None 843 2 844 1 " 845 9 845A (See 845) 846 4 847 None 848 None 849 None 850 2 851 6 852 1 853 1 Law Article Last Section Number Ruling 326 ....854 2 « 855 1 tt 856 tt 857 5 it 858 10 it 859 1 a 860 tt 861 None tt 862 . . 3 u 863 None tt 864 None a 865 None tt 866 None ti 867 None tt 868 None tt 869 , , , , 1 tt 870 None tt 871 1 327 ...901 30 328 ...911 2 tt 912 3 a 913 1 tt 914 . 2 330 ...931 4 ,u 932 . , . . . . 1 a 933 , 7 u 934 None 331 ...941 17 335 . . . .951 None n 952 1 a 953 n 954 u 955 336 ...961 tt 962, . 337 ...971 2 u 972 338 ....981 Every Article of Regulations 45 (1918 Act) and of Regulations 62 (1921 Act) bearing specifically on the war-profits and excess-profits tax is listed in the foregoing table. The first Article is 701. Missing Article numbers such as 702 to 710 have not yet been used. The last Bulletin from which rulings have been reproduced hereinbefore and as listed above is VOLUME I (1922), No. 52. Later Bulletins , since issued (if any), contain no rulings bearing on the 1918 of 1921 excess-profits tax laws. Insert this page to face blue page 401. -2-22. WAR-PROFITS AND EXCESS- PROFITS TAX FOR 1921. BEING TITLE III OF THE REVENUE ACT OF 1921. {Expires by limitation December 31, 1921.) The War-Profits and Excess-Profits Tax Title (III) of the Revenue Act of 1918 is reproduced, followed by the Regulations bearing thereon, beginning on page 301. CALENDAR. (Same as for Income Tax.) Return: Domestic corporation, and foreign corporation other than one not having any office or place of business in the United States: Calendar year basis, on or before March 15. Fiscal year basis, on or before the fifteenth day of the third month after the close of the taxable year. Return: Foreign corporation not having any office or place of business in the United States. Calendar year basis, on or before June 15. Fiscal year basis, on or before the fifteenth day of the sixth month after the close of the taxable year. Tax: (a) All on or before due date for filing return, or (b) In four equal installments : first installment on or before due date for filing return; subsequent installments at three-month intervals. If any installment is not paid on or before the due date, all of the unpaid balance of the tax becomes due and payable on notice and demand. [The captions and other matters in [brackets] are ours.] TITLE III.— WAR-PROFITS AND EXCESS-PROFITS TAX FOR 1921. [Expires by limitation December 31, 1 921 .] PART I. — GENERAL DEFINITIONS. 1000 Sec. 300. That when used in this title the terms "taxable year," "fiscal year," "personal service corporation," "paid or accrued," and "dividends" shall have the same meaning as provided for the purposes of income tax in sections 200 and 201. [Definitions of terms, extracted from Sections 2, 200, and 201 of the Revenue Act of 1921.] ["Taxable year" and "Fiscal year."] 1001 (1) The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term "fiscal year" means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1921, shall be the calendar year 1921 or any fiscal year ending during the calendar year 1921. Copyright 1922, by The Corporation Trust Company. WAR TAX 401 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. ["Personal Service Corporation."] 1 002 (5) The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits, or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a government contract or contracts made between April 6, 1917, and November 11, 1918. both dates inclusive. ["Government Contracts."] 1003 (11) The term "government contract" means (a) a contract made with the United States, or with any department, bureau, officer, commission, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a con- tractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States. The term "government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive" when applied to a contract of the kind referred to in clause (a) of this subdivision, includes all such contracts which, although entered into during such period, were originally not enforce- able, but which have been or may become enforceable by reason of subsequent validation in pursuance of law. ["Paid or incurred" and "Paid or accrued."! 1 004 (4) The term "paid," for the purposes of the deductions and credits under this title, means "paid or accrued" or "paid or incurred," and the terms "paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212. ["Dividends."] 1005 Sec. 201 [of the Revenue Act of 1921]. (a) That the term "dividend" when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, except a distribution made by a personal service corpora- tion out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922. 1006 (b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the Copyright 1922. by The Corporation Trust Company. WAR TAX 402 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. If any such tax-free distribution has been made the dis- tributee shall not be allowed as a deduction from gross income any loss sus- tained from the sale or other disposition of his stock or shares unless, and then only to the extent that, the basis provided in section 202 exceeds the sum of (1) the amount realized from the sale or other disposition of such stock or snares, and (2) the aggregate amount of such distributions received by him thereon. 1007 (c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee. 1 008 (d) A stock dividend shall not be subject to tax but if after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the distribu- tion and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation after February 28, 1913. 1 009 (e) For the purposes of this Act, a taxable distribution made by a corporation to its shareholders or members shall be included in the gross income of the distributees as of the date when the cash or other property is unqualifiedly made subject to their demands. 1010 (f) Any distribution made during the first sixty days of any taxable year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of the preceding tax- able year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was ma*le shall be deemed to have been accumulated ratably during such period. This subdivision shall not be in effect after December 31, 192L PART II.— IMPOSITION OF TAX. 101 1 Sec. 301. (a) That in lieu of the tax imposed by Title III* of the Revenue Act of 1918, but in addition to the other taxes imposed by this Act, there shall be levied, collected and paid for the calendar year 1921 upon the net income of every corporation (except corporations taxable under subdivision (b) of this section) a tax equal to the sum of the following: First Bracket. 1012 20 per centum of the amount of the net income in excess of the excess-profits credit (determined under section 312) and not in excess of 20 per centum of the invested capital; Copyright 1922. by The Corporat^n Trust Company. WAR TAX 403 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. Second Bracket. 1013 40 per centum of the amount of the net income in excess of 20 per centum of the invested capital. 1014 (b) For the calendar year 1921 there shall be levied, collected, and paid upon the net income of every corporation which derives in such year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, a tax equal to the sum of the following: 1015 (1) Such a portion of a tax computed at the rates specified in sub- division (a) of section 301 of the Revenue Act of 1918*, as the part of the net income attributable to such Government contract or contracts bears to the entire net income. In computing such tax the excess-profits credit and the war-profits credit which would be applicable to such calendar year under the Revenue Act of 1918* if it had been continued in force, shall be used; 1016 (2) Such a portion of a tax computed at the rates specified in sub- division (a) of this section as the part of the net income not at- tributable to such Government contract or contracts bears to the entire net income. 1017 For the purpose of determining the part of the net income attributable to such Government contract or contracts, the proper apportionment and allocation of the deductions with respect to gross income derived from such Government contract or contracts and from other sources, respectively, shall be determined under rules and regulations prescribed by the Com- missioner with the approval of the Secretary. 1018 (c) In any case where the full amount of the excess-profits credit is not allowed under the first bracket of subdivision (a), by reason of the fact that such credit is in excess of 20 per centum of the invested capital, the part not so allowed shall be deducted from the amount in the second bracket. [Maximum Tax Limitation.] 1019 Sec. 302. That the tax imposed by subdivision (a) of section 301 shall in no case be more than 20 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 40 per centum of the amount of the net income in excess of $20,000; and the limitations imposed by section 302 of the Revenue Act of 1918* (upon taxes computed under subdivision (c) of section 301 of that Act) are hereby made applicable to taxes computed under subdivision (b) of section 301 of this Act. Nothing in this section shall be construed in such manner as to increase the tax imposed by section 301 of this Act. •The War-Profits and Excess-Profits Tax Title (III) of the Revenue Act of 1918 is reproduced, followed by the regulations bearing thereon, beginning on page 301. Copyright 1922, by The Corporation Trust Company. WAR TAX 404 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. [Partial Personal Service Corporations.] 1 020 Sec. 303. That if part of the net income of a corporation is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of "personal service corporations," then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed (allowing in such computation only the same proportionate part of the credits authorized in section 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part is of such first part: Provided, That the tax upon such second part shall in no case be less than 20 per centum thereof, unless the tax upon the entire net income, if computed without benefit of this section, would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, without reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to the limitations provided in section 302. [Exempt Corporations.] 1021 Sec. 304. (a) That the corporations enumerated in section 231 [^[1059] shall, to the extent that they are exempt from income tax under Title II, be exempt from taxation under this title. 1022 (b) Any corporation whose net income for the taxable year is less than $3,000 shall be exempt from taxation under this title. 1 023 (c) In the case of any corporation engaged in the mining of gold, the portion of the net income derived from the mining of gold shall be exempt from the tax imposed by this title or any tax imposed by Title II of the Revenue Act of 1917, and the tax on the remaining portion of the net income shall be the same proportion of a tax computed without the benefit of this subdivision which such remaining portion of the net income bears to the entire net income. [Specific Exemption in Relation to Tax for less than 12 months.] 1024 Sec. 305. That if a tax is computed under this title for a period of less than twelve months, the specific exemption of $3,000, wherever referred to in this title, shall be reduced to an amount which is the same proportion of $3,000 as the number of months in the period is of twelve months. Part III.- -Excess-Profits Credit. 1025 Sec. 312. That the excess-profits credit shall consist of a specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year. Copyright 1922, by The Corporation Trust Company. WAR TAX 40 5 SERVICE 1-2-22 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. 1026 A foreign corporation or a corporation entitled to the benefits of section 262 fl] 1083] shall not be entitled to the specific exemption of $3,000. Part IV. — Net Income. 1027 Sec. 320. That for the purpose of this title the net income of a corporation shall be ascertained and returned for the taxable year upon the same basis and in the same manner as provided for income tax purposes in Title II of this Act. Part V. — Invested Capital. 1 028 Sec. 325. (a) That as used in this title — 1 029 The term "intangible property" means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property; 1030 The term "tangible property" means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property; 1031 The term "borrowed capital" means money or other property borrowed, whether represented by bonds, notes, open accounts, or otherwise; 1 032 The term "inadmissible assets" means stocks, bonds, and other obligations (other than obligations of the United States), the divi- dends or interest from which is not included in computing net income, but where the income derived from such assets consists in part of gain or profit derived from the sale or other disposition thereof, or where all or part of the interest derived from such assets is in effect included in the net income because of the limitation on the deduction of interest under paragraph (2) of subdivision (a) of section 234, a corresponding part of the capital invested in such assets shall not be deemed to be inadmissible assets; 1 033 The term "admissible assets" means all assets other than inadmissible assets, valued in accordance with the provisions of subdivision (a) of section 326 and section 331. 1034 (b) For the purposes of this title the par value of stock or shares shall, in the case of stock or shares issued at a nominal value or having no par value, be deemed to be the fair market value as of the date or dates of issue of such stock or shares. [Computing 1 'Invested Capital."] 1036 Sec. 326. (a) That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section) : 1036 (1) Actual cash bona fide paid in for stock or shares; Copyright 1922, by The Corporation Trust Company. WAR TAX 406 SERVICE 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. 1037 (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: Provided, That the Commissioner shall keep a record of all cases in which tangible property is included in invested capital at a value in excess of the stock or shares issued therefor, containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, the value of the tangible property at the time paid in, the par value of the stock or shares specifically issued therefor, and the amount included under this paragraph as paid-in surplus. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by reso- lution of either House of Congress, without regard to the restrictions contained in section 257; 1033 (3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year; 1 039 (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest; 1040 (5) Intangible property bona fide paid in for stock or shares on or after March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the begin- ning of the taxable year, whichever is lowest: Provided, That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggre- gate 25 per centum of the par value of the total stock or shares of the corpora- tion outstanding at the beginning of the taxable year; but 1 041 (b) As used in this title the term "invested capital" does not include borrowed capital. 1 042 (c) There shall be deducted from invested capital as above defined a percentage thereof equal to the percentage which the amount of in- admissible assets is of the amount of admissible and inadmissible assets held during the taxable year. 1 043 (d) The invested capital for any period shall be the average invested capital for such period, but in the case of a corporation making a return for a fractional part of a year, it shall be the same fractional part of such average invested capital. Copyright 1922, by The Corporation Trust Company. WAR TAX 407 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. [Special Cases Subject to Special Tax.] 1 044 Sec. 327. That in the following cases the tax shall be determined as provided in section 328: 1 045 (a) Where the Commissioner is unable to determine the invested capital as provided in section 326; 1046 (b) In the case of a foreign corporation or of a corporation entitled to the benefits of section 262 [1[1083]; 104 7 (c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective valves of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively; 1048 (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, com- missions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. [The Special Tax Applicable to the Special Cases.] 1049 Sec. 328. (a) That in the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. In the case of a foreign corpora- tion or of a corporation entitled to the benefits of section 262 1083] the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations. 1 050 In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are, as nearly as may be, similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital em- ployed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances. Copyright 1922, by The Corporation Trust Company. WAR TAX 408 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. 1 CS 1 (b) For the purposes of subdivision (a) the ratios between the average tax and the average net income of representative corporations shall be determined by the Commissioner in accordance with regulations prescribed by him with the approval of the Secretary. 1052 (c) The Commissioner shall keep a record of all cases in which the tax is determined in the manner prescribed in subdivision (a), containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, and the amount of invested capital as determined under such subdivision. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257. Part VI. — Reorganizations. 1053 Sec. 331. That in the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation. Part VII. — Miscellaneous. [Returns on Fiscal Year Basis.] 1 054 Sec. 335. (a) That if a corporation (other than a personal service corporation) makes return for a fiscal year beginning in 1920 and ending in 1921, the war-profits and excess-profits tax for the taxable year 1921 shall be the sum of: (1) the same proportion of a tax for the entire period computed under the Revenue Act of 1918,* which the portion of such period falling within the calendar year 1920 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title, which the portion of such period falling within the calendar year 1921 is of the entire period. Any amount heretofore or hereafter paid on account of the tax imposed for such taxable year by the Revenue Act of 1918 shall be credited towards the payment of the tax as above computed, and if the amount so paid exceeds the amount of such tax, the excess shall be credited or refunded to the corporation in accordance with the provisions of section 252 of this Act. •"The War-Profits and Excess-Profits Tax Title (III) of the Revenue Act of 1918, is reproduced, followed by the regulations bearing thereon, beginning on page 301. Copyright 1922, by The Corporation Trust Company. WAR TAX 409 SERVICE 1-2-22 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. 1 055 (b) If a corporation (other than a personal service corporation) makes a return for a fiscal year beginning in 1921 and ending in 1922, the war-profits and excess-profits tax for the portion of the year falling within the calendar year 1921 shall be an amount equivalent to the same proportion of a tax for the entire period computed under this title, which the portion of such period falling within the calendar year 1921 is of the entire period. [Returns and Payment of Taxes.] 1 056 Sec. 336. That every corporation, not exempt under section 304, shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, in the same manner, and subject to the same conditions, as is provided in the case of returns and payment of income tax by corporations for the purposes of Title II, and all the provisions of that title not inapplicable, including penalties, are hereby made applicable to the taxes imposed by this title. [Sale of Mines, Oil or Gas Wells.] 1057 Sec. 337. That in the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this title attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest. Effective Date of Title. 1058 Sec. 338. That this title shall take effect as of January 1, 1921. Conditional and Other Exemptions of Corporations. 1 059 Sec. 231 [of the Revenue Act of 1921]. That the following organiza- tions shall be exempt from taxation under this title — 1060 (1) Labor, agricultural, or horticultural organizations; 1061 (2) Mutual savings banks not having a capital stock represented by shares; 1062 (3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents; 1063 (4) Domestic building andf loan associations substantially all the business of which is confined to making loans to members; and co- operative banks without capital stock organized and operated for mutual purposes and without profit; Copyright 1922, by The Corporation Trust Company. WAR TAX 410 . SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. 1 064 (5) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private stockholder or individual; 1065 (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; 1 066 (7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual; 1 067 (8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare; 1 068 (9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member; 1069 (10) Farmers' or other mutual hail, cyclone, or fire insurance com- panies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses; 1070 (11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; or organized and operated as purchasing agents for the purpose of purchasing supplies and equipment, for the use of members and turning over such supplies and equipment to such members at actual cost, plus necessary expenses; 1071 (12) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title; 1072 (13) Federal land banks and national farm-loan associations as provided in section 26 of the Act approved July 17, 1916, entitled "An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes"; 1073 (14) Personal service corporations. This subdivision shall not be in effect after December 31, 1921. Copyright 1922, by The Corporation Trust Company. WAR TAX 411 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. Consolidated Returns of Corporations. 1074 Sec. 240 [of the Revenue Act of 1921]. (a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January I, 1922 [see % 1078 below], make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return, if return is made on either of such bases, all returns thereafter made shall be upon the same basis unless per- mission to change the basis is granted by the Commissioner. 1075 (b) In any case in which a tax is assessed upon the basis of a con- solidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. There shall be allowed in computing the income tax only one specific credit computed as provided in subdivision (b) of section 236. 1 076 (c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests. 1077 (d) For the purposes of this section a corporation entitled to the benefits of section 262 [^[1083] shall be treated as a foreign corporation : Provided, That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate dis- tribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses. 1078 (e) Corporations which are affiliated within the meaning of this section shall make consolidated returns for any taxable year begin- ning prior to January 1, 1922, in the same manner and subject to the same conditions as provided by the Revenue Act of 1918 [for which see page 314]. Consolidated Returns for Year 1917. 1079 Sec. 1331 [of the Revenue Act of 1921]. (a) That Title 11 of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the basis of consolidated returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917. 1 080 (b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations or partnerships (1) when such corporation or partnership owned directly or controlled through closely affiliated interests or by a nominee or nominees all or substantially all the Copyright 1922, by The Corporation Trust Company. WAR TAX 412 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. stock of the other or others, or (2) when substantially all the stock of two or more corporations or the business of two or more partnerships was owned by the same interests: Provided, That such corporations or partnerships were engaged in the same or a closely related business, or one corporation or partner- ship bought from or sold to another corporation or partnership products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or one corporation or partnership in any way so arranged its financial relationships with another corporation or partnership as to assign to it a disproportionate share of net income or invested capital. For the purposes of this section, public service corporations which (1) were operated independently, (2) were not physically connected or merged, and (3) did not receive special permission to make a consolidated return, shall not be contrued to have been affiliated; but a railroad or other public utility which was owned by an industrial corporation and was operated as a plant facility or as an integral part of a group organization of affiliated corporations which were required to file a consolidated return, shall be construed to have been affiliated. 1081 (c) The provisions of this section are declaratory of the provisions of Title II of the Revenue Act of 1917. Incorporation of Individual cr Partnership Business. 1082 Sec. 229 [of the Revenue Act of 1921]. That in the case of the organization as a corporation within four months after the passage* of this Act of any trade or business in which capital is a material income- producing factor, and which was previously owned by a partnership or in- dividual, the net income of such trade or business from January 1, 1921, to the date of such organization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1921, and the undistributed profits or earnings of such trade or business shall not be subject to the surtaxes imposed in section 211, but amounts distributed on and after January 1, 1921, from the earnings or profits of such trade or business accumulated after December 31, 1920, shall be taxed to the recipients as dividends; and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business: Provided, That this section shall not apply to any trade or busi- ness, the net income of which for the taxable year 1921 was less than 20 per centum of its invested capital for such year: Provided further, That any taxpayer who takes advantage of this section shall pay the tax imposed by section 1000 [Capital Stock Tax] of the Revenue Act of 1918 as if such tax- payer had been a corporation on and after January 1, 1921. Income From Sources Within the Possessions of the United States. 1083 Sec. 262 [of the Revenue Act of 192 1 J. (a) That in the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States — *The date of passage of "this Act" is November 23, 1921. Copyright 1922, by The Corporation Trust Company. WAR TAX 413 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. 1084 (1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section) for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a pos- session of the United States; and 1085 (2) If, in the case of such corporation, 50 per centum or more of its gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States; or 1 086 (3) If, in the case of such citizen, 50 per centum or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another. 1087 (b) Notwithstanding the provisions of subdivision (a) there shall be included in gross income all amounts received by such citizens or corporations within the United States, whether derived from sources within or without the United States. 1 083 (c) As used in this section the term "possession of the United States*' does not include the Virgin Islands of the United States. Consolidation of Liberty Bond Tax Exemptions. 1089 Sec. 1328 [of the Revenue Act of 1921]. That the various Acts authorizing the issues of Liberty bonds are amended and supplemented as follows: 1 090 (a) On and after January 1, 1921, 4 per centum and per centum Liberty bonds shall be exempt from graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the LTnited States upon the income or profits of individuals, partnerships, corporations, or associations, in respect to the interest on aggregate principal amounts thereof as follows: 1091 Until the expiration of two years after the date of the termination of the war between the United States and the German Government,* as fixed by proclamation of the President, on $125,000 aggregate principal amount; and for three years more on $50,000 aggregate principal amount. 1 092 (b) The exemptions provided in subdivision (a) shall be in addition to the exemptions provided in section 7 of the Second Liberty Bond Act [1] 728 II a], and in addition to the exemption provided in subdivision (3) of section 1 of the Supplement to the Second Liberty Bond Act in respect to bonds issued upon conversion of 3}^ per centum bonds [^728 II b], but shall be in lieu of the exemptions provided and free from the conditions and limitations imposed in subdivisions (1) and t (2) of section 1 of the Supplement to Second *The date of the termination of the war is July 2, 1921. Copyright 1922, by The Corporation Trusl Company. WAR TAX 4H SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. Liberty Bond Act and in section 2 of the Victory Liberty Loan Act [1J728 II c, d, e, f]. Alternative Tax on Personal Service Corporations. TG93 Sec. 1332 [of the Revenue Act of 1921]. (a) That if either sub- division (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act is by final adjudication declared invalid, there shall, in addition to all other taxes, be levied, collected, and paid on the net income (as defined in section 232) received during the calendar years 1918, 1919, 1920, and 1921, by every personal service corporation (as defined in section 200) included within the provisions of such subdivisions, a tax equal to the taxes imposed by Titles II and III of the Revenue Act of 1918 and, in the case of income received during the calendar year 1921, by Titles II and III of this Act. 1084 (b) In such event every such personal service corporation shall, on or before the fifteenth day of the sixth month following the date of entry of decree upon such final adjudication, make a return of any income received during each of the calendar years 1918, 1919, 1920, and 1921 in the manner prescribed by the Revenue Act of 1918 (or in the manner prescribed by this Act, in the case of income received during the calendar year 1921). Such return shall be made and the net income shall be computed on the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in the manner provided for other corporations under the Revenue Act of 1918 and this Act. 1 095 (c) If either subdivision (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act is so declared invalid, claims for credit or refund of taxes paid under both such sections shall be allowed, if made within the time provided in subdivision (f) of this section. I0SS (d) In case the claims for credit or refund, filed within six months from such date of entry of decree, represent less than 30 per centum of the outstanding stock or shares in the corporation, the amount of taxes imposed by this section upon such corporation shall be reduced to that proportion thereof which the number of stock or shares owned by the share- holders or members making such claims bears to the total number of stock or shares outstanding. 10S7 (e) The tax imposed by this section shall be assessed, collected, and paid upon the same basis, in the same manner, and subject to the same provisions of law, including penalties, as the taxes imposed by sections 230 and 301 of the Revenue Act of 1918 (or by sections 230 and 301 of this Act, in the case of income received during the calendar year 1921), but no interest or penalties shall be due or payable thereon for any period prior to the date upon which the return is by this section required to be made and the first installment paid. The amount of tax paid by any shareholder or member of a personal service corporation pursuant to the provisions of subdivision (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act shall be credited against the tax due from such corporation under this section upon the joint written application of such corporation and such shareholder or member or his representatives, heirs, or assigns, if such ap- C op y right 1922, by The Corporation Trust Company, WAR TAX 415 SERVICE 1-2-22. 1921 WAR-PROFITS AND EXCESS-PROFITS TAX LAW. plication is filed with the Commissioner within six months from such date of entry of decree. 1098 (f) Notwithstanding any other provision of law, no claim for a credit or refund of taxes paid under subdivision (e) of section 218 of the Revenue Act of 1918 or subdivision (d) of section 218 of this Act, may be filed after the expiration of six months from such date of entry of decree: Provided, however. That a personal service corporation of which no shareholder or member has filed such claim within such period of six months shall not be subject to the tax imposed by this section. Repeals. 1 099 Sec. 1400 [of the Revenue Act of 1921]. (a) That the following parts of the Revenue Act of 1918 are repealed, to take effect (except as otherwise provided in this Act) on January 1, 1922, subject to the limitations provided in subdivision (b): He * * * * * Title III (called "War-Profits and Excess-Profits Tax") as of January 1, 1921; * * * * * * 1100 (b) The parts of the Revenue Act of 1918 which are repealed by this Act shall (unless otherwise specifically provided in this Act) remain in force for the assessment and collection of all taxes which have accrued under the Revenue Act of 1918 at the time such parts cease to be in effect, and for the imposition and collection of all penalties or forfeitures which have accrued or may accrue in relation to any such taxes. In the case of any tax imposed by any part of the Revenue Act of 1918 repealed by this Act, if there is a tax imposed by this Act in lieu thereof, the provision imposing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act. * '* * . Copyright 1922, by The Corporation Trust Company. WAR TAX 416 SERVICE 1-8-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC.— 1922. OFFICIAL RULINGS, REGULATIONS, OPINIONS, AND DECISIONS UNDER THE LAW IMPOSING A WAR-PROFITS AND EXCESS-PROFITS TAX FOR 1921 AND UNDER PRIOR WAR-PROFITS AND EXCESS-PROFITS TAX LAWS MADE AVAILABLE DURING 1922. (Decision.) (Revenue Act of 1917.) December 15, 1921. Borrowed capital in relation to the "no invested capital or not mere than a nominal capital" provision of Section 209 of the 1917 Act. UNITED STATES CIRCUIT COURT OF APPEALS Sixth Circuit. Charles E. Cartier and Edward M. Holland, Co-partners doing business under the firm name and style of Cartier-Holland Lumber Company, Plaintiffs in Error, vs. Emanuel J. Doyle, United States Collector of Internal Revenue for the Fourth Col- lection District of Michigan, Defendant in Error. (No. 3541.) Before Knappen, Denison and Donahue, Circuit Judges. 1 101 On the 20th day of May, 1912, Charles E. Cartier and Edward M. Holland, entered into a written contract of partnership for the purpose of manufacturing and dealing in forest products including lumber, timber, ties, shingles, laths, etc., and also timbered, improved and cut-over lands. 1102 It was further agreed that the paid-in capital of the partnership should be thirty thousand dollars, any portion or all of which amount should be furnished to the partnership by Charles E. Cartier, as the require- ments of the partnership appear upon the note or notes of the partnership to be paid at the earliest practicable opportunity out of the net earnings of the partnership business, and to bear legal rate of interest. 1 1 03 It does not appear from the evidence that this partnership ever manufactured any forest products but it did purchase lumber and kindred commodities to fill current orders of its customers but not for specu- lative purposes based upon rise and fall of the market. It kept no lumber Copyright 1922, by Tht Corporation Trust Comptmy. WAJLTAX 417 SERVICE Error to the District Court of the United States' for the Western District of Michigan, Southern Di- vision. 1-3-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC. 1922. yard and kept no lumber in stock, and the only lumber owned by it was lumber in transit from the mill from which it was purchased by the partner- ship, to the partnership's customers. In a few cases, however, where the lumber was rejected by the customer it was held by the partnership until it could be sold to another purchaser. In 1917 the partnership also negotiated sales for timber and secured an option on a larger acreage of timber land in its own name, but in fact for William and Samuel Horner, who furnished the thousand dollars necessary to be paid for this option and the additional five hundred dollars necessary to extend the option beyond the sixty days named therein. 1 104 For services in this transaction the partnership received $20,353. 00. which is by far the largest single item in the aggregate of the net in- come of $47,018.00, earned by the partnership in 1917. I 105 It further appears from the record that after the organization of the partnership which was known as the Cartier-Holland Lumber Company, Cartier did furnish it some money and took its notes therefor, but in 1914 a new arrangement was entered into by which the partnership borrowed the money required in its business directly from the bank and exe- cuted its notes therefor. These notes were indorsed by both Cartier and Holland, and Cartier left upon deposit with the bank, as collateral to his indorsement of these notes, securities theretofore deposited by him when 1 e borrowed the money in his own name and loaned it to the partnership. It was also further understood and agreed between the bank and the partner- ship, when these loans were negotiated, that if at any time the collateral deposited by Cartier seemed to the bank to be insufficient to cover his liability as indorser on the notes of the partnership, Holland would furnish further collateral security. This method of transacting the partnership business was continued until and during the year 1917 and in this way the partnership ob- tained all its capital including the money required by it to discount its bills for lumber and other commodities purchased by it and sold to its cus- tomers. 1 1 06 It further appears that during the time the partnership was operated Cartier drew out of the partnership business $11,556.37 and Holland $18,106.28, which amounts were charged to them on the books of the partner- ship. If these amounts withdrawn by the partners are reckoned as assets of the partnership, then on January 1, 1917, there was a net surplus of assets over and above liabilities of $22,443.80; otherwise the liabilities of the partner- ship would exceed its assets by the sum of $7,218.85. I I 07 The partnership paid an excess profit tax of eight per cent of its net income of $47,018.00, for the year 1917 under the provisions of Section 209 of Title II of the Act of October 3, 1917, amounting to $3,761.44. Later a supplemental return was requested by the Commissioner of Internal Revenue, who then notified the partnership that its claim for assessment based upon the provisions of Section 209 of the Excess Profits Tax Law had been disallowed and that the tax had been computed and assessed against it under Sections 201 and 210 and Articles 18. 24 and 52 of Regulati* -. No. 41. 1 1 OS This tax based upon an estimated capital of $1 18,515.85 amounted to $12,788.90, or a balance over the amount already paid of $9,027.46, which additional tax was paid under protest. Later the partnership brought an action in the District Court of the United States for the Western District of Michigan, Southern Division, to recover the additional tax levied and Copyright 1922, by The Corporation Trust Lompany WAR TAX 418 SERVICE 1-3-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC.— 1922. demanded by the Internal Revenue Commissioner and paid by it under protest. 1 1 09 The parties having expressly waived a jury, the cause was submitted to the District Court upon the pleadings and the evidence, resulting in judgment for the defendant. Findings of fact were submitted by the plaintiff and defendant, but the court refused to adopt these findings or either of them, and ordered that its opinion should constitute its findings of fact and conclusion of law, to which findings, conclusion and judgment, exceptions were taken by the plaintiff in error. 1110 Donahue, Circuit Judge: The only question presented by this record is whether or not the partnership of Cartier-Holland Lumber Company during the year 1917 had an invested capital within the meaning of Section 201, 207 and 210 of Title II of the Act of Congress approved October 3, 1917. 1111 If this question were to be determined separate and apart from the act levying this excess profit tax, then it would be of easy solution. Money invested in a partnership business, whether paid in by the partners or borrowed from a partner or a bank, in the absence of legislation to the contrary, would constitute invested capital in the ordinary meaning and acceptation of that term. Congress, however, evidently for the purpose of protecting the government from claims of inflated capitalization, thought it wise and necessary to define the term "invested capital," which is made the basis of the computation of the tax to be levied under the authority conferred by this Act. To that end Section 207 provided among other things the following: "As used in this title 'invested capital' does not include stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means, subject to the above limitations: "(a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: * * * ." 1112 In the construction of the Act of Congress of which this definition is a part, this legislative definition of the term "invested capital" must be accepted as final and conclusive, regardless of any preconceived notion the public generally, or this court, may have as to the meaning of that term. 1113 In the construction of this statute it must also be remembered that it is the settled rule not to extend the provisions of taxing statutes by implication, or to enlarge their operation, so as to embrace matters not specifically covered thereby. Gould v. Gould, 245 U. S. 141. 1114 The trial court based its judgment for the defendant upon the con- clusion of law that the collateral deposited by Cartier as security for his liability as an indorser of the partnership notes became a part of the working capital and was used and employed in the business of the company to the same extent as if it had been paid directly into the partnership funds. Copyright 1922, by The Corporation Trust Company. WAR TAX 419 SERVICE 1-8-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC.— 1922. 1115 This conclusion of law is not supported by the facts found by the court or by any evidence in this record. The articles of co-partnership provide that the paid-in capital of the partnership is to be $30,000.00, any or all portions of which amount is to be furnished to the partnership, upon notes signed by it, and to be paid at the earliest practicable opportunity out of the net earnings of the partnership. 1116 It would seem unnecessary to say that a private contract between these parties would not change or afiect, in the slightest degree, the plain and positive terms of the statute, declaring what shall be included and what shall not be included as "invested capital." for the purpose of this tax. If the articles of co-partnership had provided that the paid-in capital of the partnership should be $30,000.00, one-third of which should be paid in cash or in property by the partners, and 20,000.0. to be borrowed from a bank upon the notes of the partnership, indorsed by the nartners, and further secured by the deposit of such collateral as the bank might demand, the money borrowed in pursuance of such partnership agreement, fixing the total capital of the partnership at $30,000.00, would necessarily be rejected as invested capital in the computation of surplus income taxes levied under this act. It logically follows that, if under this statutory definition of invested capital, money borrowed could not be included as capital where some sub- stantial amount of cash had actually been paid into the partnership fund by the partners, such borrowed money can not be reckoned as invested capital where the partners contributed neither cash nor property to the partnership capital. 1117 The original plan of operation written in the partnership agreement was abandoned as early as 1914, and thereafter the money used in the partnership business was borrowed directly from the bank upon the notes of the partnership, payable unconditionally and at certain fixed times, regard- less of net earnings or any other contingency. While these notes were indorsed by the individual partners, nevertheless the money was borrowed by the partnership for partnership purposes, and it was primarily liable for the payment of these notes. Collateral held by the bank, a stranger to the part- nership, whether the property of one or of both partners, was a mere incident to the loan, and can in no wise affect the character of the transaction. 1118 It is therefore wholly unnecessary to determine whether under the original agreement the money to be furnished by Cartier, to be repaid out of the partnership earnings, would or would not be borrowed money within the meaning of this act. Nor is it important at whose suggestion this plan of operation was changed and the new plan adopted. It is sufficient for the purposes of this opinion to determine the legal effect of these trans- actions as they occurred during the taxing period of 1917. The evidence in relation to these transactions permits of no conclusion other than that the money borrowed from the bank upon the notes of the partnership was "borrowed money," within the meaning of Section 207 of the Act of Congress approved October 3, 1917. 1119 The clear, positive and unambiguous language of Section 207 of this act is not subject to any other construction, regardless of the exigencies of any particular case. First it provides that borrowed money or other property shall not be included in the term "invested capital" as used in that title. Paragraph "A" of that section then spec'fkally states what shall be included in determining the "invested capital" of a corporation or partner- ship as follows: "(1) Actual cash paid in." There is no claim made by the government that there was any "actual cash paid in" to the partnership funds Copyright 1922, by The Corporation Trust Company. WAR TAX 420 SERVICE (1)1-8-22. (2)1-24-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC. — 1922. other than the money borrowed from the bank on the notes of the partnership, endorsed by the partners, the endorsement of Cartier being secured by col- lateral deposited by him. "(2) The actual cash value of tangible property paid in other than cash for stock or shares in such corporation or partnership." In this case there was no tangible property paid in by either partner for the purpose named or for any other purpose. The collateral deposited by Cartier could not upon any reasonable hypothesis be held to be "tangible property paid in" to the partnership. It was not deposited with, transferred or assigned to the partnership and the partnership never acquired any right, title or property interest therein, legal or equitable. This collateral was deposited with the bank as part of the loan transaction. Cartier never parted with the title or ownership therein. The bank held it, not as owner but as pledgee merely. "(3) Paid-in or earned surplus and undivided profits used or employed in the business exclusive of undivided profits earned during the taxable year." 1 1 20 Whether this partnership used or employed in its business paid-in or earned surplus and undivided profits exclusive of undivided profits earned during the taxable year is a question of fact. The trial court found as a fact that at the beginning of the taxable year the liability of the firm ex J ceeded its assets by the sum of $7,218.85. This court has no authority to determine the weight of the evidence. R. S. Sections 649 and 1011. If the finding of fact made by the trial court is sustained by some substantial evi- dence, then it must be accepted by this court as a final determination of the facts in issue. 1121 There is practically no dispute in the evidence upon which the trial court made this finding of fact. It had been the custom of each partner, with the consent of the other, practically from the time the partner- ship was organized, to withdraw earnings of the partnership in advance of the ascertainment of the exact profits and a formal division of the same. These withdrawals were charged against the partners respectively on the partnership books of account, and whenever there was a formal division of the profits the amount due to each partner was credited to his account as against amounts that were withdrawn by him. On the first day of January,. 1917, it appeared that Cartier had withdrawn in the aggregate, during the life of the partnership, the sum of $11,556.37, in excess of all sums credited to him. Holland had also withdrawn $18,106.28 in excess of his credits. The evidence further shows that these withdrawals were made in anticipation of a distribution of the profits, to be credited to them as against these with- drawals, that would finally balance their accounts. That this was the purpose and understanding of the partners fully appears by their testimony, and particularly the testimony of Holland, as follows: "The Court: It would be liquidated by dividends you declared? "A. Eventually. "The Court: And credited yourself with? "A. Yes." 1 122 In the absence of an express agreement to the contrary, the. partner- ship could not require a partner to return to it his share of the actual; profits anticipated by these withdrawals. The strongest inference which any- thing in this record would justify as to the duties of the partners to each other to repay these items charged against them is that each should repay the amount he had withdrawn in excess of his share of the profits. This, would mean in the aggregate $7,218.85, just enough to pay the general debts and leave no surplus. In any event, these profits were drawn by the Copyright 1922, by The Corporation Trust Company. WAR TAX 421 SERVICE (1)1-8-22. (2)1-24-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC. — 1922. partners and were not used in the partnership business. The claim that they were used in the partnership business as bills receivable, so they would furnish a basis of credit, is not tenable. These partners were the sole owners of the partnership business and in full control of its affairs; they were each individu- ally liable for all the debts of the partnership, so that whether they were liable to the partnership for the full amount of these withdrawals, regardless of profits, could in no wise affect the security of creditors for the payment of their debts. 1123 It would therefore appear that this finding of the trial court is fully- sustained by substantial evidence. 1 1 24 Section 9 [209] of this act provides that in the case of a trade or business having no invested capital (and, of course, that means in- vested capital within the meaning of the act), or not more than a nominal capital, there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this act, in lieu of the tax imposed by Section 201, a tax equivalent to eight per centum of the net income. This section of the act would appear to have been intended to cover just such conditions as are here presented. 1 1 25 For the reasons above stated, this judgment must be reversed and the cause remanded for a new trial in accordance with this opinion. [The District Court decision is reported at 269 Fed. 647.] 1126 Allocations of tax: Partnerships and corporations in consolidated 1079 cases. (1917-1921 Acts.) — An opinion is requested in the consolidated case of the M Company, wherein corporations and partnerships are consolidated, as to the proper basis of allocating the tax between the units of the consolidation. 1127 No opinion is requested as to whether or not the corporations are properly consolidated and no opinion is expressed upon this question. 1128 In the request attention is called to article 78, Regulations 41, on the subject of allocating the excess profits taxes in consolidated cases involving corporations, and objections are pointed out to allowing taxpayers the option to allocate the excess profits taxes to partnerships in cases where both corporations and partnerships are consolidated. Article 78, Regulations 41, reads as follows: When affiliated corporations may be required to make consolidated returns. — Whenever necessary to more equitably determine the invested capital or taxable income, the Com- missioner of Internal Revenue may require corporations classed as affiliated under article 77 to furnish a consolidated return of net income and invested capital. Where such con- solidated return is required it may be made by any one or more of such corporations or by all of them acting jointly; but if such affiliated corporations, when requested to file such consolidated return, neglect or refuse to do so, the Commissioner of Internal Revenue may cause an examination of the books of all such corporations to be made and a consoli- dated statement to be made for such examination. In cases where consolidated return* are accepted, the total tax will be computed in the first instance as a unit upon the basi^- of the consolidated return and will be assessed upon the respective affiliated corporation -» in such proportions as may be agreed among them. If no such agreement is made fcne tax will be assessed upon each such corporation in accordance with the net mbme and invested capital properly assignable to it. 1129 It is clear that the above-quoted article applies only to caset* when corporations are consolidated, and not to cases where corporations and partnerships are consolidated. } 1 30 Consolidated returns are required because otherwise opportunity would be afforded affiliated corporations and partnerships to evadr Copyright 192?, by The Corporation Trust Company. W4* TAX 422 SERVICE 2-1 1-22 WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC. —1922. taxes by the shifting of income through price fixing, charges for service, and other means by which income can be arbitrarily assigned to one or another unit of the group. The reason for permitting the taxpayer in consolidated cases an option as to the allocation of the excess profits tax as between cor- porations is that all corporations pay the same rate of income tax and the allocation of the excess profits tax as between corporations would make no difference in the total income and excess profits taxes received by the Govern- ment. This reason, however, does not apply where partnerships are included in the consolidation with corporations, because the individual members of partnerships do not pay their income tax at the same rate as corporations. To allow the taxpayer to allocate the excess profits tax in cases where cor- porations and partnerships are consolidated might therefore result in defeat- ing one of the purposes for requiring consolidated returns in affiliated cases. While individual members of the partnerships pay income taxes at different rates than corporations, all individual members of the partnerships pay income taxes at the same rate. It appears, therefore, that there would be no objection to allowing the taxpayers the option to allocate to the partner- ship units the excess profits tax properly assignable to the partnership group. 1131 In the request attention is called to the difficulties of applying the last sentence of article 78 to consolidated cases where several units of the consolidation have losses and where there is doubt as to the invested capital properly assignable to each unit. These difficulties as to the prac- tical application of the article are recognized in such cases where it is sought to allocate the tax according to the invested capital and net income of each unit of the consolidation, but it is believed that it will be found that these difficulties disappear within the groups if the corporations are treated as one group and the partnerships as another. While the units of the two groups (units of the partnership group here mean the individual partners) will pay their income taxes at different rates, the units of the same group will pay their income taxes at the same rates, and if the excess profits tax is allo- cated to each group, according to the invested capital and net income assign- able to the group, all difficulties disappear and the tax is equitably allocated. 1132 It is held, therefore, that where corporations and partnerships arc consolidated the excess profits tax should be allocated to the part- nerships as a group according to the invested capital and net income assignable to the partnership group. After the proper amount of the excess profits tax has been allocated to the partnership group, article 78 may then be applied within the partnership group as it is now applied within the corporation group. (Law Opinion 1085, signed by Solicitor of Internal Revenue Carl A. Mapes, and issued January 16, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 423 SERVICE Form 1J22-UNITEO STATES INTERNAL REVENUE SERVICE INFORMATION RETURN OF SUBSIDIARY OR AFFILIATED CORPORATION WHOSE NET INCOME AND INVESTED CAPITAL ARE INCLUDED IN RETURN OF A PARENT OR PRINCIPAL REPORTING CORPORATION FOR PURPOSES OF INCOME AND PROFITS TAXES If return is for calendar year 1921, file it on or be- fore Mfjcb 15, 1S22, with tha Collects? of Internal Revenue for tha District in vhicb the Subsidiary or AfRBated Corporation bu its principal office. If for r period ether iian a calendar year, She return s'lculii bo filed on or bffuro Ifcs IStn day of the third month Mowing the c!o«2 of such period. FOR CALENDAR YEAR 1921 Or for period begun , 1920, and ended , 1921 (Street end number or rural route) (Post Office tod State) (D*te Received) 1. Date incorporated. 2. Kind of business.. Under laws of what State ?. 3. Par value of capital stock outstanding at beginning of taxable period: (a) Common, $ ; (b) preferred, $ 4. Name cf parent corporation.. - 5. address of parent corporation 6. Internal revenue district in which consolidated return has been filed. (Give district, or city and State) 7. The department prefers that the entire tax shown on a consolidated return bo paid by the parent or principal reporting corporation, in? tend of being ppportionod among the corporations composing the affiliated group. If apportionment is made, s ate tho amount of income and profits taxes for the taxable period to be aas&sea against the subsidiary or affiliated corporation making this return $_ _ We, the undersigned, president end taea&irer of the above-named su>)sidiary or affiliated corporation, being bcv orally duly sworn, each for himself doposra anu ftBys that the foregoing return, including the ftce£&jlMiyiitg list (if any), ha3 been examined by him and is to the best of his knowledge and belief a true and compl el of information maflia in good faith pursuant to the Revenue Act of 1921 and the Regulations issued thcreuudcr. Sworn to and subscribed before mo this day of __ _., 1922. PVvn (Stjcntnre of ocer adr-dr^steriEg w.tL) 1 /iu*-.;; :r. WAR TAX 424 SERVICE I] 4MIIA)% 8p*N ZDAJIWfft TH3MM03 On the reverse hereof is reproduced Form 1120S — Government Contracts Profits Tax Return. WAR TAX SERVICE Insert to face page 424 2-28-22. Form 1120S TJ. S. Internal Revenue GOVERNMENT CONTRACTS PROFITS TAX RETURN FOR CALENDAR YEAR 1921 Or for period begun , 1920, and ended _ , 1921 DO NOT WKTTS IN THIS STAC* "I ifl'l'j ATTACH THIS FORM TO YOUR INCOME TAX RETURN, FORM 1120, TOR THE CORRE- SPONDING TAXABLE PERIOD AS A PART OF THAT RETURN. Print plenty corporation'., turn. and bualrMaa add™.. IKua) (StrMtud Dumb*) (Post OBce and BUM) KIND OF BUSINESS. IS THLS A CONSOLIDATED RETURN?. Horn. 1. Average Net Incoue for Prewar Period (from Form 1120 for 1918, page 1, Schedule I, Item «) - ! 2. Net Income for Taxable Period (from Form 1120 for 1921. pace 1. Schedule A. Item 271 r SCHEDULE II— INVESTED CAPITAL. Item. 1. Invested Capital for Taxable Period (from Form 1120 for 1921, page 1, Schedule B Item 9) 2. Average Invibted Capital for Trewar Period (from Form 1120 for 1918, page 1, Schedule II Item 101 . . _ -. 3. Increase or Decrease in Invested Capital for Taxable Period as compared with Averaoe Prewar Invested Cafital (indicate decrease bv " r> "i. i SCHEDULE III— EXCESS PROFITS AND WAR PROFITS CREDITS. EXCESS PROFITS CREDIT. 1 Eiph t per cent of invented capital for taxable period ( Item 1 Schedule II)..._ „ _ C . t WAR PROFITS CREDIT. 4. Average net income for prewar period ( Item 1, Schedule IV_ 5. Plus 10% of increase or minus 10% of decrease shown by Item 3, Schedule IL - - _ 1 u 6. (a) Total of (or diBerc-oe between! Items 4 and 5, or (6) 10« of inverted' capital for taxable period (Item 1, 3. Excess Profits Credit (Item 1 plus Item 2)- $ Schedule II), whichever ia larger 7. Exemption for domestic corporation ($3,000) * . . 8. War Frofits Credit (Item 6 plus Item 7) J SCHEDULE IV— COMPUTATION OF TAXES. WAR PROFITS AND EXCESS PROFITS TAX (BRACKETS ONE AND TWO). 1. Bracken. ^ 2. Net Income, ^ 3. Excess Profits Cr*w1it (Item 3, Scfaedale.il). A Bl tlaiv* Siit>)ect to Tu. iuw.1 1. Net ii come not in excess of 20% of invested capital t 1 » 30% L_ - ! • 65% S. Totals _ ; _. t _J fc_J $.. .. lT'l. WAR PROFITS AND EXCESS PROFITS TAX (BRACKET THREE). 4. Net income fcr taxable period (Item 2, Schedule I). itnount of War Profits Credit (Item 8, Schedule III).. Balance _ . 7. Eighty per cent of Item 6.. J$ 8. Lees Item 3, column 6 (il ...II . smaller than Item 7) ) _. 10. Total War Profits and Excess Profits Tax as computed under Section 301(6)1 (Item 3, roTumn «, plus Item 9) 11. Total War Profits and Excess Profits Tax, il computed under Sections 302 or 337 of the Revenue Act of 1021 . SUMMARY— WAR PROFITS AND EXCESS PROFITS TAX. 12. Total War Profits and Excess Profits Tax computed under Sectiors 301(d), 302, or 337, whichever is the smallest. !$_ 13. Total Excess Profits Tax (Item 3 or 4. whiohovpr is the smaller in column «. Schedule IV Form 1120^ _ ' 11. That proportion of Item 12 which the income derived -from Government contracts bears to the total net income ■ ■ , ■ ■ — lf>. That proportion of Item 13 which the income not derived from Government contracts bears to the total net income 16. Total War Profit* and Excess Profit* Tax. Item 14 plus Item 15 (enter as Item 8. Schedule D, Form 1120) _ -. I_J 1 GENERAL INSTRUCTIONS REGARDING TAX ON INCOME DERIVED FROM GOVERNMENT CONTRACTS. the year 1921 a net income of more than $10,000 from any Government contractor contracts In the case of a corporation which derives during t November 11. 1918, both dates in- lusive, the tar shall be that year, as the portion of the r.»t income attributable to the Gc vernmeni smc-int of the remaining net income b^ars to the entire net income. See St Government contracts may include: (a) A contract with the United < f a subcontract with a contractor under any stub contract; provided in < eequentjy ratified are treated as thoosb made when originally entered into into od and after April 6, 1917. •e*n April ring period Total'. There should also be shown in the i tledm form: : c orporal ion (total). (d) Total gross income of corporation. (e) Percentage which total ci column (I) it of (rf). If) Total general expenses, losses, and d-turtrns c (b) Amount of (f i allocated to Gov (h) Percentage which (g) is of (/). If the^allocation of general expenses, losses, ard deductions difera bora the percccaga which the greet income from the Government contract or contracts hears to the total gross income, there shall be submitted a ststement showing the items and the amounts thero f which have been otherwise allocated, and the reasons therefor If a claim it made und'r Section 327 of the statute, gain', pronia, commisaicna, or c:b»r income derived on a cow. plus basis from a Government contract or coooacts made between April 6, 1917, and November 11, 1918. both date* inclusive, should be shown separate!) from income fro.* WAR TAX SERVICE Insert to face page 425. 2-1 1-22. Form 1120 V . R'.- Internal Revenue THIS RETURN JJHOUIJD BE FILED NOT LATER THAN THE 1STH DAY Or THE THjRD MONTH FOLLOWING THE CLOSE OF THE TAXABLE fEMOO CORPORATION INCOME AND PROFITS TAX RETURN FOR CALENDAR YEAR 1921 Or for period be run . 1920, and ended _ , 1921 PRINT PLAINLY CORPORATION'S 1 PlttST PAYMENT KiHH OF BUSINESS . IS THIS A CONSOLIDATED RETURN 7 SCHSDULE A— TAXABLE NET INCOME. GROSS INCOME. s, leas return: and allowance* . of goods sold, exclusive of ile! i called for separately below (from Schedule A2). > irota operations other than trading or manufacturing, loss aliowiocos (from Schedule A3).. iroeton Liberty Bonds, etc. (from Schedule A4)._ _ _.. rf*trt from ail other sources. - Koyalties . Share of ih t income earned by personal service corporation (whether received or not) _ _ _. Invideude on slocV of foreign and domestic corporations _ _ C.rom iLcoino from ail other sources (not including any amount reported in Item 2:1, below) (from Schedule A10)_. Total cf Itkms 1 to 10 '. , DEDUCTIONS. Expenses (except amounts reported in Item 2 above, or called for separately below) (from Schedule A12).. . Compensation of officers (in whatever form paidj (from Schedule A13) _ _ Repairs (including labor, suppliee. etc.) (from Schedule AH) Interest (see pago 2 of Instructions, paragraph 9) Tar.es (from Schedule A16) P.ad debts (from Schedule A17) _ _ iit'ua' .si! ■>□, wear and tear (including obsolescence) (from Schedule A18) , Depletion (from Schedule A19) _ ..... . Amortization oi war facilities (from Schedule A20) Total or Inns 12 to 20.. _ _ _ Itzk 11 kuius Itim 21 _ _ . I'roSt br loss on sales of capital assets and miscellaneous investments (from Schedule ASS?*. : . Losses by fire, storm, etc. (From Schedule A24.) (Extend difference between or sum of Items 23 and . Net income exclusive of deductions for di\ ideods (Item 2? minus 24, extended) , , Mvideuds deductible under Section 234(a) 0 of the Revenue Act of 1921, (from Schednle AJ6) . Nit Income (Item 25 minus Item 26) (If return is for a period lass than twelve months, i SCHEDULE B— INVESTED CAPITAL. 1. Capital, surplus, and undivided profits at beginning of taxable period (from Schedule E, Item 11) 2. Pius adjuBlmecta by way of additions (from Schedule F, Item 4) — _ 4. Less edjuetmeuts by way of deductions (from Schedule G, Item 7) 6. Plus or minus changes in invested capital during taxable period (net Increase or Decrease from Sebsdule IT) 7. Total (om Rimainder) _ — — — — - 8. Less doduction on account of inadmissible assets (from Schedule J) L* — I nvested capital for taxable period. SCHEDULE C-EXCESS PROFITS CREDIT. 1. Eight per cent of invested capital for taxable period (Iiem 2. Exemption ($3,000) (except for a foreign corporation 3. Excess Profi ts Cr edit (Item 1 plus Item 2) corporation satisfying the conditions provided in Section 2C2 of the Act) . SCHEDULE D— COMPUTATION OF TAXES. T : Sorter t* Tax. 1. Net income, not in excess of 20 JS of invested capital 2. Balance of net income — --w 5. Totals computed under Section 301(a) ■4. Excess Profits Tax. if contputed under Sections 302, 303, 3 04(c) or 337 of the Revenue Act of 1921 (see page 2 of Instructions, paragraph 14) 6. Net income (Item 27, Schedule A) 6. Le'-s : Taxable InWn^t oil obligations cf J L 9. Eremptluii i.' it'-, rnrrlurr-^llr^-T^f^-l Mi limine a in: :ri< jiLt: Qi>t i-if oodiag J25.20Q- 10. Balance (Item 5, Ions Items 6, 7, and 9, or Itema 6, 8, and 9). II. Income t£H (lOfo of Item 10) . 13. Total tax (Itom 3 or 4 the leoex, or 8, plus Items 11 and 12). ci tt» ItOTeuo* Act ot 16. Balance of tax (Item 13 mij An a nr. cr. do*' return must be plainly Checks and drafts will bo accepted only if payable at par. [Page 1 of Form 1120.] WAR TAX 425 SERVICE Pope 2 of Return. SCHEDULE E.-CAPITAL. SURPLUS. AND UNDIVIDED PROFITS AS SHOWN BY BOOKS BEFORE ANY ADJUSTMENTS ARE MADE THEREIN. E4. Stock actually outstanding at the end of the preceding taxable period should he entered in this -chert ule ioiild reflect tlieacio!' lis un i 1 L Ku.k \m\< =«k ' "er.--.fb' 'i e do-.*, t be r 'eoedJnr, taxable period. itin? rut learnt as rr fumed In pro~n"i< yea . If tLftcort ^r-liun I. a.) en hrmrj b'. ai.y time during the taxable peric ntnescoverlng the original issuance, repossession and any substquem xplajted, be entered as Item 7. Such and not canceled. regardless o < j] Hi! stork ii r, „-,-] a-f uallyo tuning a' Surplusand .j- .. profits' Heer.<-.o.:iHl< i ... ■ J."' turns). . SCHEDULE F.-ADJUSTMENTS BY WAY OX ADDITIONS. •Up to tbe corporation, {« dock or shares issued therefor and t upon which the actual cash value of the property was determined and tbe date * ma'e.and fp) the amount ol depreciation sustained on sucb property from the date of acquisition t. of theUrabta period, f 2. If an addition to' Invested capital is claimed Id Item 2, Schedule F, submit a statement showing (a) the kind o( property, (o) tbe year in which it was acquired, (c) its cost, (d) the amount of depredation sus- tained on such property from the date of acquisition to the b«gtnning of the taxable period. State also whether erpefidltures, when made, written off In lieu or depreciation* T II so, explain what adjustments have l«een made to provide for depreciation in view of the proposed restoration to surplus. Additions la this ilrtc are mtauiatlve to the beginning oi the taxable period. For afl additions hereunder provision must be n ule for <} L-predatlon to the beginning of the taxable period. F3. If any addition to invested capital is claimed in Item 3, Schedule F, state specifically the amount of depreciation written oil each year Id tbe books of the company and the amount allowed as a deduction In com- puifrjf Let Infome Additions to this item arecumulotive to the beginning of the taxable period. :j. Depreu,tioa or BMtio^lSo <8^oTtheVevcnue h A irnlus (see Section 326 (a) 3 of the consideration paid ; Department as a deduction o SCHEDULE C— ADJUSTMENTS BY WAY OF Gt. Is any patent, copyright, secret process, or formula, good will, trade-mark, trade brand, franchise, c tier similar Intangible property, paid la for stock, camod as an asset by the corporation* — ] L e"''-r...] !jjt-' locally as such, in the Intangible value merged under any other lifle or titles on the books a lance sheets submitted with this return' Is it entered on the Looks at a value In excess of It !t.n!casliY&luewbenpaidlD? In excessof thepar valueof thestock issued therefor? the acrregateof such assets acquired prior to March 3. 1917, entered on the books at a value Pa excess of 24 pe I od March 3, 1917* Is the aggregate of such asset 5 percent of the par value of the slock outstanding at the beglnnin ovets acquired 1 1 ) before March 3, 1917, and ('.•) on or after that date, item I, ^beduie 0, for the taxoblo period fYttJeW, That iflnt nt by which (J) exceeds (61, (e), 25 per ?m i , Schedule C , lor the taxable period, nt by which the entry In If) relating to , whichever Is lowest, must beinchided :>les were acquired before March 3, 1917. □nt Included In invested capital for the » property, paid lo for stock t entered on the " the par value of the stock paid therefor? C3. WeatbebusiDexsral-x-oiporated raorganltad i ebanfe la ownership of property after March 3. 19I7T prsoparcertt'or e persons, corpora! i ss«ts cniered on the hooks ,0! r was not a cqrpr'Mifin Ifdjadl t to that date fort Thl.lfljJ h*;SUCbjtfT^C4T10 1 ' 1' ■' 1 • v ,. 1 ■ 1 propurty was ecq-.iln-J from a corporal rati durifcs;" rofihelaoa. I* perua ei. J"a*a» the G4. Is any property f ■ physical property, m-cu-Mi kn .1 of properly, r' If so. iu».m_ita If tbe answer Is "yes." state In detail lor each stock dividend received, («) date received, (ft) from whom received, (e) number of shares received, (e") par value of shares received, (t) value at which entered on its books of account* u*) whether or not surplus was lncr»*ssd by this raJue, Ifaoswerto (fj Is "yes/'ea'cr tfca amount by which surpl'-is was Increased as Item 6, Schedule 0. V answer U "no," state tbe account to which It was Included, (g) date of sale of any of the shares of stock received as a stock dividend, (A) number of shares sold, (i) amount received tbertfor. N'otl. —If answers to the foregoing questions Indicate that stock di-rtdend] recti red at any time bars beeo treated as an Increase of surplus, and sucb increase Is reflected tn the computation of invested capita) lo returns for any or all of the taxable periods 1917, 1918, 1919, and 1923, emended returns should be Died for tucfi taxable period or periods In which this error cccurred. trade mork^trade brands fracrtVes, orotr 1 r irta^p^propVrtv > ". , Valuation of tancfble property pnid In for stock _ \aluatlon 0' assets acquired In ircrganlratlom- . Appreciation Deprerlitloo, depletion, and other losses. Stock dividend ort jp on the hooks or no*. The average adjusted deduction to b« entered In column 7 equals total Income and profits tax multiplied by 0.1236. are applicable only to tbe Isi^e or rcocquisiUon or tbe corporation's slock. 4. In column 1 enter the number of days remaining In the taxable period (Including the data ol change). 5. The net changes not reported tn Schedule U " in the balance sheets, should be fully"Teconciled tl SCHT.DU!.E J -INADMISSIBLE ASSETS. : g*"- 1 '! or tbe tAi.r 1* t l«l|lltath||iM (C Amot.,.1 t) »J^im kt [Page 2 of Form 1120.] WAR TAX 426 SERVICE 2-11-22. Page 3 of Return. QUESTIONS. KIND OF BUSINESS. t. By means of the key letters given below. i.J»pt:fv the eorpontiua's main income, producing activity with one of the general classes, and follow this by a special description of the business sufficient to give the information called for under each general class. A.— Agriculture and related industries, including fishing, logging, ice harvesting, etc., and also the leasing of such property. State the product or products. B. — Mining and quarrying, including gas and oil wells, and also the leasing of such property. State the product or products. C. — Manufacturing. State ihe product and also the materia] if not implied by the name of the product. D.-^Construction — excavations, buildingB, bridges, railroads, ships, etc , also equipping and installing eame with systems, devices, or machinery, vrithout their manufacture. State nature of structures built, materials used, or fciod of installations. El — Transportation— rail, water, local, etc. State the kind and special product transported, if any. E2.— Public utilities — gas (natural, coal, or water); electric light or power (hydro or steam generated); beating (steam or hot water); telephone; waterworks or power. E3. — Storage — without trading or profit from ealee — (elevators, warehouses, stockyards, etc.) State product stored. E4.— I/Casing transpor- tation or utilities. State kind of property. F.— Trading in goods bought and not pro- duced by the trading concern. State manner of trade, whether wholesale, retail, or com- mission, and product handled. Sales with storage with profit primarily from Bales. G. — Service — domestic, including hotels, restaurants, etc.; amusenieota. other professional, personal, or technical service. State the service. H. — Finance, including banking, real estate, insurance I.— Concerns not falling in above classes (a) because of combining several of them with no predominant business, or (b) for other reaeonB. 2. Concerns whose business involves activity falling in two or more of the above general classes, where the tarns product is concerned, should report business as identified with but one of the above general classes; for example, concerns in A or B which also transport and market their own product exclusively or mainly, should still be identified with classes A or B . concerns in C (manufacturing) which own or control their source of materir 1 supply in A or B and which also transport, sell, exclusively control or on tive work; concerns i concerns in F may transport or i identify them with A, B, or C. 3. Answers: I General class (u key letter designation).. Jucing business (give s under each ley letter, also whether acting t ! if inactive or in liquidation) i agent ©u commu OTHER CORPORATIONS IN SAME BUSINESS. INCORPORATION. Date of incorporation Under the laws of what State or country REORGANIZATION AND ACQUISITION OF MIXED AGGREGATES OF ASSETS. 7. Has the corporation, or enu cfitt vrtJuaion, been reorganized, or has it. or any o/its prafcawort, tsiken over a going business or acquired a mixed aggregate of tangible and intangible property, and paid for such property in whole or in part with stock or other securities since the close of the preceding taxable period ? 8. If so, furnish a brief narrative history of the business and submit showing: (a) The name of the concern taken over (or from which the property was acquired); (6) The nature of the assets and liabilities eo acquired; (c) The total par value of the stock issued therefor; (d) The value at which each class of assets was carried on the books of the concern rrom which acquired (submit a balance sheet of the predecessor concern as at the date of acquisition or as at the close of its last accounting period prior thereto); (<) The value at which each item was carried on the books of the corporation making this return, and full details of any adjustments subsequently made pertaining thereto and the basis on which such revaluation was made. 9. If patents, copyrights, secret processes or formula?, good will, trade-marks, trade brands, franchises, or other intangible property were acquired, state the basis on which their value was determined and bow they were paid for. -' — y purchase or reorganization as contemplated in question 7, any i books of the r r of other corporations?. tjie 1 i or any vendee prede i of the vendor ( t of your outstanding voting capital stock owned by another cor- r by two or more corporations that are affiliated?.. 13. Is over 70 per cent of your outstanding voting capital stock as well as over 70 per cent of the outstanding voting capital stock of another corporation or of other corpora- tions owned or controlled by the same individual or partnership or by the same individuals 14. If the answer to questions 11, 12, and 13, or to any of them, is "yea," answer the ° °(3)Dld the corporation file Affiliated Corporations Questionnaire, Form 81», lor 1)17 or subsequent taxablo years' ' If the answer to this question is "yes/' a questionnaire is Dot required, except under the circumstances described in question fb) If the answer to this question is "no," and the answer to questions 11, 12, and 13 or to any of them is " ves," procure from the Collector of Internal Revenue for your district Form 810, whi.:h shall lw' filled out and filed as a part of thin return. If the answer to this question is "no," question (b) need not be answered. ■ (b) Did substantially the same conditions, as are set out in the questionnaire filed for 1920 or prior years, obtain during the entire taxablo period 1921? .._ If the answer to this question is"no,"a statement, setting forth tho particulars in which the situation has changed . should be attached to and made a part of this return. If there have been substantial changes in stockholdings, a complete schedule of such change* should be submitted in the form prescribed in Tables 3 and 8 of the questionnaire If there aro companies other than those covered by the questionnaire for 1920 or prior vearswhicb, applying the teats contained in questions 11, 12, or 13, may have come into the affiliated group since 1920, a questionnaire, Form 819, is required for the entire group for the taxable period. VALUATION OF CAPITAL STOCK. 15. What was the fair value of the total capital slock of the corporation as determined ay! of the capital stock tax? $.._ Date of that PREDECESSOR BUSINESS. 16 Did the corporation file a return under the eame nam period? If not, was the corporation continuation, or reorganization of a businet the preceding taxable t and address of BASIS OF RETURN. 17. Is this return made on the basis of actual receipts and disbursements? If not, describe fully what other basis or method was used in computing net income.. . account of eon- GOVERNMENT CONTRACTS. 18. Have any adjustments been made during the taxable period tract or contracts with the Government or its agencies or in any Government contract or contracts from which the corporation derived income directly or indirectly, through the , claim board or otherwise? If the answer to this question is involved $ ; whether or not such amounts operations of : was terminated? : Submit a sebedule showing full particulars of the contract, date entered into, date tho work ceased under r-iid contract or contracts, and the an.ount and nature of the adjustment. AMORTIZATION. 19. Has amortization been claimed? yes, " state for what year _ Amount $ LIST OF ATTACHED SCHEDULES. Enter below a list of oil schedules accompanying this return, giving b and the schedule ntimber. .. If the answer to this question SCHEDULE K. — BALANCE SHEETS. be furnished in accordance with paragraph 7 of page 1 of Trade accounts ( before deducting reserves for losses). Notes receivable from customers. Outer eccouDtsaod cote* receivable (to Declassified). ASSETS-Ccntmued, Stock of corporations— Domestic. To officers and employees. Deterred charges to future operations (to be detailed I. ASSETS-Centlnaed. -continued. irvos for depreciation (sbow separately Paid for In cash Accrued exp: isea e*>d r 3 from the respective asset accounts or AH corporations engaged in an interiiate aud intrastate trade or business and reporting to the Interstate Commerce Col officer, may eubmit in lieu of above form, copies of their balance sheets prescribed by said Commission or State and municipal auiiioriti- [Page 3 of Form 1120.] WAR TAX 427 SERVICE Page i ot Rctui 1, laocrtu from PchodUe A, ltsra ' l^»fi«lS*o*,lle»tloaa ol las m imJ?™ "aM££ SCHEDULE I.. RF.CONCIL1A-! ION OF NKT INfOMF. A,«> ANALYSIS OF CHANGES IN : SCHEDULE TO EE FURNiSHEB IN SUPPORT OF ITEMS IN SCHEDULE A. Th» following schedules mutt be funuBhod, and LbwK prspaad on eoparate SCHEDULE A2: COST OP GOODS GOLD, EXCLUSIVE OJ ITEMS CALLKD TOR SEPAKATKLT. D whicb tba prof^ctlon^ jparciojr-^o.- nk of lawriLicdiM of aay kind ft OblieatfoE*. Utt^'* i Jwcfil ALuoant). ----- Hi.-- > ( 3, &nd 4. 2. V»/VX> 3. 1135,00 ■fifCood, Third, tod fojrth -No*! Totil Tir.-.- Tf.T.TSJrti — k... srEEL-ITLlS Alt! 1-.RC.-.3 OICOUS V.-.OM A: L C) llUi SO'jiiC irS :k. >j,.s ica-LNiBS ' tiuiis, r u ltl *i)ipa93 to 7. J SCIIKDU7.S A13: COMPENSATION O? OPJICCR3. fliii.inli.asrhadulaBbo^l.ir. ,'or*a<-li ofiU to" ( 1 ) m i.t-. (2) i1u< l.-; . : tin. . Iii u Im J I -. ,. k or -..offo!;.-. ,n i.-.n-icl. ,m " u , . - ^ : . -..o^i. - ...... aauuut ot.ud ratuu turiuorewtt.ifwy, ovar j..-t •.•Si»{ prrlod. WBKOULE Ami WU-AW3 (tadudlns labor, ■ : .. .rtrbiid, ud clhoi lien rajajra), feubinit a scfaadjlo *how!nf t>.» 3 i^.u.v. s*0 3 of I Bacttm 384(a) 3 o.'tbo ll^.us /.CI of 182L) SCHKDUIS A17: BAD Ti JBTS. Hufmlt » %-ua1u5« ibovrinr rt*bt9 or r>.r'tla )«eoi»l)oTt. . .:..lr : ■orb cL-jp! tr.:'ide;i:nsd, (jk k jirv:;w. r.nd (M • of LlM prooartj &3*aa*wi ara not liiow art.-ir.r '-era strl-j or rrefrarlijat ■ (9aa : 'r!r.£ v. >jr depletion rx. udo:. . .' i . ' . : -..-...11 .•until «!•■ . ... . r.bv,i!-i wtLa ii,;ini^t;^- ... rr-tf drpieUao uaUoodon lor 111- del jTotlued. Ir. cvi* of oir-.U. oM- >L M L y CHj^; r'ott- ^uutoa!). >li of'.! ,'5--i>>..--^iTS. cataolrvijpuailotproi^ , caln^ t s#p&/a> line for Bbd ofprep«a>T QT CA«r.-X AfiC^;3 AMD K->JiiLAmt0479 ■t "tin s£SH':':~k' riwha;: Ifinj 0,'Lbcasa- ■.. valoa of oroparijf raoali tort ac^olraJ , to llarcb 1. 1JU of pro;>tr'> J Llt.il ovijaa -:- : ->.r>- :-t.c.. I Clao; (; ) daU ofakfc. (a) I f. ' ,-ri r- ■ -' C- *f Wo, tbe undaTEtgrtad, piwiJent »ad truu-'.iror oi llw rorpontion lor which this mtutu in >o»Jti, bain* eovanlly J. Iv atrora, etch lor biwavll .lopoaw »ud amya IW tbia tMu inclif Aiag iho it ■ ompuyiDg ■ hedulai aoJ biui«j!f.Lii!, baa bain oiaut'ouii by hiut aud ia, to the Ikmi o! bu kuo» It J«o ami Loliof, a tri.o »ud coaipUta rfturn ruada in good lauii, for I taxabl>- iffriod us euatts), purff'iaot to tha Ro\ onuo Actoi 1921 uid Lha ilogiiiauons iaauiAt uudtrt autbority ilcicoL , j.u -itot Swom lo ami aubscribod baloro mo tbia . fPagc 4 of Form 1120.] WAR TAX 4?S SKRVK I' 2-11-22. Vcgo I of Instruction. :. INSTRUCTIONS FOR CORPORATION RETURN'. LIABILITY FOR FILING ftETURNS. 1. Corporations generally. — Evory domestic or resilient corporation, joint-stock Company, . isocir.ticn. or inrnrenco company not specifically exempted by Soctioa 231 of the Revenue Act of 1921, whether or not having any act inccuno, must file a return. 2. A corporation, he ring a not income of lesa than $3,CfK> for the taxable period n< sd liol fill in thb schedules pertaining to excess profits tax, but if the ael income is $3,000 or more, it is subject to the excess profi'o tftjt and wsst file a complete rofjrn > n this form. 3. Government Ccrtrscts. — In addition thereto, if net income in exces* of $!0,nno was derived during the tifecaWfl period from a Govem- 1 men', contract, f'oim 1 120S should ho semre*i from tho Colhctor pf Inter- nal Revenue for your district end filed as a part of this return i, i. Corporations in Possessions of the United States. — Domestic corporations within the. "possessions of the United States (except the Virgin -Islands) may report as gro?3 income only gross income from Mfcreea within tho U.~il»d States, provided, (a) 80 per cent or more cf tlio total gross income for the. three-year period iflatnediatery preceding llio close of the taxable year (or such part thereof as may ho applicable) was derived from sources within a possession of tho United States; and (b) 50 per cent or more of the total gross income for such throe-year period or applicable part thereof was derived frnm tho active conduct of a trade or business within a possession of the United States. .However, a corporation entitled to the above boaufits is not entitled lo tho specific exemption of $3,000 in computing tho excess profits fas. (Seo Sections 2G2 aa'd 312, Rove 5. Foreign Corporations.—, regardless of tho amount of its n the Collector in whose, district through which is transacted tho Ac t of 1921.j A foreign corporation subject to the la-*-, iet income, is required to file a return with i3 located its principal office or egency l business in the United States. If it has :ce or agency m tho United States, tho return should be filed with theCo'dector of Intered Revenue, Baltimore, Maryland. The net income should be computed in accordance with Section 217 of tho Revenue Act of 1921. 6. Personal Service Corporations. — Personal service corporations must file a return on Form 1065. CONSOWDATED RETURNS. 7. The parent or principal reporting company of affiliated corpora tiona as defined in Section 240 of the Act must file a coreciidatcd return «a this form with tho collector of the district in which its principal ofliee ■Is bested and attach thereto a schedule sho«rog the names and addresses of all tSLUstcd corporations in the group, and if the tax is apportioned •«awag th'ae corporations, 'da amount allocated to each. (See paragri^h . 9, below.) Each of ibo other affiliated corporations shall file Form 1122 in the ofTico of the Collector of its district. Consolidated kivestc d Capita] must be computed as at tho beginning of tho taxable porad of the parent or principal reporting company and consolidated income most bt computed on the basis of ite taxable period. All supplementary and supporting schedules should be prepared in columnar form, one co:umn being provided for each corporation included in tho consolidation, one column tor a total of liko items before adjust- ments aro made, one column for intercompany eliminations and adjust- ments, and one column for a total of like items after giving effect to the eliminations and adjustments. The items included in the column for eliminations and adjustments should be symbolized so as to readily identify contra items affected, and if necessary, in order to give a correct understanding of these entries, suitable explanations should be appended. 8. If one domestic corporation owns 95 per cent or more of the outstanding voting stock of another, or if 95 per cent or more of tho outstanding voting stock of iwo or more domestic corporations is owned by the samo individual or individuals, partnership or partnerships, in substantially the gjasie, proportion, a consolidated return miu»t be filed by such corporations, fe^ccpt that the purpose of tho statute being to prevent the avoidance or reduction of tax liability, corporations encased in entirely dirtinct and unrelated linos of business, there being no common dealings between them giving rLe to opportunity to avoid or reduce tax liability, stall not bo required to Clo a consolidated return. If the ownership ia less than 95 per cent of tho outstanding voting stock, but exceeds 70 per cent, the parent or principal corporation of an,}' group of affiliated corporations must furnish tho information coliod for in casea- tions 11 to 14, page 3. 9. The Department prefers that the entire tax shown on a consoli- dated return be paid by the parent or principal reporting corporation, instead of being apportioned among the corporations competing the affiliated group. If apportionment is made, eacf> subsidiary or affiliated corporation should state on its Form 1122 the amount of "income and profits taxes to bo assessed against it for the taxable period. PERIOD COVERED. 10. The taxable period is the calendar year or tho fiscal period ended in such calendar year, rind the net income shall be computed upon the basis of the corporation's annual accounting period (calendar year or fiscal period) in aceordance with the method of keeping the books, unless sueh method docs not clearly refl°ct the income. The accounting period established for the taxable year irajaedisteJy preceding must bo adhered to unless permission has been received from the Commissianer to make a change. In the cose cf a return for a period of less than one year, the net income shall be placed on an annual basis by multiplying the amount thereof by twelvo and dividing by tho number of months included in such poriod; and the tax shrill be such part of a tax computed on such annual basis as the number of ru»nths hi nuch period is of twelvo months. If the period for which the first or final return is mede includes fractions of months, thoro shall bo added to the number of complete months as many thirtieths of a month as there are days in the fractional parts of months. 11. If a corporation ctsaageB ite tccotultirJ^ period, it shall ai soon as possible give ro the Collector for tranaoismnn to tne Commissioner written notice of such change und of its rontons thareior. Upon approval by the Conuni'.-i'mrr, tho corporation ai-itll thereafter make its returns upon the bans of the new accounting period. See Sections 212(e) nod 226, Revenue Act. of 1921. TIME AND PLACE FOP. FILING. 12. Tho return must be sent to the Collector of Internal Revenue for the district In which the corporation's rrhi'-na! office h locafod, so as to reach tho. Collector's office on or Worn the fifteenth day of the third mouth following tho close of tho taxrAlo period. In the case of a foreign cor- poration not having any office or place of business in tho United States the return shall be filed on or beforo Uio fifteenth day of the sizfh , month following the close of the taxabio period." 13. Th3 Collector is authorized to grant sn extension =if nol more than thirty days for filing rotous in cases of nbztf.r.c or .fids**?.. In meritorious cas'ea the Cornmisriorjer is authorized to g'ttit a farther ex- tension. SIGNATURES AND VERIFICATION. 14. The return shall he swnrA to by tho president, vice president, or other principal officer and by the treasurer or assistant treasurer. The return of a foreign corporation having e.n £-,'ent in the United States shall bo sworn to by such cg'.-nf. If receivers, trustees in bankruptcy, or assignees axe operating the property or business of the corporation, such reeoivers. trustees, or asaigneea shall execute the return for aucb corpora- tion, under oath. 1 PAYMEeiT OF TAXES. 15. Trie tax should he psiil by sending 0 r bringing with the retttrtt ' ft check or money order drawn to the enter of "Collector of ItitemaS Revenue at (insert mmo of city and State)." 16. 'Do not oend cs^h through the mail or pay it in person except at the offioe of the Collector. 17. The Jtcta! tax may be paid at the time of filing the return or is fear oquoi installments, as follows: Hie first installment shail be paid at the tiuie fixed by law for filing Ijie return, the accord irsttdln.tnt shall be paid on tho fifteenth day os the third month, tho third iostaliracnt on Uio fifteenth day ci the eixtk mosth, sad the fourth Instaiiment on tho f'toenth day of the ninth asoaih n'ter the time fis£d Dy law for fiiiag the return. PEIi/i-TrES. For H»kin£ Fuu «r Fx«ikduton.t Katuro.. 18. Not exceeding 51 0.CP0 or not exceeding one year'c icjpriaanment, or both, in tho discration pi the court, and, in addition, 50 per. ceatutp of the total tax evaded. For F«Hlr.|t Mots Rclurr. on Ttm*. 10. Not mere than 8 1 ,000, end , ia addition, 25 per eenlurn of the totsi amount of the tax. For F»IBr.g t . Pay Tox V.'hnn Dun or Underatxtomertt of Tet, TTu-curi N«s!is:»r.c», Etc. 20. Five per centum of the tax due but unpaid plus interest at the rate of 1 per centum per month during tho period in which it remnioa unpaid. WORKING FAPER3. 21. Every corporation should preserve, available for inspection by a revenue officer, working paprrs showing — (a) The balance in each account on tho corporation's books that was used in preparing Schedule A. (5) The amount deducted from sach such balance on account of each ., plus 40 per cent of the net incomo in excess of $20,000 (Section 302). unless net income amounting to more than $10,000 was derived from a Government contract, when the tax on such income shall be ass.^eed under Section 301(6). in which case the maximum excess and war profits tax imposed upon this proportion of the net income shall not be more than 30 per cent of the amount of net income in excess of $3,000 and not in excess of $20,000 i-'us SO per cent of the amount of not income in excess of $20,000. (Sec Section 302 ) (Y) Tat of corporation whose inco.ae is derived in part from "Personal Service.*'— It part of the net inc., me (not less than 30 percent) is derived from a separate trade or business of the character of "personal service*' taanx shall be computed in accordance with the («•) Tat on corporation engaged in mining of gold.— If a corporation is engaged in the mining of gold, its excess profits tax shall be that proportion of Item 3, Schedule D, which the net income not derived from the mining of gold bears to the total net income. (Joe Section 304(c) of the Ac** (/) Tax on profits from safe of mineral deposits.— In the case of a bona 6de sale of mines, oil or gas wells, or any itipwest therein, where the principal value of the p*-?crty has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the excess profits tax attributable to such sale shall not exceed 20 per cent of the selling price of such property or interest. (See Section 337 of the Act ) The Grst step is to find the excess profits tax computed without regard to this provision; the second is to find of the tax thus computed such portion as the net income from the sale bears to the total net income. If this portion equals or does not exceed 20 per cent of the selling price, then no adjustment is permitted. Should such portion exceed 20 per cent of the selling price, the tax will be that portion of the excess profits tax which the net income not attributable to the sale bears to the total net income plus 20 per cent of the selling price of the mineral deposits. 15. Statement of basis of claims.— If a corporation claims the benefit of any of the provisions outlined in (a*), (r), or t / >. A should attach to the return a complete statement of thebasb for Buch claim and a computation of the tax payable in the event that such claim is allowed. The amount of tax o computed should be entered in Schedule D. ' SPECIAL CASES. 16. Definition of special cases.— Section 327 of the Act provides that in the following- cases the tax shall be determined as provided in Section 32S: (a) Where the Commissioner is unable to determine the invested capital as provided 026. (5) In the case of a foreign corporation or a corporation entitled to the benefits of Section 262 of the Revenue Act of 1921. See paragraph 4, page 1 of Instructions. (c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock of for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively. (rf) Where, upon application by the corporation, the Commissioner finds and declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital oi income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in Section 328. This subdivision shall not apply to any case; (1) In which the tax (computed without benefit of this section) is high merely because the corpo- ration earned within the taxable period a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable period (computed under Section 233 of the Act) consisted of gains, profits, commissions, or other income derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. 17. Treatment of special cases.— In the cases specified in Section 327 the tax will be specially determined under the provisions of Section 328. A corporation which comes within the provisions of subdivision (rf) of Section 327 (paragraph 16, abovo) may make application for aasessment under the provisions of Section 323, which application shall be attached to its return in the form of a statement setting forth in full: (a) The reasons why the tax should be so determined; (6) the facts upon which such reasons are basod, (c) an exact description of each trade or business or important branch of a trade or business carried on by it; (d) a statement of the invested capital and net income for each year since the beginning of the prewar period; and (r) a statement showing the amount of gains, profits, commissions, or other income derived on a cost-plus basis from Government contracts made between April 5, 1917, and November 12, 1918, both dates inclusive, and showing the per cent which such income is of the total income of the corporation. 18. Returns in special cases.— Corporations other than foreign corporations making claim for assessment under Section 328 of the Act should answer all questions and file all schedules as far as possible and attach a statement explaining why it is impracticable to fill out the entire return. UNDISTRIBUTED PROFITS TAXABLE TO STOCKHOLDERS. 19. If any corporation, however created or organized, is formed or availed of for th» purpose of preventing the imposition of the surtax upon its stockholders or members through tho medium of permitting gains and profits to accumulate instead of being divided or distributed, thcro shall be levied, collected and paid fer each taxable year upon the net income of such corporation a tax equal to twenty-five percent (25$ ) of tho amount thereof, which shall be in addition to the tax imposed by Section 230, Revenue Act of 1921. and shall be computed, collected and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that ux. (See Saction 220, Revenue Act of 1921 1 a- "Terms relating to invested capital". . 102S "United States". .8089 Depletion allowance, invested capital. .877, 879, 1194, 1195 De Laski & Thropp Circular Woven Tire Co. vs. Iredell. .913 Depletion reserve, invested capital. .1210 Deposit of United States bonds as security. .8075 Deposits, bank, invested capital. .1182 Depreciation adjustments. .877, 879, 885 Depreciation allowance, invested capital. .877, 879, 885, 1194-1196 Depreciation reserve, invested capital. .1210 Discount: banks, invested capital. . 1218 Bonds, invested capital. .1217 District courts, jurisdiction of. .8003 District of Columbia, obligations, invested capital. . 1184, 1190 Dividends. . 1005 Invested capital. .889, 1219, 1229, 1230 Stock dividends. .889, 1230 Earned surplus, invested capital. .877, 1038, 1194 Educational corporations, exemption. .1065 Effective date of Title III . . 1058 Election of business enterprise to be taxed as corporation. .1082, (839) Evidence: Understatement of capital or surplus account. . 1196 Evidences of indebtedness, invested capital. .1189 Excess profits tax: Affiliated corporations: credits .. 1075, 1177 Invested capital. . 1074, 1235-1240 Special for 1917 .. 1079, 1126, 1263 Allocation of net income to particular source. . 1017, 1138 Application for assessment. .1048, 1243 Apportionment of specific exemption. . 1028, 1176 Assessment . . 1243 Associated Press franchises, intangible property. .1179 Change of ownership . . 1248 Computation: fiscal year. . 1054, 1249-1253 Corporation entitled to benefits of Sec. 262 [1(1083]. . 1046, 1243, 1244, 1246 Foreign corporation .. 1046," 1243, 1244, 1246 Fractional part of year. .1157, 1173, 1176 Government contracts. .1137 Illustrations. .1139-1157, 1166, 1175 Limitation. .1019, 1158, 1161 Sale of mineral deposits. .1057, 1243, 1261 Special cases.. 1044, 1243, 1244, 1246 Year 1921. .1011, 1014, 1136, 1137, 1144 Consolidations. . 1053, 1248 Corporations entitled to benefits of Sec. 262 [^1083] . .1046, 1242, 1243-1247, 1259 Credits. . 1025, 1177 Definitions. . 1000, 1134 Exemptions. .1021, 1024, 1059, 1173, 1176 Copyright 1922, hy The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax— -1921 Act— IndexfPa§<3. 2-27-22. EXCESS-PROFITS TAX INDEX — 1921 ACT The references are to paragraph numbers. Excess profits tax: — Concluded. Fiscal years ending in 1921 or 1922. .1054, 1250, 1252 Different rates. . 1054, 1249 Illustration of computation of lax. . 1253 Foreign corporations .. 1046, 1242, 1243-1247, 1259 Gas wells, sale of. .1057,1260, 1261 Gold mining, computation of tax. . 1 175 Illustrations, computation .. 1 139-1 157, 1 166, 1175 Computation of limitation . . 1 162 Imposition. . 1011, 1135 Intangible property, definition. .1029, 1179 Installment payments. . 1245 Invested capital. See Invested capital. Limitation of tax. .1019, 1158, 1161 Mailing lists, intangible property. .1179 Mineral deposits, sale of.. 1057, 1260, 1261 Net income. .1027, 1074, 1178 Oil wells, sale of. .1057, 1260, 1261 Payment. .1056, 1245-1247, 1258 Personal service corporation: apportionment of invested capital and net income.. 1020, 1163 Computation of tax on net income. .1164, 1166 Refunds. .1054, 1251, 8022 Reorganizations .. 1053, 1248 Returns. .1056, 1258 Special cases. . 1044, 1259 Subscription lists, intangible property. .1179 Tangible property, definition. .1030, 1179 United Press franchises, intangible property. .1179 Exempt corporations. . 1021, 1059, 1173 Corporation having net income of less than $3,000. . 1022, 1173 Gold mining corporations (income from such mining). .1023, 1174 Life insurance companies. . 1135, 1173 Personal service corporations. .1002, 1073, 1135, 1173 Partial personal service corporations. .1020, 1163, 1164 Possible alternative tax. . 1093 Exemption; specific. .1025, 1177 Affiliated corporations. .1075, 1177 Apportionment; return for period of less than 12 months. .1024, 1176 Corporation entitled to benefits of Sec. 262 ffll083]. .1026, 1049, 1246 Foreign corporation .. 1026, 1049, 1246 Expenses, computation of earned surplus. .926, 1194 Extension of existing statutes. .8000 Farm loan bonds, invested capital. .1032, 1037, 1184, 1190 Farmers, cooperative association, exemption. . 1069 Farm loan bonds, invested capital. .1184, 1190 Federal Reserve bank stock. .744 Fire insurance, exemption of association or mutual company. . 1069 Fiscal year, definition. . 1001 1920-1921 or 1921-1922 .. 1054, 1250, 1252 Different rates of tax. . 1054, 1249 Illustration of computation of excess-profits tax. . 1253 Fixtures, addition to surplus account of amounts expended for. . 1 196 Foreign corporations: computation of excess-profits tax.. 1046, 1242, 1243, 1246 Credits, excess profits. .1026, 1049, 1246 Definition. .8088 First installment of excess-profits tax. . 1246 Invested capital. .1049, 1242, 1259 Liberty bond exemptions. .733 Fractional part of year: computation of excess-profits tax. .1 157, 1173, 1 176 Invested capital. .1224, 1225 Franchises, intangible property. .1179 Fraternal beneficiary societies, exemption. . 1062 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax— 1921 Act— Index Page 4 2-27-22. EXCESS-PROFITS TAX INDEX — 1921 ACT The references are to paragraph numbers. Furniture, addition to surplus account of amounts expended for. .1198 Gas wells, excess profits tax on sale. . 1260 Gifts to corporations, invested capital. . 1193, 1232 Gold mining: computation of excess profits tax. . 1023, 1 175 Exemption from excess-profits tax. . 1 174 Good will, intangible property. .1029, 1179 Good will, invested capital. .1029, 1179, 1201, 1209 Government contracts, computation of excess profits tax. . 1017, 1048, 1 137, 1213' Horticultural organizations, exemption. . 1060 Illustrations: computation of excess profits tax.. 1 139, 1 166, 1 175, 1253, 1261 Computation of limitation of excess profits tax. .1161 Impairment of capital. . 1231 Improvement of secret process. .926 Inadmissable assets .. 1032, 1042, 1183, 1221 Income and excess profits taxes; reserves for. . 1214 Installment due-and-payable dates govern. .785 Income. . 1027, 1178 Inflated values, use of in determining invested capital. .865, 889 Installments, payment of tax in special cases (Sec. 328). . 1245-1247 Insurance: Companies invested capital. .1241 Premiums, corporation officer, invested capital. . 1215 Intangible property, definition. .1029, 1179 Paid in, invested capital. .1039, 1040, 1220 Interest: Invested capital .. 1 180, 1181, 1183, 1 185 Liberty bonds. . 1089 United States obligations. . 1089 War Finance Corporation bonds, credits. .726 Invested capital: Admissable assets. .1033, 1186 Affiliated corporations. .1074, 1235-1240 Appreciated values. .865, 889 Rank deposits . . 1 182 Bonus stock . . 1 183 Borrowed capital .. 103 1, 1041, 1101, 1180-1182, 1187 Cancelled indebtedness to stockholders. .1181 Cash paid in, bonus stock. .1188 Changes during year. . 1222 Computation. .865, 889, 1035, 1049, 1 187, 1223, 1234 Average invested capital. .1043, 1157, 1222 Corporations entitled to the benefits of Sec. 262 [^[1083] . . 1049, 1242, 1259 Definition. .865, 871, 889, 1035, 1187 Dividends. .889, 1219, 1229, 1230 District of Columbia obligations. .1184, 1190 Effect of ordinary dividend. . 1229 Stock dividend. .889, 1230 Expenses of organization. . 1186 Federal farm loan bonds . . 1 184, 1 190 Foreign corporations. .1049, 1242, 1259 Fractional part of year. . 1225, 1226 Good will. . 1029, 1179 Impairment of capital. . 1231 Inadmissible assets .. 1032, 1042, 1183-1185, 1190, 1221 Inflated values. .865, 889 Insurance companies. . 1241 Intangible property defined. .1029, 1179 Paid in. .1039, 1040, 1220 Interest. .1180, 1181, 1183, 1185 Measures of capital. . 1234 Method of determining available net income. . 1226 Nominal, under 1917 Act. .913 Organization expenses. . 1186 Copyright 1921, by The Corporation Trust Company, WAR TAX SERVICE Excess Profits Tax— 1921 Act—Index Page 5 2-27-22. EXCESS-PROFITS TAX INDEX— 1921 ACT The references are to paragraph numbers. Invested capital: — Concluded. Patents. . 1029, 1179 Percentage of inadmissible assets. . 1042, 1221 Possessions of United States obligations. . 1184, 1 190 Purchase of stock. . 1233 Reorganizations. . 1053, 1248 Return for fractional part of year. . 1225 Securities. . 1032, 1180, 1183 Special cases.. 9 13, 1044, 1049, 1101, 1243, 12 11 State obligations. .1184, 1190 Subscriptions of publishing concerns. . 1 192 Surplus. See Surplus and undivided profits. Surrender of stock. . 1232 Tangible property paid in. . 1037 Evidences of indebtedness. . 1 189 Inadmissible assets .. 1037, 1190 Mixture of tangible and intangible property. . 1037, 1191 Value in excess of par value. . 1037, 1 192 Territorial obligations. .1184, 1190 Undivided profits. See Surplus and undivided profits. Jurisdiction of district courts. .8003 La Belle Iron Works vs. U. S.. .889 Leaseholds. . 1030, 1179 Liberty bonds: Affiliated corporations. .735, 736 Interest, taxability. . 1089 Life insurance companies are exempt. . 1135, 1173 Life insurance, corporation officers, invested capital. .1215 Limitation, excess profits tax.. 1019, 1158, 1161 Lincoln Chemical Co. vs. Edwards. .926 Loans as invested capital. .1031, 1180 Location of mining claims, effect as to tax on sale of mineral deposits. . 1260 Lodges, exemption. . 1062 Losses, computation of earned surplus. . 1194 Mailing lists, intangible property. .1179 Medium of payment of tax. .8020 Mines: depletion .. 1 195 Sale of minerals. . 1057, 1260, 1261 Net income. . 1023, 1027, 1174, 1178 Nominal capital under 1917 Act. .913 Notes, invested capital. .1037, 1189 Obsolescence, losses from, computation of earned surplus. .1194 Oil wells: excess profits tax on sale. .1057, 1260, 1261 Ore, depletion. . 1038, 1195 Paid-in surplus: invested capital. .1038, 1193 Impairment of. . 1231 Partnership: Election to be taxed as corporation. . 1082, (839) Taxability — tax applies to corporations only. .1011, 1135 Patents: Intangible property .. 1029, 1179 Invested capital. .913, 1029, 1038, 1201, 1209 Patterns, additions to surplus account of amounts expended for. . 1196 Payment of taxes. .1056, 1258 Certificates of indebtedness and Victory notes as medium. .8020 Fractional part of cent.. .8019 Medium. .8020 Special cases (Sec. 328). . 1245-1217 Personal property taken for debt, invested capital. . 1216 Personal service corporations. . 1002 Exempt. .1073, 1 135, 1 173 Partial personal service corporations. . 1020. 1163, 1164 Possible alternative tax on. . 1093 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax — 1921 Act — Index Page 6 2-27-22. EXCESS-PROFITS TAX INDEX— 1921 ACT The references are to paragraph numbers. Possessions of United States; income from sources within (Sec. 262). . 1083 Taxation of corporations entitled to benefits of Sec. 262. .1046, 1242, 1243-1247,1259 Possessions of United States, obligations, invested capital. .1032, 1184, 1190 Premiums, insurance, corporation officers, invested capital. .1215 Promissory notes, invested capital. . 1037, 1189 Rates of tax, 1011, 1136, 1137 P.eal estate, taken for debt, invested capital. . 1216 Refunds. .1194, 8022 Regulations, authority for. . 1264 Regulations 62 (1922 Edition), .page 431 Religious corporations, exemption. . 1065 Reorganization. .1053, 1248 Reserves: depletion or depreciation, invested capital. . 1210 Income and excess profits taxes, invested capital. . 1214 Installment due-and-payable dates govern. .785 Returns. .1056, 1258 Affiliated corporations .. 1074, 1078, 1235, 1258 For 1917. .1079, 1126, 1263 Amended where inflated values used in determining invested capital. .865 Consolidated returns of corporations. .1074, 1078, 1258 For 1917. .1079, 1126, 1263 Corporation entitled to benefits of Sec. 262 ffll083]. . 1259 Foreign corporations. . 1259 Forms. . 1258 Fractional part of year. . 1157, 1161, 1176 No taxable income. .851 Sales: mineral deposits, excess profits tax. . 1057, 1260, 1261 Savings bank, exemption. .1061 Scientific corporations, exemption. . 1065 Secret formulae or processes. . 1029, 1179 Securities, invested capital .. 1031, 1032, 1180, 1183 Social clubs, exemption. . 1068 Specific exemption. .1025, 1177 Affiliated corporations . . 1075, 1177 Apportionment; return for period of less than 12 months. . 1024, 1176 Corporations entitled to benefits of Sec. 262 flfl083]. . 1026, 1049, 1246 Foreign corporations. .1026, 1049, 1246 State obligations, invested capital. .1032, 1184, 1190 Stock: Bonus, invested capital. .1183 Dividends, invested capital. .1230 Intangible property paid in for stock. . 1039, 1040, 1220 Purchase, invested capital. . 1233 Surrender, invested capital. .1232 Tangible property paid in for stock. .1037, 1189-1192 Treasury. .1232, 1233 Valuation for property paid in for stock. .1037, 1039, 1040, 1189-1192, 1220 ^ 'ptions, publishing concern, invested capital. . 1182 Lists, intangible property. .1179 Surplus and undivided profits. .926, 1038, 1193, 1226 Additions to surplus account. . 1196, 1201 Current profits. .1219 Depletion allowance. .877, 879, 1195 Reserve. .1210 Depreciation allowance. .877, 879, 1195 Reserve. . 1210 Discount reported by bank. . 1218 Sale of bonds. .1217 Earned surplus. .926, 1194 Insurance on corporation officers. . 1215 Paid-in surplus. .1193 Patents. .1209 Property paid in and subsequently written off. . 1206 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax— 1921 Act— Index Page 7 2-27-22. EXCESS-PROFITS TAX INDEX— 1921 ACT The references are to paragraph numbers. Surplus and undivided profits — Concluded. Property taken for debt. . 1216 Reserve for depletion or depreciation. . 1210 Income and excess profits taxes. . 1214 Surrender of stock, invested capital. . 1232 Tangible property, definition. .1030, 1179 Paid in, invested capital. .1037, 1189-1192 Tax. .1011, 1135 Computation of, in special cases. .1049, 1244 Telephone companies; mutual or cooperative : exemption. . 1069 Territories, obligations, invested capital. .1032, 1037, 1 184, 1190 Time: Filing returns. . 1056, 1258 Payment of taxes. . 1056, 1258 Tools, addition to surplus account of amounts expended for. . 1196 Trade brands. .1029, 1179 Trademarks. . 1029, 1179 Trade names. .1029, 1179 Treasury stock. . 1232, 1233 Uncertified checks, payment of tax. .8020 Undivided profits. See Surplus and undivided profits. United Press franchises, intangible property. . 1179 United States: Possessions; income from within (Sec. 262). . 1083 Taxation of corporations entitled to benefits of Sec. 262. . 1046, 1242, 1243-1247, 1259 Possessions, obligations, invested capital. .1032, 1037, 1184, 1190 Taxability and exemption of interest upon obligations. . 1089 Valuation of assets upon reorganization of business enterprise. .1053, 1248 Valuation of property paid in for stock. .865, 889, 1036, 1037, 1039, 1040, 1187, 1189-1192, 1220, 1231, 1234. Victory notes. .728 War Finance Corporation, interest on bonds. .732 As admissible and inadmissible assets. .745 Ccpyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess Profits Tax— 1921 Act— Index Page 8 I) f) ') Si 1-2-22. (2) 6-22-22. CAPITAL STOCK TAX 1921 ACT OR SPECIAL EXCISE TAX ON CORPORATIONS. BEING PART OF TITLE X OF THE REVENUE ACT OF 1921. In effect on and after July 1, 1922. Return: To be filed during July (on or before July 31) each year. Tax: To be paid within 10 days after notice and demand. See ^[3088. 3000 Sec. 1000 [of Title X of the Revenue Act of 1921]. (a) That on and after July 1, 1922, in lieu of the tax imposed by section 1000 of the Revenue Act of 1918 — [Domestic Corporations.] 3001 (1) Every domestic corporation shall pay annually a special ex- cise tax with respect to carrying on or doing business, equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000. In estimating the value of capital stock the surplus and undivided profits shall be included; [Foreign Corporations.] 3002 (2) Every foreign corporation shall pay annually a special excise tax with respect to carrying on or doing business in the United States, equivalent to $1 for each $1,000 of the average amount of capital employed in the transaction of its business in the United States during the preceding year ending June 30. [Exempt Corporations.] 3003 (b) The taxes imposed by this section shall not apply in any year to any corporation which was not engaged in business (or, in the case of a foreign corporation, not engaged in business in the United States) during the preceding year ending June 30, nor to any corporation enumerated in section 231 [for list of exempt corporations read at ^[3063] ; nor to any insurance company subject to the tax imposed by section 243 or 246. [Secrecy of Returns.] 3004 (c) Section 257 [of Title II, "Income Tax," of the Revenue Act of 1921] shall apply to all returns filed with the Commissioner for purposes of the tax imposed by this section. [See ^[3086.] [General Administrative Provisions of Law.] [Read under "Miscellaneous" at the back of the book.] Copyright 1922, by The Corporation Trust Company. WAR TAX 601 SERVICE TDA JATI4A3 For Regulations 64 (1922 Edition) relating to the Capital Stock Tax— 1921 Act see page 609 immediately following the return forms opposite. WAR TAX 602 SERVICE 6-1-22. Form 707 U 3 Ntekxal RlVKNl'E 1923 RETURN CAPITAL STOCK TAX FOR DOMESTIC CORPORATIONS (Collection district.) Asscameul List, Form 23 A. (Month j (Ye»r.) TO B£ ST*M«D BY CO (SEC. 1000. REVENUE ACT OF l»21) File with Collector of Internal Revenue for your dietrict on or before July 31, 1922, to avoid penalty. (Page.) (Line.) Audited by : 2. Address . (Print name ol corporation. Join (The address r. 3. Name of parent company, if any ck company, or association.) [ olthe principal placo o( business. Give "Street and numb r name, lfchjmred.) ty or town," and "State.") (Dietrict filed . (Or attach list and state number of shares held, also districts where filed.; 5. Nature of business in detail No. shares held (District filed 6. Incorporated or organized in State of Month 7. Return for previous year filed in District. Fire insurance carried, if any, $.. Year ( A i of date." E irjibi tX) ' TAX PAYABLE ANNUALLY IN ADVANCE RETURN FOR TAXABLE PERIOD JULY 1. 1»22, TO JUNE 30, 1823, BASSO ON FAIR AVERAGE VALUE OF CAPITAL STOCK FOR PRECEDINC CAREFULLY READ ALL INSTRUCTIONS BEFORE MAKING RETURN JUNE 30, 1922. Cum. or 8. Common stock outstanding 9T First preferred stock outstanding. 10. Second prefer'd stock outstanding. 11. Surplus (estimate if necessary) 12 Undivided profits (estimate if necessary) 13. Total P.»r TOTAL. This column for iiieef Department. COMPUTATION OF TAX. 14. Fair value of total capital stock for fiscal year determined by Exhibit 15. Deduction allowed by law _ 1C. Amount in excess of $5,000 (Omit cents) 17. Tax at rate of $1 for each full $1,000 in excess of $i,O0J (Omit cents) 18. ^Penalty fot delinquency in filing return _ . # _ „ 19. .. Total tax and penalty TO FACILITATE COLLECTION OF TAX A REMITTANCE IN THE AMOUNT REPORTED MAY ACCOMPANY THIS RETURN CLAIM SETTLEMENT RECORD Amount 5 ALLOWED $ Rejected s Kadi Value t Basis Every corporation must flic a return or sub- mit conclusive evidence that It Is npt liable. Determination ot liability rests wltn tlie Commissioner. Tbls applies to all companies claiming exemption. See Arts. 17 ana 31, Regulations 64. ADDITIONAL ASSESSMENT RECORD l'Atz.... , Additional Tax, I.. ALL TAXFS ARE PAYABLE TO THE COLLECTOR OF THE DISTRICT IN WHICH RKTURN IS FILED. (See I>tsteuction-s ON Paoe l.> (I) {Page 1 of Form 707.J Copyright 1922, by The Corporation Trust Company. WAR TAX 603 SERVICE 3ttu. ru tti this duucUr arc caafidentul *ni tn open to uiiftcctioa only iraW condition* ipedfied so Section 257. R«»«nue Act ol 1921 EXHIBIT A. (See Special Instructions No. 3, page 4) CONDENSED BALANCE SHEET AS OF _ REPORT AS OF JUNE 30, 1922, IF POSSIBLE, BUT IN NO CASE EARLIER THAN DECEMBER 31, 1*21 DEBITS AND ASSETS. BOOKS OP ACCOUNT. PAIR VALUE. DIFFERENCE. •(Explain iaj Imt» amount*.) Real eetate s 1 $ Buildings _ Machinery 1 Stock in subsidiaries Other securities Caeh _ _ Notes receivable ::::::: ::::::: Accounts receivable | Inventory _ | 1 — : :. Good will, patents, etc z — s Deferred charges Totals $ * 1 $ CREDITS AND LIABILITIES. books Uf Aeeouref. HAIR VAJL.UK. DlFFJULETfClf. f $ Mortgagee 1 Notes payable 1 Taxes 1 | 1 _ _ . . .... Capital stock: Comjion. i , 1 Profit and loss — - Totals _ $ -. 1 . $ MUM CI RECAPITULATION OF EXHIBIT A. TM» column Th* column »■*>« Total of debits and assets after deducting itei I.eas total of credits and liabilitieu after dedi ns not actual aase«« 5. cling capital stock, surplus, and I>itlArf.nr« Ivftlue af trttfll partital Rtiu-V ipfli-rterl )iv Kxlliliit k\ 1 ? U*teri*l differenooa will aot be allowed unless sauslactoril y explained. (2) (8t» IjfSTBVc-no.vj on Paoi «.) [Page 2 of Form 707. j Copyright 1922, by The Corporation Trust Company. WAR TAX 604 SERVICE 6-1-22. EXHIBIT B. (See Special Instructions No. 4, page 4.) QUOTATIONS OR OUTSIDE SALES PRICES i of exchange or specify ' ' Outside sales. ' July, 1921 August, 19' September, 1921 October, 1921 November, 1921.. December, 1921.. January, 1922 February, 1922... March, 1922 April, 1922 May, 1922 June, 1922 Total Average FiRST PREFERRED. Number ol shaies X X X X X X SPECIAL INFORMATION Manufacturing and trading corporations will report annual eroes sales for the five years shown under Exhibit C. FISCAL TEAR ENDED— 191 ... 191 19 19 19 ? RECAPITULATION OF EXHIBIT B. This column lor us« ol Average gale value of common stock per share, $ _. , multiplied by number of shares outstanding _ Average sale value of first preferred stock per share, $ , multiplied by number of shares outstanding Average sale value of second preferred stock per share, $ by number of shares outstanding Total (value of total capital stock reflected by Exhibit B) , multiplied Approximate number of shares traded in during the year: Common . Preferred... EXHIBIT C. (See Special Instructions No. 5, page 4.) ANNUAL INCOME NET INCOME. DEDUCTIONS. ADDITIONS. DIVIDENDS DECLARED. preferred, preferred DEPRECIATION. Aver'g* *- X X X X X X RECAPITULATION OF EXHIBIT C. Average annual income as adjusted _.. Capitalized at.... per cent (value of total capital stock reflected by Exhibit C). * % % * Thli column lor i 1=1 State of : | \ss: County of" _ _ J We, — _ „ , President, and , Treasurer, ; of the above-named company whose return for special excise tax is herein set forth, being severally duly sworn, each for himself, deposes and says I that the items entered in the foregoing report and in any additional list or lists attached to or accompanying this return are, to his beet knowledge and belief and from such information as he has been able to obtain, true and correct. Sworn to and subscribed before me this . day President. (3) (Page 3 of Form 707.J Copyright 1922, by The Corporation Trust Company. war tas; 605 SERVIC? SPECIAL INSTRUCTIONS r doing business, equivalent to tl for each II ,000 of s "ing year ending Jane 30 as s organized for profit or has i capital stock represented by shares. For the purpose of this tax the fair value of the entire capital stock as a going < regardless of stock ownership or the cbliity of Individual stockholders to liquidate no sales prices for any number of shares necessarily Indicative of the fair value of the i their holdings, is required majority Interest are notn The hook value, the kind oiasseis.the nature of the business, good will, franchises earning rapacity, etc. , ere Important factors that affect the worth of enterprises and must be given dueconsiderstlonin arriving p.t. the fair value at any given date. If the stock Is listed, the iuim of the exchange taw most be shown In the space provided therefor, and I the highest, and of the lowest bid price during each l year will be obtained. If the taxpayer prefers, I be obtained. _ . showing the highest and lowest bid price a and the average obtained therefrom. If the stock is not listed and outside sales have been by the officers making this report, such pr number of shares Involved and the -..ndit exchange quotations must accompany this f ying purposes, or sales which are restru -i ed as to resale, or sale t be considered ropiesenfative of the fair value of the 'tached to this retn i stock was quotto for each day of the year it prlcM known or determinable I be reported herein. A statement of the ,dor which sales were msde at other tnan Pales toemplovees or directors forqimll- ' ■peclallv llalnock : be included. or state why tho required data are not available. Exhibit A provides for adjusting any overstated or understated values contained In the taxpayer's books of account, and Exhibit C provides for showing an adjusted income, which should be the actual operating Income to be used for capitalising on a percentage basis fixed by Its officers as fairly representinc, conditions obtaining in the trade and in the locality. If the reconstructed book value shown by Exhibit A, the market value shown by Exhibit B, cr the valuation reflected bv Exhibit C is greater than the valuation returned by 1 £. uAtumn.-The three exhibits, A. B, and C, are provided to indicate the information desired and the manner in which it should be furnished. So fir as adaptable these forms should be completed by taxpayers, but if they find it more convenient they may attach to this return their own statements (as in the case of banks), provided substantially the same Information Is furnished. In any event, taxpayers should attach any additional statements that will aid in a comprehensive understanding of the taxpayer's return so that the Commis- sioner of Intorna! Ttcvenue may equitably determine the correctness of the fair value reported in Item 14 on page 1 hereof. "JBooki of account."— These columns most show the amounts as carried in tho taxpayer's books of account. "Fair value." — Refer to article 1 above, defining the value required, and in the event that the columns " Books of account " contain any overstated or understated values, show heroin the actual values. In the case of mines, oil and gas wells, other natural deposits, and timber, valuations establish ri1 a-- tin- bar. s-f ilepletion in computing Income and profits taxes shoula be shown in the "Fair value" column. If any different valuation Is claimed than reported in the " Fair value " column it may be stated and should bo supported by reasonably conclu- sive evidence. "Difference."— These columns will show the difference between the columns "Books of account'' and "Fair value." Any material di (Terences must be ezpiaincd in such manlier as toonablethc Commissioner of Internal Revenue to determine if they are proper and accept- able. For this purpose tho differences shown herein need not be covered by corresponding adjustments in the taxpayer's books of account. •'Profit and lost"— If the "Profit and loss'' balance Is a debit, the amount should be shown in red. Reserves for the payment or future dividends, whether declared or not, will not be consid- ered as liabilities, but a reasonable amount to cover the preceding dividend period may be so considered If the dividend has been declared and not disbursed. If deducted, show date declared and date of actual payment. 4. Exhibit B: Quotation- or Outside Bales Prices.— Furnish under Exhibit B the prices quoted on a recognized stock exchange or on the New York curb, or the prices at which outside sales were made if the stock is not listed, for the period of 12 months ending Juno 30, First. If no change occurred in the number of -hare out -t m^i.ng ^-ir'nc rre year, total the quotations or sales prices tor the months reported and divide by 'tho number of months In which quotations or sales prices are shown. Second. If any change occurred in the number of shares outstanding during the year, v'erage market price per share for the period during which the capital stick »2, has been outstanding by the number of shares out standing as of that date. 5. Exhibit C: Annual Income — Furnish under Exhibit C the annual Income and other data for the. five fiscal veers ended with tho close of the tax payer's fiscal year, or for the period during which the corporation hjs been engaged in business if for » shorter period. "Net income."— In this column wiil be shown the income returned for the purpose of the Income tax ami excess profits tax. "Dc&vctims" and " Addition*. "— Refer to article 1 of these Special Instructions, and show in these columns such amounts as should he deducted lio:n or added to " Net income ' to errive at tho adjusted Ireome whl-h may In. capitalized to determine the fair value of tho capital stock. A comprehensive erialysis of any a ~ to this return. Some ol tho principal Items treat Dcducltom: Incomo and profits taxes Interest charges not dedu Losses not fully deductlb t deductible in computing Income subject to tax. ble in computing income subject to tax. n computing income subject to tax. AddVinns: Dividends fram other corporations not included in computing income subje-t to tax. Income from securities of a State, municipality, or of the United States, not Included In the income-tax return. The difference between depiction allowed In determining net Income subject to Federal income tax and the actual deoletion based on cost. Expenditures made for additions and betterments, or reserves for such purposes, charged against income, whether direct or through expenses. oounts resulting from the adjustment •Adjured income "— This co'unua will reflect the [ the amounts shown in the thre* preceding column 'Number of thorei."— Herein should be given the total number of share' of all classes of >ck outstanding et the dose of each Qscal year. ■Divider^ lieeU-ri "—Herein should ba reported the percentage of dividends declared on represented by the percentages •Net I ' or "Adjusted Capitalizing net income.— The officers making the return income on a Dercentage basis that fairly represents, uc.-ler the condition trade in the locality, what representative enterprises must earn in order I stock at car. In other words, i f enterprises engaged in asirailer business must on the average earn 12 per cent on their Issued capital stock lo keep tho value of their stock at par, the pet income should be capitalized by dlvldiiig it by .12. verage annual itaininf In the maintain their GENERAL INSTRUCTIONS 2. Date or Fdjno RgnrsNS.— During July of oach year. 3. Tentative Return.— Filing of a tentative return will avoid penalty for dolinquer.t filing, but does not authorise withholding of the tax. Complete roturn a . far a ; possible and submit an approximate estimate as a ba^is in order that an initial asses-men* may be inade. See Art. 21, Reg. 64. 4. Examination or Records and Witnesses.— For the purpose of ascertaining tiie correctness of any return or of making a return where none has been made or of prepariac, a new return whore the one submitted is false or fraudulent the Ckirnmissioner has authority to designate a revenue agent or inspector to examine witnesses aud books, records, papers, or other memoranda. 5. Extension of Time.— If on account of sickn«sr or absence of the officer charged with making the return, it i , irppnssihlo to prepare end file a return on or hef.** July 31, the col- lector, upon application in writing, may allow an extension of not e-ce<-.iine 30 days for making and filing the relorn. Jf extension Is attached to tho return Neither tho Commissi an extension greater than 3u.dayjfroui July 31. S Sionatures and VFRincAnoN. — Returns must be signed and verified by two officers of the coiporation, that is, by the president, vice president, or other pruicipaj officer, and by tho treasurer or other financial officer, and most be sworn to before an •frrcer authorired to acrntni.,t.:r oaths, and the seal of the attesting officer, If he is required ! a have a seel, mirt be Impressed on the return. Tho name of the corporation and the names of the officers signing the return should be plainly written or printed on tho return. If, however, the lax covered by thi3 roturn does not exceed tlO, the return may be signed or acknowledged before' two witnesses instead of under oath. Penalties.— In case of any failure to make and file a r t wilhir, the time pre- i thai the failure sioner of Internal Revenue shall add to the of the tax is pavable to the collector at any I mcnt do not attach until ten days after noli pon the taxpayer. (See sections lOfM 60 per centum of its amount. The amount ' time alter July 1, 1722, but penalties for nonpay- lu e and demand has been sen ed by the collector 302, and 1311. Revenue Act of 1921, aad section 184? R.S.) 8 9. KcOULations.-Fot further information rcgardiof the tax ki Rafulatkeu 44. [Page 4 of Form 707.] Copyright 1922. by The Corporation Trust Company. WAR TAX 606 SERVICE 1923 RETURN CAPITAL STOCK TAX FOR FOREIGN CORPORATIONS (Sec. 1000, Revenue Act of 1921). (Year.' "("iin'e" Audited by Fila with Collector of Internal Revenue for your district on or before July 31, 1922, to avoid penalty. 1. Name. (Print name of corporation, Joint-stock company, or association.) (Show former naror. ii ihancnd (The address In the Cmicd state . mint be that of the principal ptac ' of tnisuievt "f the corporative.) ~ "(GiVc'street and her, city or town, and country.) (Return for previous year filed In _ District.) 2. Address _, 3. Home Office located at 4. Nature of business in detail 5. Affiliated company or companies . _ TAX PAYABLE ANNUALLY IN ADVANCE. Retain for taxable period July 1, 1922, to Juno 30, 1923, based on the avetage amount of capital employed in the transaction of its business in the United St ates for p receding y ortion of the fiscal year July 1, 1921, to June 30, 1922. 10. Computation of tax.— The method of computation is prescribed on the faco of this form. 11 Tax.— The tax is at the rate of $1 for each full $1,000 of the aver- age amount cf capital employed in the transaction of bfJMneM iu the United States. Transportation companies owning or operating vessels plying be- tween the United States and other countries, and any other cjmp.iiiivs whose business methods involve the employment of capital in the United States which is not physically maintained in this country, may use the special method of computation suggested on the face of the return. 12. Penalties. — In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pu"suaose of law, the Commis- sioner of Internal Revenue shall add to the taK 25 per centum of ita amount, except that when a return is filed after such time and it ia shown that the failure- to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. In case a falsa or fraudulent return or let is willfully made, the Coramisssioner Internal Revenue shall add to the tax 50 per centum of its amount. The tax is payable to the coliector any time after July 1. 1921, but penalties for nonpayment do not attach until ten days af:;r notice acd demand hes been served by the collector upon the taxpayer. (Soo Sections 1004, 1302, and 1311, Revenue Act of 1521, and Section 3164, R. S.) 11. Regulations. — For further information regarding the tax fee Reg. No 64. [Page 2 of Form 708.] Copyright 1922, by The Corporation Trust Company. WAR TAX 60S SERVICE 6-22-22. Reg. 64.— 1922 Edition. CAPITAL STOCK TAX REGULATIONS. REGULATIONS 64 (1922 EDITION) (Promulgated June 15, 1922. Released for publication June 22, 1922.) RELATING TO THE CAPITAL STOCK TAX UNDER THE REVENUE ACT OF 1921 CONTENTS Paragraph Article 1. The law 3005 Section 1000(a). Effective date 3000 Article 2. Due date of tax 3006 Section 2. Corporations defined and distinguished , 8086 Article 3. Corporations 3007 4. Associations and joint-stock companies 3008 5. Limited partnerships as corporations 3009 6. Limited partnerships as partnerships 3010 7. Partnership banks 3011 8. Massachusetts trusts 3012 9. Domestic corporations 3013 10. Foreign corporations 3014 Section 1000(a). (1) Tax on domestic corporations 3001 Article 11. Basis of the tax: "Carrying on or doing business" 3015 12. "Carrying on or doing business" illustrated • 3020 13. Not "doing business" 3033 14. Computation of tax 3036 15. Fair average value of capital stock 3039 16. Surplus and undivided profits 3047 Section 1300. \r> : oftn » OAA1 1307 jR eturns 8000, 8001 Article 17. Return by domestic corporation 3048 18. Return by affiliated corporation. 3049 19. Verification of return 3051 20. Time for making return 3052 21. Tentative return 3054 Section 1000 (a). (2) Tax on foreign corporations 3002 Article 22. Basis of the tax 3055" 23. Capital employed in the United States . . . 3057 24. Capital employed in the United States illustrated 3058 25. Return by foreign corporation 3059 26. Computation of tax 3060 27. Measure of tax ; 3061 Section 1000 (b). Exemption from tax 3003 Article 28. Corporation not in business during preceding year 3062 29. Organizations and insurance companies exempt 3063 30. Claims for exemption 3081 31. Return by corporation claiming exemption 3082 Section 229. Election to be taxed as a corporation 1082 Article 32. El&ction to be taxed as a corporation 3084 Section 1000. (c) Returns public records 3004 Article 33. Inspection of returns 3086 34. No authority for credit of excess payment of capital stock tax 3087 Section 1300. Laws made applicable 8000 1308. Examination of books and witnesses 8002 1301. Method of collecting tax 8012 Article 35. Time for payment of tax 3088 36. Abatement and refund of taxes 3089 Copyright 1922, by The Corporation Trust Company. WAR TAX 609 SERVICE 6-22-22. Reg. 64.-1922 Edition. CAPITAL STOCK TAX REGULATIONS. kfl l rOTT I I O'iTf. Paragraph Section 1315. Refunds fP. . 9. ff V**^".!**?! 8023 1323. Fraudulent returns 80*7 1325. Medium of payment of tax 8020 Article 37. Payment of tax by uncertified checks 3092 38. Procedure with respect to dishonored checks 3093 Section 1004. Penalty for doing business without payment of tax 7693 Article 39. Doing business without payment of tax 3094 Section 1302. Penalties.. .X AT. . .20QT3 . J^TIHAQ 8014 Article 40. Penalty for nonpayment of tax 3095 41. Penalties for failure to make return and for false return 3096 Section 1309. Unnecessary examinations 8006 1310. Jurisdiction of courts 8003 1311. Amendments to Revised Statutes 80':0 Sec. 3164. Collector to report willful violations 8061 3165. Powers of revenue officers 8062 3167. Penalties for unlawful disclosures 8063 3172. Canvass for taxable persons and objects 8061 3173. Responsibilities of persons liable to tax 806 r > 3176. Delinquent returns S071 1312. Final determinations and assessments 8007 1313. Administrative review c 00 - 1314. Retroactive regulations 801! Article 42. Section 3228 R. S. (refunds) retroactive 3101 Section 1316. Time for refund of capital stock tax 309'7 1318."! 1 320* 1 Limitations upon suits and prosecutions 8048 1321J 1322. Assessments 3102 Article 43. Section 1322 R. S. (assessments) retroactive 3102 Section 1324. Interest on refunds and judgments 8036 1303. Authority for regulations 8009 1400. Repeals. 8076 Article 44. Promulgation of regulations 3104 3005 Article 1. The law.- — The main provisions of existing law with re- spect to this tax are embodied in section 1000 of the Revenue Act of 1921, referred to hereinafter as the act. EFFECTIVE DATE. 3006 Art. 2. Due date of tax.— The act was approved November 23, 192 J , 3100 but the tax is effective from July 1, 1922, except upon t lie incorpora- tion of an individual or partnership business (see art. 32). This is a special tax and like all special taxes is due and payable annually in advance from July 1 of each year. No portion of the tax so paid is refundable to a corporation which ceases to do business during the year. CORPORATIONS DEFINED AND DISTINGUISHED. Hf8086 to 1|8089.] 3007 Art. 3. Corporations. — The term "corporation" includes associations, 3001 and joint-stock companies, whether created by statute or by contract, 3002 but no partnerships, properly so called. It is immaterial whether trie companies were organized for profit or have a capital stock represented by shares. 3008 Art 4. Associations and joint-stock companies. — Associations and joint-stock companies include organizations, by whatever name known, which act or do business in an organized capacity, whether created Copyright 1922, by The Corporation Trust Company. WAR TAX 610 SERVICE 6-22-22. Reg. 64.-1922 Edition. CAPITAL STOCK TAX REGULATIONS. under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributable among the members or shareholders on the basis of the capital stock held by each, or, where there is no capital stock, on the basis of the proportionate share of capital which each has or has invested in the business or property of the organization. But see articles 5, 6, 7, 8. An organization, the membership interests in which are transferable without the consent of all of the members, however the transfer may be otherwise restricted, and the business of which is conducted by trustees or directors and officers without the active participation of all the members as such, is an association. 3009 Art. 5. Limited partnerships as corporations. — Partnerships with limited liability or partnership associations authorized by the statutes of Pennsylvania and a few other States are only nominally partnerships. Such so-called limited partnerships, offering opportunity for limiting the liability of all the members, providing for the transferability of partnership shares, and capable of holding real estate and bringing suit in the common name, are more truly corporations than partnerships, and are taxable as corporations. In all doubtful cases limited partnerships will be treated as corporations unless they submit satisfactory proof that they are not in effect so organized. Michigan partnership associations are corporations. The liability of Virginia limited partnerships is determined in each case from a consideration of the certificate of partnership and all pertinent facts relative thereto. 3010 Art. 6. Limited partnerships as partnerships. — So-called limited partnerships of the type authorized by the statutes of New York and most of the States are partnerships and not corporations within the meaning of the statute. Such limited partnerships which can not limit the liability of the general partners, although the special partners enjoy limited liability so long as they observe the statutory conditions, which are dissolved by the death or transfer of the interest of a general partner, and which can not hold real estate or sue in the partnership name, are so like common law partnerships that they can not be differentiated therefrom for tax purposes. Michigan and Illinois limited partnerships are partnerships. California special partnerships are partnerships. 3011 Art. 7. Partnership banks. — A partnership bank, conducted like a corporation and so organized that the interests of its members may be transferred without the consent of the other members, is a joint-stock com- pany or association within the meaning of the statute. A partnership bank, the interests of whose members can not be so transferred, is a partnership. 3012 Art. 8. Massachusetts trusts. — The test of liability in all cases involving trusts of the Massachusetts type is whether the cestuis que trustent have by the terms of the trust agreement a voice in the manage- ment or control of the trust. Where the trustees are in complete control of the business, the beneficiaries having no control except the right of filling vacancies among the trustees or of consenting to a modification of the terms of the trust or of dissolving the trust, no association exists. If, however, the cestuis que trustent have a voice in the control or management of the business of the trust, whether through the right to elect trustees periodically or to remove the trustees or to restrict the trustees as to the management of the trust or Copyright 1922, by The Corporation Trust Company. WAR TAX 611 SERVICE 6-22-22. Reg. 64 —1922 Edition. CAPITAL STOCK TAX REGULATIONS. otherwise, the trust is an association within the meaning of the statute. Where the trustees hold in their own right a sufficient number of the cer- tificates of beneficial interest to constitute control as between the beneficiaries, the trust will be held to be an association regardless of the powers conferred upon the trustee by the instrument creating the trust. 3013 Art. 9. Domestic corporations. — A domestic corporation is a cor poration created or organized in the United States, which includes the States, Territories of Alaska and Hawaii, and the District of Columbia. 3014 Art. 10. Foreign corporations. — A foreign corporation is a corpora- tion created or organized outside the United States as defined in Article 9. TAX ON DOMESTIC CORPORATIONS. 30?5 Art. 11. Basis of the tax: "Carrying on or doing business."— The basis of the tax in the case of a domestic corporation is "carrying on or doing business" in the capacity of a corporation or association. The words "carrying on or doing business" must be given their ordinary and natural signification. "Business" is a very comprehensive term and embraces what- ever occupies the time, attention or labor of men for the purpose of livelihood or profit. In other words, business necessarily involves the idea of gain. 301 S The true basis of distinction is, in the first instance, between — (a) A corporation organized for the purpose of doing business as above defined, and (b) A corporation organized for the sole purpose of owning and holding property and distributing its avails; and, in the second instance, between — (c) A corporation of class (a) which is continuing the body and sub- stance of the business for which it was organized or is still active and maintaining its organization for the purpose of continued efforts in the pursuit of profit or gain, and (d) A corporation which, although included in class (a), has substantially retired from the business for which it was organized and ha 1 ? reduced its activities to the mere ownership and holding of property, distributing its avails, and doing only the acts necessary to the maintenance of its corporate existence and the private management of its purely internal affairs. 301 7 The distinction in each case must depend upon the peculiar facts in the case. Corporations of class (a) will be presumed to be subject to the tax unless they submit proof, satisfactory to the Commissioner, that they are not actually carrying on or doing business. If a corporation claim exemption on the ground that it belongs to class (b), it will be required to file an excerpt from its charter setting forth its corporate powers together with a full and comprehensive statement showing the nature of the activities in which it is and has been actually engaged. If it claim^exemption on the ground that it belongs to class (d), it will be required to furnish a copy of any amendment of its charter, or other evidence, satisfactory to the Commissioner, showing that it has reduced its activities to the mere ownership of property, receipt of its avaisl, and the doing of only what is necessary to the main- tenance of its corporate existence. Copyright 1922, by The Corporation Trust Company. WAR TAX & 612 SERVICE 6-22-22. Reg. 64.-1922 Edition. CAPITAL STOCK TAX REGULATIONS. 3018 A corporation that has "substantially retired from business" is one that has changed its status, as, for instance, by divesting itself of all control over and management of the property formerly employed by it in the doing of business, and has reduced its activities accordingly. 3019 The leasing of all the property of a corporation whereby it divests itself of control and management thereof, or the sale of all the prop- erty of a corporation and the reduction of its activities to the collection of the proceeds of the sale on an installment plan, are instances of a corporation substantially retiring from business. 3020 Art. 12. * 'Carrying on or doing business" illustrated. — Corpora- tions organized for the purpose of and actually engaged in such activities as buying, selling, or dealing in mineral or timber land or other real estate; leasing property, collecting rents, managing office buildings, making investments of profits; leasing lands and collecting royalties, man- aging wharves, dividing profits; and in some cases investing the surplus, are engaged in "carrying on or doing business" within the meaning of the statute. 3021 A corporation may complete its organization and sell its capital stock for cash without incurring liability, but other activities, such as entering into contracts for the purchase of property or construction of a plant are corporate business acts, and constitute doing business. In other words, it is not necessary that a company be actually engaged in the manu- facture of its intended product or that it be actually creating profit or gain to incur liability. The making of contracts, buying of materials or machin- ery, constructing buildings, employing and discharging of individuals are necessary business acts leading to the more profitable end of manufacturing certain products. 3022 The letting of a contract and construction of a hotel preparatory to engaging in the hotel business is sufficient to incur liability. 3023 A corporation organized for the purpose of, and actually engaged in, buying mineral or timber land or other real estate and holding it with a view to future sale at an advance is carrying on or doing business. 3024 A corporation organized for the purpose of owning and leasing real estate which has leased all of the property under its control is still engaged in doing business unless, under the terms of its lease, its activities have been reduced to the mere receipt and distribution of the avails of the leases at the actual cost of so doing. If it is still maintaining its organization for the purpose of continued effort in the pursuit of profit and gain it is doing business. 3025 A corporation owning or managing real estate which leases all of its property, but under the terms of the lease is required to maintain or keep the property in repair, is doing business. 3026 No particular amount of business is required in order to bring a company within the terms of the act. 3027 A corporation engaged in mining or in developing and speculating in mineral lands is doing business. 3028 A corporation engaged in buying and selling securities or other property is doing business, even though for a period it makes hp purchases or sales because of unfavorable market conditions. 3029 A corporation formed to take over miscellaneous stocks, bonds, or other property (as of an estate), to negotiate sales of various items from time to time as opportunity and judgment dictate, and to distribute Copyright 1922, by The Corporation Trust Company. WAR TAX 613 SERVICE C-22-22. Reg. 64.-1922 Edition. CAPITAL STOCK TAX REGULATIONS. the profits from time to time as liquidation is effected, is, while so engaged, carrying on or doing business. 3 030 A parent corporation which finances or manages the operations of its subsidiaries is doing business. 3031 A so-called holding company which, under its charter, is authorized to and doeskin addition to receiving and distributing the avails of the property or securities, held by it, finance the operations of its subsidiaries, is engaged in doing business. 3032 A corporation organized for the purpose of taking over and holding securities^ timber land, coal lands, or other real estate, is held to be doing business, if it makes investments or reinvestments of its surplus income or funds in excess of an amount necessary to maintain its original investments. 3033 Art 13. Not "doing business." — Holding companies as distin- guished from parent corporations, and corporations all of whose property and business is operated by, or is in the hands of, a receiver or the Alien Property Custodian, are not doing business. 3034 A holding company is denned as one whose corporate powersTaro limited to the mere owning and holding of property and distribution of its avails, or one which, although incorporated for the purpose of doing business as defined in article 11, has substantially retired from the business for which it was organized and has reduced its activities to the mere owner- ship and holding of property, distributing its avails, and doing only such acts as are necessary to the maintenance of its corporate existence and the private management of its purely internal affairs. 3035 A holding company, as above defined, will not|be considered to be doing business by reason of the reinvestment of its surplus income or funds to the extent only of maintaining its original investments. 3036 Art. 14. Computation of tax. — The tax is imposed at the rate of $1 for each full $1,000 of the fair average value of the capital stock of the corporation in excess of the prescribed deduction of $5,000. 3037 The tax being payable in advance is prospective and is measured by the fair average value for the year preceding the taxable year, not the fair value of the average capital stock. If a corporation begins business within the preceding year or increases or decreases its capital within the pre- ceding year, thereby materially changing the fair value of the capital stock, the tax is measured by the fair value of the capital stock outstanding at the date of incidence of the tax (June 30). Therefore, while Form 707 permits, as a matter of convenience to the taxpayer, the using of a balance sheet as of a date prior to June 30, but not prior to the preceding December 31, if there is a material change in the condition and affairs of the company affecting the fair value of the capital stock subsequent to the closing of the books and prior to the date of the incidence of the tax (June 30), the financial condition should be reported under Exhibit A as of June 30, giving effect to such material changes. Under Exhibit B, the market value will be determined by mul- tiplying the average market price per share for the period during which the capital stock as of June 30 has been outstanding by the number of shares outstanding as of that date. 3038 No deduction is allowed corporations organized in the United States for capital invested outside of the United States. If the corporation is doing business it is taxed on its entire capital stock even though most of it may not be employed in the business. Copyright 1922, by The Corporation Trust Company. WAR TAX 614 SERVICE 6-22-22. Reg. 64—1922 Edition. CAPITAL STOCK TAX REGULATIONS. 3039 Art., 15. Fair average value of capital stock. — The fair average value of the capital stock for the purpose of determining the amount of the capital stock tax must not be confused with the market value of the shares of stock where it may be necessary to determine such value under other pro- visions of the revenue laws. The fair average value of the capital stock, the statutory basis of the tax, is not necessarily the book value or the value based on prices realized in current sales of shares of stock or the value determined by capitalization of earnings. 3040 Form 707 [page 603] provides Exhibit A for the book or fair valut of the assets, Exhibit B for the market value of the shares, and Exhibit C for the value of the capital stock based on the capitalized earnings. All information called for must be given in every case where it is procurable. The fair average value of the capital stock of a corporation and the tax payable thereon shall be determined from a consideration of the data con- tained in the return as well as all elements and factors affecting values, which should be harmonized so far as possible in the ultimate fair value found. Fair value is required irrespective of the exhibit used or the method employed in its determination. 3041 Exhibit A. — The character of the assets is probably the most im- portant factor in determining the reliability of the value reflected by this exhibit as being indicative of the fair value of the capital stock. If the market value of the assets be established the fair value of the capital stock is held to be not materially less than the fair market value of the net assets. Attempts to average the assets as a means of estimating the fair average value of the capital stock are not permitted. 3042 Exhibit B. — The market is regarded as a factor, but only of im- portance when the underlying factors upon which the market has been established are sound in all essential particulars. 3043 Exhibit C. — The weight attaching to this exhibit is largely de- pendent upon the nature of the business and character of the assets. 3044 In capitalizing the net earnings of the corporation, which should reflect the true earning capacity, the officers should use a rate fairly representing the conditions obtaining in the trade and in the locality, with due regard to other important factors, including the worth of money. But such fair value must not be greatly at variance with the reconstructed book value shown by Exhibit A, unless the corporation is materially affected by extraordinary conditions which support a lower valuation. In any such case a full explanation must accompany the return. The commissioner will estimate the fair value of the capital stock in cases regarded as involving any understatement or undervaluation. 3045 The fair value of the capital stock, as provided under section 1000 (a) (1) of the Revenue Act of 1921, and invested capital under the excess- profits tax provisions of the Revenue Act of 1921 are not necessarily the same. 3046 For the purpose of capital-stock tax the fair value of the capital stock is estimated, and is predicated on present values, including actual appreciation of property, whether realized or unrealized, and such in- tangible assets as good will, trade-marks, and patents to the extent reflected by the earning power, whereas, for the purpose of excess-profits tax, the invested capital is based upon the actual investment of the stockholders in the corporation, irrespective of the present value of its assets. In the case of the capital-stock tax the fair value looks to the present net value of the Copyright 1922, by The Corporation Trust Company. WAR TAX 615 SERVICE 6-22-22. Reg. 64.— 1922 Edition. CAPITAL STOCK TAX REGULATIONS. assets, irrespective of the amount of the investment of the stockholders. (See art. 863, Reg. 62 [If 1234].) 3047 Art. 16. Surplus and undivided profits. — The surplus and undivided profits of a corporation must be included in estimating the fair average value of its capital stock. If the fair average value be determined from the book value, the surplus and undivided profits arc included in the assets; if from sales, they are necessarily a factor in determining the market price; and, if from net income, they are reflected to a greater or less extent in the earnings. RETURNS. [![8000 and f80Ol;] 3048 Art. 17. Return by domestic corporation.— Every domestic corpo- 3001 ration must make a return on Form 707 [page 6031 even though the law may indicate that it is exempt from the tax. The question of exemption is one for determination by the commissioner. Also see articles 31 and 20. 3049 Art. 18. Return by affiliated corporation.— Although section 240 [^[1074] of the Revenue Act of 1921 requires a consolidated return for affiliated corporations for the purpose of income tax, for the purpose of capital stock tax each corporation must render a separate return in complete form. So-called subsidiary corporations, all or a part of the stock of which is owned by another corporation, must render separate returns, the same as every other corporation. No deductions from the assets are permitted on account of intercompany balances, and the shareholdings must be reported in the "Fair value" column at their actual worth at the time of making the return. No deduction is allowed in the return of one corporation for the tax paid by another. 3050 If the fair value is determined by any method other than herein provided, the following requirements must be complied with: (a) The parent company must submit with its return a list of all subsidiaries and the districts in which the returns were filed; (b) the return of the sub- sidiary company must show the name of the parent company and the district in which the return was filed; (c) the method of determining the fair value, if other than by Exhibits A, B, and C, must be fully explained; (d) a copy of any agreement existing between parent company and subsidiary must be furnished, or a statement made that none exists; and (e) a combined balance sheet and a combined net income statement must be submitted for con- sideration in connection with any estimate of fair value made on behalf of the reporting corporation. 3051 Art. 19. Verification of return. — The return and any separate state- ment submitted therewith must be verified in the form printed on page 3 of the return. In the absence of the president or treasurer, or both, other responsible officers may execute the jurat to avoid delinquency. How- ever, if the amount of the tax covered thereby is not in excess of $10, the return may be signed or acknowledged before two witnesses instead of under oath. (Sec. 1303 of the Act [1[S009].) 3052 Art. 20. Time for making return. It shall be the duty of eveirj corporation on or before the 31st day of July in each year to make Copyright 1922, by The Corporation Trust Company. WAR TAX 616 SERVICE 6-22-22. Reg. 64.— 1922 Edition. CAPITAL STOCK TAX REGULATIONS. a return to the collector of the district in which its principal place of business is located. If an}' corporation fails to make and file a return within the time prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return, the collector or deputy collector shall make the return from his own knowledge and from such in- formation as he can obtain through testimony or otherwise. In any such case the commissioner may, from his own knowledge and from such infor- mation as he can obtain through testimony, or otherwise, make a return or amend any return made by a collector or deputy collector. Any return so made and subscribed by the commissioner, or by a collector or deputy col- lector and approved by the commissioner, shall be prima facie good and suf- ficient for all legal purposes. If on account of sickness or absence of the officer of the corporation charged with making the return, it is impossible to prepare and file a return on or before the 31st day of July (the due date), the collector, upon application in writing, may allow an extension of time not exceeding 30 days from July 31, in which to file the return. // extension is granted, the letter of the collector should be attached to the return, (See Sec. 3176, R. S. [1f8071].) 3053 On no account is the Commissioner of Internal Revenue or the col- lector authorized to grant an extension of time in which to file capital stock tax returns in excess of 30 days from July 31, the due date. If for reasons, other than absence or sickness, beyond the control of the officers making the return, it becomes impossible to file a completed return within the time prescribed by law, a tentative return may be filed. 3054 Art. 21. Tentative return. — The filing of a tentative return within the prescribed period will avoid the penalty for delinquent filing, but will not authorize the withholding of the tax. The regulations do not permit the filing of a tentative return to stay indefinitely the filing of a completed return and the collection of the tax due. Therefore if a tentative return is filed it should be clearly marked "Tentative Return" and should be prepared in as complete a manner as possible, including, among other information, a basis of the computation of the tax — that is, an estimate by the officers of the corporation of the approximate fair value of the capital stock in order that an initial assessment may be made. When the completed return is filed, it should be clearly marked "Completed return," showing that a ten- tative return was filed. Such action will prevent duplicate assessments and ordinary penalties. In every case a statement should be attached to the tentative return, indicating the approximate date the completed return may be expected. Upon receipt of the completed return any adjustment necessary in the assessment of the correct tax due will be made. TAX ON FOREIGN CORPORATIONS. 3 CSS Art. 22. Basis of the tax. — The basis of the tax in the case of a for- 3002 eign corporation is "carrying on or doing business in the United States." Foreign insurance companies are not liable to capital stock tax. (See art. 29.) 3056 A foreign corporation is carrying on or doing business in the United States if it maintains an agent or an office or warehouse in the United States or in any other way enters the United States for the purpose of its business. The purchase of supplies in the United States in the furtherance Copyright 1922, by The Corporation Trust Company. WAR TAX 617 SERVICE 6-22-22. Reg. 64.-1922 Edition. CAPITAL STOCK TAX REGULATIONS. of continued efforts in the pursuit of profit or gain is carrying on or doing business in the United States. jwi^ra id ,w*I lo yjirodnifi i^bnu oLnm noilzlu%oi xo 10 w&i vd bacfho^iq 3057 Art. 23. Capital employed in the United States. — The "capital em- ployed in the transaction of its business in the United States" means the portion of the total capital, surplus, and undivided profits, of the foreign corporation, utilized for the purpose of doing business in the United States. A foreign corporation may have income from sources within the United States for the purpose of the income tax, and yet not have capital employed in the transaction of business here for the purpose of the capital-stock tax. Compare articles 92-94 and 316-329 of Regulations 62 [see Income Tax Service, beginning on page 93]. A foreign corporation not actually doing business in the United States is not subject to tax, and, accordingly, the investment of a part of its funds in United States stocks and securities will not constitute capital employed in its business in the United States. For the definition of "doing business" see article 11. If a corporation does business in this country, then, although the mere investment of funds in United States securities is not such a taxable employment of capital, such investment will constitute capital employed in the transaction of business in the United States if made in a subsidiary corporation which the foreign corporation uses as an instrumentality for the conduct of its own business in the United States. Thus the investment of the funds of a foreign cor- poration in the purchase of facilities, although apparently independent, for the purpose of its business here, or the purchase of stock and securities of a subsidiary corporation for the same purpose, will constitute the employment of capital in the transaction or business in the United States. A foreign corporation may not escape taxation by organizing or purchasing the stcck of another corporation to own the facilities which the foreign corporation needs in its business. See article 352, Regulations 62^ [If 743 ^Income Tax Service]. 3058 Art. 24. Capital employed in the United States illustrated. — A for- eign corporation may employ capital in the transaction of its busi- ness in the United States in various ways. For example, the investment of funds in property in the United States used in its business, in stocks and securities of subsidiary corporations as explained in article 23, in bills and accounts receivable representing business done in the United States, in mer- chandise kept here for sale, in materials manufactured here, and in deposits in United States banks maintained for use in business here. Generally speak- ing, approximately such proportion of the entire capital of a foreign corpora- tion will presumably be employed in the transaction of its business in the United States as the gross amount of its business in the United States bears to its total gross business, but this will not always be conclusive, since a cor- poration may conceivably transact a greater or less volume of business in one country than in another on the same amount of capital. 3059 Art. 25. Return by foreign corporation. — Every foreign corporation carrying on or doing business in the United States shall make return on Form 708 [page 607], irrespective of the amount of capital employed in this country in the transaction of its business. The capital actually em- ployed in the transaction of the business of a foreign corporation in the United States and the tax payable thereon shall be calculated in accordance with the instructions on the form. Copyright 1922, by The Corporation Trust Company. WAR TAX 618 SERVICE 6-22-22. Reg, 64.— 1922 Edition. CAPITAL STOCK TAX REGULATIONS. 3060 Art. 26. Computation of tax. — The tax is at the rate of $1 for each full $1,000 of the capital of a foreign corporation actually employed in the transaction of its business in the United States, and is in all cases to be computed on the basis of the average amount of capital so employed during the preceding year ending June 30. The measure of the tax is accord- ingly different from that of domestic corporations which pay a tax measured by the fair average value of their capital stock. No deduction from the total fair average amount of capital so employed is allowed in computing the tax. 3061 Art. 27. Measure of tax. — The measure of the tax is the average amount of capital employed in the transaction of business in the United States during the preceding fiscal year. It will usually be sufficient to determine the amount of capital so employed at the beginning of each year and the amount so employed at the end of such year, and to divide the sum of such amounts by two. Where, however, there have been material changes in the amount of capital, the average amount should be determined with due regard to the times at which such changes occurred. A foreign corporation may, if it so desire, compute the average amount of capital employed on a monthly basis. EXEMPTION FROM TAX. 3062 Art. 28. Corporation not in business during preceding year. — The 3003 tax being payable in advance does not apply to any corporation which was not engaged in business during any part of the fiscal year pre- ceding the year for which the tax is due, but if it was in business even one day of the preceding year and one day of the taxable year it is subject to the tax. There is no relation between the amount of the tax payable and the length of time the corporation was in business. A corporation engaged in business during a part of the preceding year, but not engaged in business at the beginning of the taxable year, is not required to make any return if it is dissolved or in process of dissolution, but if it is only temporarily inactive and subsequently during the year re-engages in business it should file a return in the month in which it recommences business and pay the tax due from the first of such month to the end of the taxable year. A corporation organized and beginning corporate activities on or after July 1 is not subject to tax for the remainder of the taxable period in which the company was organ- ized, unless, as of July 1, it takes over the business of an organization which was subject to capital stock tax, in which event the new corporation is re- quired to file a return and pay the tax. Also see article 32 relative to election to be taxed as a corporation. In the case of foreign corporations "engaged in business" means the transaction of any business within the United States. 3063 Art. 29. Organizations and insurance companies exempt. — The tax does not apply to insurance companies (stock, mutual, domestic, or foreign) nor to corporations the fair value of whose capital stock for the pre- ceding year does not exceed $5,000 nor to any of the following classes of corpo- rations specified in section 231 of the act, viz.: (1) Labor, agricultural, or horticultural organizations. [See Art. 512, Reg. 62, 1fl020 Income Tax Service.] 3064 (2) Mutual savings banks not having a capital stock represented bv shares. [See Art. 513, Reg. 62, 1fl021 Income Tax Service.] Copyright 1922, by The Corporation Trust Company. WAR TAX 619 SERVICE 6-22-22. Reg. 64—1922 Edition. CAPITAL STOCK TAX REGULATIONS. 3065 (3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents. [See Art. 514, Rcr. 62, 1[1022 Income Tax Service.] 3066 (4) Domestic building and loan associations substantially all the bus- iness of which is confined to making loans to members; and co- operative banks without capital stock organized and operated for mutual purposes and without profit. [See Art. 515, Reg. 62, ^1023 Income Tax Service.] 3067 (5) Cemetery . companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for burial purposes as a cemetery corpo- ration and not permitted by. its charter to engage in any business not nec- essarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private stockholder or individual. [See Art. 516, Reg. 62, T[1029 Income Tax Service.] 3068 (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual. [See Art. 517 (1), Reg. 62, ^[1030 and ^[1031, Income Tax Service.] 3069 A corporation organized and operated exclusively for the purpose of maintaining a symphony orchestra and giving musical concerts, the programs being of an educational character, and no part of the net earnings inuring to the benefit of any private stockholder or individual, is organized for "educational purposes." [See Art. 517 (2), (3), Reg. 62, If 1032 and ^1033 Income Tax Service.] 3070 (7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual. [See Art. 518, Reg. 62, ^[1034 Income Tax Service.] 3071 (8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare. [See Art. 519, Reg. 62, U1035 Income Tax Service.] 3072 (9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member. [See Art. 520, Reg. 62, 1fl036 Income Tax Service.] 3073 (10) Farmers* or other mutual hail, cyclone, or fire insurance com- panies, mutual ditch or irrigation companies, mutual or co-operative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses. 3074 It is necessary to exemption of organizations mentioned in the fore- going subsection (other than insurance companies, all of which are exempt) that the income of the company be derived solely from assessments, dues, and fees collected from members. [See Art. 521, Reg. 62, ^ 1037 Income Tax Service.] 3075 (11) Farmers, fruit growers, or like associations, organized and operated as sales agents for the purpose of marketing the products Copyright 1922, by The Corporation Trust Company. WAR TAX 620 SERVICE 6-22-2 Reg. 64 —1922 Edition. CAPITAL STOCK TAX REGULATIONS. of members and tufning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; or organized and operated as purchasing agents for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to such members at actual cost, plus necessarv expenses. [See Art. 522, Reg. 62, <[1038 Income Tax Service.] 307© (12) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title. 3077 (13) Federal land banks and national farm-loan associations as provided in section 26 of the act approved July 17, 1916, entitled "An act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes." 3 078 Joint stock land banks created under the Federal farm loan act of July 17, 1916, are not exempt under this section. 3079 (14) Personal service corporations. This subdivision shall not be in effect after December 31, 1921. 3 080 Personal service corporations so classified under the Revenue Act of 1918 are exempt from capital-stock tax for the taxable period July 1, 1921, to June 30, 1922, but are liable to capital-stock tax the same as other corporations effective July 1, 1922, under the Revenue Act of 1921. 081 Art. 30. Claims for exemption. — It may be stated generally that in all claims for exemption under the act, it is necessary that the claim- ant establish to the satisfaction of the commissioner that it is in practice actually operated in an exempt manner. In those cases falling under para- graphs of the statute requiring that the organization be "organized" or "organized and operated" in the manner specified, it is necessary also that the claimant establish to the satisfaction of the commissioner that it is so organ- ized. The term "organized," as thus used, refers to the real substance and intent of the organization and not its mere form. In determining the real substance and intent of the organization the provisions of the charter and by-laws are not in themselves conclusive, but only prima facie evidence giving rise to presumptions according to their terms. The burden is upon the claimant to overcome these presumptions by extraneous evidence to the satisfaction of the commissioner. 3082 Art. 31. Return by corporation claiming exemption. — As corpora- tions are generally organized to do business every existing company is presumed to be subject to the tax unless satisfactory evidence is submitted showing that it is exempt. Corporations claiming exemption should fill out Form 707 but instead of computing the tax should enter in the space pro- vided for the computation the notation "Exemption claimed." In all such cases the return so filled out must be filed with the collector, together with a comprehensive statement of the reasons for claiming exemption. 3083 If exemption has been allowed for the preceding taxable year and there has been no change in the status or conditions of the company then the first 13 lines of Form 707 should be completed and a state- ment attached to the effect that exemption is claimed for the same reasons Copyright 1922, by The Corporation Trust Company. WAR TAX 621 SERVICE 6-22-22. Reg. 64.— 1922 Editiom. CAPITAL STOCK TAX REGULATIONS. as for the previous year and that the same status and conditions of the com- pany exist for the taxable period in question. In this way the records of the collectors' offices will be complete and corporations will avoid requests for the filing of returns and unnecessary correspondence. The determina- tion of liability rests with the Commissioner of Internal Revenue and with- out complete information it is impossible to make a decision. ELECTION TO BE TAXED AS CORPORATION. [If 1082.] 3084 Art. 32. Election to be taxed as a corporation. — In the event a busi- ness enterprise qualifies under the above provisions and elects to b* taxed under Titles II and III as a corporation, then it is required to file capital stock tax returns and pay the tax for the six months' period, Januarv 1 to June 30, 1921, and the 12 months' period, July 1, 1921, to June 30, 1922. The valuations for the first ment'oned period will be reported as of Decem- ber 31, 1920. The values for the last mentioned period will be reported as pi June 30, 1921. 3085 The clauses of section 1000 of the Revenue Act of 1918, which re- quire that a corporation must have been engaged in business some part of the year preceding the taxable period in order to be liable for the tax, are not applicable to corporations filing returns under the provisions of section 229, of the Revenue Act of 1921. RETURNS PUBLIC RECORDS. 3C86 Art. 33. Inspection of returns. — The returns upon which the tax has been determined by the commissioner, although public records, are in general open to inspection only to the extent authorized by the Presi- dent. All bona fide stockholders of record owning 1 per cent or more of the outstanding stock of any corporation shall, upon making request of the commissioner, be allowed to examine the annual income returns of such corporations and of its subsidiaries, but such privilege of examination is personal and can not by power of attorney be delegated by the stockholder to another. Only such officers of any State as are charged with the enforce- ment of a State income tax law shall have access to the returns of any cor- pora' ion, or to an abstract thereof showing the name and income of the cor- poration, at such times and in such manner as the secretary may prescribe, and then only in case the information is to be used by them in connection with such enforcement. Any stockholder who is allowed to examine the return of any corporation, and who makes known in any manner whatever not provided by law the amount or source of income, profits, losses, expendi- tures, or any particular thereof, set forth or disclosed in any such return, shall be guilty of a misdemeanor and be punished by a fine not exceeding $1,000 or by imprisonment not exceeding one year, or both. See Treasury Decisions 2961, 2962, 3273, and 3277 for full particulars. [See Beginning at 1|2659 Income Tax Service.] 3087 Art. 34. No authority for credit of excess payment of capital stock tax. — Section 252 of the Revenue Act of 1921 provides for a credit against additional income taxes due to previous overpayments of income or excess-profits taxes. The law does not authorize the credit of an excess payment of capital stock tax for a given period against an assessment of Copyright 1922, by The Corporation Trust Company. WAR TAX 622 SERVICE 6-22-22. Rog. 64.— 1922 Edition. CAPITAL STOCK TAX REGULATIONS. the same or other tax for a previous or subsequent period. A claim for abate- ment or refund for the excess assessment should be filed and payment made of the correct tax due for the previous or subsequent period. LAWS MADE APPLICABLE. [118000.] EXAMINATION OF BOOKS AND WITNESSES. [118002.] METHOD OF COLLECTING TAX. [118012.] 3088 Art. 35. Time for payment of tax. — All assessments shall be made by the commissioner. The collector shall within 10 days after re- ceiving any list of taxes from the commissioner give notice to each corpora- tion liable to pay any tax stated therein, to be left at its place of business or to be sent by mail, stating the amount of such tax and demanding payment thereof. If such corporation does not pay the tax within 10 days after the service or the sending by mail of such notice, it shall be the duty of the collector to collect the tax with a penalty of 5 per cent additional upon the amount of the tax and interest at the rate of one per cent a month. See section 3184, Revised Statutes. A collector has no authority to extend the time for payment of the tax, and any extension granted by him will be at his own risk. All taxes are payable direct to the collector of internal revenue of the district in which return is filed. The collector may accept payment of the tax when the return is filed as an "advance collection," subject to any adjustment later found necessary, but no corporation is required to pay the tax until after notice and demand. However, the collection of the tax is facilitated where a corporation transmits with the return a check for the amount of tax due. Tax due from a corporation which has liquidated is legally col'ectible from the stockholders or others who have received its assets. 3089 Art. 36. Abatement and refund of taxes. — Section 3220 of the Re- vised Statutes, as amended by section 1315 of the Revenue Act of 1921, provides [see H8023]. FRAUDULENT RETURNS. 3090 Section 3225 of the Revised Statutes, as amended by section 1323 of the Revenue Act of 1921, provides [see If 8047]. MEDIUM OF PAYMENT OF TAX. — •n~iuT9*i 98iBi toi bfiB rrr u$9H ^?Ium 9Tjxii.B^ iqi ??9iiij>ri3^[ I£ toA gonr 3091 Section 1325 of the act reads as follows [see ^8020]. 3 092 Art. 37. Payment of tax by uncertified checks. — Collectors may ac- cept uncertified checks in payment of taxes, provided such checks are collectible at par — that is, for their full amount, without any deduction for exchange or other charges. The collector will stamp on the face of each check before deposit the words, "This check is in payment of an obligation to the United States and must be paid at par. No protest," with his name and title. The day on which the collector receives the check will be consid- Copyright 1922, by The Corporation Trust Company. WAR TAX 623 SERVICE 6-22-22. Reg. 64.-1922 Edition. CAPITAL STOCK TAX REGULATIONS. ered the date of payment so far as the taxpayer is concerned, unless the check is returned dishonored. If one check is remitted to cover the taxes of two or more corporations, the remittance must be accompanied by a letter of transmittal stating (a) the name of the drawer of the check; (b) the amount of the check; (c) the amount of any cash, money order, or other instrument included in the same remittance; (d) the name of each corporation whose tax is paid by the remittance; (e) the amount of the payment on account of each corporation; and (f) the kind of tax paid. 3093 Art. 38. Procedure with respect to dishonored checks. — If the bank on which any such check is drawn shall refuse to pay it at par, the check shall be returned through the depositary bank and be treated in the same manner as a bad check. All expenses incident to the attempt to collect such a check and the return of it through the depositary bank must be paid by the drawer of the check to the bank on which it is drawn, since no deduc- tion can be made from amounts received in payment of taxes. See section 3210 of the Revised Statutes. Any taxpayer whose check is not paid by the bank on which drawn becomes liable, under the terms of the law, for pay- ment of the tax and for all legal penalties and additions, and the collector shall proceed to collect the same as though no check had been given. A tax- payer who tenders a certified check in payment for taxes is not released from his obligation until the check has been paid. (Act of March 2, 1911, 36 Stat. 965.) PENALTIES. [117693; 1!8014-8016.J 3094 Art. 39. Doing business without payment of tax.— Every corpora- tion which does business without having paid the tax is liable to a penalty of $1,000. A corporation paying the capital stock tax is not on that account exempt from any occupational tax. 3095 Art. 40. Penalty for nonpayment of tax. — (a) Any corporation which fails to pay the tax when due and payable is liable to a penalty of $1,000. If it willfully refuses to pay or willfully attempts to evade the tax, it is liable also to a fine of $10,000 and costs and to a 100 per cent penalty to be added to the tax. See also article 39. (b) Any officer or employee of a corporation who in the course of his duty fails to pay the tax when due and payable is liable to a penalty of $1,000. If he willfully refuses to pay or willfully attempts to evade the tax, he is liable also to a fine of $ 10,000 and costs and to imprisonment for a year, and to a penalty of the amount of the tax unpaid or evaded. 3096 Art. 41. Penalties for failure to make return and for false return. — Any corporation which fails to make a return within the required time is liable to a penalty of $1,000. If it willfully refuses to make a return it is liable also to a fine of $10,000 and costs. 3097 Any officer or employee of a corporation who in the course of his duty fails to make a return within the required time is liable to a penalty of $1,000. If he willfully refuses to make a return he is liable also to a fine of $10,000 and costs and to imprisonment for a year. 3098 In case of failure to file a return on time, a penalty of £5 per cent HBt-lBfof the amount of the tax is added to it unless the return is later Copyright 1922, by The Corporation Trust C ompany. WAR TAX 624 skrvki: 6-22-22. Reg. 64. — 1922 Edition. CAPITAL STOCK TAX REGULATIONS. filed and failure to file it within the prescribed time is satisfactorily shown to the Commissioner to be due to a reasonable cause and not to willful neglect. This penalty is imposed by section 3176 of the Revised Statutes as amended. Two classes of delinquents are liable to this penalty: (a) Those who do not file returns and for whom returns are made by the collector or commissioner; and (b) those who file tardy returns and are unable to show reasonable cause for the delay. A taxpayer who files a tardy return and wishes to avoid the penalty must make an affirmative showing of all the facts alleged as a reason- able cause for failure to file the return on time in the form of an affidavit, which should be attached to the return. If such an affidavit is furnished with the return or upon the collector's demand, the collector, unless other- wise directed by the commissioner, will forward the affidavit with the re- turn, and if the commissioner determines that the delinquency was due to a reasonable cause and not to willful neglect the 25 per cent penalty will not be assessed. If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return in the prescribed time, then the delay is due to "reasonable cause." UNNECESSARY EXAMINATIONS. [118006.] JURISDICTION OF COURTS. [^[8003-8005.] AMENDMENTS TO REVISED STATUTES. [H8060.] COLLECTOR TO REPORT WILLFUL VIOLATIONS. [118061.] POWERS OF REVENUE OFFICERS. [U8062.] PENALTIES FOR UNLAWFUL DISCLOSURES. [1[8063.] CANVASS FOR TAXABLE PERSONS AND OBJECTS. [118064.] RESPONSIBILITIES OF PERSONS LIABLE TO TAX. [1[8065 to 1)8070.] DELINQUENT RETURNS. [118071 to H8074.] FINAL DETERMINATIONS AND ASSESSMENTS. [1f8007.] ADMINISTRATIVE REVIEW. [H8008.] RETROACTIVE REGULATIONS. [IfSOll.] Copyright 1922, by The Corporation Trust Company. WAR TAX 625 SERVICE 6-22-22. Reg. 64.-1922 Edition. CAPITAL STOCK TAX REGULATIONS. TIME FOR REFUND OF CAPITAL STOCK TAX. 3099 Section 3228 of the Revised Statutes is amended by section 1316 of the act to read as follows: All claims for the refunding or crediting of any internal-revenue 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 Com- missioner of Internal Revenue within four years next after payment of such tax, penalty, or sum. 3100 This section, except as modified by section 252, shall apply retro- actively to claims for refund under the Revenue Act of 1916, the Revenue Act of 1917, and the Revenue Act of 1918. 3101 Art. 42. Section 3228, R. S. (refunds), retroactive. — This section is retroactive in its effect. Any claim for the refund of taxes or pen- alties illegally assessed or collected under the Revenue Acts of 1916, 1917, or 1918, regardless of whether or not such claim was barred in whole or in part: at the time of the passage of this act will be considered on its merits if pre- sented within the four-year period specified in the foregoing section. LIMITATONS UPON SUITS AND PROSECUTIONS. [ < U8048- ( tf8055.] ASSESSMENTS. Sec. 1322. That all internal revenue taxes, except as provided in section 250 of this Act, shall, notwithstanding the provisions of section 3182 of the Revised Statutes or any other provision of law, be assessed within four years after such taxes became due, but in the case of fraud with intent to evade tax or willful attempt in any manner to defeat or evade tax, such tax may be assessed at any time. 31 02 Art. 43. Section 1322 R. S. (assessments) retroactive. — This section is retroactive in its effect. Under its terms capital stock taxes may be assessed at any time within a period of four years after such taxes became due, notwithstanding the fact that assessment may have been barred by a prior statute at the time of passage of the Revenue Act of 1921. 3103 The new period of limitation embodied in the section also has the effect of extending for the same period the time within which the 25 per cent and 50 per cent penalties imposed by section 3176 of the Revised Statutes may be assessed. INTEREST ON REFUNDS AND JUDGMENTS. [1I8G36-8037.] AUTHORITY FOR REGULATIONS. [H8009.] REPEALS. M[8076-8077.] 3104 Art. 44. Promulgation of regulations. — In pursuance of the statute the foregoing regulations are hereby made and promulgated and all rulings inconsistent herewith are hereby revoked. D. H. BLAIR, Commissioner of Internal Revenue. Approved June 15, 1922. [Released for publication June 22, 1922.] A. W. MELLON, Secretary of the Treasury. Copyright 1922, by The Corporation Trust Company. WAR TAX 626 SERVICE 1-2-22. (2) 6-22-22. CAPITAL STOCK TAX REGULATIONS. (T. D. 3160.) Decision of the United States Court of Claims. Act of September 8, 1916. Washington Water Power Company vs. United States. (February 14, 1921.) 3105 1. Validity of tax. — The capital stock tax is an excise tax imposed 3000 upon a corporation with respect to the carrying on or doing business by the corporation, which is a proper subject for taxation by the Government, and within its constitutional powers of taxation. 3106 2. Payment in advance. — The capital stock imposed by the Act of September 8, 1916, is not illegal because assessed and collected in advance under regulations of the Treasury Department, the act, by Sections 407 and 409, contemplating that a corporation must pay a tax on its capital stock for the preceding year in order to do business for the coming year. 3106a 3. Action to recover tax paid — Maintenance. — An action to recover a capital stock tax paid in advance, on the ground that advance pay- ment was unauthorized, cannot be maintained where the tax became due and payable under the taxpayer's theory before suit was brought. (T. D. 3160, April 30, 1921.) 2 107 t ot 1|3107 see page 631. Copyright 1922, by The Corporation Trust Company. AVAR TAX 627 SERVICE < < ( € This page and pages C29-630 will remain in blank. WAR TAX 62K SKRVIC'K 6-9-22. CAPITAL STOCK TAX REGULATIONS. {Decision.) Revenue Acts of 1916 and 1918. June 6, 1922. Certain trusts of the Massachusetts type are subject to capital stock tax. UNITED STATES CIRCUIT COURT OF APPEALS FOR THE FIRST CIRCUIT. No. 1551. John F. Malley, formerly Collector of Internal Revenue, Defendant, Plaintiff in Error, v. Arthur L. Howard Et Al., Trustees, Plaintiffs, Defendants in Error. No. 1552. Andrew J. Casey, acting Collector of Internal Revenue, Defendant, Plaintiff in Error, v. Arthur L. Howard Et Al., Trustees, Plaintiffs, Defendants in Error. No. 1553. John F. Malley, formerly Collector of Internal Revenue, Defendant, Plaintiff in Error, v. Alvah Crocker Et Al., Trustees, Plaintiffs, Defendants in Error. No. 1554, John F. Malley, formerly Collector of Internal Revenue, Defendant, Plaintiff in Error. v. Louis Hecht, Jr., Et Al., Trustees, Plaintiffs, Defendants in Error. Error to the District Court of the United States for the District of Massachusetts. 3107 Anderson, J. These cases involve the validity of taxes imposed 3015 upon business organizations, commonly known as Massachusetts Trusts, under the Revenue Acts of 1916 (39 Stat. 789) and 1918 (40 Stat. 1057). Nos. 1551 and 1552 involve the Haymarket Trust and we treat them as one case. The cases were argued as a group and may be con- veniently dealt with in one opinion. 3108 The chief business of the Haymarket and Hecht Trusts is that of owning, managing and leasing real estate, and distributing the net income to its shareholders. These concerns deny that they are associations within the meaning of the statutes. Copyright 1922, by The Corporation Trust Company. , WAR TAX 631 SERVICE 6-9-22. CAPITAL STOCK TAX REGULATIONS. 3109 The Crocker Trust is a large manufacturing concern. It admits that it is an association within the meaning of the statutes, but it claims immunity from the tax on the ground that it has no capital stock within their meaning. 3110 The court below sustained the plaintiff's contentions in each case, and the government brought the cases here on writs of error. 3111 The fundamental question is whether the plaintiffs are associations having a capital stock represented by shares, within the meaning of these provisions. So far as the issues in these cases are concerned, the pro- visions of the two statutes seem to us to be equivalent, for there is now presented no controverted question as to the amount of any tax; we therefore need not consider the different amounts exempt under the two statutes or the retroactive and substitutional effect of the 1918 statute. 3112 The Act of 1916 levies a tax on associations "now or hereafter organized in the United States for profit and having a capital stock represented by shares . . . with respect to the carrying on or doing business by such association . . . equivalent to 50 cents for each $1,000 of the fair value of its capital stock, and in estimating the value of capital stock the surplus and undivided profits shall be included. . . . The amount of such annual tax shall in all cases be computed on the basis of the fair average value of the capital stock for the preceding year," — with an exemption not now material. 3113 The Act of 1918, section 1, includes associations under the term "corporation"; and in section 1000 (a) provides for an annual "special excise tax with respect to carrying on or doing business equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year" etc. "In estimating the value of capital stock the surplus and undivided profits shall be included." 3114 Both acts are conceded to levy an excise tax with respect to doing business, the amount of the tax being measured by the average value of the capital stock, including any surplus and undivided profits as a part thereof. All the plaintiffs agree that they are doing business within the mean- ing of these acts. 3115 While we recognize that in applying this and every other tax statute reasonable doubts must be resolved in favor of the taxpayer (Gould v. Gould, 245 U. S. 151) yet revenue acts are not penal statutes; the Govern- ment is not to be crippled by strained and unnatural construction of tax statutes fairly plain. Cliquofs Champagne, 3 Wall. 114, 145. United States v. Hodson, 10 Wall. 395. Worth Brothers v. Lederer, 251 U. S. 507. 31 16 Taxation of this general kind began with the passage of the Act of August 5, 1909 (36 Stat. 11, 112), which imposed a tax "on even corporation, joint-stock company or association organized for profit and having a capital stock represented by shares . . . now or Hereafter organized under the laws of the U nited States or of any state or territory with respect to the carrying on or doing business by such cor- poration, joint-stock company or association . . . equivalent to one per cent upon the entire net income over and above $5,000," etc. 3117 This statute, passed before we had the 16th amendment, was attacked as an income tax and therefore unconstitutional. But the Supreme Court held that it was not an income tax, and sustained it as an excise tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 632 TERVICE G-9-22. CAPITAL STOCK TAX REGULATIONS. Flint v. Stone Tracy Co. (1911), 220 U. S. 107. It was measured by the income, — not as under the present law, on the capital used. 3118 In Eliot v. Freeman, 220 U. S. 178, the court at the same time held the Act of 1909 not to cover two typical Massachusetts real estate trusts, on the ground that, "The language of the act, 'now or hereafter or- ganized under the laws of the United States, 3 etc., imports an organization deriving power from statutory enactment." Organized as purely non-statutory, they were exempt. 3119 The gist of the present case is whether the statutes of 1916 and 1918 are, as the plaintiffs contend, to be given the same interpretation in favor of exempting such organizations as was given by the Supreme Court to the Act of 1909. 3120 The government, on the other hand, contends that the language of the acts is plainly applicable to such organizations ; that the history of the legislation shows that Congress intended to avoid the result reached in Eliot v. Freeman, supra, and that there are no applicable decisions of the courts supporting the plaintiffs' position. We think the government is right, and that the court below erred in holding that such organizations are not associa- tions within the meaning of these Revenue Acts. 3121 The language of the statutes, supra, seems so plain that repetition and paraphrasing would add nothing. 31 22 The history of the legislation lends emphasis to the initial impression of its import. For it is elementary, that when language used in an earlier statute has in application received judicial construction, change in language in later analogous legislation imports legislative purpose to attain a different result. If Congress had intended the acts in question to have the restricted application given by the Supreme Court to the Act of 1909, there was no conceivable reason for changing the words ''''organized under the laws of the United States or of any state " etc., etc., to "organized in the United States." 3 1 23 We think it plain that by this change Congress intended in the later acts to include non-statutory organizations, and to avoid the re- strictions found by the Supreme Court in the words of the 1909 act. We cannot accord with the learned District Judge in his view that "it is hard to discover any substantial distinction between the scope of" the Act of 1909 and the Acts of 1916 and 1918 "as far as 'associations' are concerned." We think there is a vital and controlling distinction. 3124 Eliot v. Freeman was decided in 1911. In 1913 an income tax act was passed (38 Stat. 114, 166), imposing such tax "on every corpo- ration, joint-stock company, or association, and every insurance company organized in the United States, no matter how created or organized, not including partnerships." The original case of Crocker v. Malley, 249 U. S. 223, the plaintiffs' chief reliance, arose under this statute. Sitting as District Court, Judge Bingham, in July, 1917, held the Wachusett Realty Company, the predecessor of the present Crocker Association, a trust, according in that regard with Judge Hale in a decision made on May 23, 1914, in the case of Crocker v. Crocker. 3125 But in this court (250 Fed. 817) the organization was held an asso- ciation within the meaning of the statute. The Supreme Court reversed this court, adopting the view of the District Court. The decisions, both in the Supreme and District Courts, against the government, turned upon the fact that the shareholders had no real control over the trust estate; Copyright 1922, by The Corporation Trust Company. WAR TAX 633 SERVICE 6-9-22. CAPITAL STOCK TAX REGULATIONS. so that it therefore fell within the doctrine of Williams v. Milton, 215 Mass. 1 from the opinion in which Mr. Justice Holmes quoted (249 U. S. 232) as follows : "There can be little doubt that in Massachusetts this arrangement would be held to create a trust and nothing more. 'The certificate holders are in no way associated together, nor is there any provision in the [instrument] for any meeting to be held by them. The only act which (under the [declar- ation of] trust) they can do is to consent to an alteration ... of the trust' and to the other matters that we have mentioned. They are confined to giving or withholding assent, and the giving or withholding it 'is not to be had in a meeting, but is to be given by them individually.' 'The sole right of the cestuis que trust is to have the property administered in their interest by the trustees, who are the masters, to receive income while the trust lasts, and their share of the corpus when the trust comes to an end'." 3126 The trustees of the Wachusett concern held title, subject to a long lease, to eight mills, and to the stock of the corporation operating these mills, and distributed the net income to the eight beneficiaries of the trust. The trustees were not managing the mills; the organization was not a business enterprise within the normal use of that term. The beneficiaries were "admitted not to be partners in any sense . . . have no joint action or interest and no control over the fund." 249 U. S. 234. The court, in referring to the phrase in the statute "no matter how created or organized," says: "The trust that has been described would not fall under any familiar con- ception of a joint-stock association, zahether formed under a statute or not." ' Citing Smith v. Anderson, 15 Ch. Div. 247, 273, 277, 282. 3127 Moreover, the tax then sought to be sustained was levied, at least in substantial part, in respect of dividends received from a corporation that itself was taxable upon its net income. The court therefore held that "as the plaintiffs undeniably are trustees, if they are subjected to a double liability the language of the statute must make the intention clear. Gould v. Gould, 245 U. S. 151, 153." 3128 It is thus apparent that the Wachusett Realty Company was in organization and purpose but an ordinary inter vivos trust for eight beneficiaries; also that the tax sought to be imposed would have resulted in double taxation, never easily inferred. It was in nature, and in relations to its shareholders and to society at large, radically different from the plaintiff's organizations, described below. That decision lends no support to the plaintiffs' contention. 3129 Next in chronological order was the stamp tax provision of the Act of October 22, 1914 (38 Stat. 745, 775). This act imposed a stamp tax on "each original issue ... of certificates of stock by any association, company or corporation." This court in Malley v. Bouditch, 259 Fed. 809, held such tax applicable on the original issue of certificates or shares of the Pepperell Manufacturing Company "a manufacturing company organized in the form of a trust under the common law, and deriving none of its rights, qualities or benefits from any statute." The crucial question in t hat case, as in the case at bar, was whether the organization was an association within the meaning of the Federal Tax Act. The case is, in essentials, diffi- cult, if not impossible, to distinguish from the cases at bar. The cogent opinion of Judge Brown is applicable to most aspects of the present problem. It might well be quoted from at length. Copyright 1922, by The Corporation Trust Company. WAR TAX 634 SERVICE 6-9-22. CAPITAL STOCK TAX REGULATIONS. 3130 The Revenue Acts of 1916 and 1918, supra, both in their income and excise tax provisions, adopt the same broad phrasing as to joint stock companies or associations "organized in the United States," thus showing a continuing legislative purpose to avoid the limitation found by the Supreme Court in Eliot v. Freeman, supra, arising out of the language u organized under the laws of the United States or of any state" etc. 3131 Plainly, there is nothing in this history of legislative and judicial dealing with the matter, lending support to plaintiffs' contention that Congress intended to exempt such business organizations as the plaintiffs. Rather does the history support the natural construction of the acts in question. 3132 We find nothing else in the history of the legislation concerning this and analogous forms of taxes, nor in other cases cited, tending to uphold the plaintiffs' contentions or otherwise calling for analysis and discussion. 3133 A brief description of the three plaintiffs' organizations will con- veniently precede our final considerations. We take first the Hecht case, agreeing with learned counsel that it is the strongest case for the plain- tiff. 3134 On superficial examination, this organization' looks somewhat like a family affair, making provision for members of the Hecht family, immature or otherwise unfitted for business responsibilities. But, on analysis, we find the organization is a very genuine business concern. 3135 In 1899, members of the Hecht family holding as tenants in common real estate on Federal Street and Atlantic Avenue, Boston, conveyed it to Jacob Hecht, who declared a trust for twelve beneficiaries all named Hecht, who received certificates transferable likejordinary corporation shares, but with a restriction in favor of lineal descendants of Elias Hecht, and, on certain contingencies not now important, to be offered to the trustee before sold to an outsider. The restriction is analogous to the close-corporation provision dealt with in New England Trust Co. v. Abbott, 162 Mass. 148. It is in no way peculiar to a trust as distinguished from a corporation. While the Hecht trustee has broad general powers of management, including power to buy and sell, the seat of real power is with the shareholders and not with the trustee; for three-fourths of the shareholders may remove the trustee, three-fifths may terminate the trust or give him binding instructions, and also, — what is of vital importance, — modify the instrument in any particular. This power to modify covers, potentially, the right to extend or change the business so as to make it as large and as corporate in form and function as the Crocker concern, which admits that it has evolved into an association. The Hecht organization is not a trust within the doctrine of the Massachusetts decisions. Williams v. Milton, 215 Mass. 1. Compare Crocker v. M alley, 249 U. S. 223; In re Associated Trust, 222 Fed. 1012. The Hecht trustee has made annual statements showing the assets, liabilities and net income, and kept books, containing a capital account and surplus account. Its stock- holders have, sensibly and we think legally, treated their dividends like cor- poration dividends, in their income tax returns. They have thus by conduct, presumably under the advice of counsel, denied that they are partners taxable under the Act of 1918, sec. 218 (a). 3136 Parenthetically, we note that counsel do not contend that the share- holders of any of these plaintiff associations are partners. There is no suggestion that any of the shareholders in any of the plaintiff organizations have made, propose to make, or could make, tax returns as partners in these Copyright 1922, by The Corporation Trust Company. WAR TAX 635 SERVICE fi-9-22. CAPITAL STOCK TAX REGULATIONS. business concerns. Manifestly, counsel would deprecate such result as im- posing burdens probably much heavier, — certainly difficult if not impossible of ascertainment, — upon the shareholders in such organizations. Their quest is tax exemption, not tax substitution. Compare Dana v. Treasurer, 227 Mass. 562, 565; Frost v. Thompson, 219 Mass. 360. 3137 Plainly the Hecht Trust is quasi-corporate in form and power. It is an association within the meaning of the Revenue Acts. 3 1 38 The Haymarket Trust, both in genesis and organization, is even more like a corporation. It has none of the aspects of a family affair. It started by securing from the investing public $250,000 on solicited subscrip- tions, the trustee paying a commission of $2,500 to the promoter for thus raising the capital for doing business. The declaration of trust provides for nearly all the machinery and proceedings of an ordinary corporation. We hold it also to be quasi-corporate and an association within the meaning of the Revenue Acts. 3139 Learned counsel in the Croker case admit that it is an association, but claim exemption on the ground that the concern has no capital stock. This association was evolved from the Wachusett Realty Trust, above referred to. As there pointed out, the shareholders had under the Wachusett declaration no power to amend without the assent of the trustees. But in June, 1917, shareholders and trustees both agreeing, the organization was radically altered. Its name was changed and in express terms it agreed that its form should thereafter be "changed to that of an association," with power to take over and carry on the extensive manufacturing business pre- viously carried on by the corporation whose stock it had held, or any sub- stantially similar business. 3140 The new organization conforms closely to the corporation model, — in powers, in official personnel, and in methods of doing business. It lias issued 96,000 shares of no par value, transferable like corporation stock, but with a restriction somewhat like that in the case of New England Trust Co. v, Abbott, supra. 3141 Conceding that it is an association with transferable shares, this plaintiff yet seeks exemption on the ground that it has attached no par value to its 96,000 shares. It admits that if it had attached a par value of, say, $100 to each of these shares, making a capital account of $9,600,000, a little less than is shown on its balance sheet of July 1, 1917, where the interest of the shareholders is put down as $9,877,105.16, — the concern would have had a capital stock represented by shares, and thus be an association within the meaning of the Revenue Acts above. 3142 We cannot adopt this scholastic and artificial distinction. Cf. Worth Bros. v. Lederer, 251 U. S. 507, 510. It is for present purposes immaterial whether the stock of a corporation, of an association, or a joint* stock company has or has not par value. Compare Gen. Laws of Mass. chap. 156, sees. 14, 15, 47. Stockholders, whether a definite value is or is not attributed to their shares, severally or in mass, own beneficially the net value of the corporation's assets, — that is, whatever may remain after dis- charging debts. See Hood Rubber Co. v. Commonwealth, 238 Mass. 369,371. Cook — "Stock Without Par Value," Am. Bar Ass'n Journal, October, 1921. Hollcn and Tuthill "Stock Having No Par Value," Aim. Bar Ass'n Journal, November, 1921, p. 578. Copyright 1922, by The Corporation Trust Company. WAR TAX 636 SERVICE 6-9-22. CAPITAL STOCK TAX REGULATIONS. Colton "Par Value v. No Par Value Stock," Am. Bar Ass'n Journal, December, 1921, p. 671. Compare also Eisner v. Macomber, 252 U. S. 189, 209 et seq. 3143 Congress intended that this tax should be measured by the average amount of capital used during the tax year in doing the business. The phrase in the statutes as to "including surplus and undivided profit s" puts beyond doubt the question of the Congressional intent to measure this tax by business and financial realities, not by book-keeping forms or mere names. "Fair value" and "fair average value" carry the same notion. Cf. Wright v. Georgia R. R. et aL, 216 U. S. 420, 424. 3144 The Croker Association cannot escape taxation, falling on its com- petitors, by adopting the modern theory of no par value for its stock. The presumption is against such immunity; it savors of special privilege. Compare United States v. Dickson, 15 Pet. 141, 165. 3145 It is a matter of common knowledge that, for most business and financial purposes, all the larger organizations of this sort have for years been indistinguishable from corporations. One might almost say that they are a device under which parties make their own corporation code. Business concerns so organized have come to occupy a large field in industry and in finance. At least two substantial text-books have been written on the law concerning such organizations and dealing with their advantages for general business purposes. See Sears, Trust Estates as Business Companies, 1st Ed. 1912, 2d Ed. 1921. Note the long list of industries so organized referred to on pages VI and VII of the preface of the 1921 edition. Sec Wrightington on Unincorporated Associations, 1916. In Dana v. Treasurer, 227 Mass. 562, 565, it appears that the Amoskeag Manufacturing Company, commonly known to be one of the largest enterprises in New England, is so organized. The Pepperell Manufacturing Company, before this court in Malley v. Bowditch, supra, had a capitalization of over $7,500,000; the Crocker Trust operates large paper manufacturing mills, employing about 1,000 men, with gross assets of over $10,000,000. 3146 Such concerns have long been recognized as quasi-corporate in form. In 1904, Chief Justice Knowlton in the Massachusetts Supreme Court said of a typical one of them, in Hussey v. Arnold, 185 Mass. 202: "The agreement creating the trust has peculiar provisions. The object of it, apparently, was to obtain for the associates most of the advantages belonging to corporations, without the authority of any legislative act, and with freedom from the restrictions and regulations imposed by law upon corporations ." 3147 No amplification of words could more accurately and adequately char- acterize this sort of business organization. Other cases in the Mass- achusetts reports concerning them abound in similar observations as to their resemblance to corporations. Williams v. Milton, 215 Mass. 1, and cases cited. See Williams v. Boston, 208 Mass. 497; Phillips v. Blatchford, 137 Mass. 510, 515; Tyrrell v. V/ashburn, 6 Allen, 466, 474. 3148 But the prosposition that they are quasi-corporate in form need not rest merely on our own analysis or on observations found in the decisions of the Massachusetts courts. It has now been distinctly recognized by the Massachusetts legislature; they have a statutory status as associations, not as trusts or as partnerships. 3149 In the decision below, these organizations have been treated as having no status not arising out of the common law; so also in the briefs of the government and of counsel for the defendant. It seems to have been overlooked that they have acquired in Massachusetts a distinct statutory Copyright 1922, by The Corporation Trust Company. WAR TAX 637 SERVICE 6-9-22. CAPITAL STOCK TAX REGULATIONS. basis. This, if the question before us were otherwise doubtful, would seem to us of much significance. See General Laws of Mass. (1921), c. 182, codifying earlier legislation of 1909, 1913, 1914, 1915. and 1916. Compare also Acts of 1921, c. 368. The title of this chapter is "Voluntary Asso- ciations." 3150 In section 1 of this act, dealing with definitions, it is provided: " 'Association,' a voluntary association under a written instrument or a declaration of trust, the beneficial interest under which is divided into transferable certificates of participation or shares." This definition exactly fits the plaintiffs at bar. 3151 In section 2, it is provided that the written instrument or declaration creating the association shall be filed with the Commissioner of Corpo- rations, and with the clerk of every town where such association has a usual place of business. Section 5 requires the Commissioner to transmit to the Secretary of State copies of such instruments or of any amendments filed during the previous year, to be printed as a public document. The in- struments creating such associations are thus made even more generally accessible than are ordinary corporation charters. 3152 Sections 3 and 4 and 7 to 11 deal specially with associations owning stock of public utility companies; they need no present comment. 3152 Section 6, — a re-enactment of the Act of 1916, c. 184, passed sub- sequent to all the Massachusetts decisions cited and relied upon by the plaintiffs, — has probably the most direct bearing on our present problem; it is as follows: "An association may be sued in an action at law for debts and other obligations or liabilities contracted or incurred by the trustees, or by the duly authorized agents of such trustees, or by any duly authorized officer of the association, in performance of their respective duties under such written instruments or declarations of trust, and for any damages to persons or property resulting from the negligence of such trustees, agents or officers acting in the performance of their respective duties, and its property shall be subject to attachment and execution in like manner as if it were a corporation, and service of process upon one of the trustees shall be sufficient." 3154 Here is a distinct enactment that such associations shall be suable in like manner as if corporations. An organization described as an association and made generally liable "to attachment and execution in like manner as if it were a corporation" cannot easily be held a partnership or a trust. 3155 We are not called upon to deal with the confusing and perhaps irreconcilable decisions in the Massachusetts courts concerning the nature and legal incidents of these associations, most of which were made before the passage of this Act of 1916, or with the effect of this legislation upon their powers and liabilities, — except so far as pertains to our single problem of determining whether these associations are liable to Federal tax- ation under the Revenue Acts, supra. We intimate no opinion on any other question. But when a Massachusetts statute has described such organiza- tions as associations, and has put their liability to ordinary creditors appar- ently on the same basis as that of corporations, we have no hesitation in reaching the conclusion that they have now been given a statutory basis as quasi-corporate, and that they are associations within the meaning of the Federal Statutes, as well as under the Massachusetts Statutes. \\ c cannot hold Massachusetts associations, liable under Massachusetts Statutes to ordinary creditors as though corporations, not liable under Federal Statutes Copyright 1922, by The Corporation Trust Company. WAR TAX 638 SERVICE 6-9-22. (2) 6-16-22. CAPITAL STOCK TAX REGULATIONS. to taxation imposed generally on corporations, joint-stock companies and associations. 3156 It may be argued that these statutes are distinguished from corpora- tion acts in that their chief functions are to regulate or restrict, whereas corporation acts also empower. Technically, that may be so. But the powers of these voluntary associations are in many respects greater, and the regulations and restrictions less, than in the case of corporations. Broadly speaking, their promoters select and define such powers and provide such limitations of liability, as they desire. Cf. Hussey v. Arnold, supra. If and in so far, therefore, as the tax in question is directed at "the privilege" or power of doing business through large organizations, — and particularly at the power to obtain money from the outside public on transferable shares, — voluntary association offers at least as much "privilege" as does any cor- poration form of organization. Associations are resorted to, not because thought weaker, but because thought stronger, than corporations. 3157 If, in construing the statutes, we may look at the policy Congress probably desired to adopt, it could not be overlooked that the plaintiffs' contention, if sustained, would amount to a discriminatory im- munity in favor of a kind of business organization, the nature and activities of which have hitherto been the subject of much question and investigation. See the Report of the Tax Commissioner of Massachusetts on Voluntary Associations, under Resolves of 1911, c. 55, — a very interesting document, — in which Commissioner Trefry ably reviewed their origin, history and legal incidents, both in England and in this country; referring, passim, and par- ticularly on page 13, to many other documents and legislative reports con- cerning them. See also a report of the Special Commission to Investigate Voluntary Associations, January, 1914, made under Mass. Resolves of 1912, c. 113. In the Resolve of 1911, c. 55, the Commissioner was required to make an investigation "with a view to determine" inter alia, "whether their prohibition is advisable in the public interest. 19 3158 There is, we think, no conceivable reason why Congress should have desired to favor organizations of this questioned sort by exempting them from taxation to which their competitors in corporate form are subjected. The presumption is plainly the other way. Modern corporation laws furnish adequate machinery for carrying on every legitimate form of business, includ- ing now that of dealing in real estate. See Gen. Laws of Mass. chap. 156, passim; sec. 7, authorizing real estate corporations. There is no present reason for resorting to this form of organization, except on the theory that more "privileges of doing business" may be thus acquired than by conform- ing to our broad and elastic corporation laws. To hold that Congress in- tended to discriminate in their favor would be to disregard^the letter, the spirit and the reason of the acts. 3159 Our views accord with those expressed by Judge Page in Chicago Title & Trust Co. v. Smietanka, 275 Fed. 60. The reasoning of Judge Morton in the Associated Trust case, 222 Fed. 1012, where he reached the conclusion that such an association was an "unincorporated company" within the meaning of the Bankruptcy Act, seems to us to sustain our con- clusions rather than those reached by the learned Judge in the instant cases. 3160 We summarize our conclusions as follows: (1) The natural interpretation of the language used in the Acts of 1916 and 1918 would include plaintiffs' organizations as associations. (2) The contrast between the language used in the Act of 1909 "organized Copyright 1922, by, The Corporation Trust Company, WAR. TAX 639 SERVICE 6-9-22. (2) 6-16-22. CAPITAL STOCK TAX REGULATIONS. under the laws of the United States or any State"; etc., and in the Act of 1916 and 1918 "organized in the United States," shows that Congress intended to avoid the result reached in 1911 by the Supreme Court in Eliot v. Freeman. (3) The manifest general purpose of Congress was to tax business deriving powers and making profits from association, particularly business done by organizations getting all or a substantial part of their capital on transferable shares, such as are commonly sold to the investing public. (4) Prior to the passage of either the Revenue Act of 1916 or 1918, the Massachusetts Legislature had by the Acts of 1909 and 1914 expressly recognized such organizations as associations. Congress used the word "association" as the Massachusetts Legislature had previously defined and used it. (5) By the Act of 1916, the Massachusetts Legislature made such asso- ciations liable to creditors in like manner as if corporations; by analogy they have similar liability to the Federal Government for taxes. (6) The case of M alley v. Crocker, 249 U. S. 223, makes, on analysis of the Wachusett Trust and the reasoning of the court, not for the plaintiffs but for the government. One ground of that decision was to avoid unjust, discriminatory, double taxation; whereas, to sustain the plaintiffs' contention, would create discriminatory immunity for a large class of business organiza- tions, thus giving them an unfair advantage over their incorporated com- petitors. (7) The conclusion now reached accords with the reasoning and decision of this court in M alley v. Bowditch, 259 Fed. 809. In each case the judgment of the District Court is reversed and the case is remanded to that court for further proceedings not inconsistent with this opinion] the plaintiff in error recovers costs in this court. (Decision) Revenue Act of 1916. Equally applicable to 1918 and 1921 Acts. May 25, 1922. As the measure of the tax the fair average value of the capital stock of a corporation is the equivalent of the fair average value of the enterprise in its entirety as a going concern. District Court of the United States, for the Southern District of New York Central Union Trust Company of New York, Plaintiff, vs. Wm. H. Edwards, Collector of Internal Revenue for thd 83 f 5 Second District of New York, Defendant. Memorandum Opinion. 3161 Grubb, J. — -This case presents for decision of meaning of the words 3001 "capital stock," used in Section 407 Title 1Y Excise lax Act of 3034 September 8, 1916. The Plaintiff contends that the true meaning of the words is the paid in capital, together with surplus and mi- divided profits, less liabilities; or the net value of the capital assets of the corporation, after deducting its debts. The Collector applied a different Copyright 1922, by The Corporation Trust Company. WAR TAX 640 SERVICE 6-16-22. CAPITAL STOCK TAX REGULATIONS. method of reaching the value of the "capital stock" of the plaintiff corpora- tion, and one which increased the amount of the tax due over that which would have been due according to the method contended for by the Plaintiff. If the method contended for by the Plaintiff is not a correct one, the Plaintiff offers no criticism of that actually adopted by the Collector; so that the single question presented is whether the method, for which the Plaintiff contends is the only proper one under the statute. 3162 The method, which the Plaintiff says should have been adopted by the Collector in measuring the tax, takes into consideration only the net worth of the tangible assets of the corporation, and does not take into consideration such elements as franchises, good-will, existing contracts, and established business. The tax imposed by the statute is not a property tax. It is an excise tax imposed upon the privilege of doing business in corporate form, as a going concern. The value of this privilege is the obvious way to measure the tax. The value of the business of a going concern depends upon its good-will, favorable contracts, amount of business done and its profitable character; as well as upon the value of its tangible property less its debts. It would seem wrong to eliminate these factors of value, if the tax is to be measured by the value of the enterprise as a going concern. They enter into the market value of the share stock, and are represented in the earning capacity of the corporation. It would therefore seem to be competent for the Collector to consider, in estimating the value of "capital stock," in addition to the net worth of the corporation, as shown by its books, such elements of intangible value as good will, favorable contracts, amount and character as to profits of the business done, and also past earnings and the market value of the stock. The method insisted upon by the Plaintiff as being the only correct one, would eliminate all these factors from the com- putation, and base it exclusively upon the paid in capital, together with surplus and undivided profits. The character of the tax and the subject matter of its imposition seem to me to forbid such an exclusion unless it is made necessary by the language of the statute itself. 31 S3 If the words "capital stock" had but one meaning, viz: — the money paid and property contributed to the corporation by its shareholders, the Plaintiff's contention that by the unambiguous terms of the statute, only paid in capital together with surplus and undivided profits could be con- sidered in the measurement of the value upon which the tax is estimated, would be correct. The words "capital stock" have been so construed by some authorities, when employed in statutes imposing taxes. It is also true that they have by other courts been construed to have a different and broader meaning, when used in acts of the same character. The conclusion to be drawn from the authorities would seem to be that the signification to be accorded these words is to be determined in each such act, by the character of the particular act under construction and by the language used and by the context. They may mean either net worth, as shown by the books, i. e., the value of the tangible corporate assets, less liabilities; or they may mean the value of the entire enterprise as a going concern, including franchises, good-will, etc., as represented by the excess value of the market price of the share stock over and above its book value. In each act, the meaning of the words is to be ascertained by reference to the language used and to the pur- pose of the act containing them. 3 1 64 The act in question provides for the annual payment of "a special excise tax with respect to the carrying on or doing business by such corpora- tion, equivalent to fifty cents for each one thousand dollars of the fair value Copyright 1922, by The Corporation Trust Company. WAR TAX 641 SERVICE 6-16-22. CAPITAL STOCK TAX REGULATIONS. of its capital stock and in estimating the value of its capital stock the surplus and undivided property shall be included. . . . the amount of such annual tax shall in all cases be computed on the basis of the fair average value of the capital stock for the preceding year." The words employed in- dicate rather an appraisal of the value of the "capital stock" arrived at by considering various factors of value, by the exercise of judgment; than an auditor's exact determination of the value of the net worth of tangible assets, taken from the corporate books of account. If the value of good-will and franchises, earnings and market value of shares, are eliminated as factors of value, then the computation of value would in no sense be an estimation; the value would be the exact value rather than the fair value; and it would have been made determinable as of the end of a fiscal year, rather than by "the fair average value of the capital stock for the preceding year." 3165 The act provides that "in estimating the value of capital stock the surplus and undivided profits shall be included." Plaintiff contends that these words restrict the computation to the par value of the capital stock, plus surplus and undivided profits. I think the purpose of the insertion of these words was to make certain that these two factors should be considered, but not to eliminate other factors equally as important. If the purpose was to so narrow the elements to be considered, there was apt language to accom- plish this purpose in previous congressional legislation. Act of Congress, October 22, 1914 — Section 3. 3166 The language and context seem more favorable to the defendant's interpretation than to that of the Plaintiff, since they imply an estimation to be based on judgment exercised, rather than the mere com- putation of an accountant. 3167 The legislative discussion of the Act upon the floor of the House of Representatives and the statements of the Chairman of the Com- mittee in charge of the Bill, are persuasive that the Defendant's construction, was that which was in the minds of the legislators. Congressional Record- House of Representatives, September 7, 1916, 64th Congress — First Session, Vol. 53, part 13, page 14,118. 3168 After the Act of September 8, 1916, had received from the Com- missioner of Internal Revenue, the construction new contended for by the Defendant, Congress enacted the Revenue Act of 1918, containing Section 1000-a, in the same language as of Section 407 of the Act of September 8, 1916, except that the rate was doubled and the deduction lowered. The Senate had amended the House bill, so as to make the basis of the tax the amount of the net assets shown on the books as of the close of the preceding income tax year. This amendment was rejected by the House, and the Senate receded from it in conference. This is persuasive that the words "fair average value of the capital stock" were not thought by that Congress to be synonymous with the net worth of physical assets as shown by the corporate books. 3169 For the reasons stated, I do not think the construction advanced by the Plaintiff is a correct one. I believe the Collector was confronted with the proposition of determining the value of the corporation's business and property as an entirety and as a going concern, and in doing so had the right to look to the net worth of the corporate assets, including its surplus and undivided profits, as shown by its books; also to the franchises, good-will, outstanding contracts, the earning capacity of the corporation and the market value of its share stock over the preceding year, and, after having done so, Cvpyrigltt 1922, by The Corporation Trust Lompany. WAR? TAX 642 SERVICE 7-7-22. (2) 7-1S-22. CAPITAL STOCK TAX REGULATIONS. was authorized to arrive at a value for its entire capital stock, representing the enterprise as a going concern, according to his best judgment; and that the value, so ascertained, would be the "fair average value of the capital stock for the preceding year," by which the tax by the terms of the statute is to be measured. This the Collector did, and this conclusion requires the direction of a verdict in favor of the Defendant, and it is so ordered. (T. I). 3359.) 31 70 [ This Treasury Decision consists of a reprint oi the opinion in Central 3161 Union Trust Company vs. Edwards, Collector, which is reproduced in full beginning at ^[3161. — The Corporation Trust Company.] (T. D. 3361.) 3171 [Regulations 64 (1922 Edition), Capital Stock Tax, are further 3005 designated as T. D. 3361. --The Corporation Trust Company.] fT. D. 3368.) 3 172 [This Treasury Decision consists of a reprint of the opinion in fytalley 3107 vs. Howard, etc., w hich is reproduced in full beginning at * 3107. The Corporation Trusl Company.] Copyright 1922, by The Corporation Truft Company. WAR TAX 643 SERVICE r 7-18-22. CAPITAL STOCK TAX. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Capital Stock Tax Law Provisions. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph 1921 Law Provisions 3000 Reg. 64 Regulations under 1921 law (1922 Edition. Approved June 15, 1922. See exhaustive Table of Contents begin- ning on page 609.) 3005 Decision Washington VVater Power Co. vs. U. S. Court of Claims decision, 1916 Act. Validity of Tax; payment in advance. (February 14, 1921.) 3105 Decision Malley vs. Howard et al., Trustees. C. C. of A., First Circuit. Certain trusts of the Massachusetts type are liable to tax. (June 6, 1922.) 3107 Decision Central Union Trust Co. vs. Edwards, U. S. D. C, Southern District of New York. As the measure of the tax the fair average value of the capital stock of a corporation is the equivalent of the fair average value of the enterprise in its entirety as a going concern (May 25, 1922) 3161 3359 Treasury Decision designation for the Central Union Trust Co. vs. Edwards opinion, ^"3 161 herein. (June 23, 1922.) 3170 3361 Treasury Decision designation for Regulations 64 (1922 Edition) beginning on page 609 3171 3368 Treasury Decision designation for the Malley vs. Howard, etc., opinion, ^[3 107 herein. (July 12, 1922) 3172 The matters listed above are indexed. Insert this sheet immediately before the blue Capital Stock Tax Index. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Capital Stock Tax Supplementary Pag« I. 1 6-23-22. CAPITAL STOCK TAX INDEX. The references are to paragraph numbers. Abatement of tax. . 3089 Absence: cause for extension of time. .3052 Affiliated corporations. . 3049 Agent of foreign corporations in U. S.. .3056 Agricultural organizations. .3063 Alien property custodian; corporations whose property is in hands of. . Assessment of tax. .3088 Associations as corporations; defined. .3008 Banks: partnership vs. association. .3011 Boards of trade. .3070 Book value of stock does not control. . 3039 Building and loan associations: domestic. .3066 "Business" defined. .3015 "Doing business" by domestic corporations, illustrated. . 3020 "Doing business" by foreign corporations, illustrated. .3056 Means any business transacted in U. S.. .3062 Business leagues. .3070 California special partnerships. .3010 Capital employed in U. S. by foreign corporations. .3057 Averaging. . 3061 Illustrated. .3058 Capital invested outside U. S. by domestic corporations. . 3038 Capital not employed in business. .3038 Capital stock: determining fair average value. .3039, 3161 Outstanding at date of incidence of tax. . 3037 Capitalizing earnings to determine value of stock. .3044, 3161 Carrying on or doing business: domestic corporations. .3015 Illustrated. . 3020 Carrying on or doing business in U. S.: foreign corporations. . 3055. 3057 Ceasing business after July 1. .3006 Cemetery companies. .3067 Central Union Trust Co. of N. Y, vs. Edwards . 3161 Chambers of commerce. . 3070 Charitable organizations. .3068 Checks, uncertified: in payment of tax. .3092 Civic organizations. .3071 Claims for refund or abatement of tax ; 3089, 3099 Clubs. .3072 Collector may make return. . 3052 List of collectors of Internal Revenue (see page 1711) Commencing business after July 1. .3037, 3062 Commissioner may make return. .3052 Consolidated returns by affiliated corporations. . 3049 Construction of plant constitutes doing business. .3021 Contracts; making, constitutes doing business. .3021 Cooperative banks without capital stock. . 3066 Corporation defined. . 3007 Domestic. .3013 Exempt. . 3063 Foreign. .3014 Credit for former tax. .3087 Deduction of $5,000. .3036, 3048, 3063, 3082 None in case of foreign corporations. . 3060 Dishonored checks: procedure. .3093 Doing business: domestic corporations. .3015 • Penalty for doing business without paying tax. .3094, 3095, 3096 Doing business in U. S.: foreign corporations. .3055 Penalty for doing business without paying tax. . 3094, 3095, 3096 Domestic building and loan associations. .3066 Domestic corporations: basis of tax on. .3015 Denned. .3013 iOL Returns by. . 3048 Copyright LVIZ } by The Corporation Trust Cvtnpany WAR TAX SERVICE Capital Stock Tax — Index Page 1. 6-23-22. CAPITAL STOCK TAX INDEX. The references are to paragraph numbers. Due date of tax. .3006 (see 3088) Educational organizations. .3068 Election to be taxed as corporation. . 3084 Employees and officers: obligations and penalties. .3095, 309o Exemption from tax. .3062 Claiming: proof to be submitted. .3081 Corporations not "carrying on or doing business". . 3033 Corporations not in business during previous year. .3062 Corporations specifically exempt. .3063 Corporations whose stock values not to exceed $5,000. . 3036, 304$, 3063, 3082 Does not apply to foreign corporations. .3060 Foreign corporations not doing business in U. S.. .3057 Insurance companies. .3055, 3063 Extension of time for filing return. .3052 Extension of time for payment of tax. .3088 Failure to file return. .3094, 3096 Fair average value vs. market or book value of stock. .3039 False or fraudulent returns. .3094, 3096 Farmers' associations. . 3075 Farmers' mutual insurance, ditch, irrigation, telephone, etc., companies. .3073 Federal land banks. .3077 Foreign corporations: basis of tax on. .3055, 3061 Capital employed in United States. ^3057 Averaging. . 3061 Illustrated. .3058 Carrying on or doing business in United States. .3056, 3062 Control of a domestic corporation. . 3057 Deduction of $5,000: none. .3060 Defined. .3014 Measure of tax. .3061 Rate of tax. . 3060 Returns by. .3059 • - Securities: investment of funds in. .3057 Subsidiaries. . 3057 Form for making return: domestic corporations, .page 603 Use of. . 3040, 3048 Form for making return: foreign corporations, -.page 607 Use of. .3059 Franchises, etc.. .3046, 3161 Fraternal beneficiary societies,, orders,. etc*. .3065 Fruit growers' associations. .3075 Goodwill, etc.. .3046, 3161 Holding companies. .3029, 3031, 3033 Defined. .3034 For exempt organizations. . 3076 Horticultural organizations. . 3063 Hotel; contract for and construction of. .3022 Illinois limited partnership. .3010 Individual electing to be taxed as corporation. .3084 Inspection of returns. .3086 Insurance companies are exempt. . 3063 Foreign. .3055 Interest on tax on delayed payment. .3088 Joint stock companies as corporations: defined. .3003 July 1: general due date. .3006 (see 3088) Ceasing business after July 1. .3006 Commencing business after July 1. .3037, 3062 July 31: return to be made on or before. .3052 Law provisions: 1921 Act. . 3000 . Leasing property, etc.. .beginning at 3024 C opyright 1922, by The Corporation Trust Company. V/AR TAX SERVICE Capital Stock Tax— -Index Page '2. 6-23-22. CAPITAL STOCK TAX INDEX. The references are to paragraph numbers. Liability to tax generally. .3015, 3062 Foreign corporations. .3055, 3062 Insurance companies are exempt. . 3063 Limited partnerships. .3009, 3010 Liquidation of corporation: tax collectible from stockholders. .3088 Malley vs. Howard et al. .3107 Market value of stock does not control. . 3039 Massachusetts trusts. .3012, 3107 Michigan limited partnerships. .3010 Michigan partnership associations. .3009 Mineral lands: buying, selling, holding, operating, .beginning at 3024 Mining. .3027 Mutual companies: farmers' and others of purely local character. .3073 Mutual insurance companies are exempt. .3063 Foreign. . 3055 Mutual protective associations. .3065 Mutual savings banks. .3064 National farm loan associations. .3077 New York limited partnerships. .3010 Notice and demand for tax. .3088 Occupational taxes: payment of capital stock tax does not relieve from liability to. . 3094 Office buildings: managing. .3024 Office of foreign corporation in United States. .3056 Officers and employees: obligations and penalties. .3095, 3096 Organization; completing of, merely, does not constitute doing business. .3021 Parent and subsidiary corporations: returns by. .3049 Shareholdings to be reported. . 3049 Tax paid by one not deductible by other. .3049 Parent financing or managing subsidiaries. .3030, 3031 Partnership banks. .3011 Partnership electing to be taxed as corporation. . 3084 Partnerships: limited. .3009, 3010 Patents, etc.. .3046, 3161 Payment of tax (see "Tax payable annually in advance") Penalties. .3094 Delay in payment of tax. .3088, 3094 Doing business without payment of tax. .3094 Failure to file return. . 3052, 3096 False or fraudulent return. .3052, 3096 Officers and employees. .3097, 3098 Willfully refusing to file return. . 3096 Willfully refusing to pay tax or attempting to evade. . 3095 Pennsylvania limited partnerships. .3009 Personal service corporations. .3079 Prevention of cruelty to animals or children: organizations for. .3068 Promulgation of regulations. .3104 Proof of exemption to be submitted. .3081 Purchase of supplies by foreign corporation in United States. .3056 Rate of tax: domestic corporations. .3036 Foreign corporations. . 3060 Real estate companies, .beginning at 3024 Receivers: corporations whose property is in hands of. .3033 Reengaging in business after period of inactivity. .3062 Refund of tax. . 3089, 3099 Refund on account of ceasing business during year: none. .3006 Regulations: authority for and promulgation of. .3104 Religious organizations. .3068 Rents: collecting, .beginning at 3024 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Capital Stock Tax- — Index Page 3. 6-23-22. CAPITAL STOCK TAX INDEX. The references are to paragraph numbers. Returns. .3085 Affiliated corporations: consolidated return by. .3049 Capital stock valued at less than $5,000. .3036, 3048, 3063, 3082 Commissioner or collector may make. . 3052 Consolidated by affiliated corporations. . 3049 Corporations claiming exemption. . 3048, 3082 Extension of time for filing. .3052 Failure to file return. . 3052, 3096 False or fraudulent returns. .3052, 3096 Form 707 (Domestic Corporations), .page 603 Use of. .3040, 3048 Form 708 (Foreign Corporations), .page 607 Use of. . 3059 Inspection of. . 3086 Officers or employees: obligations and penalties. .3097 Secrecy of returns. .3086 Subsidiaries: returns by. .3049 Tentative returns. .3053, 3054 Verification of. . 3051 When to be filed. .3052 Where to be filed. .3052 Willfully refusing to file. . 3095 Revenue Act, Provisions of. . 3000 Royalties: collecting. .3024 Scientific organizations. .3068 Secrecy of returns. .3086 Securities: buying and selling. .3028, 3035 Securities: investments in by foreign corporations. .3057 Sickness: cause for extension of time. .3052 Stock of other companies held, to be reported. . 3049 Stock outstanding at date of incidence of tax: tax based on average value of. . 3037 How to value. .3039, 3161 Stockholders/' when liable for tax on corporation. . 3088 Subsidiaries financed or managed by parent. .3030, 3031 Subsidiaries of foreign corporation. .3057 Subsidiaries to make separate returns. .3049 Intercompany balances and shareholdings to be reported. . 3049 ''Substantially retired from business". . 301-8 Surplus and undivided profits. .3047, 3161 Foreign corporations: employed in United States. .3057 Tax paid by parent or subsidiary not deductible by the- othefr. ■ >04 ,: > Tax payable annually in advance. . 3006, 3088 10 days' notice and demand. .3088" Abatement and refund. .3089, 3099 Collectible from stockholders: when. .3088 Credit for former tax. .3087 Dishonored checks: procedure. .3093 Extension of time for payment. . 3088 Medium for payment. .3091 Officers and employees: obligations and penalties. .3097 One check covering payment for two or more corporations. . 3092 Penalty for delay in payment. . 3088, 3094 Penalty for doing business without having paid tax. . 3094 Penalty for willfully refusing to pay or attempting to evade tax. .3095 Uncertified checks. . 3092 ■Validity of tax. .3105 When due and payable. . 3006, 3088 Day of receipt of remittance bv collector governs. . 3092 Where paid. .3088 Willfully refusing to pay or attempting to evade. .3095 Tax year. . 3006 Tentative returns. .3053, 3054 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Capital Stock Tax — Index Page 4. 6-23-22. CAPITAL STOCK TAX INDEX. The references are to paragraph number. Timber lands: buying, selling, holding, operating, etc.. .beginning at 3024 Trade-marks, etc.. .3046, 3161 Treasury stock: not mentioned specifically, but see ^[3037 Trusts as associations or corporations. .3012, 3107 Uncertified checks in payment of taxes. . 3092 Understatements or undervaluations to be corrected by commissioner. .3052 Undivided profits. .3047, 3161 Foreign corporations: employed in United States. .3057 Validity of tax. .3105 Valuing capital stock. .3039, 3161 Verification of returns. .3051 Virginia limited partnerships. .3009 Warehouse of foreign corporation in United States. .3056 Washington Water Power Co. vs. U. S.. .3105 Wharves: managing. . 3020 Year: tax. . 3006 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Capital Stock Tax — Index Page 5. 1 STAMP TAXES-1921 ACT BEING TITLE XI OF THE REVENUE ACT OF 1921. TITLE XI.— STAMP TAXES. 3500 Sec. 1100. That on and after January 1, 1922, there shall be levied collected, and paid, for and in respect of the several bonds, de- bentures, or certificates of stock and of indebtedness, and other documents, instruments, matters, and things mentioned and described in Schedule A of this title, or for or in respect of the vellum, parchment, or paper upon which such instruments, matters, or things, or any of them, are written or printed, by any person who makes, signs, issues, sells, removes, consigns, or ships the same, or for whose use or benefit the same are made, signed, issued, sold, removed, consigned, or shipped, the several taxes specified in such schedule. The taxes imposed by this section shall, in the case of any article upon which a corresponding stamp tax is now imposed by law, be in lieu of such tax. [United States, State, Municipal, and Foreign Government Bonds, and other Instruments Exempt,] 3501 Sec. 1101. That there shall not be taxed under this title any bond, note, or other instrument, issued by the United States, or by any foreign Government, or by any State, Territory, or the District of Columbia, or local subdivision thereof, or municipal or other corporation exercising the taxing power; or any bond of indemnity required to be filed by any person to secure payment of any pension, allowance, allotment, relief, or insurance by the United States, or to secure a duplicate for, or the payment of, any bond, note, certificate of indebtedness, war-savings certificate, warrant or check, issued by the United States; or stocks and bonds issued by cooperative building and loan associations which are organized and operated exclusively for the benefit of their members and make loans only to their shareholders, or by mutual ditch or irrigation companies. [Penalty for Failure to Pay Tax and for Failure to Cancel Stamps.] 3502 Sec. 1102. That whoever— 3503 (a) Makes, signs, issues, or accepts, or causes to be made, signed, issued, or accepted, any instrument, document, or paper of any kind or description whatsoever without the full amount of tax thereon being duly paid; 3504 (b) Manufactures or imports and sells, or offers for sale, or causes to be manufactured or imported and sold, or offered for sale, any playing cards, package, or other article without the full amount of tax being duly paid; 3505 (c) Makes use of any adhesive stamp to denote any tax imposed by this title without canceling or obliterating such stamp as prescribed in section 1104; 3506 Is guilty of a misdemeanor and upon conviction thereof shall pay a fine of not more than $100 for each offense. Copyright 1922, by The Corporation Trust Company: WAR TAX 701 SERVICE 1-2-22. STAMP TAXES LAW. — 1921 ACT. [Penalty for Fraud in Connection with Stamps.] 3507 Sec. 1103. That whoever— 3508 (a) Fraudulently cuts, tears, or removes from any vellum, parchment, paper, instrument, writing, package, or article, upon which any tax is imposed by this title, any adhesive stamp or the impression of any stamp, die, plate, or other article provided, made, or used in pursuance of this title; 3509 (b) Fraudulently uses, joins, fixes, or places to. with, or upon any vellum, parchment, paper, instrument, writing, package, or article, upon which any tax is imposed by this title, (1) any adhesive stamp, or the impression of any stamp, die, plate, or other article, which has been cut, torn, or removed from any other vellum, parchment, paper, instrumentjwriting, package, or article, upon which any tax is imposed by this title; or (2) any adhesive stamp or the impression of any stamp, die, plate, or other article of insufficient value; or (3) any forged or counterfeited stamp, or the im- pression of any forged or counterfeited stamp, die, plate, or other article; 3510 (c) Willfully removes, or alters the cancellation, or defacing marks of, or otherwise prepares, any adhesive stamp, with intent to use, or cause the same to be used, after it has been already used, or knowingly or willfully buys, sells, offers for sale, or gives away, any such washed or re- stored stamp to any person for use, or knowingly uses the same; 351 1 (d) Knowingly and without lawful excuse (the burden of proof of such excuse being on the accused) has in possession any washed, restored, or altered stamp, which has been removed from any vellum, parch- ment, paper, instrument, writing, package, or article; 3512 Is guilty of a misdemeanor, and upon conviction shall be punished by a fine of not more than $1,000, or by imprisonment for not more than five years, or both, and any such reused, canceled, or counterfeit stamp and the vellum, parchment, document, paper, package, or article upon which it is placed or impressed shall be forfeited to the United States. [Cancellation of Stamps.] 3513 Sec. 1104. That whenever an adhesive stamp is used for denoting any tax imposed by this title, except as hereinafter provided, the person using or affixing the same shall write or stamp or cause to be written or stamped thereupon the initials of his or its name and the date upon which the same is attached or used, so that the same may not again be used: Provided, That the Commissioner may prescribe such other method for the cancellation of such stamps as he may deem expedient. U : ^. 'c> ip 1/uiomi; ilul oiii li/oilliw afoiJts ioHjg TO , ^fiviDfiq <4 pro- videdjn this title, as he may deem expedient. Copyright 1922, by The Corporation Trust Company. WAR TAX 702 SERVICE 1-2-22. STAMP TAXES LAW. — 1921 ACT. 3515 (b) All internal revenue laws relating to the assessment and collec- tion of taxes are hereby extended to and made a part of this title, so far as applicable, for the purpose of collecting stamp taxes omitted through mistake or fraud from any instrument, document paper, writing, parcel, package, or article named herein. [Stamps to be on Sale at Post-Offices.] 3516 Sec. 1106. That the Commissioner shall furnish to the Postmaster General without prepayment a suitable quantity of adhesive stamps to be distributed to and kept on sale by the various postmasters in the United States. The Postmaster General may require each such postmaster to give additional or increased bond as postmaster for the value of the stamps so furnished, and each such postmaster shall deposit the receipts'from the sale of such stamps to the credit of and render accounts to the Postmaster General at such times and in such form as he may by regulations prescribe. The Postmaster General shall at least once monthly transfer all collections from this source to the Treasury as internal-revenue collections. [Stamps to be on Sale at Designated Depositaries.] 3517 Sec. 1107. (a) That each collector shall furnish, without prepay- ment, to any assistant treasurer or designated depositary of the United States, located in the district of such collector, a suitable quantity of adhesive stamps to be kept on sale by such assistant treasurer or designated depositary. 3518 (b) Each collector shall furnish, without prepayment, to any person who is (1) located in the district of such collector, (2) duly appointed and acting as agent of any State for the sale of stock transfer stamps of such State, and (3) designated by the Commissioner for the purpose, a suitable quantity of such adhesive stamps as are required by subdivisions 2, 3, and 4 of Schedule A of this title, to be kept on sale by such person. 3519 (c) In such cases the collector may require a bond, with sufficient sureties, in a sum to be fixed by the Commissioner, conditioned for the faithful return, whenever so required, of all quantities or amounts un- disposed of, and for the payment monthly of all quantities or amounts sold or not remaining on hand. The Secretary may from time to time make such regulations as he may find necessary to insure the safekeeping or prevent the illegal use of all such adhesive stamps. SCHEDULE A.— STAMP TAXES. [Bonds of Indebtedness.] 3520 1. Bonds of indebtedness: On all bonds, debentures, or certificates of indebtedness issued by any person, and all instruments, however termed, issued by any corporation with interest coupons or in registered form, known generally as corporate securities, on each $100 of face value or fraction thereof, 5 cents: Provided, That every renewal of the foregoing shall be taxed as a new issue: Provided further, That when a bond conditioned for the re- payment or payment of money is given in a penal sum greater than the debt secured, the tax shall be based upon the amount secured. Copyright 1922, by The Corporation Trust Company: WAR TAX 703 SERVICE 1-2-22. STAMP TAXES LAW. — 1921 ACT. [Original Issue of Stock.] 3521 2. Capital stock, issued: On each original issue, whether on organ- ization or reorganization, of certificates of stock, or of profits, or of interest in property or accumulations, by any corporation, on each $100 of face value or fraction thereof, 5 cents: Provided, That where a certificate is issued without face value, the tax shall be 5 cents per share, unless the actual value is in excess of $100 per share, in which case the tax shall be 5 cents on each $100 of actual value or fraction thereof, or unless the actual value is less than $100 per share, in which case the tax shall be 1 cent on each $20 of actual value, or fraction thereof. 3522 The stamps representing the tax imposed byl this subdivision shall be attached to the stock books and not to the certificates issued. [Sales or Transfers of Stocks.] 3523 3. Capital stock, sales or transfers: On all sales, or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal title to shares or certificates of stock or of profits or of interest in property or accumulations in any corporation, or to rights to subscribe for or to receive such shares or certificates, whether made upon or shown by the books of the corporation, or by any assignment in blank, or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer or sale, whether entitling the holder in any manner to the benefit of such stock, in- terest, or rights, or not, on each $100 of face value or fraction thereof, 2 cents, and where such shares are without par or face value, the tax shall be 2 cents on the transfer or sale or agreement to sell on each share: 3524 Provided, That it is not intended by this title to impose a tax upon an agreement evidencing a deposit of certificates as collateral security for money loaned thereon, which certificates are not actually sold, nor upon the delivery or transfer for such purpose of certificates so deposited, nor upon mere loans of stock nor upon the return of stock so loaned: 3525 Provided further, That the tax shall not be imposed upon deliveries or transfers to a broker for sale, nor upon deliveries or transfers by a broker to a customer for whom and upon whose order he has purchased same, but such deliveries or transfers shall be accompanied by a certificate setting forth the facts: 3526 Provided further, That in case of sale where the evidence of transfer is shown only by the books of the corporation the stamp shall be placed upon such books; and where the change of ownership is by transfer of the certificate the stamp shall be placed upon the certificate; and in cases of an agreement to sell or where the transfer is by delivery of the certificate assigned in blank there shall be made and delivered by the seller to the buyer a bill or memorandum of such sale, to which the stamp shall be affixed; and every bill or memorandum of sale or agreement to sell before mentioned shall show the date thereof, the name of the seller, the amount of the sale, and the matter or thing to which it refers. Copyright 1922, by The Corporation Trust Company. WAR TAX 704 SERVICE 1-2-22. STAMP TAXES LAW. — 1921 ACT. 3527 Any person liable to pay the tax as herein provided, or anyone who acts in the matter as agent or broker for such person, who makes any such sale, or who in pursuance of any such sale delivers any certificate or evidence of the sale of any stock, interest or right, or bill or memorandum thereof, as herein required, without having the proper stamps affixed thereto with intent to evade the foregoing provisions, shall be deemed guilty of a misdemeanor, and upon conviction thereof shall pay a fine of not exceeding $1,000, or be imprisoned not more than six months, or both. [Sales of Produce at or Under the Rules of Exchanges.] 3528 4. Produce, sales of, on exchange: Upon each sale, agreement of sale, or agreement to sell (not including so-called transferred or scratch sales), any products or merchandise at, or under the rules or usages of, any exchange, or board of trade, or other similar place, for future delivery, for each $100 in value of the merchandise covered by said sale or agreement of sale or agreement to sell. 2 cents, and for each additional $100 or fractional part thereof in excess of $100, 2 cents: 3529 Provided, That on every sale or agreement of sale or agreement to sell as aforesaid there shall be made and delivered by the seller to the buyer a bill, memorandum, agreement, or other evidence of such sale, agreement of sale, or agreement to sell, to which there shall be affixed a law- ful stamp or stamps in value equal to the amount of the tax on such sale: 3530 Provided further, That sellers of commodities described herein, having paid the tax provided by this subdivision, may transfer such contracts to a clearing-house corporation or association, and such transfer shall not be deemed to be a sale, or agreement of sale, or an agreement to sell within the provisions of this Act, provided that such transfer shall not vest any beneficial interest in such clearing-house association but shall be made for the sole purpose of enabling such clearing-house association to adjust and balance the accounts of the members of such clearing-house association on their several contracts. 3531 Every such bill, memorandum, or other evidence of sale or agreement to sell shall show the date thereof, the name of the seller, the amount of the sale, and the matter or thing to which it refers; and any person liable to pay the tax as herein provided, or anyone who acts in the matter as agent or broker for such person, who makes any such sale or agreement of sale, or agreement to sell, or who, in pursuance of any such sale, agreement of sale, or agreement to sell, delivers any such products or merchandise without a bill, memorandum, or other evidence thereof as herein required, or who delivers such bill, memorandum, or other evidence of sale, or agreement to sell, without having the proper stamps affixed thereto, with intent to evade the foregoing provisions, shall be deemed guilty of a misdemeanor, and upon conviction thereof shall pay a fine of not exceeding $1,000 or be imprisoned not more than six months, or both. 3532 No bill, memorandum, agreement, or other evidence of such sale, or agreement of sale, or agreement to sell, in case of cash sales of products or merchandise for immediate or prompt delivery which in good faith are actually intended to be delivered shall be subject to this tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 705 SERVICE 1-2-22. STAMP TAXES LAW. — 1921 ACT. 3533 This subdivision shall not affect but shall be in addition to the provisions of the "United States Cotton Futures Act/' approved August 11, 1916, as amended, and "The Future Trading Act," approved August 24, 1921. [Promissory Notes and Drafts or Checks Other than Sight or Demand.] 3534 5. Drafts or checks (payable otherwise than at sight or on demand) upon their acceptance or delivery within the United States whichever is prior, promissory notes, except bank notes issued for circulation, and for each renewal of the same, for a sum not exceeding $100, 2 cents; and for each additional $100, or fractional part thereof, 2 cents. 3535 This subdivision shall not apply to a promissory note secured by the pledge of bonds or obligations of the United States issued after April 24, 1917, or secured by the pledge of a promissory note which itself is secured by the pledge of such bonds or obligations: Provided, That in either case the par value of such bonds or obligations shall be not less than the amount of such note. off icsaranotf to sla* lo 3mmo6 > \$& ib olce vrovo no jeHT ^tot^ esse [Conveyances.] 3536 6. Conveyances: Deed, instrument, or writing, whereby any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his, her, or their direction, when the consideration or value of the interest or property conveyed, exclusive of the value of any lien or encumbrance remaining thereon at the time of sale, exceeds $100 and does not exceed $500, 50 cents; and for each additional $500 or fractional part thereof, 50 cents. This subdivision shall not apply to any instrument or writing given to secure a debt. [Customhouse Entries.] 3537 7. Entry of any goods, wares, or merchandise at any customhouse, either for consumption or warehousing, not exceeding $100 in value, 25 cents; exceeding $100 and not exceeding $500 in value, 50 cents; exceeding $500 in value, $1. [Customs Bonded Warehouse Withdrawal Entries.] 3538 8. Entry for the withdrawal of any goods or merchandise from cus- toms bonded warehouse, 50 cents. [Passage Tickets for Foreign Ports Other than Those in Canada or Mexico.] 3539 9. Passage ticket, one way or round trip, for each passenger, sold or issued in the United States for passage by any vessel to a port or place not in the United States, Canada, or Mexico, if costing not exceeding $30, $1; costing more than $30 and not exceeding $60, $3; costing more than $60, $5. This subdivision shall not apply to passage tickets costing $10 or less. Copyright 1922, by The Corporation Trust Company. WAR TAX 706 SERVICE 7-21-82. (2) 8-3-22. STAMP TAXES LAW. — 1921 ACT. [Proxies.] 3540 10. Proxy for voting at any election for officers, or meeting for the transaction of business, of any corporation, except religious, educational, charitable, fraternal, or literary societies, or public cemeteries, 10 cents. [Powers of Attorney.] 3541 11. Power of attorney granting authority to do or perform some act for or in behalf of the grantor, which authority is not otherwise vested in the grantee, 25 cents. This subdivision shall not apply to any papers necessary to be used for the collection of claims from the United States or from any State for pensions, back pay, bounty, or for property lost in the military or naval service, nor to powers of attorney required in bank- ruptcy cases nor to powers of attorney contained in the application of those who become members of or policy holders in mutual insurance companies doing business on the inter-insurance or reciprocal indemnity plan through an attorney in fact. [Playing Cards.] 3542 12. Playing cards: Upon every pack of playing cards containing not more than fifty-four cards, manufactured or imported, and sold, or removed for consumption or sale, a tax of 8 cents per pack. [Casualty Insurance Policies Written by Certain Foreign Corporations or Partnerships or Nonresident Aliens.] 3543 13. On each policy of insurance, or certificate, binder, covering note, memorandum, cablegram, letter, or other instrument by whatever name called whereby insurance is made or renewed upon property within the United States (including rents and profits) against peril by sea or on inland waters or in transit on land (including transshipments and storage at termini or way points) or by fire, lightning, tornado, wind-storm, bombard- ment, invasion, insurrection or riot, issued to or for or in the name of a domestic corporation or partnership or an individual resident of the United States by any foreign corporation or partnership or any individual not a resident of the United States, when such policy or other instrument is not signed or countersigned by an officer or agent of the insurer in a State, Territory, or District of the United States within which such insurer is authorized to do business, a tax of 3 cents on each dollar, or fractional part thereof of the premium charged: 3544 Provided, That policies of reinsurance shall be exempt from the tax imposed by this subdivision. 3545 Any person to or for whom or in whose name any such policy or other instrument is issued, or any solicitor or broker acting for or on behalf of such person in the procurement of any such policy or other instru- ment, shall affix the proper stamps to such policy or other instrument, and for failure to affix such stamps with intent to evade the tax shall, in addition to other penalties provided therefor, pay a fine of double the amount of the tax. [General Administrative Provisions of Law.] [Read under "Miscellaneous" at the back of the book.] Copyright 1922, by The Corporation Trust Company, WAR TAX 707 SERVICE 1-2-22. (2) 7-5-22. (3) 7-20-22. (4) 7-21-22. (5) 8-3-22. STAMP TAXES REGULATIONS.— 1918 AND 1921 ACTS. Regulations 40 (1922 Edition) : Stamp taxes on original issue and transfers of stock, and on sales oi products for future delivery. These regulations begin on page 709 opposite. Differences between the old and new regulations are shown below. * Changes doing no more than to reflect the changed provisions of the law bearing on stock without par value have been made at 1[3549, 3552, 3592, and Tf3594a; and bearing on loans of stock at TJ3623 (further, old (1) of Art. 12 has been eliminated). 1J3553. — Non-par original issue: "stock" (as used twice) instead of "certificate" and "of each share" added. If3636.- — Return to be made to Collector rather than to Commissioner. 1J3741 (a), (b), and (c). — Refunds and redemptions; new, here. Otherwise no material change, except that the paragraph defining "calls" and exempting from tax the transfer of the certificate of stock pursuant to the call, is eliminated (former (o) of Art. 13), Regulations 55 (1922 Edition) : Stamp Taxes on Documents. Beginning on page 737 are reproduced the revised regulations (1922 Edition) relating to the stamp taxes on documents imposed by Title XI of the Revenue Act of 1921, promulgated June 12, 1922 (released July 5, 1922). Other than inconsequential verbal changes, such as "pay the tax" from "pay for the stamp," the omission of Articles relating to indemnity and surety bonds, and to parcel post packages — not taxable under the 1921 Act — , and the necessary change in the numbering of the Articles because of such omission, differences between the old and the new regulations are few. All such other changes are noted below. Art. 8, H3751. — Former ruling applying to "instruments issued by corpo- rations in numbers, under a deed of indenture" is made general in its appli- cation (as provided by the law) by omitting "by corporations." Art. 11, 1f3754. — In connection with business property investment bonds the former reference was to "certain specified real property," rather than, as now, to "certain specified property" merely. Art. 14 (b), lf3758. — Referring to the non-taxability of certain conditional bills of sale, the qualification "unless in the form of promissory notes" is changed to "unless containing an obligation in the form, etc." Art. 100, 1[3881. — In connection with the non -taxability of passage tickets issued to certain foreign representatives, exemption is extended to the families, attaches, secretaries, and servants of ambassadors and ministers. Tax on playing cards, 1f39l9. — The separate regulations covering this subject are referred to, merely. * Art. 160, ^[3982. — Additional cancellation (three parallel incisions) is now required in the case of stamps of the value of 50 cents or more, only (here- tofore, 10 cents or more). Applies to stock, etc., stamps as well. See \\373l. Arts. 165 and 166, 1f3986 a and b.— These Articles, referring to "Claims" and "Refunds" are new. Arts. 169 to 171, 1[3989 to H3991.— These Articles, under "Duties of officers" (administrative) have been changed somewhat. Copyright 1922, by The Corporation Trust Company. WAR TAX 708 SERVICE 7-8-22. Reg. 40— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3546 REGULATIONS 40—1922 ACT [Promulgated July 8, 1922.] (Supplemented.) Relating to the STAMP TAX ON ISSUES, SALES, AND TRANSFERS OF STOCK AND SALES OF PRODUCTS FOR FUTURE DELIVERY Under SUBDIVISIONS 2, 3, AND 4 OF SCHEDULE A, TITLE XI, OF THE REVENUE ACT OF 1921. PART I. ISSUES OF STOCK. Schedule A 2. Capital stock, issued Paragraph Article 1. When tax accrues 3547 2. Rate of taxation 3548 3. Computation of the tax 3550 4. Issues subject to tax 3554 5. Issues not subject to tax 3576 6. Stamp tax acts 3585 7. Documentary stamps used 3588 8. Stamps to be attached to stock book 3589 PART II. SALES AND TRANSFERS OF STOCK. Schedule A 3. Capital Stock, sales and transfers Article 9. When tax accrues 3590 10. Rate of taxation 3591 11. Computation of the tax 3593 12. Sales and transfeis subject to tax 3595 13. Sales and transfers not subject to tax 3615 14. Inconsistent by-laws, rules or customs of exchanges 3630 15. Memoranda of sales 3631 16. Records of sales or transfers of stock 3632 17. Returns by persons making sales 3636 18. Returns by clearing houses 3639 19. Stock transfer stamps 3645 PART Hf. SALES OF PRODUCTS OR MERCHANDISE AT OR UNDER THE RULES OR USAGES OF EXCHANGES FOR FUTURE DELIVERY. Schedule A 4. Produce, sales of, on exchange Article 20. When tax accrues 3647 21. Rate of taxation 3648 22. Transactions subject to tax 3649 23. Transactions not subject to tax 3650 24. Inconsistent by-laws, rules or customs of exchanges 3653 25. Memoranda of sales 3654 26. Clearing house as agent 3657 27. Records to be kept by buyers and sellers 3664 28. Records to be kept by clearing houses 3671 29. Returns of transactions 3675 30. Returns by clearing houses 3678 31. Stamps may be affixed to returns 3680 32. Future delivery stamps 3683 Copyright 1922, by The Corporation Trust Company. WAR TAX 709 SERVICE 7-8-22. Reg. 40—1922 Edition. STAMP TAX REGULATIONS.— 1922. PART IV. DEFINITIONS AND GENERAL PROVISIONS. Paragraph Article 33. Further definitions 3684 34. Registration 3704 35. Record of registration kept by collector 3718 BROKERS. Article 36. Brokers 3720 AFFIXING AND CANCELLATION OF STAMPS Section 1104 Section 1105 (a) Article 37. Affixing and cancellation of stamps 3726 PART V. ADMINISTRATIVE. Sections 1105 (b), 1300, 1307, 1308, 1311 Article 38. Failure to make returns; substitute returns 3732 SALES OF STAMPS. Section 1107 (b) Article 39. Sale of stamps 3734 FINES AND PENALTIES. Sections 1102, 1103 Schedule A 4 Article 40. Sections of the Revised Statutes applicable 3739 DATE EFFECTIVE. Section 1100. Article 41. Date effective , 3740 REDEMPTION OF OR ALLOWANCE FOR STAMPS. Article 42. Stamps rendered useless, affixed in error, or for which the owner has no use 3741a 43. Claims 3741b REFUNDS. Article 44. Refunds 3741c AUTHORITY FOR REGULATIONS. Article 42. Promulgation of regulations 3742 PART I. ISSUES OF STOCK. 3647 Art. 1. When tax accrues. — Stock is deemed to be issued when 3521 it is subscribed for and the subscription is accepted by the corpora- tion, regardless of the time of delivery of the certificate 3548 Art. 2. Rate of taxation. — (a) All certificates or instruments, of whatever designation, having a par or face value, representing shares of stock, or of profits, or of interest in property or accumulations, issued by any corporation, joint-stock company or association, are subject to tax at the rate of 5 cents on each $100 of the face value or fraction thereof. 3549 (b) All certificates of stock, or of profits, or of interest in property or accumulations issued by any corporation, without par or face value, are subject to the tax of 5 cents per share, unless the actual value is in excess of $100 per share, in which case the tax shall be 5 cents on each $100 of actual value or fraction thereof, or unless the actual value is less than $100 per share, in which case the tax shall be 1 cent on each $20 of actual value or fraction thereof. [See1f40l6 and 1)4019]. Copyright 1922, by The Corporation Trust Company, WAR TAX 710 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS.— 1922. 3650 Art. 3. Computation of the tax. — (a) The tax is computed upon the par or face value, if the certificates have a face value, of the certificates of stock, or of profits, or of interest in property or accumula- tions, of any corporation, joint-stock co -pany or association, as set forth in the articles of incorporation, or agreement of association or of partner- ship, whether such par or face value appears on the face of the certificate or not. 3551 (b) Where a certificate represents more than one share of stock (however large the number of shares), on the issue of such certificate the tax is reckoned on its par or face value and not on the par or face value of each separate share of stock which it represents. 3552 (c) The tax on original issue is measured not by the amount paid in, on, or for the stock, but by the par or face value in the case of shares having a face value; and by the actual value in the case of shares without face value. 3553 (d) In the case of stock without par or face value, the actual value of the stock is to be determined by the market price of each share. 3554 Art. 4. Issues subject to tax. — (a) The issue of certificates of stock, or of profits, or of interest in property or accumulations, by any cor- poration, joint-stock company or association, is subject to tax. 3555 (b) The issue to the beneficiary of certificates covering shares in the nature of shares of stock, where a number of persons pool their individual properties and appoint trustees having a definite term of office for the purpose of managing it and retain certain rights of control over the property and a voice in the selection of the trustees who are authorized to issue the certificate, is subject to tax. 3556 (c) The issue by a corporation of business property investment bonds, or other instruments wherein it is certified that the holder thereof is the owner of an interest in specified real property, the legal title to which has been previously conveyed to a trustee and whereby the corpor- ation issuing the same agrees to manage the property and distribute the proceeds in a certain manner, is subject to tax. 3557 (d) The issue by a corporation, joint-stock company or association, of stock in exchange for property, real or personal, or for the purpose of purchasing the business or assets of another concern, is subject to tax. 3658 (e) The issue of certificates of stock by joint-stock land banks is subject to tax. 3559 (f) The issue of stock dividend and fractional scrip certificates is subject to tax. [Read 1f3565 below.J 3560 (g) The issue of temporary or interim certificates of stock is subject to tax. 3561 (h) The issue of certificates of stock upon reorganization [see 1(3687] of a corporation not expressly provided for in Art. 4(1) is subject to tax as follows: Preferred stock issued in place of common, or vice versa, or one kind of preferred stock issued in place of another kind of preferred stock, or one kind of common stock issued in the place of another kind of common stock, or stock without par value issued in place of stock with par value, or vice versa, is subject to tax on the entire issue. 3562 (i) The issue of stock by a consolidated corporation in exchange for stock of the consolidating corporations is subject to tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 711 SERVICE 7-8-22. Reg. 40.-1922 Edition. - STAMP TAX REGULATIONS. — 1922. 3563 (j) The issue of stock, in addition to its already existing stock, by the continuing corporation in case of a merger of corporations, is subject to tax. 3564 (k) The issue of certificates of stock outside the United States by a domestic corporation is subject to tax. 3564a (1) The issue of a greater number of shares of no par value stock in lieu of a smaller issue of such shares, previously made, or the issue of a greater number of shares of par value stock in lieu of a smaller issue of such shares of the same kind, previously made, whether on organization or reorganization of the issuing corporation, is subject to stamp tax only on the additional shares so issued. 3665 Taxability of original issue of scrip certificates for fractional shares. — Please advise if the issue of scrip certificates for fractional shares of said stock having par value of one hundred dollars is subject to tax at rate of five cents for each certificate issued or at rate of five cents for each full share of the total number of shares represented by aggregate amount of scrip certificates issued. Please answer collect. 3566 (Answer.) Stamp tax is based on par value of each certificate for fractional share issued. (Telegram of inquiry from Kennedy M. Thompson, New York, N. Y., signed by Deputy Commissioner J. M. Baker, and dated January 9, 1920.) 3567 Stamp tax liability on account of original issue and transfer of stock and conveyance of real property incident to the reorganization of a corporation under the laws of another State, without more. — Reference is made to your letter of February 5, 1920, in which you inquire as to the appli- cation of stamp tax in the case where the Co. of Illinois has been reorganized into the [same name] Co. under the laws of the State of Ohio. [See note at ^[3573 below.] 3568 You are advised that where a company gives up its articles of incorpo- ration in the State of Illinois and is incorporated in the State of Ohio, the application of stamp tax is to be determined by the method followed. 3569 In any event stamp tax on original issue applies to the stock to be issued by the new corporation. 3570 The transfer of stock among the assets of the old corporation to the new corporation is subject to stamp tax. 3571 Conveyance of real property from the old corporation to the new cor- poration in consideration of the issue of new stock to the old corpora- tion or to its stockholders is subject to stamp tax on the basis of the value of the property. 3572 If the new stock is issued to the old corporation the transfer of that stock from the old corporation to its stockholders is subject to stamp tax. If the new stock is issued to the stockholders of the old corporation the transfer of the right to receive that stock from the old corporation is subject to transfer stamp tax additional to the original issue stamp tax. If the old stock is surrendered to the old corporation for extinguishment no transfer stamp tax accrues. If the old stock is surrendered to the new corporation and constitutes it a corporate stockholder that surrender is taxable. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated February 26, 1920.) 3673 [Note. — The facts submitted with names omitted, on which the above ruling is based, are as follows: The Co. was organized many years ago under the laws Copyright 1922, by The Corporation Trust Company. WAR TAX 712 SERVICE 7-8-22. Reg. 40.-1922 Edition. STAMP TAX REGULATIONS.— 1922. of Illinois. A new corporation of the same name has been organized under the laws of Ohio and will acquire the property and continue the business of the Illinois corporation. 3674 The Ohio corporation will take over all the assets (both real and person- al) and assume all liabilities of the Illinois corporation. In payment for the property, the Ohio corporation will deliver to the Illinois corporation certificates of stock issued in the names of the present stockholders and for the number of shares owned by them, respectively, in the Illinois corpora- tion. The Illinois corporation will receive from its stockholders its own shares of stock, in exchange for a like number of shares of the Ohio corpo- ration, and will then be dissolved. 3576 The identical property will remain in the possession of the identical stockholders and the proportionate interest of each stockholder will remain unchanged, the sole purpose of the transaction being merely to domi- cile the present enterprise in Ohio as a matter of convenience.] 3576 Art. 5. Issues not subject to tax. — (a) The issue of stock by co- operative building and loan associations, organized and operated exclusively for the benefit of their members and making loans only to share- holders, or by mutual ditch or irrigating companies, is not subject to tax. 3577 (b) The issue of certificates of stock by Federal land banks is not subject to tax. 3578 (c) The issue of "rights" to subscribe for stock by any corpora- tion, joint-stock company or association evidenced by warrants is not subject to tax. 3579 (d) The issue of certificates of stock in a new name, the only change in the corporation being in the name, is not subject to tax. 3580 (e) The issue of voting trust certificates is not subject to tax. 3581 (f) The issue, upon a merger of corporations, of certificates of stock of the same kind in substitution for the old certificates of stock is not subject to tax. [See ^[3994] 3582 (g) The issue of certificates of stock of a smaller denomination in exchange for outstanding certificates, where there is no change in ownership or in the total amount of stock issued, is not subject to tax. 3583 (h) The issue of the definitive certificates of stock in exchange for temporary or interim certificates upon which the tax has been paid is not subject to tax. 3684 (i) The issue by a corporation of certificates of preferred stock in lieu of outstanding certificates of common stock, or vice versa, or the issue of certificates of preferred stock of one kind in lieu of certificates of preferred stock of another kind, pursuant to the terms of the original charter of the corporation, without other consideration and without change in the amount of the authorized capital stock of the corporation, is not subject to tax. 3585 Art. 6. Stamp tax acts.— (a) All certificates of a stock issued between December 1, 1914 and September 8, 1916, are subject to tax under the Emergency Revenue Act of October 22, 1914; those issued between December 1, 1917, and April 1, 1919, are subject to tax under the Revenue Act of 1917; and certificates of stock, or of profits, or of interest in property or accumulations issued by any corporation, joint-stock com- pany, or association on or after April 1, 1919, are subject to tax under the Revenue Act of 1918; those issued on or after January 1, 1922, are subject to the tax under the Revenue Act of 1921. Copyright 1922, by The Corporation Trust Company. WAR TAX 713 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3586 (b) There was no stamp tax upon issues of certificates of stock 3587 between September 8, 1916, and December 1, 1917. 3588 Art. 7. Documentary stamps used.— Ordinary documentary stamps shall be used in payment of the tax imposed upon the issue of stock. 3589 Art. 8. Stamps to be attached to stock book.— The stamps repre- senting the tax imposed by this subdivision must be attached to the stock book and not to the certificates when issued. PART II.— SALES AND TRANSFERS OF STOCK. 3590 Art. 9. When tax accrues. — The stamp tax on sales or transfers 3523 of stock accrues at the time of making the sale or agreement to sell or memorandum of sale, or delivery of, or transfer of the legal title to shares, or certificates of stock, or of profits, or of interest in property or accumulations in any corporation, joint-stock company, or association, or of the right to subscribe for or to receive such shares or certificates, regard- less of the time or manner of the delivery of the certificate or agreement or memorandum of sale. [Read at ^[3614.] 3591 Art. 10. Rate of taxation. — (a) In the case of stock having a par or face value, the amount of the tax is 2 cents on each $100 or frac- tion thereof of the total par or face value of the shares or certificates in- volved in the sale or agreement to sell, whether such aggregate par or face value is greater or less than $100; e. g., where the total par or face of the shares involved in the transaction is $100 or less, the tax is 2 cents; where such value is in excess of $100, the tax is 2 cents on each $100 or fraction thereof. 3592 (b) In the case of shares of stock without par or face value, the tax is 2 cents on the transfer or sale of, or agreement to sell, each share. 3593 Art. 11. Computation of the tax. — (a) In the case of stock having a par or face value, the amount of the tax is computed upon the total par or face value of the shares and not upon the amount that may have been paid in on such stock; e. g., where stock of the par value of $100 is sold, for which only $25 is paid, the tax is reckoned upon the par value of $100 and not upon the $25 paid. 3594 (b) Where one certificate represents several shares (however large the number of shares) on the transfer of such certificate the tax is computed upon its face value and not on the face value of each separate share of stock, or of profits, or of interest in property or accumulations; e. g., on the transfer of one certificate representing 500 shares par value $5, the face value of the certificate being $2,500, the stamp tax is 50 cents. 3594a (c) In the case of stock without par or face value, the tax is com- puted on each share; e. g., the tax on the transfer of a certificate for 20 shares of such stock is 40 cents. 3695 Art. 12. Sales and transfers subject to tax. — (a) The sale, or trans- fer, or change of ownership, of certificates of stock, or of profits, or of interest in property or accumulations in corporations, joint-stock companies, or associations, is subject to tax. [For transfer from partnership to individual members thereof, see \ 4020.] Copyright 1922, by The Corporation Trust Company. WAR TAX 714 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3596 (b) The sale or transfer of shares of stock, whether or not repre- sented by certificates, is subject to tax. 3597 (c) The transfer of stock to or by trustees is subject to tax. [See H4000 and f4002.] 3598 (d) The transfer of voting trust certificates is subject to tax. 3599 (e) The sale or transfer of temporary or interim certificates of stock is subject to tax 3600 (f) The sale or transfer of certificates issued by trustees, where such trustees are appointed for a definite period and the declaration of trust provides that the beneficiaries (termed "shareholders") shall hold annual meetings for the election of new trustees to fill the vacancies thus occurring, the beneficiaries thus reserving to themselves control over the persons delegated to conduct their affairs and a voice in the business is subject to tax. 3601 (g) The transfer of the interest of a subscriber for stock, however such interest may be evidenced or conditioned upon further payments, is subject to tax. 3602 (h) The transfer of the right to subscribe for stock in any corpora- tion, joint-stock company, or association, whether or not evidenced by warrants, is subject to tax. 3603 (i) The transfer of the right to receive a stock dividend already declared is subject to tax. 3604 (j) The transfer or surrender of stock to a corporation, for the pur- pose of the corporation, whether or not it intends eventually to sell such stock, is subject to tax. 3605 In blank. ' 3606 (k) The sale of or agreement to sell shares of stocks made by a broker, directly or indirectly, for himself, is subject to tax. 3607 (1) The sale or transfer of stock by a broker at a price different from that at which he accounts to his selling customer is subject to tax. 3603 (m) The transfer of stock in pursuance of a gift, bequest, or con- veyance by trustees is subject to tax. 3609 (n) The transfer of stock from parties occupying fiduciary relations to those for whom they hold stock is subject to tax. 3610 (o) The transfer of certificates of stock by an administrator or executor to the legatee or distributee is subject to tax. 361 1 (p) The transfer of stock on the books of a domestic corporation, regardless of where the sale is made or the stock certificates delivered, is subject to tax. 3612 (q) The sale, transfer, or delivery, within the territorial jurisdic- tion of the United States, of shares of stock of a foreign corporation is subject to tax 361 3 (r) The transfer of stock of a corporation to be merged to the merg- ing corporation prior to the actual merging and as a condition prece- dent to the merger is subject to tax Stamp tax liability on account of transfer of stock incident to the reorgan- ization of a corporation under the laws of another state, without more. — Read at ^[3567 3614 Delivery of stock by issuing corporation to another by direction of original subscriber involves a taxable transfer. — Reference is made Copyright 1922, by The Corporation Trust Company. WAR TAX 715 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. to your letter of March 18, 1920, requesting a ruling as to whether or not federal stamp tax applies to certain issues and transfers of stock, 1fYou are advised that the tax imposed by subdivision 3 of Schedule A, Title II, Revenue Act of 1918, upon the original issue of stock applies when the stock is subscribed for and the subscription is accepted regardless of the time of delivery of the certificate. The direction by the subscriber to deliver such stock to other parties involves the transfer of the right to receive stock and is subject to stamp tax under the provisions of Schedule A-4. (Letter to The Corporation Trust Company, signed by James M. Baker, Deputy Commissioner, and dated March 25, 1920.) [See 1f3998.] 3615 Art. 13. Sales and transfers not subject to tax. — (a) The transfer of stock pursuant to a sale, where the memorandum of sale has been duly stamped, is not subject to tax. 3616 (b) The sale or transfer of enemy-owned shares of stock in Amer- ican corporations to or by the Alien Property Custodian is not sub- ject to tax. 3617 (c) The surrender of certificates in exchange for other certificates representing the same or new stock, provided they are issued to the same holders, is not subject to tax. [See 1f4002.] 3618 (d) The surrender of the stock of the consolidating corporation in exchange for stock in the consolidated corporation, in the case of consolidation of two or more corporations, is not subject to tax. 3619 (e) The transfer of the stock of a merged corporation in exchange for stock of the merging corporation at the time and as a part of a statutory merger is not subject to tax, nor is the substitution of new cer- tificates for the certificates representing the old stock of the merging cor- poration. 3620 (f) The surrender of stock for extinguishment or in exchange for new certificates to be issued without change of ownership is not subject to tax. 3621 (g) The transfer of certificates of stock from the decedent to the administrator or executor of the estate is not subject to tax. 3622 (h) The sale or transfer of certificates issued by trustees, where such trustees are legally appointed for the entire period of the trust and the beneficiaries retain no substantial control over the affairs of the trust, but delegate their proprietory functions to others, any further control on their part depending upon contingencies, their rights being limited to filling vacancies caused by death, resignation, or disability, is not subject to tax. 3623 (i) An agreement evidencing a deposit of certificates as collateral security for money loaned thereon, which certificates are not actually sold, is not subject to tax, nor is the delivery or transfer for such purpose of the certificates so deposited, nor the mere loan nor return of stock so loaned subject to tax: Provided, That in each case the person making a transfer of such certificates shall make and sign a statement of the facts and attach it to the certificate. 3624 (j) The transfer or delivery of certificates to a clearing house for the sole purpose of clearing or adjusting accounts, where no beneficial interest is vested in such clearing house and there has been no change of title or interest, is not subject to tax. 3626 (k) The transfer of a certificate of stock from the owner thereof tc a broker, solely for the purpose of enabling such broker to make a sale thereof for the owner, is not subject to tax, provided the broker shall in Copyright 1922, by The Corporation Trust Company. WAR TAX 716 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS.— 1922. every case at the time of such transfer to him make and sign a certificate stating that he has no ownership in such stock and that the transfer to him was made solely to enable him to sell the stock for the owner. Such certificate shall in every case be attached to the certificate of stock and presented to the transfer agent at the time such certificate of stock is sur- rendered for transfer and shall be preserved, together with the old certifi- cate, by such transfer agent, for the inspection of the revenue officer. 3626 (1) The transfer of a certificate of stock by a broker to his customer for whom and upon whose order he has purchased such stock, where the tax has been paid upon the transfer of the stock to the broker, is not subject to tax, provided that the broker shall in every case, at the time of such transfer from him, make and sign a certificate stating that the transfer from the broker to his customer is made solely to complete the purchase made by such broker for such customer. Such certificate in every case shall be attached to the certificate of stock and presented to the transfer agent at the time such certificate of stock is surrendered for transfer, and shall be preserved, together with the old certificate, by such transfer agent for the inspection of the revenue officer. 3627 (m) The certificates required by the two preceding paragraphs shall be in the following form: [See 1f4003.] (1) (In the case of a transfer to a broker) — We hereby certify that we have no ownership or interest in * * * shares of the stock above transferred, the transfer by the owner to us being merely for the purpose of sale. (Broker sign here) (2) (In the case of a transfer by a broker) — We hereby certify that the transfer of * * * of the within shares to the names indicated by the star is made solely to complete the purchase made by us for our customer, and we have no ownership or interest therein. (Broker sign here) 3628 (n) No broker who has filed a certificate on the form given in para- graph (1) shall file a certificate on the form given in paragraph (2) with relation to the same transfer of shares of stock. 3629 In blank. 3630 Art. 14. Inconsistent by-iaws, rules, or customs of exchange. — No provisions, by-laws, rules or customs of any exchange or similar institution inconsistent with any requirement or provision of the Revenue Act of 1921 or any regulations made thereunder, nor any collateral additional agreement or understanding, either verbal or written, respecting the subject matter of sales or transfers of certificates, or the settlement or fulfillment thereof, which are inconsistent or in conflict with any requirement of said act or regulations shall exempt any person from the payment of the tax imposed. 3631 Art. 15. Memoranda for sales. — Every person who makes an agree- ment to sell or transfer title to shares of stock by delivery of certi- ficates assigned in blank, shall as a part of such transaction promptly make and deliver to the buyer a bill or memorandum of such sale or agreement to sell, duly signed by the seller or his agent, to which the requisite stamps shall be affixed and canceled, which bill or memorandum shall show the Copyright 1922, by The Corporation Trust Company. WAR TAX 717 SERVICE 7-8-22. Reg. 40—1922 Edition. STAMP A TAX|REGULATIONS.— 1922. date of the transaction, the names of the seller and buyer and the name and number of shares of stock, and the price per share and the tax paid thereon, and in the case of a transaction made on an exchange shall bear a number upon the face thereof and have printed and written in ink thereon the words "Subject to the Revenue Act of 1921 and regulations made in accordance therewith. " No more than one such bill or memorandum made by the seller on any given date shall bear the same number: Provided, however, That no single transaction or purchase or sale that is made upon an exchange by one member to another member shall require to be evidenced by more than one stamped memorandum of sale or agreement to sell. 3632 Art. 16. Records of sales or transfers of stock. — (a) All persons who are wholly or partly engaged in the business of buying, selling or transferring shaies of stock, whether at public or private sale, or whether or not they are members of an exchange, including persons engaged in trans- actions known as "matched," or "on-order," or "pass-outs," or "give-ups," or settled directly between the seller and buyer, or cleared or adjusted through a clearing house or otherwise, or engaged in accepting and procuring the transmission of orders for purchase or sale of shares of stock shall keep a record showing: (1) Date of transaction. (2) Line number (if at an exchange). (3) Name of broker or salesman who executed the order. (4) Name of party to whom sold, or from whom bought. (5) Number of shares dealt in. (6) Name or description of stock. (7) Price of stock, if without face or par value. (8) Amount (or total market value) of stock. (9) Face or par value of stock per share. (10) Tax paid on shares having face or par value. (11) Tax paid on shares without face or par value. (12) State tax paid, if any. (Optional.) (13) Total amount to ledger. (Optional). (14) Folio number. (Optional.) (15) Name of customer for whom sold or transferred, or for whom bought or transferred. (16) Method of settlement or adjustment. 3633 (b) Persons keeping such records may incorporate therein additional columns that will be of use to them, such columns to be placed so as not to interfere with the columns and headings hereby prescribed. These records must be in book form, and all entries therein must be legibly written in ink and the records kept for a period of at least two years. Such record forms will not be supplied by the department. 3683 The form of record required shall be substantially as follows: [For a the form see page 719.] Copyright 1922, by The Corporation Trust Company. WAR TAX 718 SERVICE 7-8-22. Reg. 40.-1922 Edition. STAMP TAX REGULATIONS. — 1922. u o a « » * £8 £ 4» G t> T3 3 c Jj U.3 « e-o 3-2 S e O W 6 > a Sou j-S-5 S m .2 g S « * 2* CO In * 2 « c 3 .£ © o — 3= s i .£ * bn**j *+ tu Su « A uw Date B Line No. (if at an exchange) (C) Name of broker or salesman who executed order To whom sold (D) Number of shares. Name or description of stock. Price of stock if there is no face (or par) value Amount (or total market value). Face (or par) value of stock per share Tax paid on shares having face (or par) value (E) Tax paid c- - . - .tares without face (or par) value (F) State tax (if any). (GH) Total amount to ledger. (H) Folio No. (HT Name of customer (for whom sold or transferred). (1) Loaned shares (J) Borrowed shares returned (K.) Method of settlement or adjustment. In case of recording clearing-house transac- tions it is permissible to state:"All trans- actions entered hereon are settled through clearing house except balances listed below," or in case of ex-clearing house transactions to state "Numbers indicate deliveries by (or to) us." All other settlements whether by "offset." "matched," "on order," "pass out," "scratch sale," "give up," or otherwise, must be entered opposite each trans- action. N £ v 8." 3 r? £9- > to gg £ 6 -0 3 a c O v •J3 a TJ O 5 U M O v £ 0 .2- o 3TO b 0 i. •I -* P C 1 § — v o e. to w o -5 S a 3 cS * », « h. TJ U C o t> > o " n 5 »• 3 -s-s^ 2 1 .1 S 0 .Sj £ • r • u g « * 3. -5 o-S >> 5 B 3 C 2 SS-.2: §° ^ EJi K : .8 sjs-s - ;-| vitiTif o. « « — ■ « *i 5 « «> 2 i? » -r.o «o5 w «6 2-5Sf: 1J 8-2 §.£-5 -rrJS g 8*8?- &.s5f 2 S Si > 8 a o > o a T 3 ' E >> o 8 o o 1 SSJSJS S'-S.s MrfJS sjgJS 2 < CQ U g Q.UJI-.-^ Copyright 1922, by The Corporation Trust Company. WAR TAX 719 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3834 (c) Provided, however. That brokers known as strictly "floor brokers," or "two dollar men," or "room traders," in lieu of the foregoing record, whether their transactions are settled directly between seller and buyer or by "matched," "on-order," "pass-out," "or scratch sale," or "give- up," or any other kind of sale or purchase, or are cleared through a clearing house or otherwise, shall keep a record showing: (1) The date of the transaction. (2) The name of the seller. (3) The name of the purchaser. (4) The name of the stock. (5) The number of shares. (6) The par or face value of the shares. (7) The price, if the stock has no par value. (8) Whether the transaction is "matched," "on-order," "pass-out," "scratch sale," or "give-up." (9) Name of person to whom "given-up." 3635 (d) Provided further, That persons engaged in accepting and pro- curing the transmission of orders for the purchase or sale of shares of stock to be executed at a brokerage office or an exchange, board of trade, or similar place, shall keep a record showing: (1) Date of acceptance and transmission of order. (2) Name of person from whom accepted. (3) Name and address of person to whom transmitted. (4) Name of stock. (5) Par value of stock. (6) Number of shares. (7) Whether purchase or sale. (8) Price. (9) Whether order was executed at an exchange; and, if so, what exchange (10) Date of execution of order. 3636 Art. 17. Returns by persons making sales.— (a) All persons who are wholly or partly engaged in the business of buying, selling or trans- ferring shares of stock, whether such sales, purchases, or transfers shall be made, cleared, settled, or adjusted through a clearing house, or otherwise, shall on or before the fifteenth day of each month, and at any other time designated by the Commissioner, render under oath a true return of all such sales and transfers for the preceding month or for any other period desig- nated by the Commissioner. This return should be made to the collector of internal revenue for the district in which such person or persons are located, and should contain in detail the following data and information: (1) The month for which the return is made (2) The name and address of the person, partnership, corporation, or association making the return. (3) The number of shares sold, loaned, and borrowed returned, and tax paid as follows: (a) Par value shares through clearing house. (b) Par value shares ex-clearing, curb, over the counter. (c) No par value shares, market value $100.00 or leas through clearing house. (d) No par value shares, market value $100.00 or less ex-clearing house, curb, over the counter. Copyright 1922, by The Corporation Trust Company. WAR TAX 720 SERVICE 7-8-22. W: Reg. 40.-1922 Edition. STAMP TAX REGULATIONS . — 1 922 . (e) No par value shares, market value over $100.00 through clearing house. (f) Market value no par value shares, market value over $100 .00 through clearing house. (g) No par value shares, market value over $100.00 ex-clearing house, curb, over the counter. (h) Market value no par value shares, market value over $100.00 ex-clearing house, curb, over the counter. (i) Transfers, calls, rights, when as and if issued, contracts, and miscellaneous. (4) Number of shares cross trades. (5) The amount of tax paid (6) The amount of stamps on hand on the first day of the month, or other period. (7) The amount of stamps purchased during the month, or other period. (8) The amount of stamps on hand on the last day of the month for which return is being made. 3637 (b) Provided that brokers known strictly as "floor brokers," or "two-dollar men" or "traders" in lieu of the foregoing return shall render a return only as to such sales as were not "given up" to or cleared through some other broker including direct settlements, "pass-outs," or "scratched sales." 3638 (c) Provided further that in the event any broker who has not closed business shall make no sales of stock during any one month he shall file with the Commissioner a statement to that effect in lieu of a return. 3639 Art. 18. Returns by clearing houses. — (a) If any person, who negotiates sales or transfers of stock on a stock exchange, shall appoint in writing the clearing house for the exchange upon which such sales or transfers are made his agent for the purposes hereinafter indicated, and shall make to such clearing house a written return, statement, or sheet, on each business day, containing a full disclosure of all such transactions, both clearable and non-clearable, of the preceding day, in shares of stock that are listed or permitted to be dealt in by such member on such exchange, and also showing which, if any, of such stocks are loaned or borrowed or returned, then in that event such return, statement, or sheet, delivered to the clearing house, shall be deemed to be the bill, or memorandum of sale, or agreement to sell, required under subdivision 3, Schedule A, Revenue Act of 1921, and such clearing house is hereby authorized to affix to such return, statement, or sheet the amount of stamps required for each sale or agreement to sell or memorandum of sale or delivery or transfer of the stock indicated thereon, and to cancel the stamp so affixed. 3640 (b) The affixing and cancellation of such stamps by the clearing house shall be held to be the act of the person making such sale or agreement to sell, or memorandum of sale, or delivery or transfer of such stock; or if such person and clearing house so elect, such person shall affix and cancel such stamps before delivering such clearing house sheets or memoranda of sales to the clearing house, but such clearing house shall not accept such clearing house sheet or memoranda unless stamps for all transfer tax required to be affixed are attached thereto and properly cancelled. Copyright 1922, by The Corporation Trust Company. WAR* TAX 721 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3641 (c) The returns, statements or sheets made to the clearing house shall in respect of each sale show the date thereof, the name of the seller, the name of the buyer, the amount of the sale, and the name of the stock, or certificates, or other things traded in, but a return for more than one sale may be made upon the same return, statement, or sheet; and m settlement of differences or other dealings between members shall be per mitted that will interfere with the full disclosure of the whole transaction. 3842 (d) Said clearing house shall preserve the returns, statements, or sheets so made and stamped for at least two years. 3643 (e) Such return, statement, or sheet to the clearing house shall not relieve the seller from making and delivering to the buyer the bill or memorandum required by article 15 of these regulations. 3644 (f) Wherever any clearing house carries upon its sheets or records information or reports of transactions showing the transfer by one of its members of an account of a customer without change of ownership of the securities of the customer, there shall be kept by the members of such clearing house or body concerned in such transaction a record showing the particulars of such transaction. 3645 Art. 19- Stock transfer stamps. — (a) Ordinary documentary stamps with the words "Stock transfer" overprinted thereon, known as "Stock transfer stamps/' shall be affixed to all sales or agreements to sell, or memoranda of sales, or deliveries of or transfers of legal title to shares or certificates of stock or of profits, or of interest in property or accumulation* of a corporation, joint-stock company, or association, and all "warrants/' rights, and other securities, made at exchanges or similar places. 3646 (b) Ordinary documentary stamps may be affixed to sales, agree ments to sell, or memoranda of sales not made at exchanges or similar places. PART III. SALE OF PRODUCTS OR MERCHANDISE AT OR UNDER THE RULES OR USAGES OF EXCHANGES FOR FUTURE DELIVERY. 3647 Art. 20. When tax accrues. — The stamp tax on sales of products 3528 or merchandise for future delivery accrues immediately upon the making of a sale, agreement of sale, or agreement to sell, and is in no wise dependent upon the manner of delivery of the product. 3648 Art. 21. Rate of taxation. — The rate of taxation is 2 cents on each $100 or fraction thereof of the value of the products or merchandise involved in the sale, agreement of sale, or agreement to sell. 3649 Art. 22. Transactions subject to tax. — All sales or agreements to sell (except as herein otherwise provided) of products or mer- chandise at or under the rules and usages of an exchange for future delivery are subject to the payment of tax, and every sale or agreement not evidenced by a memorandum or contract expressly requiring immediate or prompt delivery shall be deemed to be for future delivery. In cases in which the commissioner is not satisfied from the evidence that the transaction is in good faith intended to be followed by immediate or prompt delivery, the seller is required to pay the tax as on a sale for future delivery. 3660 Art. 23. Transactions not subject to tax. — (a) So-called "transfer or scratch sales" or "pass-outs" are not subject to the tax: Provided, Copyright 1922, by The Corporation Trust Company. WAR TAX 722 SERVICE 7-8-22. Reg. 40. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. That the purchase and sale are made at the same exchange on the same day, at the same price, and for the account of the same person. 3661 (b) Cash sales of products or merchandise for immediate or prompt delivery, which are in good faith actually intended for "immediate or prompt delivery ,, ? as denned in article 33 (3) (d) of these regulations, ire not subject to tax 3652 (c) Transfers of sales, agreements of sale, or agreements to sell, to a clearing house by a person selling products or merchandise on exchange for future delivery who have paid the tax provided by law, are not subject to tax, provided such transfers do not vest any beneficial interest in the clearing house and are made for the sole purpose of enabling the clearing house to adjust and balance the accounts of members of the exchange and of such clearing house on their contracts. 3653 Art. 24. Inconsistent by-laws, rules, or customs of exchanges. — No provisions, by-laws, rules, or customs of any exchange, board of trade, or similar institution or place of business which are inconsistent or in conflict with any requirement or provision of the Revenue Act of 1921, or any regulations made thereunder, nor any collateral, or additional agree- ment, verbal or written, respecting the subject matter of such contract or the settlement or fulfillment thereof which is inconsistent or in conflict with any requirement of said act or regulations, shall exempt any person from the payment of tax imposed by subdivision 4 of said act. 3654 Art. 25. Memoranda of sales. — (a) Every person who makes sales, or agreements of sale, or agreements to sell, any products or merchandise at or under the rules or usages of any exchange, board of trade, or similar place, for future delivery, shall deliver to the buyer bill, memor- andum, or other evidence of such sale, agreement of sale, or agreement to sell, to which there shall be affixed a lawful stamp in value equal to the amount of the tax on such sale. 3655 (b) Such bill, memorandum, or other evidence duly stamped shall be kept by the buyer for two years, unless otherwise prescribed in these regulations. 3656 (c) No single sale or agreement of sale, or agreement to sell, made upon an exchange by one member for another need be evidenced by more than one stamped bill, memorandum, or agreement. 3657 Art. 26. Clearing house as agent. — (a) If any person who makea sales, agreements of sale, or agreements to sell any products or merchandise at or under the rules or usages of any exchange, board of trade, or similar place, for future delivery, shall in writing appoint the clearing house for the exchange upon which such sales are made, his agent for the purpose hereinafter named, such clearing house being approved by the commissioner, and shall make a written return or sheet of each such sale o such clearing house in accordance with these regulations, such return or 3heet shall be deemed to be the bill, memorandum, or other evidence required by these regulations to be delivered by the seller to the buyer and the clear- ing house is hereby authorized to affix to such return or sheet the amount of the stamps required for each sale, agreement of sale, or agreement to sell as indicated thereon and to cancel the stamps so affixed. 3658 (b) The affixing and canceling of such stamps by the clearing house ^Joid shall be held to be the act of the person making such contract of sale. Copyright 1922, by The Corporation Trust Company. WAR TAX 723 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3659 (c) If the person making such sale and the clearing house so elect, the seller may affix the stamps to the clearing house return or sheet snd cancel the same before or at the time of delivery to the clearing house. 1 he clearing house shall in no event accept such bill, memorandum of sale or clearing house return or sheet unless stamps for all the tax required to be paid thereon are attached and properly canceled. 3660 (d) The returns or sheets of sales so made to the clearing house shall in respect of each sale, set forth the date, the name of the seller, the name of the purchaser, the amount of the sale, the matter or things to which it refers, and the tax paid thereon, but a return for more than one sale may be made on the same paper or sheet. 3661 (e) The clearing house shall preserve for a period of not less than two years, each bill, memorandum or return, or sheet made to it by such person. 3662 (f) Every clearing house shall include in its monthly return to the commissioner a statement of the amount of stamps so affixed and canceled on the returns or sheets of each person. 3663 (g) The making of such return by the clearing house shall not relieve the person making such sale, or agreement of sale, or agreement to sell, from making the monthly return of his transactions required by Art. 29 of these regulations. 3664 Art. 27. Records to be kept by buyers and sellers. — (a) All persons who make sales or agreements of sale of, or agreements to sell (in- cluding so-called "transferred or scratch" sales, "pass outs," "pair offs > " "matched trades," or "give ups") any products or merchandise at, or under the rules or usages of, any exchange for future delivery, or are engaged in the business of accepting and transmitting orders for the purchase of such pro- ducts or merchandise to be executed at, or under the rules or usages of any exchange for future delivery, shall keep a record showing: (1) Date of contract. (2) Name of person executing contract (floor broker). (3) To whom sold or from whom bought (name and address). (4) Whether transaction is a purchase or sale. (5) Quantity of product or merchandise involved, whether in tons, pounds, bales, bushels, bags, mats, barrels, gallons, or whatever other unit of weight or measure is used. (6) Name of products or merchandise, including (if not a basis grade) grade, type, sample, or description (7) Whether contract is a "basis-grade," "deferred-acceptance," or what- ever kind of contract. (8) Price specified per ton, pound, bale, bushel, bag, mat, barrel, gallon, or whatever"other unit of weight or measure is used. (9) Tax paid. (10) Customer (name and address). (11) Origin of order (whether domestic or foreign). (12) Month or time specified in contract for delivery. (13) Date of settlement. (14) Method of settlement or adjustment. 3665 (b) Provided, That "floor brokers," or "two-dollar men," or "room traders", in lieu of the foregoing record, shall keep a record showing: (1) Date of transaction. (2) Name of person who'executed the order, if other than the floor broker. Copyright 1922, by The Corporation Trust Company. WAR TAX 724 SERVICE '1.7-8-22. Reg. 40.— 1922JEdition. STAMP TAX REGULATIONS. — 1922. (3) Name of seller. (4) Name of buyer. (5) Quantity of product or merchandise involved in the transaction. (6) Name of product or merchandise, including (if not a basis-grade con- tract) grade, type, sample, or description. (7) Whether the contract is a basis-grade contract. (8) Price. (9) Time specified in contract for delivery. (10) Name of persons to whom "given up," "paired off," "transferred or scratched," or "passed out." 3666 (c) Any other transactions than those specified in this proviso made by "floor brokers," "two-dollar men," or "room traders," shall be kept on the first form prescribed in this article. 3667 (d) Persons who use either of such forms may incorporate addi- tional columns which may be of use to them, such columns to be so placed as not to interfere with the columns and headings herein pre- scribed. 3868 (e) Such record forms will not be supplied by the department. 3669 (f) The foregoing records shall be legibly written in ink, and con- tracts of sale for future delivery of two or more distinct products or merchandise shall be kept separate. Each person who executes or makes such contracts of sale shall preserve the books, bills, memoranda, "sales tickets," or trading cards of all transactions, and the purchaser shall pre- serve the bill, memorandum, agreement, or evidence of sale to which the stamps are affixed for the period of two years, that they may be readily inspected by the revenue officer. 3670 (g) The form of record required by these regulations shall be sub- stantially as follows: [For copy of form see page 726.] Copyright 1922, by 1 he Corporation Trust Company. WAR TAX 725 SERVICE & 7-8-22. STAMP TAX REGULATIONS.— 1922. Reg. 40.— 1922 Edition. -2-° Si *> *± o c.2 .2 o> •A . y y o Uu y O E S *2 c v a) oc c « 2 E " bo §:e o . si g- J 0 ~ "S " 2 -n s « u : 6 g>-c o C o e <9 O g 5 2 3 2 2~ v C .5 0 -C .£ 0^5 g H 43 a: : : ; «to »: 5 y OTJ «. ■ : y . I. u y o °J! £.2 • : 2 *s I 5 i a' B * » 6 >» O >>4)U » 1)"° u . 2-0 § & S c e 9 u -g S 2 S °^ C • - - u it C O a o o u oj & 'C o E^ II , u !■: 2 c y y, -a 2 £ a , -a g u« „- q rj o cs S y * £-0 sg ™ Or; tt u> «> 9 J S s" -c h Copyright 1922, by The Corporation Trust Company. WAR TAX 726 SERVICE c 0 c y o c 5. y O y "CT3 y cl & E «E «TJ cn (8 9 « £~ "H i o.2 u 2 2 o- .2 ° 'Jee 2 8 C W "" a c <* y »j 'Si <3 y «! 3 y^ E u'o S3 -*.jd I ° 2 O « 9 O >> N « d 9 B EP" • ^ £ § « 0 . y IE « >> Hirj . O >> oj pro c c o -C JO c3 o * jjo - - . 5— B|"*i .- y - 7-8-22. Reg. 40.— 1922]Editi STAMP TAX REGULATIONS. — 1922. 3671 Art. 28. Records to be kept by clearing houses. — (a) All persons who act in the capacity of a clearing house shall keep a record showing: (1) Name of person for whom each contract is cleared. (2) Date when contract was made. (3) Whether the transaction is a purchase or sale. (4) Quantity of product, or merchandise, involved, whether in tons, pounds, bales, bushels, bags, mats, barrels, gallons, or other unit of weight or measure, as the case may be. (5) Name of product, or merchandise, including (if not a "basis-grade" contract) grade, type, sample, or description. (6) Whether the contract is a "basis-grade" contract. (7) Time specified in contract for delivery. (8) Date of settlement. (9) Method of actual settlement. 3672 (b) Records of sales for future delivery of two or more distinct products or merchandise must be kept separate 3673 (c) The clearing house shall preserve such records for the term of two years. 3674 (d) Such record forms will not be supplied by the department 3675 Art. 29. Returns of transactions. — (a) All persons who make contracts of sale or purchase of any product or merchandise, at or under the rules or usages of any exchange, board of trade, or other similar place of business, for future delivery, whether such contracts shall be cleared and adjusted through a clearing house, or directly between the seller and buyer, or otherwise, shall on or before the fifteenth day of each month, or at any other time required by the Commissioner, make a return in writing to the Commissioner, for the preceding month or any other period, verified before some officer authorized to administer oaths, showing: (1) The number of contracts of sale and purchase of each product or mer- chandise brought forward from the preceding month or period. (2) The number of contracts of sale and purchase of each product or mer- chandise on each day during the current month or period. (3) The month in which the products or merchandise are to be delivered. (4) The method of settlement of each contract, i. e., whether by "actual delivery," "notice," "ring," "direct," "transfer," "scratch sale," "pass out," "matched," "pair off," "set-off," "give up," through a clearing house or otherwise. (5) The tax paid thereon. (6) The number of contracts both of purchase and sale carried forward at the end of the month or period. (7) The amount of stamps on hand at beginning of month or period. (8) The amount of stamps purchased during month or period. (9) The amount of stamps used during month or period. (10) Balance of stamps on hand at end of month or period. (11) The origin of the order or the contracts, whether domestic or foreign. 3676 (b) Provided^ That "floor brokers," or "two-dollar men," or "room traders" may omit from their returns information called for under paragraphs marked (1), (6), and (11). But in the event such "floor brokers," "two-dollar men," or "room traders" shall make or settle transactions in any other way than by "transferred or scratch sales," "give ups," or "pass outs," they shall make the full returns prescribed in this article. Copyright 1922, by The Corporation Trust Company. WAR TAX 727 SERVICE 7-8-22. Reg. 40. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3677 (c) Such returns shall be made upon forms to be furnished, upon application, by the collector of internal revenue, of the district in which the exchange, board of trade, or other similar place is located. 3678 Art. 30. Returns by clearing houses. — (a) Every clearing house shall on or before the fifteenth day of each month, and at such other times as required by the Commissioner, make return in writing, under oath, to the Commissioner, for the preceding month or other period, showing: (1) The number of open contracts "long" and "short" brought forward for each member from the preceding month (2) The number of contracts bought and sold by each member of the association. (3) The number of tons, pounds, bales, bushels, bags, mats, barrels, or gallons, or other units of weight or measure involved in such con- tracts, as the case may be. (4) The month in which such product, merchandise, or commodity is to be delivered. (5) The method of settlement of said contracts, i. e., whether by "set off," "notice," or "delivery," or by what method. (6) Total tax paid by each member of the exchange. (7) The number of open contracts "long" and "short" carried forward for each member to the following month. 3679 (b) Such returns shall be made upon forms to be furnished, upon application, by the collector of internal revenue of the district in which the clearing house is situated. .rbnorn donb \o vcb rtanaaJirt ^rb siotad io no iUrfa {^^iwl^^i^o io t i3^nd 3680 Art. 31. Stamps may be affixed to returns. — (a) If any exchange shall by proper resolution request the Commissioner to permit the members of such exchange to affix the requisite amount of stamps on the returns made by such members to the Commissioner of all transactions made by such member at such exchange and cancel such stamps, and shall file with the Commissioner a copy of the charter and by-laws of such exchange accompanied with a list of the names and addresses of the officers and members of such exchange, designating those of such members who are active and those who are inactive on the exchange, then upon approval of such resolution by the Commissioner, instead of affixing the stamps to the bill or memorandum of sale as now required, it shall be lawful for the members of such exchange to affix the amount of stamps on such returns as shall represent the aggregate amount of tax due on all sales, agreements of sale, or agreements to sell, made by such member during the preceding month or other period designated by the Commissioner and such stamps shall be canceled by such member in the manner prescribed in these regulations. 3681 (b) Such returns, duly stamped, shall be filed and preserved for two years. 3682 (c) The stamping and filing of such returns shall not in any way relieve the members of such exchange from making and delivering to the buyer the memorandum or bill of sale prescribed by law and these regulations, nor the buyer from the necessity of preserving the same for the term of two years. 3683 Art. 32. Future delivery stamps. — The stamps to be used on sales, agreements of sale, or agreements to sell products or merchandise at or under the rules or usages of any exchange, or board of trade, or other Copyright 1922, by The Corporation Trust Company. WAR TAX 728 SERVICE 7-8-22. Reg. 40.-1922 Edition. STAMP TAX REGULATIONS. — 1922. similar place, for future delivery shall be the ordinary documentary stamps with the words "Future delivery" overprinted thereon, and they shall be known as "Future delivery stamps." PART IV. DEFINITIONS AND GENERAL PROVISIONS. 3684 Art. 33. Further definitions. — (1) When used in these regulations: 8084 3685 (a) The term "person" includes the plural as well as the singular, also individuals, partnerships, joint-stock companies, associations, and corporations, except when from the context it is plain that a different meaning is intended; 3686 (b) The term "issue" includes not only actual delivery of, but also acceptance of subscriptions to shares or certificates of stock, or of profits or of interest in property or accumulations in any corporation, joint-stock company, or association; 3687 (c) The term "reorganization" includes those business arrangements whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority, or the property is sold to a new corporation for new stock and bonds, or is sold by the foreclosure of a mortgage upon it to a purchaser who buys for himself and his associates, and the various proceed- ings and transactions by which succession of corporations is brought about, and also the proceedings by which existing corporations are continued under a different organization without the creation of a new corporation; 3688 (d) The term "broker" includes not only those persons defined as brokers in the Revenue Act of 1916, but also persons defined as commission merchants and commercial brokers under the Revenue Act of 1914, except those persons classed as commercial brokers under the Revenue Act of 1914 whose business it is to negotiate freight and other business for the owners of vessels or for shippers or consignors or consignees of freight carried by vessels, who, in the Revenue Act of 1918, are classed as ship brokers; 3689 (e) The act, omission, or failure of any official, agent or other person or corporation, employed by any person, partnership, company association, or corporation, within the scope of his employment or office, shall in every case be deemed also the act, omission, or failure of such person, partnership, company, association, or corporation. 3690 (2) As used in Parts I and II of these regulations: 3691 (a) The term "sale" or "transfer" includes sales, agreements to sell, memoranda of sales, or deliveries or transfers of legal title to shares or certificates of stock, except as otherwise specifically provided in these regulations; 3692 (b) The term "agreement to sell" includes options, calls in "puts and calls," offers, indemnities and privileges, and contracts, either in writing or by parol, to sell on the deferred or partial payment plan; 3693 (c) The term "share of stock" includes shares and certificates for shares of stock representing interest in corporations, joint-stock companies or associations, or interest in profits or in property or in accumu- lations in a corporation, and certificates for shares or interest in shares "if, as and when issued," and rights to subscribe for stock or interest in profits or in property or in accumulations, in any corporation; Copyright 1922, by The Corporation Trust Company. WAR TAX 729 SERVICE 7-8-22. Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3694 (d) The term "exchange" includes each and every agency, office, room, or other place of assembly whether under shelter or in the open, at which stock, rights, warrants, interests in property, or in profits, or in accumulations, by corporations, are publicly bought, sold, bid for, offered or exchanged between persons there assembled, in behalf of them- selves or others; 3695 (e) The term "clearing house" includes every corporation or associa- tion, whether incorporated or not, of individuals, partnerships or corporations wholly or partly engaged in the business of clearing, settling, , or adjusting transactions in the purchase, sale, receipt, or delivery of shares of stock, whether or not the same be a part or department of an exchange or an independent body. 3696 (3) As used in Part III of these regulations: 3697 (a) The term "sale" or "contract of sale" includes all sales, or agreements of sale, or agreements to sell, including so-called trans- fers or "scratch sales"; 3698 (b) The term "agreement of sale" or "agreement to sell," includes options, calls in "puts and calls," offers, indemnities, and privileges; 3699 (c) The term "transferred or scratch sale" includes "pass-outs" or those transactions in which a person buys from another a certain quantity of any product, at a certain price, and at the same session of an exchange, sells to a third person the same quantity of the same product at the same price, and eliminates himself by instructing the person from whom he brought to deliver such product to the person to whom he sold; but no transaction in which a broker or a commission member of an exchange receives a commission greater than that charged to a person who executes his own contracts shall be deemed to be a "transfer" or a "scratch sale"; 3700 (d) The term "'immediate or prompt delivery" means delivery at once or as soon as practical, and in any event within twenty days of the date of the sale, or agreement of sale, or agreement to sell; 3701 (e) The term "exchange," except where it is plain from the con- text that a different meaning is intended, includes each and every agency, board of trade, bourse, auction place, or other meeting place, whether under shelter or in the open, at which products or merchandise are publicly bought, sold, bid for, offered, or exchanged, for future delivery, or con- tracts for such future delivery are made, either between members of such exchange, or between members and nonmembers, patrons, and the public; and includes places at which there is only one manager or firm, who controls all the sales and purchases at that particular place or where no actual delivery of the products or merchandise is contemplated, and all incorporated and un- incorporated associations of individuals, partnerships, and corporations engaged in the business of publicly selling, buying, or exchanging products or merchandise for future delivery; 3702 (f) The term "at an exchange" means near to or in close proximity to or in the immediate vicinity of an exchange, as well as on the floor of an exchange; 3703 (g) The term "clearing house" includes each and every person, corporation, association, or committee engaged in the business o? clearing, settling, and adjusting transactions in the purchase, sale or de- livery of products or merchandise, whether such clearing house be a part or department of an exchange or an independent body. Copyright 1922, by The Corporation Trust Company. WAR TAX 730 SERVICE Reg. 40.— 1922 Edition. STAMP TAX REGULATIONS.- 1922. 3 704 Art. 34. Registration.— (a) Every person engaged, in whole or in part, in any of the following businesses or activities shall file £ .statement for registration with the collector of internal revenue of the district in which his principal office or place of business is located: 3705 (1) Persons engaged in negotiating, making, or recording sales, agreements to sell, deliveries or transfers of shares or certificates of stock, or rights, or warrants, or certificates of beneficial interest in profits, property, or accumulations of a corporation. 3706 (2) Persons conducting or transacting a stock brokerage business. 3707 (3) Persons accepting or procuring the transmission of orders for the purchase or sale or transfer of stocks, rights, warrants, certi- ficates of beneficial interest or interests in property, profits, or dividends, to be executed at a stock brokerage office or an exchange or similar place. 3708 (4) Persons engaged in the business of transferring stock other than their own. 3709 (5) Persons engaged in making sales or agreements of sale of, or agreements to sell, any products or merchandise at, or under the rules or usages of, any exchange, for future delivery; or engaged in the business of accepting or procuring the transmission of orders for such contracts of sale to be executed at an exchange, or under the rules or usages of an ex- change, for future delivery. 37 1 0 (6) Persons engaged in conducting an exchange or clearing house or clearing association for the clearing, adjusting, and settling trans- actions, made on exchanges or similar places: Provided, That in case the person conducting such an exchange has a department connected therewith engaged in clearing, adjusting, and settling transactions made on such exchange, he shall so state and shall give the names and addresses of the superintendent and secretary of such clearing house division or committee. 3711 (b) If the person required to file a statement for registration is also a member of an exchange, a seat on which is worth $2,000 or more, he shall state the average value of such seat for the year ending June 30 immediately preceding his registration. 3712 (c) In the case of a partnership of which two or more members are members of exchanges, the names of such members and of each exchange in which memberships are held shall be stated, together with the price of a seat on each exchange. 3713 (d) The statement above required shall be verified on oath by the person required to make such statement, or by the president or secretary of a corporation, association, or clearing house, and shall set forth specifically the character of the business to be conducted and the full name and address of each person or member of a partnership engaged in such business: Provided, That, in the case of a corporation or association, the statement for registration shall set forth the date and place of incorporation and the principal office or place of business both within and without the State where incorporated, with the names and addresses of the chief officer and secretary of such corporation, and be accompanied with a list of the members and their addresses. 3714 (e) Each exchange or clearing house shall also file with such col- lector a copy of its constitution, charter, or agreement of associa- tion and by-laws, rules and regulations, and all amendments thereto as the same may from time to time be adopted, and the names and addresses of new members as from time to time admitted to membership. Copyright 1922, by The Corporation Trust Company. WAR TAX 731 SERVICE 7-8-22. Rog. 40. -1922 KHition. STAMP TAX REGULATIONS. — 1922. 3716 (f) If the person or corporation required to file such statement has been licensed under the laws of any State or under any other provision of Federal law the date and place at which such license was issued •hall be stated. 37 IS (g) In case a person registered as required by these regulation* shall suspend or close his business before the end of the year for which he is registered, he shall file in the office of the collector of internal revenue in which he is registered a certificate to that effect, giving the date on which he suspended or closed his business. 37 1 7 (h) Such statement for registration shall be made on a form to be furnished upon application to the collector of internal revenue 37 18 Art. 35. Record of registration kept by collector. — (a) Every collector shall file and preserve each statement for registration filed with him in accordance with these regulations, and shall issue to each person, partnership, exchange, clearing house, or corporation a certificate of regis- tration, showing the date of issue, the name of the person, or exchange, clearing house, or corporation, conducting the business, the nature of the business for which the license is granted, and the date of expiration of said registry, which certificate of registration shall be signed by the collector, and shall be posted in some prominent place in the office of said person, partnership, exchange, clearing house, or corporation during the period for which it is issued. 3719 (b) If such business is conducted at more than one place, a cer- tificate shall be so posted in each such place of business. BROKERS. 3720 Art. 36. Brokers.— (a) The special tax paid by a firm or corpora - 7502 tion as broker, covers individual members of the firm or corporation, as long as such members are trading solely for the benefit of the firm or corporation. 372 1 (b) A broker who owns a single seat only in one exchange is required to pay the special tax of $50 per year and in addition a tax at the rate of $100 or $150 per year, according to the value of the seat in the exchange or organization of which he is a member. 3722 (c) If a broker owns a seat in more than one exchange, the addi- tional tax which he is required to pay is the sum of the taxes upon all the seats owned by him. 3723 (d) If a broker owns more than one seat in the same exchange, he is subject to the additional tax onlv uoon the value of a single seat. 3724 (e) If a partnership or corporation owns a number of seats in the name exchange, but holds such seats in the name of the individual members of the partnership or corporation who transact business solely for the benefit of the partnership or corporation, the tax on the ownership of such seats or memberships in such exchange shall not apply to each individual in the partnership or corporation, but only to one seat or one membership. 3726 (f) Where the possession of shares of stock is a prerequisite to membership in an exchange, the lessee of a share of stock in such exchange is liable for the additional tax imposed bv subdivision 1 of section 1001 [1(7502]. CoPyriglU 1922, by The Corporation Irast Company. WAR TAX 732 SERVICE 7-8-22. (2) 8-3-22. Reg. 40.-1922 Edition. STAMP TAX REGULATIONS. — 1922. AFFIXING AND CANCELLATION OF STAMPS. 3726 Art. 37. Affixing and cancellation of stamps. — (a) In the case of 3514 the issue of shares of stock, whether on organization or reorganiza- 3522 tion, the stamps representing the tax shall be affixed to the stock books and not to the certificates issued. 3727 (b) In the case of a sale before certificates are issued, where the evidence of transfer is shown only by the books of the corporation, the stamps shall be placed on such books. 3728 (c) In case the change of ownership is effected by transferor de- livery of the certificate, i. e., where the name of the transferee is inserted in the indorsement or power of attorney on the back of the certi- ficate, the stamp shall be affixed to such certificate and canceled by the person making the sale. 3729 (d) In case of agreement to sell, or where the transfer is'by delivery of the certificate assigned in blank, the stamp shall be affixed to the bill, memorandum, or agreement to sell, and canceled by the seller. 3730 (e) In no event shall any transfer agent or corporation accept or transfer any shares of stock or certificates unless stamps for all transfer tax required thereon have been properly affixed either to the certi- ficates of stock or memoranda of sale, as the case may be, and duly canceled. 3731 (f) The person using or affixing the stamp shall write or stamp 3513 thereon, in ink, his initials and the day, month, and year on which the same shall be affixed, or shall, by cutting or canceling with a machine or punch, affix his initials and the date as aforesaid, and so deface such stamp as to render it unfit for reuse. In addition to the foregoing, stamps of the value of 50 cents or more shall have three parallel incisions made with some sharp instrument lengthwise through the stamp after the same has been attached to the certificate or bill, or memorandum, or other evidence of sale or transfer: Provided, That this shall not be required where stamps are canceled by perforation: And provided further, That the cancella- tion by either method shall not so deface the stamp as to prevent its denom- ination and genuineness from being readily determined. PART V. ADMINISTRATIVE. [T3515, 1(8000-2, H8064, and ^807 1-2] 3732 Art. 38. Failure to make returns; substitute returns. — (a) If any person or clearing house required to make returns by this Act or the regulations thereunder shall fail or refuse to make any such return within the time prescribed by these regulations or designated by the Com* missioner, then the same shall be made by an internal-revenue officer upon the inspection of the books of the person or clearing house so required, but the making of such return by an internal revenue officer shall not relieve the person or clearing house from any default or penalty incurred by reason of failure to make such return. 3733 (b) Any officer designated by the Commissioner shall have authority to examine the books, papers, and records kept pursuant to these regulations, and may require the production of any books, records, papers or statements of account necessary to determine any liability to the tax imposed by this Act or the observance of the provisions of the regulations made in accordance therewith. Copyright 1922, by The Corporation Trust Company. WAR TAX 733 SERVICE 7-8-22. (5) 8-3-22. Reg. 40 —1922 Edition. STAMP TAX REGULATIONS. — 1922. SALE OF STAMPS. 3 734 Art. 39. Sale of Stamps. — (a) No person other than a collector 3517 of internal revenue or duly authorized deputy collector of internal revenue, assistant treasurer, or designated United States depositary shall sell or expose for sale, give away, traffic in, trade, barter, lend, borrow, or exchange any stamps issued pursuant to these regulations: Provided, That iny person or corporation which has been duly appointed and constituted and is acting agent of any state for the sale of stock transfer stamps of such tate. may upon approval by the Commissioner and upon giving a bond satisfactory to the collector, sell United States stamps issued pursuant to 'hese regulations; Provided further. That a bond shall not be required when such person or corporation uniformly purchases such stamps from the collect- >r for cash. As used in this article, the term "stamps issued pursuant to r hese regulations" or "stamps to be used under these regulations" shall mean "stock transfer stamps" and "future delivery stamps." 3736 (b) No person shall buy, receive, or have in his possession, or under his control, any stamps issued pursuant to these regulations, unless •uch stamps have been purchased directly from the collector of internal revenue, or duly authorized deputy collector of internal revenue, assistant treasurer, United States designated depositary, or a designated agent for the sale of State stock transfer stamps, authorized by the Commissioner, in the district in which the stamps are to be used. 3736 (c) All requisitions for stamps to be used under these regulations shall be made in writing, on a form prescribed by the Commissioner, to the collector of internal revenue or duly authorized deputy collector of internal revenue, assistant treasurer, or designated United States depositary, or State agent authorized by the Commissioner, in the internal-revenue district in which the stamps are to be used, giving the date thereof, the number and denomination of stamps applied for, and the name and address of the purchaser, and shall be signed in ink by the person receiving such itampi. 3737 (d) If the requisition for such stamps shall be made to any assis- tant treasurer or United States designated depositary or duly author ized state agent for sale of state stock transfer stamps, such assistant treas- urer, or United States designated depositary, or duly authorized state agent shall keep a record thereof, and on or before the fifteenth day of each month shall file with the collector of internal revenue of the district a statement, for the preceding month, setting forth the number, denomination, and amount of all stamps on hand at the beginning of the month, the number, denomination, and amount sold during the month, and the number, de- nomination and amount on hand at the end of the month, accompanied with the requisition filed by each purchaser, and on or before the fifteenth day of each month shall pay over to such collector of internal revenue all money received from sales of such stamps for the preceding month, taking his re- ceipt therefor: Provided, that any assistant treasurer or United States designated depositary or duly authorized state agent for the sale of state stock transfer stamps who uniformly purchases such stamps for cash shall not be required to keep the record or make the return above prescribed, but the stamps shall be resold only upon requisition as prescribed in paragraph (c), and all requisitions shall be filed with the collector on or before the fifteenth day of each month for the preceding month Copyright 1922. by The Corporation Trust Company. WAR TAX 734 SERVICE 7-8-22. Reg. 40.— 1922 Editioa. STAMP TAX REGULATIONS. — 1922. 3738 (e) The collector of internal revenue shall keep the requisitions for stamps sold by him and those sold by such assistant treasurer, designated United States depositary, or authorized State agent, separate ■and apart from all other requisitions for stamps, and shall preserve them in his office for a period of t wo years. FINES AND PENALTIES. [flS&O^fe] 1j3507-12, and ^353L ( ! 3739 Art. 40. Sections of the Revised Statutes applicable. -The pro visions of the internal-revenue laws of the United States, so far as applicable, including sections 3173, 3174, 3175, and 3176 of the Revised Statutes as amended, are applicable to the Revenue Act of 1918. [Sec ^4016.] DATE EFFECTIVE. 3740 Art. 41. Date effective.— (a) Issues, sales, or transfers on or after 3500 December I, 1917, and prior to April 1, 1919, are subject to tax under the Revenue Act of 1917. 3740a (b) Issues, sales, or transfers on or after April 1, 1919, and prior to January 1, 1922, are subject to tax under the Revenue Act of 1918. 3741 (c) Issues, sales, or transfers on or after January P, 1922, are sub- ject to tax kinder the Revenue Act of 1921. REDEMPTION OF OR ALLOWANCE FOR STAMPS. 3741 a Art. 42. Stamps rendered useless, affixed in error, or for which the owner has no use.— Where documentary stamps are rendered useless by gumming or sticking together in transit or otherwise without fault of the purchaser, they may be exchanged by a collector for other stamps of exactly the same quantity and denomination. Amounts paid for stamps used in excess, or on instruments not actually effective and for which a substitute is prepared and stamped, or on instruments not subject to tax or for which the owner has no use, may be refunded, upon claim properly presented to the collector. 3741b Art. 43. Claims. — All claims for the redemption of or allowance for stamps must be presented within two years after the purchase of said stamps from the Government. The provisions of sections 3220 to 3228 Revised Statutes do not apply to the redemption of or allowance for internal revenue stamps, and the authority for such redemption or allowance is the act of May 12, 1900 (3 1 Stats. 177), as amended by the act of June 30, 1902 (32 Stats. 506), set forth below [i. e., as set forth beginning at * T 8Q24l . REFUNDS. [ f t8023, ^8056-8058.] 3741 c Art. 44. Refunds. — Where taxes are paid pursuant to an assessment and not by the affixing of stamps, claims for the refund of amounts so paid are governed by Sections 3220-3228 R. S. [beginning at ^[8023 herein], as amended, and must be presented within four years next after payment of such taxes, as provided in Section 1316 of the Revenue Act of 1921 f r 8056|. Cop-yri#ht by The Corf-oration Trust Company. *r£$ tax i$$ titivitt 7-8-22. Ht-R. 40. 1922 Edition. STAMP TAX REGULATIONS. — 1922. AUTHORITY FOR REGULATIONS. 3742 Art. 45, Promulgation of regulations.— In pursuance of the statut* the foregoing regulations are hereby made and promulgated and a!! rulings inconsistent therewith are hereby revoked C. P. Smith, Acting Commissioner of Internal Revenue. Approved July 8, 1922. [Released for publication July 20, 1922,1 A, W. Mellon, Secretary of the Treasury. Copyright 1922. by Tkq C«r/va**o." Trust Comp*m$, WA1 TA* 7$% ttftTOCl 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. REGULATIONS No. 55—1922 EDITION. (Promulgated June 12, 1922.) Fully indexed on the blue pages at the end of this "Stamp Taxes" division . STAMP TAXES ON DOCUMENTS. (Except on issue, sales and transfers of certificates of stock and sales of products for future delivery [for which see page 709] ) Imposed by Title XI of the Revenue Act of 1921. REGULATIONS— STAMP TAXES. 3743 Title XI, Revenue Act of 1921, imposing stamp taxes is effective 3500 on and after January 1, 1922. See section 1100 [1j3500]. BONDS, DEBENTURES, AND CERTIFICATES OF INDEBTEDNESS. 3744 Article 1. Delivery essential to issue. — Delivery is essential to 3520 constitute an issue of bonds. 3745 Art. 2. "Fcregoing" defined.— The word "foregoing" in Schedule Al is held to apply to the class of instruments listed therein, re- gardless of whether issued prior to or after January 1, 1922, and not merely to instruments issued on or after January 1, 1922. 3746 Art. 3. Bonds accompanying real estate mortgages. — Bonds accompanying real estate mortgages are taxable as bonds of in- debtedness upon the amount secured. 3747 Art. 4. Bonds renewed by agreement extending mortgage. — An agreement extending a mortgage upon maturity, where a bond is secured by the mortgage and such agreement operates to renew the bond, subjects the latter to stamp tax as a renewal. 3748 Art. 5. Agreement extending maturity of mortgage bond; ad- ditional bond, — An agreement between the holder of a bond and the present owner of a parcel of real estate, extending maturity of a mortgage bond executed by a former owner, operates as a renewal and such renewal is subject to tax. If in addition a new bond is given for the same in- debtedness, it also is subject to tax. 3749 Art. 6. Stamps may be affixed to bonds or indenture; bonds to bear legend. — The necessary revenue stamps may be affixed either to the bonds or to the indenture under which the bonds are issued. If the stamps are affixed to the indenture the bonds must bear a legend showing that the proper revenue stamps have been affixed to the indenture and duly canceled. If the indenture provides for the issue of bonds over a period of years, the necessary stamps may be affixed at the time of each issue. Copyright 1922, by The Corporation Trust Company. WAR TAX 737 SERVICE 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3750 Art. 7. Interim certificates and temporary bonds. — Interim certifi- cates or temporary bonds issued in lieu of definitive bonds are tax- able, but no additional tax is required upon the issue of the permanent or definitive bonds, which, however, should bear notation of the fact that stamps in the proper amount were duly attached to the interim certificates. 3751 Art. 8. Instruments issued in numbers, under a trust indenture, are bonds. — Instruments containing the essential features of a prom- issory note, but issued in series, secured by a trust indenture, either in reg- istered form or with coupons attached, embodying provisions for acceleration of maturity in the event of any default by the obligor, for optional registration in the case of bearer bonds, for authentication by the trustee, and in some instances for redemption before maturity, or similar provisions, are bonds within the meaning of the statute, whether called bonds, debentures, or notes. 3752 Art. 9. Scrip-dividend certificates or warrants. — Scrip-dividend certificates or warrants are taxable as certificates of indebtedness. 3753 Art. 10. Instrument styled a bond and under seal a bond, unless.— An instrument which is styled a "bond" and which is under seal should be held subject to tax as a bond unless it is shown affirmatively that it is not a bond. 3754 Art. 11. Business property investment bond. — A business property investment bond wherein it is certified that the holder thereof is the owner of an interest in certain specified property, legal title to which has previously been conveyed to a trustee, and whereby the corporation issuing the same agrees to manage the property and distribute the proceeds in a certain manner, is not subject to tax as a bond, debenture, or certificate of indebtedness, but is subject to tax as a certificate of interest in property issued by a corporation. 3755 Art. 12. Instrument assigning interest in bond. — An instrum^rt which merely represents an assignment of interest in a bond accom- panying a mortgage is not taxable. 3756 Art. 13. Certificates of deposit; Morris-plan banks. — Any strument which is actually a certificate of deposit issued by a bank is exempt from stamp tax, regardless of whether it is negotiable or non- negotiable or whether it is payable on demand or at some specified time. Certificates of deposit issued by banks or organizations operating upon the Morris plan are not subject to stamp tax. ©1 abnod ; a luJiiabn! 10 abnod o) bsxift* ed ^bcq 2qaiat3 .d .fik . e*TE 3757 Art. 14. Certificates of indebtedness. — (a) The term '^certificates of indebtedness" includes only instruments having the general char- acter of investment securities as distinguished from instruments evidencing debts arising in ordinary transactions between individuals. [See *4010.] 3758 (b) Conditional bills of sale used in the sale of merchandise on the installment plan are not certificates of indebtedness within the meaning of Schedule Al and are not subject to stamp tax unless containing an obligation in the form of a promissory note. Copyright 1922, by The Corporation Trust Company. WAR TAX 738 SERVICE 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3759 Art. 15. Certificates of indebtedness issued by receivers, — A certificate of indebtedness issued under order of a Federal court by a receiver is subject to tax. 3760 Art. 16. Bonds of indebtedness executed and delivered as security. — The tax applies to bonds of indebtedness executed by the obligor and delivered to a bank or trust company as security for the payment of an obligation. 3761 Art. 17. Bonds executed in Canada and delivered in the United States. — Bonds executed in Canada by a Canadian corporation, certified to by a trustee in the United States, given for part of the purchase price of timber located in Canada, and delivered in the United States arc subject to tax. 3762 Art. 18. Bonds issued in satisfaction of insurance policies. — Bonds issued by life insurance companies in satisfaction of insurance policies are subject to tax. 3763 Art. 19. Bonds issued by school districts. — Bonds issued by school districts for school purposes are exempt from tax. 3764 to 3779 Blank. [No tax on indemnity and surety bonds under the Revenue Act of 1921.] Copyright 1922, by. The Corporation Trust Company. WAR TAX 739 SERVICE 6-12-22. Reg. 55.— 1922 Edition. STAMP TAX REGULATIONS.— 1922. CAPITAL STOCK, ISSUE. 3780 Schedule A 2. CSee Regulations No. 40, 1922 Edition, covering this subject [113547 — Complete table of contents, page 709].*) SALES AND TRANSFERS OF CERTIFICATES OF STOCK. 3781 Schedule A 3. (See Regulations No. 40, 1922 Edition, covering this subject [^[3590 — Complete table of contents, page 709].*) SALES OF PRODUCTS FOR FUTURE DELIVERY. 3782 Schedule A 4. (See Regulations No. 40, 1922 Edition, covering this subject [^3647 — Complete table of contents, page 709].*) *Pending the release of Reg. 40, 1922 Edition, the reference is to the regulations under the 1918 Act.— C. T. Co., June 12, 1922. DRAFTS, CHECKS, AND PROMISSORY NOTES. 3783 Art. 20. Drafts and checks payable otherwise than at sight or on 3534 demand. — Drafts and checks payable otherwise than at sight or on demand become subject to stamp tax if delivered or accepted within the United States. [See 1J4004 and 1(4009.] 3784 Art.2 1 . Time draft or check taxable on acceptance or delivery. — A time draft or check becomes subject to tax concurrently with its acceptance or delivery, whichever is prior, within the territorial juris- diction of the United States, which includes the States, District of Columbia, Hawaii, and Alaska. Time drafts drawn and delivered outside of the United States are subject to the tax upon their acceptance within the United States. 3785 Art. 22. Drawee, payee, or indorsee to see that tax is paid. — Thr drawee, payee, or indorsee should see that the tax is paid before or a: the time of acceptance or delivery. The question of who shall pay the tax is a matter for adjustment between the parties. 3786 Art. 23. Draft drawn abroad on foreign drawee with foreign payee. — If a draft drawn abroad on a foreign drawee with a foreign payee passes through a bank here in the course of collection, no tax is payable unless it should be delivered by an agent of the drawer to an agent of the payee within the United States. 3787 Art. 24. Liability to tax determined by form or face of check or draft. — The liability of drafts or checks to stamp tax as well as the amount of such tax is determined by their form and face and can not be affected by proof of facts or instructions outside of the drafts or checks. A draft expressed to be payable at sight on "arrival of car," or embodying a memorandum tc hold until arrival of car, is taxable. A sight draft ac- companied by instructions outside the instrument deferring time of pay- ment is not taxable. 3788 Art. 25. Draft accepted for payment at future date. — A draft stating no time for payment which is accepted for payment at a certain future date is taxable upon such acceptance as a time draft. 3789 Art. 26. Trade acceptances. — So-called "trade acceptances'' .un- taxable in the same manner as ordinary time drafts. [See *|4005.] Copyright 1922, by The Corporation Trust Comf nny. WAR TAX 740 SERVICE 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3790 Art. 27. Drafts against actual shipment. — Drafts directly against an actual shipment are taxable in the same manner as other domestic time drafts. 3791 Art. 28. Time draft covering exports to foreign country.— A time draft directly covering exports to a foreign country and which con- stitutes an inherent, necessary, and bona fide part of the actual process of exportation is exempt from stamp tax. This exemption does not depend on whether or not the time which the draft has to run will expire before or after the ocean shipment. Time drafts drawn against the proceeds of the foregoing draft are subject to stamp tax. [See ^[4005 and ^j4009.] 3792 Taxable and nontaxable drafts directly and indirectly involved with exports. — Further reference is made to your letter of August 24, 1920, wherein you request, for the information of the Equitable Trust Company of New York, a ruling as to the application of stamp tax upon transactions connected with the exportation of merchandise in foreign commerce. [See 1(4005.] 3793 The transactions mentioned by you are as follows: "Q}? The. exporter draws a time draft upon the buyer abroad for the sale price of the merchandise and presents this draft, accompanied by the shipping documents, to his bank for discount. It is clear that such a draft is not subject to the stamp tax and it has been so ruled by the Internal Revenue Department. 3794 "(2). It sometimes happens that the exporter is unable to negotiate a draft drawn by him in the manner above set forth so that he may receive the full value for the same, but he may be able to obtain a loan or advance in some form from his bank, which will take the draft in question for collection. In such case the exporter may give a note to the bank secured by the draft; or, instead of borrowing money from the bank and giving his note therefor, the exporter may draw a second draft payable at a future date upon his bank, payment for which second draft is to be liquidated by the payment of the draft drawn upon the foreign buyer. The question is whether the note or draft given to or drawn upon the bank in the foregoing circumstances is subject to stamp tax. 3795 In the event that the note or draft given to or drawn upon the bank, as stated in paragraph (2), is not subject to stamp tax, the question is whether any renewal of such note or drafts given because of the fact that the original draft drawn upon the foreign buyer has not been collected during the period of the original financing is subject to stamp tax. 3796 "(4). Methods of financing similar to those outlined in paragraph (2) are used in connection with exportations of merchandise where the original documents forwarded abroad are not accompanied by drafts upon the buyers but are either forwarded against sales previously made or on consignment, to be sold either on arrival or perhaps to await better market conditions. The exporter either borrows money from his -bank and gives his note or draws his draft upon his bank payable at a future date, with the understanding that the proceeds of the sale of the mer- chandise are paid in to the collecting bank abroad for the account of the bank making the loan or discounting the draft of the exporter in the United States; such proceeds from time to time to be used in liquidating such loan or advance. The question is whether the note or draft given in connection with such a transaction would be subject to stamp tax. Copyright 1922, by The Corporation Trust Company. WAP TAX 741 SERVICE 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3797 "(5). The same question as outlined in paragraph (3) arises in connection with renewals of the note or draft given in connection with the transaction referred to in paragraph (4)." 3798 In reply your attention is called to Article [28,^1379 1] of Regulation? 55, a copy of which is inclosed. The exemption extended by that article applies only to time drafts directly covering exports to a foreign country and which constitute an inherent, necessary and bona fide part of the actual process of exportation. This exemption does not apply to time drafts drawn against the proceeds of other drafts which are exempted or upon time drafts made against sales previously made or on consignments, to be sold either on arrival or perhaps to await better market conditions. 3799 The typical draft which is exempt from the tax as a part of the process of exportation is the one attached to the bill of lading and drawn upon the foreign buyer, which may be discounted and negotiated in this country. The exemption from tax has been held to extend to equivalent drafts drawn upon funds or agencies established in this count! y by foreign governments or buyers to facilitate exchange. Exemption does not extend to drafts which represent the preliminary or subsequent adjustment or use of accounts or funds involved in exportation 3800 It is, therefore, held by this office that the draft covered by paragraph (1) of your inquiry is not subject to stamp tax. 3801 However, the drafts and notes, and this includes renewals, covered by the remaining paragraphs of your letter, cited above, do not directly cover exports to a foreign country and do not constitute an inherent, necessary and bona-fide part of the actual process of exportation and do not come within the exemption extended by Article [28], and are, therefore, subject to stamp tax. (Letter to Murray, Prentice and Rowland, New York, N. Y.. signed by Commissioner Wm. IV1. Williams, and dated September 21, 1920.) 3802 Art. 29. Time draft to secure purchase money. — A time draft drawn on a domestic bank for the purpose of securing money to purchase goods to be exported is subject to tax regardless of the fact that a contract for the sale of the goods existed at the time the draft is drawn. 3803 Art. 30. Time drafts on domestic banks covering exports. — A time draft directly covering a sale for export to a foreign buyer and drawn on a domestic bank as the authorized acceptor of the foreign buyer is exempt from stamp tax. A time draft drawn by or on an exporter or on his bank in payment for export shipments made by the manufacturer on the exporter's order is subject to stamp tax. 3804 Art. 31 . Time drafts payable in foreign countries. — Time drafts not covering exports drawn and delivered or accepted in the United States and payable in foreign countries are taxable. 3805 Art. 32. Time drafts covering shipments to Canal Zone. — Stamp tax attaches to time drafts covering articles shipped from the United States, Hawaii, and Alaska to Canal Zone, if the drafts are delivered within the United States, Hawaii, or Alaska. 3806 Art. 33. Time drafts covering shipments to Virgin Islands, Philip- pines, and Porto Rico. — Stamp tax does not attach to time drafts covering shipments to the Virgin Islands, Philippines, and Porto Rico, because of express legislation exempting shipments to these dependencies. Copyright 1922, by The Corporation Trust Company. WAR TAX 742 SERVICE 6-12-22. Reg. 55—1922 Edition. STAMP TAX REGULATIONS . — 1 922 . 3807 Art. 34. Time drafts covering shipments from Virgin Islands, Philippines, and Porto Rico.— Time drafts drawn against shipments from the Virgin Islands, the Philippines, and Porto Rico, into the United States, are subject to stamp tax if delivery or acceptance of said drafts first takes place within the United States, Alaska, or Hawaii. 3808 Art. 35. "Promissory notes." — (a) A promissory note is an un- conditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to such other person, or to order or to bearer, free from restrictions as to registration or transfer, and usually with- out coupons. 3809 (b) The stamp tax on a promissory note is measured by the amount of the principal obligation without regard to the form in which the obligation to pay interest is expressed. 3810 Art. 36. Notes payable on demand promissory notes. — The term "promissory notes," as used in this Schedule, includes those payable on demand. 3811 Art. 37. Promissory notes given as security. — Promissory notes given for security only are subject to tax. 3812 Art. 38. Renewal of promissory note taxable. — Each renewal of a promissory note is taxable. Any writing or instrument however designated which operates as a renewal of a promissory note is taxable. [See 14008.] 3813 Art. 39. Extension or renewal of promissory note by extension of mortgage by which secured. — Where a contract or agreement ex- tending either a chattel or real estate mortgage operates to extend or renew a promissory note secured by the mortgage the renewal of such note is taxable. [See f*008.] 3814 Art. 40. Promissory notes given to Federal land banks and joint- stock land banks. — (a) Promissory notes given to Federal land banks and joint-stock land banks when secured by first mortgages are exempt from stamp tax. 3815 (b) Promissory notes issued by Federal land banks are exempt from stamp tax. 3816 (c) Promissory notes issued by joint-stock land banks are subject to stamp tax. 3817 Art. 41. Promissory notes issued by foreign governments.-— Promissory notes issued directly by foreign governments and placed in this country for sale are exempt from stamp tax. 3818 Art. 42. Promissory notes secured by obligations of the United 3535 States. — Promissory notes secured by United States bonds and obligations issued after April 24, 1917, of a par value of not less than the amount of such notes are exempt from tax. " m I 3819 Food Administration Grain Corporation Notes.— Promissory notes issued by Food Administration Grain Corporation are subject to Copyright 1922, by The Corporation Trust Company. WAR TAX 743 SERVICE 6-12-22. Reg. 55.-1922 Edition. STAMP TAX REGULATIONS.— 1922. stamp tax. (Telegram to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 10, 1919.) 3820 Art. 43. Promissory notes secured by certificates of indebtedness issued by Director General of Railroads or by bonds of the War Finance Corporation. — Promissory notes secured by certificates of indebted- ness issued by the Director General of Railroads are exempt from stamp tax. Promissory notes secured by bonds of the War Finance Corporation are subject to tax. 382 1 Art. 44. Suspension of payment or forbearance. — Mere suspension of payment or forbearance is not taxable. 3822 Art. 45. Coupons and interest notes. — (a) Coupons attached to bonds, debentures, or certificates of indebtedness issued by any individual, partnership, or corporation, or to instruments, however termed, issued by a corporation and known generally as corporate securities (all of which are subject to tax as bonds of indebtedness under Schedule A 1), are not subject to tax if they impose no obligation not imposed by the principal instrument. 3823 (b) Interest coupons attached to promissory notes taxable under Schedule A 5, as distinguished from the securities enumerated in paragraph (a), if they are themselves promissory notes, separable from the principal obligation and negotiable independently of it, are subject to tax, ■even though they impose no obligation not imposed by the principal in- strument. 3824 Art. 46. Payment of interest on demand note not a renewal.— The mere payment of interest on a demand note without any agree- ment in writing extending the note, is not a renewal within the meaning of this act. 3825 Art. 47. Payment of interest in advance after maturity of promis- sory note a renewal. — Where after maturity of a promissory note, interest is paid in advance, and as evidence of such payment an indorse- ment in substance as follows: "19 — . Received six months' interest to , 19_^ $ " i s ma de on the note, the indorsement operates as a renewal, and the renewal is subject to tax. **?e Art *8 Policy loan and premium extension agreements.— Policy loaned premium extension agreements which contain an nu- llified oromise to pay a specified sum of money at a certain date are ?ub& as promissory notes. Where the sole.remedy of payee in case of nonpayment of the premiums or loans is to reduce or cancel the rights of the insured, tax does not accrue. 3827 Art. 49. Certificates of deposit. — A certificate of deposit is not subject to tax as a promissory note. 3828 A-t 51 Post-dated checks.— Post-dated checks are not subject to tax* unless expressly payable after their date. aa >9 Art 54, Promissory note executed and mailed in Canada.-A promissory note executed and mailed in Canada to a payee within the United States is not subject to tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 744 SERVICE 6-12-22. Reg. 55—1922 Edition. STAMP TAX REGULATIONS. — 1922. 3830 Art. 52. Promissory note executed and mailed to payee in Canada. — A promissory note executed and mailed in the United States to a payee in Canada is subject to tax. DEEDS OF CONVEYANCE. 383 1 Art. 53. Who shall affix stamps. — The law requires that the person 3536 who makes, signs, or issues any instrument taxable thereunder shall affix and cancel the revenue stamps. it also prohibits any person from accepting such instruments unless they are properly stamped. The grantee in a deed is liable for the tax as we'll as the grantor. 3832 Art. 54. Actual value at time of conveyance the measure of the tax. — Where the consideration for a conveyance of lands, tene- ments, or other real property, is left open, to be fixed by future contingencies, the actual value at the time of conveyance is the measure of the tax upon the deed, instrument, or writing whereby the conveyance is made. 3833 Art. 55. Tax, how computed. — In calculating the amount of stamps which must be affixed to a deed of conveyance, the tax is computed upon the full consideration for the transfer less all encumbrances which rest on the property before the sale and which are not removed by the sale. Encumbrances placed on the property in connection with and as a result of the sale or transfer, as well as notes for deferred payments, can not be deducted in determining the amount upon which tax is calculated, 3834 Art. 56. Tax on deed executed by sheriff, referee, or commissioner, how computed.. — The stamp tax on a deed of real property executed by a sheriff, referee, or commissioner to mortgagee, who bids in the property at foreclosure sale to satisfy a mortgage lien, should be computed upon the amount bid for the property plus the cost, if paid by the purchaser. 3835 Art. 57. "Sold" defined. — The term "sold" imports the transfer of the absolute or general title for a valuable consideration or price. 383 Q Art. 58. Deeds executed and delivered on or after Jan. 1, 1922. — Deeds executed and delivered on or after January 1, 1922, conveying property in pursuance of a contract made prior to that time are taxable. The same rule applies to similar deeds delivered prior to January 1, 1922, and taxable under the act of 1918 approved February 24, 1919. 3837 Art. 59. Deed dated prior to Jan. 1, 1922, but acknowledged and delivered after that date. — A deed dated prior to January 1, 1922, but delivered subsequent to that date, is taxable under the Revenue Act of 1921. If delivered between December 1, 1917, and April 1, 1919, it is taxable under the act of October 3, 1917. If delivered subsequent to April 1, 1919, and prior to January 1, 1922, it is taxable under the act of 1918, approved Feb- ruary 24, 1919. 3838 Art. 60. Deeds in escrow. — Deeds in escrow become subject to stamp tax upon delivery to the grantee. If delivered between December 1, 1917, and April 1, 1919, they are taxable under the act of October 3, 1917; if delivered on or after April 1, 1919, they are taxab!e under the act of February 24, 1919; if delivered on or after January 1, 1922, they are taxable under the Act of 1921. Copyright 1922, by The Corporation Trust Company. WAR TAX 745 SERVICE 6-12-22. Keg. 55.— 1922 Edition. STAMP TAX REGULATIONS. — 1922. 3839 Art. 61. Deeds conveying property sold under foreclosure or execution; tax, how paid. — Deeds executed by masters in chancery, sheriffs, clerks of courts, etc., to cover transfers of property sold under a foreclosure or execution are subject to tax. The grantee or vendee may be required to pay the tax or the cost of revenue stamps may be included in the expenses of foreclosure sale. 3840 Art. 62. Deeds on exchange of properties. — In the case of an exchange of two properties, the deeds transferring title to each are subject to tax, which should in each case be computed on the basis of the actual value of the interest or property conveyed, the amount of any pre- existing lien or encumbrance which is not removed by the sale being de- ductible. 3841 Art. 63. What constitutes real property determinable by law of State where located. — (a) What constitutes "lands, tenement?, or other realty" is determinable by the lav/ of the State in which the property is situated. Standing timber is ordinarily held to be real estate, and where so held the deed transferring it is subject to the tax. 3842 (b) In States where common-law dower still exists an instrument purporting to convey the inchoate right of dower of a wife or the con- summate right of dower of a widow, prior to assignment of dower, is not subject to stamp tax; but an instrument conveying the estate acquired by a widow upon assignment of dower is subject to tax. Where by statute dower has been abolished and a different interest in the husband's real property conferred upon the wife in lieu thereof, the taxability of an instrument pur- porting to convey such an interest prior to its assignment will be determined by the nature of the wife's interest, and the statutes and decisions of the par- ticular State in which the real estate is located must be consulted. 3843 Art. 64. Deeds conveying mines. — Deeds conveying mines are taxable. 3844 Art. 65. Conveyance of property subject to equity of redemption.— A conveyance of property subject to an equity of redemption is taxable when made, not when the time for the equity of redemption ha§ expired. 3845 Art. 66. Conveyance of land in consideration of maintenance. — A conveyance of land in consideration of life maintenance is taxable, the tax to be measured by the value of the property or interest conveyed. 3846 Art. 67. Deeds of building and loan associations. — Deeds of build- ing and loan associations conveying realty are taxable. 3847 Art. 68. Stock in corporation a valuable consideration. — Stock in a corporation is a valuable consideration for the transfer of real prop- erty. 3848 Art. 69. Quit-claim deeds. — A quit-claim deed given for no con- sideration, or merely the nominal consideration of $\ , foi the purpose of correcting a flaw in title is not subject to tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 746 SERVICE 6-12-22. Reg. 55.— 1922 Edition. STAMP TAX REGULATIONS. —1922. 3849 Art. 70. Options and contracts for real estate. — No tax is imposed upon an option for the purchase of real property or upon a contract for the sale of real estate. 38 50 Art. 71. Deeds of release and deeds of trust. — Deeds of release and deeds of trust are exempt from tax under the provisions of this law. 3851 Art. 72. Deeds by State, county, or municipal officers. — Deeds executed by State, county, or municipal officers conveying realty sold for nonpayment of taxes are not subject to stamp tax. 3852 Art. 73. Deeds to a State. — Deeds conveying to a State real estate purchased by it are not subject to tax. 3853 Art. 74. Deeds to burial sites. — Deeds to burial sites which do noc convey title to land, but only a right to sepulture, to erect monu- ments, etc., are not subject to stamp tax. 3854 Art. 75. Deed to cover gift. — A deed issued to cover a pure and bona fide gift of property from husband to wife, or from parent to child, or from an individual to a municipality or other political subdivision, or to the United States, wherein the consideration named is "natural love and affection and $1," "desire to promote public welfare and $1," or "$1 and other valuable considerations" is not taxable. 3855 Art. 76. Deed to trustee for benefit of creditor. — A deed executed by a debtor covering an assignment of property to a trustee to be held for the benefit of a creditor is not subject to tax. When, however, the trustee sells or conveys such property either to the creditor or any other person, the deed executed by him is taxable. 3856 Art. 77. Deed to building and loan association. — A deed transfer- ring title to property to a building and loan association for the pur- pose of securing a loan on the property so conveyed, which property is immediately reconveyed to its owner, is not subject to tax, the deed of re- conveyance being likewise exempt. 3857 Art. 78. Deed by husband and wife to "straw man." — A deed given by a husband and wife to a "straw man" who immediately executes a deed reconveying the property to the wife is not subject to tax if given for no valuable consideration, or merely the nominal consideration of $1, and, likewise, the deed of reconveyance is exempt. 3858 Art. 79. Deeds from agent to principal. — Deeds from an agent to his principal conveying real estate purchased for and with funds of the principal are not taxable. 3859 Art. 80. Reconveyances of partnership property by receivers. — Conveyances of property of a copartnership, in the hands of re- ceivers, back to the owners after administration of the estate are not taxable. Copyright 1922, b$ The Corporation Trust Company. WAR TAX 747 SERVICE 6-12-22. Reg. 55—1922 Edition. STAMP TAX REGULATIONS. — 1922. 3860 Art. 81. Partition deeds. — Partition deeds are not subject to tax unless a consideration passes between the parties by reason of one or more of them taking under the division a share of real estate of greater value than his undivided interest, in which event stamp tax attaches to the deeds conveying such greater shares, calculated upon the value of such consideration. 38GT Art. 82. Conveyances without consideration. — Conveyances of realty, not in connection with a sale, to trustees or other persons without consideration are not taxable 3862 Art. 83. Conveyances of real estate in foreign country. — A deed conveying real estate in a foreign country is not subject to tax. 3863 Art. 84. Deeds confirming title. — Deeds that are simply confirm- atory and do not vest title not already vested are exempt from tax. 3164 Art. 85. Contracts for sale of real property. — Contracts for the sale of real property are not taxable unless they vest title. 3865 Art. 86. Abstracts of title. — Abstracts of title are not taxable. 3866 Art. 87. Leases of real property. — Leases of real property are not subject to the tax. 3867 Art. 88. Conveyance by coowners in consideration of capital stock. — A conveyance of real estate by coowners to a corporation organized for convenience in handling the property, made in consideration of the issue to them of the corporation's capital stock, is subject to tax. 38S8 Art. 89. Deeds by executor. — Deeds by an executor to devisees, conveying specific parcels of real estate, devised to them in com- mon, are not subject to tax unless a consideration passes between the devisees by reason of some of them taking a greater share in the real estate than that to which entitled under the will, in which event tax attaches to the deeds conveying such greater shares, and is calculated upon the amount of value of such consideration. 3869 Art. 90. Conveyance by corporation to owner of all the capital stock. — A conveyance of real estate by a corporation without valu- able consideration to an owner of all its capital stock in consequence of ite dissolution is not subject to tax. 3870 Art. 91. Conveyance by mortgagor to mortgagee. — A conveyance by defaulting mortgagor to mortgagee in consideration of the can- cellation of mortgage debt is subject to tax calculated on the amount of the mortgage debt plus unpaid accrued interest. 3871 Art. 92. Conveyances to trustee, or from trustee to cestui qui trust, without consideration. — Conveyances to a trustee without valuable consideration or from a trustee to a cestui qui trust without valu- able consideration are not subject to tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 748 SERVICE 6-12-22. Reg. 55—1922 Edition. STAMP TAX REGULATIONS.— 1922. 3872 Art. 93. Conveyance to United States. — A conveyance of reai estate sold to the United States Government is subject to tax. 3873 Art. 94. Deed from one corporation to another owning capital stock of former in consideration of payment of debts. — A deed from a corporation, the entire capital stock of which is owned by another cor- poration, conveying real estate to the latter in consideration of the payment by the grantee of all obligations of the grantor is subject to tax. [Conveyance incident to the reorganization of a corporation under the laws of another state, without mere.— Read at 1(3567.] 3874 Art. 95. Judgment or decree of State court transferring title to real estate. — Judgment or decree of a State court operating to transfer title to real estate is not taxable as a conveyance. 3875 Art. 96. Taxes and assessments, when deductible. — Taxes and assessments which have become a lien on real estate by operation of statute and which are not paid at time of sale are deductible from the con- sideration in computing the stamp tax. 3876 Art. 97. Conveyance by corporation to an officer through third party. — Where an officer of a corporation purchases reai estate from the corporation, conveyance being first made to a third party and as part of the same transaction, the property is conveyed by the third party to the officer, the conveyance to the third party is subject to tax, while the con- veyance from the third party is not subject to tax, 3877 Validity of unstamped instruments and admission as evidence : Deeds in particular. — As to the absence of revenue stamps, it is true that the deeds showing title in some of the plaintiffs — they were produced in evidence over the defendant's objection — were without the stamps required by the act of October 22, 1914, c. 331, §22, Schedule A, 38 Stat. 762. But this neither invalidated the deeds nor made them inadmissible as evidence. The relevant provisions of that act, while otherwise following the language of earlier acts, do not contain the words of those acts which made such an instrument invalid and inadmissible as evidence while not properly stamped. Those words were carefully omitted, as will be seen by contrasting §§6, 11, 12 and 13 of the act of 1914 with §§7, 13, 14 and 15 of the act of 1898, c. 448, 30 Stat. 454. From this and a comparison of the acts in other particulars it is apparent that Congress in the later act departed from its prior practice of making such instruments invalid or inadmissible as evidence while re- maining unstamped and elected to rely upon other means of enforcing this stamp provision, such as the imposition of money penalties, fines and im- prisonment. The decisions upon which the defendant relies arose under the earlier ads and were based upon the presence in them of what studiously was omitted from the later one. (From Cole et al., vs. Ralph, 252 U S. 286.) Copyright 1922, by The Corporation Trust Company. WAR TAX 749 SERVICE 6-12-22. Reg. 55.-1922 Edition. STAMP TAX REGULATIONS.— 1922. CUSTOMHOUSE ENTRIES FOR CONSUMPTION OR WAREHOUSING. 3878 Art. 98. Customhouse entries by United States officials and rep- 3537 resentatives of foreign countries. — Customhouse entries made by United States officials traveling as such on Government funds are net taxable. Likewise entries made by all representatives of foreign coun- tries in their official capacity are by comity exempt. WITHDRAWAL ENTRIES FROM CUSTOMS BONDED WAREHOUSES. 3879 Art. 99. Entries tor withdrawal of goods or merchandise.— 3538 Entries for withdrawal of any goods or merchandise from customs bonded warehouses are subject to stamp tax. PASSAGE TICKETS. 3880 Art. 100. Passage tickets issued to Federal and State officials, 3539 military and naval forces, and certain foreign representatives.— Passage tickets issued to United States Government officials, employees, military and naval forces, as well as officials of States and their political subdivisions, traveling in the course of their duty as such on vesseli operated by private parties or by any government are not taxable when the Amount of the passage is paid for by the United States Government, State or political subdivision thereof. 3881 Ambassadors, ministers, and properly accredited diplomatic rep- resentatives of any foreign government to the United States are exempt from the payment of taxes on such passage tickets. As under inter- national law the privileges and immunities of ambassadors and ministers of foreign countries extend to the members of their family and to the members of their household, including attaches, secretaries, and servants, they are likewise exempt from the payment of taxes on such passage tickets. All other foreign agencies not specifically mentioned above are subject to the tax as levied under this schedule. 88S2 Art. 101. Passage tickets issued to private individuals.— Passage tickets issued to private individuals traveling on vessels operated privately or by any government are taxable. 3883 Art. 102. Passage tickets to Porto Rico and Philippine Islands.— Passage tickets to Porto Rico or Philippine Islands are taxable. 3884 Art. 103. Passage tickets to Hawaii and Alaska. — Passage tickets issued to Hawaii and Alaska arc not taxable. 5885 Art. 104. Prepaid orders for passage tickets. — Prepaid orders for passage tickets are not subject ro tax. 5886 Art. 105. Passage tickets issued on exchange orders purchased in Canada or Mexico. — Passage tickets issued in the United States to ports not in the United States. Canada, or Mexico, on exchange orders pur- chased in Canada or Mexico, in connection with through transportation from points in Canada or Mexico, are subject to tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 750 SERVICE 6-12-22. Reg. 55 —1922 Edition. STAMP TAX REGULATIONS.— 1922. 8887 Art. 106. Passage tickets to ports not in United States, Canada, or Mexico. — (a) Passage tickets issued in the United States to ports not within the United States, Canada, or Mexico, on exchange orders pur- chased other than in the United States, Canada, or Mexico are subject to tax. 3888 (b) Passage tickets sold or issued in the United States for passage by any vessel to a port or place in Newfoundland are subject to tax. 3889 Art. 107. Passage tickets sold in United States from ports not in United States, Canada, or Mexico, to ports not in said countries, not subject to tax, unless. — Passage tickets sold in the United States from ports not within the United States, Canada, or Mexico, to a port not in the United States, Canada, or Mexico, are not subject to tax unless sold as part of a round trip or through ticket from a port in the United States, Canada, or Mexico. PROXIES. 3800 Art. 108. Tax on proxies attaches to the instrument. — The stamp 3540 tax on proxies attaches to the instrument and is not measured by the number of grantors and grantees. 389! Art. 109. Stamp may be affixed and canceled by either party to proxy. — The stamp may be affixed and canceled either by the party who executes the proxy or by the party to whom the proxy is given. 3882 Art. 110. Directors of corporations officers, — Directors of a cor- poration arc officers within the meaning of the clause imposing & tax on proxies for voting at the election for officers of an incorporated com- pany. 3893 Art. 111. Proxies to vote stock of building and loan associations. — Proxies for the purpose of voting the stock of building and loan associations are taxable. 3894 Art. 112. Proxies executed and accepted before Jan. 1, 1922. — Proxies executed and accepted before January L 1922, are taxable, under the revenue act approved February 24, 1919. 38S5 Art. 113. Proxy to vote for officers and for other purposes. —A proxy for voting at any election for officers of a corporation and authorizing the proxy to act in such capacity upon all questions or matters presented at a stockholders' meeting, is subject to tax of 10 cents only. 3886 Art. 114= "Corporation" defined. — The term "corporation" in- cludes associations, joint stock companies, and insurance com- panies. 38S7 Art. 115. Proxies sent out by corporations may be stamped after execution and delivery. — Where proxies are sent out by a corpora- tion to be executed and returned to the corporation or to the person named in the proxy, such proxies may be stamped after execution and delivery by the person receiving same as the a^ent of the person executing the proxy. [See •[4029.] Copyright 1922, by The Corporation Trust Company. WAR TAX 751 SERVICE 6-12-22. Reg. 55—1922 Edition STAMP TAX REGULATIONS. — 1922. POWERS OF ATTORNEY. B8I 3898 Art. 1 16. Tax on power of attorney, when due.— The tax or a power 3541 of attorney is due when the instrument is executed and delivered. Delivery includes depositing instrument in the maii?. 38S9 Art. 117. Tax attaches to the instrument. — Tax is imposed on the instrument itself, and is not measured by the number of persons joining therein. 3800 Art. 118. Resolution of board of directors authorizing an officer of the corporation to sell, etc., stock or bonds, not taxed as power of attorney; otherwise in case of person not an officer. — Where a corporation, by resolution of its board of directors, has empowered an officer thereof to sell, assign, or transfer stock or bonds standing in the name of the corporation, or to perform any act in the name of the corporation, such authority is not taxable as a power of attorney for the reason that it is necessary for a corporation to perform its corporate acts through one of its officers. If, however, a person other than an officer of the corporation acting in his official capacity is given this authority, the power of attorney so granted is subject to stamp tax. 3901 Art. 119. Revenue stamp required on each instrument executed under general power of attorney granted to person not an officer of the corporation. — A general power of attorney granted by a board of directors to a person, other than an officer of a corporation acting in hia official capacity for the purpose of transacting business of the corporation, including making conveyances of land and acknowledging deeds, is con- sidered specific authority for each such transaction, and a revenue stamp i* required on each instrument executed under the power of attorney. 390? Art. 120. Power of sale embodied in mortgage not taxable. — A power of sale embodied in a mortgage, authorizing and empowering a mortgagee himself, upon default, to make public sale of the property affected and to convey the title to the purchaser at such sale free from all rights or equity of redemption, thus avoiding the necessity of resorting to the courts for foreclosure, is not taxable. 3903 Art. 121. Powers of attorney contained in assignments of insurance policies. — Powers of attorney contained in assignments, absolute or as collateral security, of insurance policies are not subject to tax. 3904 Art. 122. Powers of attorney from corporations to resident agents. — Powers of attorney executed by corporations to resident agents authorizing the latter to accept service of process are taxable. 3905 Art. 123. Power of attorney to sell or transfer Government bonds. — A power of attorney to sell or transfer Government bonds is taxable. 3906 Art. 124. Powers of attorney contained in assignments, for valuable consideration, conferring no authority upon assignee not implied by the assignment, not taxable. — An assignment, for a valuable considera- tion, of debts, wages, mortgages, bonds, etc., ordinarily transfers to the assignee all the rights of the assignor and the remedies necessary for their enforcement, and the assignee acquires no further rights by the means of a Copyright 1922, by The Corporation Trust Company. WAR TAX 752 SERVICE 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS. — 1922. power of attorney clause in the assignment than are conveyed by the instru- ment itself, and such pro forma power of attorney is therefore not taxable 3907 Art. 125. Authority to secretary of corporation to transfer stock on the books not taxable. — An instrument authorizing the secretary to transfer stock on the books of a corporation is not taxable as a power pf attorney, but an instrument appointing an attorney in fact to transfer stock en the books of a corporation is taxable. 39 cc? Art. 126. Pro forma power of attorney to transfer bonds or stocks on books of corporation, printed on bond or stock certificate, not taxable.— The pro forma power of attorney to transfer bonds or stocks on the books of a corporation, embodied in the assignment printed on the back of the bond or stock certificate, is not subject to tax. 3909 Art. 127. A warrant of attorney in a judgment note or promissory note authorizing confession of judgment. — The clause in a judg- ment note or a promissory note authorizing confession of judgment is not taxable as a power of attorney. 3910 Art. 128, Warrant of attorney in a lease. — A warrant of attorney embodied in a lease is not taxable. 3sn Art. 129. Power of attorney mailed in United States to point abroad; power of attorney mailed abroad to party in United States. — A power of attorney executed and mailed within the United States to a foreign point is subject to tax, but a power executed in a foreign country and mailed there to an agent in the United States is not subject to tax, 3912 Art. 130. Power of attorney to sell, etc., shares of capital stock, taxable, unless. — A power of attorney to sell, assign, and transfer shares of capital stock is subject to tax unless it is given in connection with a deposit of the stock as security for a loan. 391 3 Art. 131. Power of attorney authorizing vendee of shares of stock to transfer same. — A power of attorney by which a person executing the instrument sells, assigns, and transfers shares of stock and appoints the vendee agent for the transfer is not subject to tax. 3914 Art. 132. Copy of power of attorney, printed on form provided by- Government and filed in executive department. — Where the original power of attorney has been properly stamped and a copy of it is printed on a card (Form 272) provided by the Government, and the card is filed in the executive departments of the Government or with a collector of internal revenue, such copy is not subject to tax. 3916 Art. 133. Power of attorney authorizing deputy to have access to safe. — A power of attorney authorizing a deputy to have access only to a safe or safety deposit box is not subject to tax, but a power of attorney to have access and control over its contents is subject to tax. Copyright 1922, by The Corporation Trust Company. WAR TAX 753 SERVICE 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS.— 1922. 3916 Art. 134. Power of attorney authorizing Federal officer to assign United States bonds deposited as security. — (a) A power of attorney executed by a bank authorizing a designated officer of a Federal reserve bank to assign United States bonds deposited with the Federal reserve bank and designed to protect it in event of default in payment of a loan is not taxable. 3917 (b) Powers of attorney given by persons who deposit United States Liberty bonds or other bonds of the United States as security in lieu of surety or sureties on penal bonds under the provisions of Section 1329 of the Revenue A,ct of 1921 authorizing the official having authority to approve such penal bonds to collect or sell such United States bonds so deposited in case of any default in the performance of any of the conditions or stipulations of such penal bonds, are not subject to the stamp tax. 3918 Art. 135. Powers of attorney executed and delivered before Jan. 1, 1922. — Powers of attorney executed and delivered before January 1", 1922, are not taxable, even though used subsequent to that date, except such as are taxable under the act approved February 24, 1919. PLAYING CARDS. 3919 (See separate regulations covering this subject.) 3542 3920 to 3845 Blank. Copyright 1922, by The Corporation Trust Company. WAR TAX 754 SERVICE 6-12-22. Reg. 55.-1922 Edition. STAMP TAX REGULATIONS —1922. FOREIGN INSURANCE POLICIES. 3946 Art. 136. Definitions. — When used in the Regulations under this 3545 subdivision—- 3947 (a) The term "insurer" includes any person, copartnership, associa- tion, or corporation transacting the business of insurance, and also any agent or broker, wherever applicable. 3948 (b) The term "insurance" includes every manner of providing indemnity against risks upon property of any description (including rents and profits) from peril by sea or inland waters or in transit on land (including transshipments and storage at termini or way points) or by fire } lightning, tornado, windstorm, bombardment, invasion, insurrection, or riot. 3949 (c) The term "policy of insurance" includes any instrument by what- ever name the same is called whereby insurance is made or renewed by the insurer, as policies, binders, certificates, open policies, covering notes, memoranda, cablegrams or letters. 3960 (d) The term "other instrument" includes any instrument by which insurance is made or renewed, i. e., by which the relationship of insurer and insured is created or evidenced, whether it be a letter of accep- tance, cablegram, or other instrument by whatever name called. 3951 (e) The expression "whereby insurance is made or renewed" includes any evidence or confirmation of a binding contract of insurance whereby a risk is assumed by the insurer. 3962 (f) The term "issue" means the act whereby insurance is made or renewed or in any manner becomes a binding contract effective for insurance. 3953 (g) The term"premium charged" means the total premium payable during the life of a contract of insurance and shall include any addi- tional assessment or charge in the nature of a premium which may be assessed or charged during the life of a contract of insurance, whether payable in one sum or in installments and however paid (and though never paid if the con- tract of insurance be delivered and accepted or otherwise becomes binding upon the insurer). 3954 (h) The term "premium" means the agreed price for assuming and carrying the risk. It includes all that is received by the underwriter therefor and is in fact the total consideration receivable for underwriting the risk, whether in one sum or in installments, during the life of the policy. 3956 (i) The term "United States" includes the States of the United States, the Territories of Alaska and Hawaii, and the District of Columbia. 3958 Art. 137. Effective date.— Policies of insurance which are issued and accepted on and after April 1, 1919, regardless of when the insurance thereunder becomes effective, are subject to tax, but policies which were issued and accepted prior to April 1, 1919, if issued in the usual course of business and according to general custom and not for the purpose of evading the tax, are not subject to tax. 3957 Art. 133. Persons iiable, — The insurer, the agent, or broker, effecting, accepting, placing, or soliciting the insurance, and also the insurec are each liable for the tax. S958 Art. 139. What instruments must bear a stamp,— (a) The stamp must be affixed to the first instrument by which the insurance is made or renewed, i. e., by which the relationship of insurer and insured is created or evidenced, whether it be a letter of acceptance, cablegram or other instrument by whatever name called. Copyright 1922, by The Corporation Trust Company. WAR TAX 755 SERVICE 6-12-22. Reg. 55. — 1922 Edition. STAMP TAX REGULATIONS.— 1922. 3959 (b) In the case of so-called "open policies" or "open cargo covers," where the amount of the premium is not definitely determined ai t'me of issuance, the stamps may be affixed to the receipts for monthly or o r her payments if proper notation be made upon such receipts identifying the original instruments to which they apply. 3960 (c) In the case of a binder or other instrument whereby insurance is made or renewed, issued without agreement as to the premium to be charged, stamps must be affixed when the amount of the premium is deter- mined. 386? Art. 140. Insured to retain policy for two years. — The person having control or possession of a policy of insurance or other instrument to vhich documentary stamps shall be affixed according to law shall retain such instrument for the period of two years from the date of insurance [sic] thereof for the purpose of enabling internal revenue officers to verify the fact that payment of the full amount of tax due thereon has been made. 39S2 Art. 141. Subsequent instruments shall indicate prior document to which stamps are affixed. — Any policy of insurance or other instru- ment which is subsequent to or which confirms a contract of insurance that is created or evidenced by any prior instrument by which insurance was origi- aaily made or renewed shall bear a notation designating such prior instru- ment (hereinafter referred to as the original instrument) and showing that the proper stamps have been affixed thereto and canceled. By this is meant that if a letter, cablegram, or other instrument is so worded that it establishes or evidences a contractual relation between the insurer and the insured, executed or executory, by which insurance is made or renewed, or by "which the relationship of insurer and insured is created or evidenced, such instru- ment shall be construed as the original instrument and must have stamps- of the proper amount affixed to it, and any policy or other instrument which subsequent to or which confirms such original instrument must bear thereon the notation above indicated. 3963 Art. 142. Subsequent instruments that must be stamped. — In case an instrument subsequent to the original instrument provides for the payment of a premium greater than the premium provided for in the original instrument, such subsequent instrument must have affixed thereto stamps equal to the tax imposed upon the additional premium charged therein : also such subsequent instrument must bear notation of the stamps affixed tc the original instrument. (See Art. 141.) The same rules apply to any riders, indorsements, or other forms attached to or foirning a part of any original or subsequent instrument where such rider, indorsement, or other form provides for the payment of a premium greater t ban theretofore charged; 3964 Art. 143. Unstamped instruments and those bearing no notation of stamping. — Failure (a) to stamp the original instrument by which .nsurance is made or renewed, whether it be a letter of acceptance, cablegram, 2T other instrument by whatever name called, or (b) to indicate that such original instrument was properly stamped on any policy or other instrument which is subsequent to or which confirms the contract of insurance that is created or evidenced by any prior instrument by which insurance was aaade or renewed, will be held to raise a presumption ot an intent to evade the payment of tax under the provisions of the Act. Copyright 1922, by The Corporation Trust Company. WAR TAX 756 SERVICE 6-12-22. Reg. 55.-1922 Edition. STAMP TAX REGULATIONS. — 1922. 3966 Art. 144. Measure of tax. — The tax is measured by total premium paid, including any additional assessment or charge in the nature of a premium on each policy of insurance or other instrument by which insurance is made or renewed, and is at the rate of 3 cents on each dollar or fractional part thereof of such premium; for example, upon a premium charge of $10.10 the tax imposed is 33 cents, being 3 cents for each dollar and 3 cents for the fractional part of a dollar. 3966 Art. 145. Insurance on commodities exported. — (a) No tax is imposed upon the premium charged for insurance issued to cover commodities which are in the actual process of exportation and which have begun their voyage or preparation for the voyage from the United States. 3967 (b) If a policy or other instrument is issued covering both export and non-export property, the tax will be computed upon the full amount of the premium charged, unless such instrument clearly indicates the property for export and the premium charged for the insurance thereon. 3968 Art. 146. Movable property. — Movable property, such as rolling stock of railroads, ships, vessels, barges, and other similar movable property, shall be held to be property within the United States if the prin- cipal place of business of the corporation or partnership owning and controlling the same is located within the United States, or, in the case of an individual, if he resides in the United States, unless such property is permanently located without the United States for the purpose of ordinary use. The nation of registry of a vessel shall have no bearing upon the location of the property in the same. 3969 Art. 147. Credits and refunds. — In case a policy of insurance or other instrument is issued and accepted by the insured, and afterwards, for any reason, such insurance does not become effective, the value of the stamps affixed thereto will be refunded upon a proper claim presented to the collector of internal revenue. 3970 Art. 148. Penalties. — In addition to the penalties provided by Sec. 1102 of the Revenue Act of 1921, subdivision 13 of Schedule A imposes a penalty of double the amount of the tax upon (a) any person to or for whom or in whose name any such policy or other instrument is issued, • or (b) any solicitor, agent, or broker acting for or on behalf of such person in the procurement of any such policy or other instrument, who fails to affix the proper stamps to such policy or other instrument, with intent to evade the tax. 3971 Art. 149. Returns. — No monthly return or monthly statement show- ing a list of policies or other instruments by which insurance was made or renewed upon property located in the United States by a foreign corporation or partnership or nonresident individual will at this time be required from any person to or for whom or in whose name such policy or other instrument is issued, or from the solicitor or broker acting directly or in- directly for or on behalf of such person, but each person, solicitor, or broker accepting, placing, or soliciting such policy or other instrument shall keep a record of each policy or other instrument subject ro the tax imposed by this subdivision by which he has directly or indirectly made, placed, solicited, or .assisted in the making, or renewal of, such insurance, or for which he has Copyright 1922, by The Corporation Trust Company. WAR TAX 757 SERVICE 6-12-22. Reg. 55—1922 Edition. STAMP TAX REGULATIONS. — 1 922 . paid or received compensation, and shall be prepared to furnish full infor- mation to the Commissioner at any time upon demand. MISCELLANEOUS. 3972 Art. 150. Stamp affixed and canceled can not lawfully be removed 3500 and affixed to another instrument. — A stamp affixed to an instrument and cancelled can not lawfully be removed therefrom and affixed to another instrument requiring a stamp. [For refund see beginning at € [3986.] 3973 Art. 151. Both parties to taxable instrument liable. — Both parties 3502 to a taxable instrument are responsible to the Government for affixing and canceling stamps in the required amount. The law does not prohibit parties in interest from entering into an agreement as to which of them shall actually pay same. 3974 Art. 152. Stamp taxes under revenue act of 1917; present regulations 3547 generally applicable. — As documentary stamp taxes under the revenue act approved February 24, 1919, were very similar to those imposed under the revenue act of 1921, these regulations are generally applicable to all taxable documents issued and delivered on and after April 1, 1919. 3976 Art. 153. Schedule A of revenue act of 1921 an extension of sched- ule A of the revenue act of 1918. — The revenue act of 1921 simply supersedes and extends Schedule A, Title XI, of the act approved February 24, 1919, except in a few instances where the language of the present act slightly modifies or amends that of the former act. These slight changes will be readily noticeable by a comparison of the two acts. Schedule A 2 and 14 of the revenue act of 1918, however, are eliminated. 3S76 Art. 154. Former stamp-tax acts. — For still older acts of Congress requiring stamps to be affixed to certain written instruments, see act of July 1, 1862, schedule B following section 110 (12 Stat., 479); act of March 3, 1863, section 6 (12 Stat. ,720); act of June 30, 1864, section 151 (13 Stat., 291); act of March 3, 1865, section 1 (13 Stat., 469); act of July 13, 1866 (14 Stat., 141); act of June 23, 1874, section 1 (18 Stat., pt. 3, 250). The act of June 6, 1872, section 36 (17 stat., 256), provided for the repeal, on and after October 1, 1872, of stamp taxes on instruments, except the tax of 2 cents on bank checks, drafts, and orders, which was repealed by the act of March 3, 1883 (22 Stat., 488). Taxes were imposed by the act of June 13, 1898, on instruments and documents, under schedule A thereof, and were repealed in part by the act of March 2, 1901, and wholly repealed by the war-revenue repeal act (act of Apr. 12, 1902) (32 Stat., 96), taking effect July 1, 1902. Taxes were imposed by Schedule A of the act of October 22, 1914, upon certain instruments and documents, from December 1, 1914, to December 31, 1915. These taxes were continued in force by the joint resolution of December 17, 1915, until December 31, 1916, but were repealed by the act of September 8, 1916, as of that date. The revenue act of 1917 was in force from December 1, 1917, until March 31, 1919, and the revenue act of 1918 was in force from April 1, 1919, until.December 31, 1921. Copyright 1922, by The Corporation Trust Company. WAR TAX 758 SERVICE 6-12-22. Reg. 55.-1922 Edition. STAMP TAX REGULATIONS. — 1922. DENOMINATIONS OF DOCUMENTARY STAMPS. 3977 Art. 155. Documentary stamps issued .—Under authority conferred 3154 upon the Commissioner of Internal Revenue in section 1105 (a) of the Act, the following adhesive stamps have been prepared: Documentary stamps, Schedule A: One cent, 2 cents, 3 cents, 4 cents, 5 cents, 8 cents, 10 cents, 25 cents, 40 cents, 50 cents, 80 cents, $1, $2, $3, $5, $10, $30, $60, $100, $500, $1,000. PURCHASE OF STAMPS. 3878 Art. 156. Stamps, where purchased.— The above stamps may be 3514 purchased from collectors and stamp deputy collectors of internal revenue. 3979 Art. 157. Assistant Treasurers of the United States, designated de- 3516 positaries, and postmasters to be furnished stamps; bond required. 3517 — In addition, provision has been made in the Act for the delivery of stamps by collectors without prepayment to any Assistant Trea- surer of the United States, designated depositary of the United States, or postmaster, who may be required to give bond for the value of stamps so deposited. It is not mandatory upon the persons named to secure and keep the stamps on sale. 3980 Art. 158. Stamps on articles manufactured in foreign countries.— Stamps to be affixed to articles manufactured in a foreign country and imported into the United States may be purchased and forwarded to the place of manufacture and there affixed to the articles before the same are packed for importation. CANCELLATION OF DOCUMENTARY STAMPS. 398! Art. 159. Cancellation of stamps. — In any and all cases where an 3514 adhesive stamp shall be used for denoting any tax imposed by Schedule A of the revenue act of 1921, the person using or affixing the same shall write or stamp thereon, or cause to be written or stamped thereon, with ink, the initials of his name and the date (year, month, and day) in which the same shall be attached or used; or shall, by cutting and canceling said stamp with a machine or punch, which will affix the initials and date as aforesaid, so deface the stamp as to render it unfit for reuse. The cancellation by either method should not so deface the stamp as to prevent its denomination and genuineness from being readily determined, 3982 Art. 160. Additional cancellation required in case of stamps of 3513 value of 50 cents or more. — In addition to the foregoing, stamps of the value of 50 cents or more shall have three parallel incisions made by some sharp instrument lengthwise through the stamp after the stamp has been attached to the document; provided, this will not be required where stamps are canceled by perforation. STAMPS UNDER FORMER ACTS; POSTAGE STAMPS. 3983 Art. 161. Documentary stamps only to be used. — Documentary 3514 stamps only must be used upon papers, documents, and instru- ments subject to tax as provided in Schedule A, except as provided in Regulations 40, 1922 Edition, relating to stamp taxes on issue and trans- fers of stock and sales of products for future delivery. Copyright 1922, by The Corporation Trust Company. WAR TAX 759 SERVICE 6-12-22. Reg. 55 —1922 Edition. STAMP TAX REGULATIONS.— 1922. 3984 Art. 162. Documentary stamps issued under acts of October 22, 1914, October 3, 1917, and February 24, 1919.— Docu- mentary revenue stamps issued under acts of October 22, 1914, October 3, 1917, and February 24, 1919, may be used to pay stamp taxes required by the revenue act of 1921. 3985 Art. 163. Ordinary postage stamps not to be used for internal- revenue taxes. — Ordinary postage stamps can not be used for the payment of any internal-revenue taxes. REDEMPTION OF OR ALLOWANCE FOR STAMPS. 3986 Art. 164. Stamps rendered useless, affixed in error, or for which the 8024 owner has no use. — Where documentary stamps are rendered useless by gumming or sticking together in transit or otherwise without fault of the purchaser, they may be exchanged by a collector for other stamps of exactly the same quantity and denomination. Amounts paid for stamps used in excess, or on instruments not actually effective and for which a sub- stitute is prepared and stamped, or on instruments not subject to tax or for which the owner has no use, may be refunded, upon claim properly presented to the collector. 3986a Art. 165. Claims. — All claims for the redemption of or allowance for stamps must be presented within two years after the purchase of said stamps from the Government. The provisions of sections 3220 to 3228 Revised Statutes do not apply to the redemption of or allowance for internal revenue stamps, and the authority for such redemption or allowance is the act of May 12, 1900 (31 Stats. 177), as amended by the act of June 30, 1902 (32 Stats. 506), set forth on page 30 of these regulations [1[8024 herein]. REFUNDS. 3986b Art. 166. Refunds. — Where taxes are paid pursuant to an assess- ment and not by the affixing of stamps, claims for the refund of amounts so paid are governed by Sections 3220-3228 R. S., as amended [beginning at ^[8023], and must be presented within four years next after payment of such taxes, as provided in Section 1316 of the Revenue Act of 1921 [1f8056 herein]. AFFIXING STAMPS. 3987 Art. 167. Two or more stamps may be used, when. — Where a 3515 stamp of the proper denomination to pay the tax due on an article or document can not be procured, two or more stamps may be used. In such case as few stamps as possible should be attached and each stamp used should be canceled in the manner provided by regulation. DUTIES OF OFFICERS. 3988 Art. 168. Revenue officers to make investigations. — It isthedury 8000 of revenue officers in canvassing for taxes due to investigate as to violations of Title VIII of the act of October 3, 1917, and Title XI of the acts of February 24, 1919, and November 23, 1921, and for this purpose they should visit all State, countv, and municipal offices, also banks and trust .'fi'j'jiish ynitiii lor iJouDOKj to iMii bfls to 8t5t Copyright 1922, by The Corporation Trust Company. WAR TAX 760 SERVICE 6-12-22. (2) 7-27-22". Reg. 55.— 1922 Edition. STAMP TAX REGULATIONS.— 1922. companies, having to do with the issuance, handling, or recording of doc- uments taxable under these Titles, as well as customs houses and customs bonded warehouses and steamboat offices and agencies for such information as will lead to the detection of violators of said Titles. 3989 Art. 169. Revenue agents to report. — Revenue agents will report to this office all such violations, separate letter reports being made in each case marked "Miscellaneous Division." In each instance the report should show the full amount of delinquent tax discovered. 3990 Art. 170. Collectors' and deputy collectors' reports of delinquency or additional tax due. — Form 807 (revised July, 1921) will be used by field deputies in reporting to collectors additional and delinquent miscel- laneous taxes discovered, and should be accompanied by returns, offers in compromise, and remittances. In those cases where the tax, penalties, and interest do not accompany the report of the field deputy submitted on Form 807, the collector will prepare and forward to the commissioner a report on Form 807-A (revised July, 1921). 399 1 Art. 171 . Stamp tax to be reported for assessment in certain cases. — Only in cases where instruments are no longer in existence or can not possibly be stamped or where a taxpayer, after being advised of his liability, refuses to affix stamps, will tax be reported for assessment. When assess- ment is paid a receipt on Form 1 will be issued. In those instances where stamps are purchased and affixed to the instrument receipt on Form I will not be issued. 3992 Art. 172. Regulations covering tax on issue, sales, and transfers of stock and sales of products. — See separate regulations (No. 40) [page 710] relative to collection of tax on issue, sales, and transfers of stock .and on sales of products for future delivery. 3 IO 010091 AUTHORITY FOR REGULATIONS. 3993 Art. 173. Promulgation of Regulations. — In pursuance of the statute the foregoing Regulations are hereby made and promulgated^ and all rulings inconsistent herewith are hereby revoked. D. H. BLAIR, Commissioner of Internal Revenue. fbumesni 3ud t &uz$i airfj-no x*J on ad bluo/Ia oisrti Jjsn> oj fnsoa bluow J I Approved June 12, 1922 [Released July 5, 1922]. A. W. MELLON, Secretary of the Treasury. on io 83i£fi8 gxV io sl/eai aai o* x&i qmsJa 5>m to flod&oilqqs wiJ o) 3£ gniiin jjulsv ifiq aril k> vlpoJg flOiii.:;o-> lo .M£i'a rhr.o io! 9§n£rbx3 ni Aoolz auffiv ifiq }naom£ arlj m X£J qm-£J« odi oJ ioo[6ua &i doolz eirfa k> anaai sdT .001$ \o X£J sdl bns 31/831 rbns xioqu bbji/qnroo X£j srii noovrtod sonoiMb odi \o .Si M moil yiiupnt lo irtSoJ) *.830fiiq3i t\ doidw ai/sai 3rh noqu bafiiqmcD ,oiHO .bxififevaD ,ynBQxrroO i?mT bnfitev^D 3/iT .}n£*Iu3noO zbT .vsioiG .vnjiqrpoD JeuiT noiifiio Copyright 1922, by The Corporation Trust Company. WAR TAX 761 SERVICE 1-2-22. (2) 6-12-22. (3) 7-27-22. STAMP TAX REGULATIONS. — 1922. 3994 Taxable and tax-free issues upon a merger of corporations.— It 3562 appears that paragraph (f) of article 5, which is somewhat uncertain, 3563 requires construction in order to be reconciled with paragraph (j) 3581 of article 4. The distinction with respect thereto is clearly drawn in Law Opinion 440 and Solicitor's Opinion 4, Income Tax Bulletin % 22-20. In case of a consolidation of corporations all stock issued by the consolidated or newly created corporation is subject to tax under paragraph (i) of article 4, and no other provision in the Regulations tends to relieve of the tax by reason of substitution or exchange for the stock of the consolidating corporations. 3995 It was held in Law Opinion 440, under a provision of the Revenue Act of 1917, substantially the same as the pertinent provision in the Revenue Act of 1918, that stock issued by the merging corporation (continuing corporation) in exchange for stock of the merged corporation is subject to tax as an original issue, saying: "It is an original issue of stock that was never issued before. It is immaterial that part of the new stock of one corporation is issued in exchange for old stock of the other corporation." Such rule is considered sound. It is strengthened by the direct language in paragraph (j) of article 4, supra, and by the result reached in case of consolida- tion of corporations and issue of stock, whether or not in exchange, mentioned supra. Paragraph (f) of article 5, supra, is not necessarily inconsistent therewith. 3996 It is accordingly concluded that paragraph (f) of article 5 of Regula- tions 40 (revised) exempts stock of the merging corporation (continuing corporation) from the original issue tax when exchanged for the old certificates of stock of such corporation, but not when exchanged for the old certificates of stock of the merged corporation or corporations. (Office Decision No. 83: Ruling No. 198, March, 1921.) 3997 Exchange of non-par for par value stock on reorganization.* — A 3561 company is issuing shares of no par value stock to each stockholder of record of one share of common stock $100 par value. Through the reorganization of the company, I am informed that there is no change in the amount of the authorized working capital. Inasmuch as Subdiv- ision (i) of Article 5, Regulations 40, has been amended, is this issue by the corporation of certificates of no par value stock in lieu of outstanding certificates of common stock without other consideration subject to tax? The new amendment under T. D. 3118 seems to eliminate from those subject and not subject to tax issues of certificates of preferred stock or of no par value stock in lieu of outstanding certificates of common stock or vice versa. It would seem to me that there should be no tax on this issue, but inasmuch as I have been asked to obtain a ruling immediately, I would be greatly obliged if you would send me a wire at once collect. (Answer.) Reference letter M. R. Dickey, Tax Consultant, dated February 14, 1921, requesting ruling as to the application of the stamp tax to the issue of l}/2 shares of no par value stock in exchange for each share of common stock of the par value of $100. The issue of this stock is subject to the stamp tax in the amount of the difference between the tax computed upon such issue and the tax computed upon the issue which it replaces.* (Letter of inquiry from N. R. Dickey, Tax Consultant, The Cleveland Trust Company, Cleveland, Ohio, and the telegram of reply thereto signed by Deputy Commissioner Baker, and dated February 21, 1921.) •By subsequent T. D. 3289 (H4026) and Regulations 40, 1922 Edition, it is otherwise provided. — The Corporation Trust Company. Copyright 1922, by The Corporation Trust Company. WAR TAX 762 SERVICE 1-2-22 (2) 6-12-22 STAMP TAX REGULATIONS. — 1922. (T. D. 3219.) (273 Fed. 197.) {Revenue Act of 1918.) A taxable transfer of stock is involved when stock is issued in considera- tion of the transfer of property and the vendor corporation authorizes the vendee corporation to issue the new stock direct to the vendors stockholders. 3998 1. Transfer of right to receive shares or certificates of stock.— 3524 Where one corporation sold to another corporation certain property 3614 in consideration of the issuance to it of a fixed number of shares of the capital stock of the purchasing corporation, and thereafter, prior to the actual issuance of the stock certificates, the vendor corporation author- ized the vendee corporation to issue the shares direct to the stockholders of the vendor corporation, the resolution of the board of directors of the vendor corporation conveying the authority is a transfer of the right to receive such shares, and the transaction is subject to the stamp tax imposed by Subdivision 4, Schedule A, of the Revenue Act of 1918. 3999 2. Corporations — disregard of corporate entity. — The substantial difference between a corporation and its stockholders may not be disregarded. (The decision [syllabus only, as shown above] of the United States Dis- trict Court, District of New Jersey, rendered May 31, 1921, in the case of Marconi Wireless Telegraph Company of America v. Charles V. Duffy, Collector [273 Fed. 197], is published not as a ruling of the Treasury Depart- ment, but for the information of Internal Revenue officers and others con- cerned.) 4000 Transfer of stock from trustee to substituted trustee, when such 3597 transfer results wholly from operation of law. — Reference is made to your letter of February 3, 1921, wherein you request to be advised "whether when one trustee is substituted for another, the beneficiaries remain- ing the same, and a certificate of stock is transferred from the name of one trustee to that of the substituted trustee the transfer is subject to tax." fin reply, you are advised that this office holds that the transfer of stock from one group of trustees to another group, although one or more of the trustees remains the same, is subject to stamp tax under subdivision (4), Schedule A, Title XI of the Revenue Act of 1918, and that the tax is measured by the face or par value of all the stock covered by the transfer. However, if transfer of title results wholly from operation of law, such transfer is net subject to stamp tax. (Letter to a subscriber, signed by Assistant Commis- sioner Paul Myer, and dated February, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 763 SERVICE 1-2-22. (2) 6-12-22. STAMP TAX REGULATIONS. — 1922. 4001 Transfer of stock to substituted trustee under the Massachusetts 3597 law. — Reference is made to your letter of April 22, 1921, with respect to the transfer of stock to the names of succeeding trustees appointed under the Massachusetts statute. Ifln reply you are advised that it is the opinion of this office that where new trustees are appointed under the provis- ions of Chapter 147, Section 6,* Revised Laws of Massachusetts, the newly appointed trustees acquire title to the trust estate by virtue of their appoint- ment and without any formal conveyance. Therefore, the transfer of the stock from the names of the retiring trustees to the succeeding trustees is not subject to stamp tax. (Letter to Robert H. Gardiner, Jr., Boston, Mass., signed by Acting Deputy Commissioner A. C. Holden, and dated May 4, 1921.) *Section 5. If a trustee under a written instrument declines, resigns, dies or is removed before the objects of the trust are accomplished and such instrument makes no adequate provision for supplying the vacancy, the supreme judicial court, the superior court or the probate court shall, after notice to all persons interested, appoint a new trustee to act solely or jointly with the others as the case may be. Section 6. A new trustee appointed under the provisions of the preceding section, or appointed in the place of a former trustee in conformity with a written instrument creating a trust, shall, upon giving such bond as may be required, have the same powers, rights and duties and the same title to the estate, whether as a sole or a joint trustee, as if he had been originally appointed; and the court may order any conveyances to be made by the former trustee or his representatives or by the other remaining trustees which it may find proper or convenient to vest the trust estate in the new trustee either solely or jointly with the others. 4002 Nominal transfer of title to stock on death of trustee to surviving 3597 trustee or trustees. — Reference is made to your letter of March 5, 3617 1921, requesting a ruling as to the application of the stamp tax to the transfer of shares of stock to the surviving trustee upon the death of one of the trustees. ^fln reply you are advised that when stock stands in the name of two or more trustees, the nominal transfer of such stock to the surviving trustee or trustees upon the death of one of the trustees is not subject to the stamp tax. (Letter to The Corporation Trust Company, signed by Acting; Deputy Commissioner A. C. Holden, and dated March 15, 1921.) 4003 Use of rubber stamps on certificates in case of transfers of stock to 3627 broker for sale and from broker to purchasing customer. — Reference letter AM-CW-636, dated April 15. Permission is granted brokers to use rubber stamp with the name of firm and address in issuing certificates required by Article 13, paragraphs (k) H! 3625], (1) IT3626] and (m) [*[3627] of Regulations 40 Revised. (Telegram to the Collector of Internal Revenue, New York, N. Y., signed by Acting Deputy Commissioner A. C. Holden, and dated April 19, 1921.) 4004 Drafts payable in terms of foreign currency, accepted or delivered 3783 within the U. S. — Reference is made to your letter of September 7, 1921, requesting a ruling as to the application of the stamp tax to certain drafts drawn outside of the United States where acceptance or delivery is made within the United States but payable in terms of foreign currency; as for example, payable in French francs in New York. %\n reply you are advised that the stamp tax accrues upon delivery or acceptance within the United States, whichever is prior. This stamp tax should be computed on the rate of exchange at the time and place of such delivery or acceptance. (Letter to the Equitable Trust Company of New York, New York, N. V., attention Franklin Carter, Jr., signed by Acting Commissioner C. P. Smith, and dated Sept. 20, 1921.) <--'/' yiigi't 1922, by The Corporation Trust Company. WAR TAX 764 SERVICE 1-2-22. (2) 6-12-22. STAMP TAX REGULATIONS.— 1S22. 4005 Trade acceptance given in settlement of balance due on open export 3789 account is not exempt, as it is not incident to the process of ex- 3791 portation. — Reference is made to your letter of October 14, 1921, 3792 where you state as follows: "A customer of ours has sold and shipped goods to a Cuban firm in Cuba on open account. The Cuban firm, after making a small cash payment, has offered to give its acceptance for the balance due on account of goods shipped. " You request to be ad- vised whether this draft is an inherent part of the export transaction, even though it is not accompanied by shipping documents, and therefore exempt from the stamp tax. 4006 Article 41 of Regulations 55, Revised, provides that "A time draft directly covering exports to a foreign country and which constitutes an inherent, necessary and bona fide part of the actual process of exportation is exempt from stamp tax." This language is not intended to convey the idea that every draft used in payment for exports is exempt from tax by reason of the constitutional prohibition against tax on exports. The drafts which are thus exempt from stamp tax are only those which through long established custom have come to be a necessary part of the process of exportation, of which the draft drawn by an exporter upon a foreign purchaser for the price of the goods and which is accompanied by the bill-of-lading is typical, if not the sole example. 4007 The acceptance in question is given in settlement of a balance due upon an open account. It is not believed that this instrument is an inherent and necessary part of the actual process of exportation, and, there- fore, no exemption can be allowed on the ground that it constitutes an inherent and necessary part of the process of exportation. (Letter to the National Bank of Commerce in New York, New York, N. Y., signed by Deputy Commissioner F. G. Matson, and dated Nov. 4, 1921.) 40 OS Extension or renewal of promissory note by extension of mortgage 3812 by which secured, — Reference is made to your letter of March 23, 3813 1921, wherein you state that you have been advised by the office of the Collector of Internal Revenue at Boston, Mass., that "where a mortgage is extended by the usual form of extension, operating to renew the note also, the revenue stamps to be used in that connection should be affixed to such extension agreement rather than to the original note already stamped in accordance with its entire principal amount," and request to be advised whether the foregoing is correct. %ln reply you are advised that the ruling referred to above and which you state was given to you by the Collector of Internal Revenue at Boston, Mass., is correct. (Letter to Holmes & Worthen, Boston, Mass., signed by Acting Deputy Commissioner A. C. Holden, and dated March 31, 1921.) 4009 Drafts covering bunker coal supplied in this country to foreign 3783 steamship company. — Reference is made to your letter of April 5, 3791 1921, requesting a ruling as to the application of the stamp tax to a draft drawn against a foreign steamship company covering a bill for bunker coal furnished in this country. The sale of bunker coal in this coun- try to a foreign steamship company is held to be a domestic sale and not an export. In view of this fact, a draft drawn on the foreign buyer in payment of such bunker coal is subject to the stamp tax under Schedule A-6, Title XI of the Revenue Act of 1918. (Letter to a subscriber, signed by Acting Commissioner M. F. West, and dated April 13, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX 765 SERVICE 1-2-22. (2) 6-12-22. STAMP TAX REGULATIONS.— 1922. (Decision.) 276 Fed. 51. Revenue Act of 1918. (T. D. 3233.) Trust Certificates issued under the Pennsylvania Plan held to be taxable as "Certificates of Indebtedness." IN THE DISTRICT COURT OF THE UNITED STATES FOR THE EASTERN DISTRICT OF PENNSYLVANIA. Fidelity Trust Company ) December Sessions 1920 vs. y No. 8118 Ephraim Lederer, Collector. ) Assumpsit. Sur rule for judgment. 4010 Dickinson, J. — This case is in effect a case stated, in the determination 3520 of which we are asked to decide a question of law. The question 3757 broadly stated is whether the "certificates" held by the plaintiff as trustee are taxable. We, in consequence, limit our attention to this. 401 1 The taxing authorities give the impression of their attitude as first one of uncertainty and then one of doubt. We have given the subject of the tax the name of "certificates" in order to get a word as colorless as possible, because any word or words definitely descriptive of what the thing sought to be taxed really is, anticipates the ruling to be made inasmuch as what the thing is determines whether or not it is taxable. It is conceded that Congress might have taxed these "certificates" had they been known or thought of and had Congress so willed. The whole question is has it taxed them? It has if they fall within the verbiage [sic] of the Acts of Congress, otherwise they remain untaxed. It is doubtless the fact that the draught of the tax laws had the purpose in mind to tax everything from which income was expected to be derived by granting to one person the use of the money of another. In the effort to make sure of the accomplishment of this purpose resort was had to enumeration and description. The descent from the general to the particular and specific, however careful the attempt to make the list of the latter full and all embracing, always has the result of at least rendering doubtful the inclusion of what is not by name listed. All forms of so called securities or investments issuei by corporations, whether expressive of in- debtedness or shares in anything the corporation possesses, are without doubt taxed, as are also all forms of instruments expressive of the indebted- ness of any person to the holder. 4012 We were strongly impressed by the argument at bar that these two general lines of thought marked the limits of what had been taxes. The question before us then resolved itself into an inquiry into what these "Certificates" are. They are in strictness neither evidences of debt nor of shares in corporate assets. This is because of their peculiar form and of the plan under which created. A dealer (n so called investments or securities would without doubt or hesitation list them under the name or designation of "Car Trust Certificates," for such they are. There are many such "on the market." They all have the same general purpose and character. They Copyright 1922, by The Corporation Trust Company. WAR TAX 766 SERVICE 1-2-22. (2) 6-12-22. (3) 12-30-22. STAMP TAX REGULATIONS. are called for because some railroad or other transportation company is in need of rolling stock or other equipment and is without funds or credit with which to supply itself, and there is a legal or other difficulty in the way of a direct pledge of the property. They are issued under a number of different plans. The one with which we are concerned is known as the Philadelphia plan. Those willing to share in the venture are invited to place their contribu- tions in the hands of an acceptable trustee. The rolling stock, or other property is then purchased in the name of this trustee as owner. The trustee then enters into a form of bailment or conditional sale agreement with the carrier, the periodical and final payments upon which are sufficient to pay the interest on the investment and the principal at maturity. The contributors in the meantime hold the certificates or acknowledgment of the trustee of their respective shares in the venture. 4013 It will thus be seen that in strictness the only obligation in the nature of a debt or promise to pay money is the obligation and agree- ment of the carrier to pay the agreed price for the hire and use of the property or the rentals as they are commonly termed. The trustee is a mere purse, and only in a secondary sense can be said to owe anything to any one other than faithfulness to its trust obligations, and is not a debtor even in this secondary sense unless and until and as the moneys which belong to the contributors come into its hands. The certificate is not within the literal verbiage [sic] of the Act of Congress not being "a certificate of indebtedness issued by any person" nor "an instrument issued by any corporation." If the taxing hand has been laid only upon these specific forms of what are generally known as securities, it must be withdrawn from the "trust certi- ficates" now under view. This would mean that they are the exceptions among this general class of securities and are exempt because of the very effort made in the framing of the law to include all forms of securities of this general character has, in verbal nicety, excluded them. The Act of Congress, however, includes more than the two kinds of securities mentioned above, because we think it includes everything "known generally as corporate securities." That these trust certificates are so known would not be denied. The denial would be of the correctness of this construction of the Act of Congress. There are two obstacles to be surmounted before reading this construction. One is that the rule of the nearest antecedent makes the quoted phrase relate to and serve as a definition of the described kinds of "instruments issued by corporations," and the other is that the finding of a meaning to tax all instruments "commonly known as corporate securities" involves presence of a grammatical error in the Act of Congress. Neither of these obstacles are however insurmountable, if this was the meaning of Congress, and we so find. Nor do we see any conflict between a ruling that these certificates are taxable and the doctrine of the cases to which we have been referred that there is no such thing as a doubtful tax. U. S. vs. Isham, 84 U. S., 496. 4014 The question now presented is admittedly a close one, but this does not necessarily make for the taxpayer. The true doctrine is that neither the Executive nor the Judicial Departments nor both can levy a tax. This can only be done by Congress. When, however, Congress has acted and the tax questioned is found to have been levied, the mere fact that in the light of the particular case in which the question is raised the meaning of Congress might have been more clearly expressed, does not justify refusal to give that meaning effect. The real truth back of the whole discussion is that if these certificates are not taxable, it is because of the accidental circumstance of a wholly nominal separation of the security held Copyright 1922, by The Corporation Trust Company. WAR TAX 767 SERVICE 1-2-22.J (2) 6-12-22. (3) 12-30-22. STAMP TAX REGULATIONS. by the taxpayer from the obligation of debt entered into by the carrier corporation. The real security is the promise not of one corporation but of two to pay to the certificate holders the sums due them. The real trans- action is the request of the carrier company made to the certificate holders to advance the money required for equipment, in consideration of which the carrier agrees to pay back the sum advanced, with interest. This it is true was not the form of the promise, but such it was in substance because it was a promise to pay a sum which was the exact (and not accidental but prefixed) equivalent of the advances, with interest. It is, however, and none the less true, that if for any reason Congress has not included these certificates, no tax can be imposed. The impression to this effect made by the argument at bar has been removed by what seems to us to be the sufficiently expressed will of Congress to tax them. 4015 We have disposed of the case as if on trial hearing with all the facts which enter into the discussion established, understanding such to be the wish of all parties, it being conceded that all these facts are in the record.* Rule for judgment discharged. *Sur trial by the court sitting without a jury. After trial Judge Dickin- son says: "This case, although in form assumpsit, raises the sole question of the legality of a tax levy. The very question now raised was raised and dis- posed of on a rule for judgment. Judgment was refused [If 40 10]. This necessitated a trial hearing, but the question to be determined has in no wise changed." And in conclusion: "Our conclusion is on the trial what is was in the rule for judgment, that these car-trust certificates are subject to the tax imposed by this act of Congress." (Fidelity Trust Co. vs. Lederer, U. S. D. C, E. D. of Penn. Not yet reported.— T. D. 3417: Bull I ('22)-52, p. 15.) Copyright 1922, by The Corporation Trust Company. WAR TAX 768 SERVICE (1)2-6-22. (2)2-17-22. STAMP TAX REGULATIONS. — 1922. 4016 Reliance by original-issue agents, for stamp tax purposes, on state- 3503 ment of officials of corporation as to "actual value" of its non-par value stock. — Reference is made to your letters of January 3 and 6, 1922, concerning the application of the stamp tax to the issue of stock of no par or face value where such stock is worth less than $20 per share. 4017 It is noted that rulings are requested as follows: "May we regard as sufficient authority for tax determination purposes a resolution or instructions from the- Board of Directors or the officers of the issuing corporation to the effect that the issued stock is of a certain 'actual value* for stamp tax purposes ?" 4018 In your letter of January 6, 1922, you state "we are the original issue and transfer agents for many corporations and affix revenue stamps for them in the case of original issue of stock.'' In the absence of further definite information it is assumed for the purposes of this reply that the status of principal and agent correctly describes the legal relation- ship between you and the corporation for which you act. The responsibility for the correct determination of the actual value of no-par-value stock is upon the taxpayer. Although as a general rule your principal (i. e., the corporation issuing the stock) would be liable for additional taxes and penalties resulting from an incorrect determination of such value, it is absolutely impossible for this office to advise you that in all cases the issue or transfer agent would be free to accept with absolute impunity the resolu- tion or instructions of the proper corporate officials as to the actual value of the stock. 401 9 Original issue tax liability on certificate representing more than one 3521 share having actual value of less than $100. — "We ask also that you advise us as to your interpretation of the no-par-value stock-issue tax provided for by Schedule A (2). Where the actual value 'is less than $100 per share' is the tax of 1 cent 'on each $20 of actual value or fraction thereof on a per share basis, or is it based on the actual value of the cer- tificate which may represent a number of shares?" (Answer.) The stamp tax should be computed on the value of each share. Where the actual value of a share of no par value stock is $5 the tax on ten shares of such stock will be 10 cents. (Letter to The Corporation Trust Company, signed by Deputy Commissioner F. G. Matson, and dated January 26, 1922.) 4030 Transfer of stock registered in name of a partnership to the individual 3595 members thereof. — Reference is made to your letter of January 14, 1922, wherein you state that a partnership * * * has presented for transfer a certificate of stock for 100 shares of * * * Railway, regis- tered in the name of the partnership, to be split up in the names of the two parties [the two members of the partnership] 50 shares to each, and request to be advised whether said transfer is subject to stamp tax. (Answer) In reply you are advised that this office holds that the transfer of this stock from a partnership to the members of the partnership individually is subject to stamp tax. (Letter to The Equitable Trust Company, New York, N. Y., attention Franklin Carter, Jr., signed by Deputy Commissioner F. G. Matson, and dated February 3, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 769 SERVICE 2-17-22. STAMP TAX REGULATIONS. — 1922. (T. D. 3286.) 4021 Issuance and renewal of indemnity and surety bonds before Jan- 3764 uary I, 1922 and after December 31, 1921.— Section 1400 (a) under Title XIV of the Revenue Act of 1921 repeals the stamp taxes im- posed by subdivision 2, Schedule A, of the Revenue Act of 1918, to take eff-ct on January 1, 1922, subject to the limitations regarding the assessment and collection of taxes accrued prior to such date prescribed in subdivision (b) of said Section 1400. Section 1100 and Schedule A-2 of the Revenue Act of 1918 provided: "Sec. 1100. That on and after April 1, 1919, there shall be levied, collected, and paid, for and in respect of the several bonds, debentures, or certificates of stock and of indebtedness, and other documents, instruments, matters, and things mentioned and described in Schedule A of this title, or for or in respect of the vellum, parchment, or paper upon which such instruments, matters, or things, or any of them, are written or printed, by any person who makes, signs, issues, sells, removes, consigns, or ships the same, or for whose use or benefit the same are made, signed, issued, sold, removed, consigned, or shipped, the several taxes specified in such schedule. The taxes im- posed by this section shall, in the case of any article upon which a corresponding stamp tax is now imposed by law, be in lieu of such tax." "2. Bonds, indemnity and surety: On all bonds executed for indemnifying any person who shall have become bound or engaged as surety, and on all bonds executed for the due execution or performance of any contract, obligation, or requirement, or the duties of any office or position, and to account for money received by virtue thereof, and on all policies of guaranty and fidelity insurance, including policies guaranteeing titles to real estate and mortgage guarantee policies, and on all other bonds of any description, made, issued, or executed, not otherwise provided for in this schedule, except such as may be required in legal proceedings, 50 cents: Provided, That where a premium is charged for the issuance, execution, renewal or continuance of such bond the tax shall be 1 cent on each dollar or fractional part thereof of the premium charged: Provided further, That policies of reinsurance shall be exempt from the tax imposed by this subdivision." 4022 The tax imposed by the foregoing statutory provisions was upon the issuance, execution, renewal or continuance in force of the bonds described therein. Therefore, any such instrument issued or executed after March 31. 1919, but prior to January 1, 1922, is subject to the stamp tax whether taking effect immediately or subsequent to the repeal of said tax. But any such instrument issued or executed after December 31, 1921, is not subject to stamp tax although effective as of a date prior to January 1, 1922. 4023 Where a premium is charged prior to January 1, 1922, for the issuance or execution (regardless of the effective date), or the renewal or con- tinuance in force, of any bond or other instrument designated in Schedule A-2 of the Revenue Act of 1918, the same is subject to stamp tax upon the entire amount of the premium so charged. But where a premium is charged subsequent to December 31, 1921, for the issuance or execution after said date, or for the renewal or continuance in force, of any such bond or in- strument, no stamp tax is due upon the premium charged. 4024 However, where a premium is charged upon the issuance, execution, renewal or continuance in force, subsequent to December 31, 1921, of any indemnity or surety bond given to the Federal Government, or of any policy of guaranty and fidelity insurance in favor of the United States, a statement must be made on the face of such bond or policy showing the rate and amount of the premium charged. (T. D. 3286, signed bv Commissioner D. H. Blair, and dated February 15, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 770 SERVICE 2-24-22. (2) 6-9-22. (3) 7-18-22. (4) 7-21-22. STAMP TAX REGULATIONS— 1922. nr. D. 3289 ) 4025 Issues of stock : Article 4(h), Article 4(1) and Article 5(i) (T. D. 31 18), of Regulations 40 (Revised), amended. — Article 4(h), Article 4(1) and Article 5(i) (T. D. 3118), of Regulations 40 (Revised), are hereby amended to read as follows: 4026 Art. 4(h). — The issue of certificates of stock upon reorganization of a 3561 corporation not expressly provided for in Art. 4(1) is subject to tax as follows: Preferred stock issued in place of common, or vice versa, or one kind of preferred stock issued in place of another kind of preferred stock, or one kind of common stock issued in place of another kind of com- mon stock, or stock without par value issued in place of stock with par value, or vice versa, is subject to tax on the entire issue. 4027 Art. 4(1). — The issue of a greater number of shares of no par value 3564a stock in lieu of a smaller issue of such shares, previously made, or the issue of a greater number of shares of par value stock in lieu of a smaller issue of such shares of the same kind, previously made, whether on organization or reorganization of the issuing corporation, is subject to stamp tax only on the additional shares so issued. 4C28 Art. 5(i). — The issue by a corporation of certificates of preferred 3584 stock in lieu of outstanding certificates of common stock, or vice versa, or the issue of certificates of preferred stock of one kind in lieu of certificates of preferred stock of another kind, pursuant to the terms of the original charter of the corporation, without other consideration and without change in the amount of the authorized capital stock of the corpora- tion, is not subject to tax. (T. D. 3289, signed by Commissioner D. H. Blair, and dated February 21, 1922.) 4029 Stamps of large denominations in proper aggregate amount may be 3890 affixed to permanent corporation record accompanying proxies in lieu of separate stamps to the respective proxies. — Reference is made to your letter of May 2, 1922, in reply to the letter from this office dated April 26, in regard to the affixing of documentary stamps of large denominations covering the amount of stamp tax incurred under the pro- visions of section 10, Title XI, of the Revenue Act of 1921. 4030 In reply you are advised that where the number of proxies required in voting at a stockholders' meeting is sufficiently large to warrant the purchase of stamps of large denominations in payment of the stamp tax on such proxies, the stamps may be affixed to a permanent record of the corporation and signed by the secretary of such corporation, provided the corporate seal is affixed -thereto. This permanent record should accompany the proxies for which the stamps were canceled. 4031 In the event that the special certificate of election mentioned in your letter remains with the proxies in question, such certificate should bear the documentary stamps properly canceled and be retained in the office of the corporation for inspection by the officers of the Bureau of Internal Revenue. (Letter to The Corporation Trust Company, signed by Deputy Commissioner F. G. Matson, and dated May 27, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 771 SERVICE 6-9-22. (2) 7-18-22. (3) 7-21-22. STAMP TAX REGULATIONS. — 1922. 4032 Transfer of stock standing in name of brokerage firm, and held by 3595 it for account of its clients, to and into name of successor firm is taxable. — Reference is made to your letter of October 19, 1921, wherein you state that certain shares of Southern Pacific Company's stock stand in the name of Berg, Roesler and Kerr; that said firm has dissolved and a new firm formed under the name of Berg, Eyre and Kerr, and that the new firm desires to transfer to its name the shares standing in the name of the old firm. In connection with this transfer you enclose a copy of a com- munication received by you and which reads as follows: "Southern Pacific Railway Company, 165 Broadway, New York, N. Y. Dear Sirs: We hereby guarantee that the firm of Berg, Roesler and Kerr have no ownership in any securities presented for transfer registered in their name and that said securities were held by the firm of Berg, Roesler & Kerr for the accounts of their clients and transferred to Berg, Eyre & Kerr under the same conditions as existed with Berg, Roesler & Kerr. Yours very truly, (Signed) Berg, Roesler & Kerr. (Signed) Berg, Eyre & Kerr." 4033 You are advised that the transfer of the stock under the circum- stances related is held not to come within the proviso of Sub-division 4, Schedule A, Title XI of the Revenue Act of 1918, which exempts from stamp tax deliveries or transfers to a broker for sale, this provision being construed by the Bureau to apply only to the transfer of certificates of stock from the owner thereof to the broker solely for the purpose of enabling such broker to make a sale thereof for the owner. (See Article 13(k) of Regula- tions 40, Revised [1(3625.]). The transfer in question is, therefore, held to be subject to stamp tax. (Letter to the Southern Pacific Company, New York, N. Y., signed by Deputy Commissioner F. G. Matson, and dated Nov, 4, 1921.) (T. D. 3364.) 4034 [Regulations 55 (1922 Edition) are further designated as T. D. 3364. — 3743 The Corporation Trust Company.] Copyright 1922, by The Corporation Trust Company. WAR TAX 772 SERVICK 8-24-22. STAMP TAX REGULATIONS. — 1922. (T. D. 3380.) 4035 [Regulations 40 (1922 Edition) are further designated as T. D. 3546 3380. — The Corporation Trust Company.] 4036 Transfer of stock from banking institution to its nominee is taxable. — [3595 Reference is made to your letter of August 4, 1922, relative to the application of stamp tax to a transfer of stock from a banking in- stitution to its nominee, accompanied by a certificate that there is no change in the ownership of the stock. Ifln reply you are advised that the transfer tax is not measured by the transfer of ownership of stock but by the transfer of legal title to stock. The term "legal title" as used in the act signifies the appearance of title. See Bonbright v. State of New York, 165 App. Div. 640, 151 N. Y. Supp. 35, which case is followed by the Department. You are accordingly advised that the transfer of the stock to the nominee of the bank as referred to by you is subject to stamp tax. (Letter to the Empire Trust Company, New York, N. Y., signed by Deputy Commissioner F. G. Matson, and dated August 16, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 773 SERVICE d iud iioote to qrnai^nwo 'io loiafifn:? adt v^d bsujafisn >£ sri} fii basu as "oLrh legal" miol yfiT .^aoja oJ 3 (.££QI ,dl jstrsi/A balfib bi -in ^gniilriiid £ sgrififf:) on ei f .viG .qqAe» uoY .Jmran •yiiqrrrSI %At o .O .1 wnomi 8*24-22. STAMP TAXES. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Stamp Tax Law Giving Treasury Decision Number or other designation, General Subject Content, Date of Issue, and Paragraph Reference, T D. Reg. 40 Reg. 55 0. D. 83 Soecial Decision Special Special Speeial Social Special Special Special Special Decision Subject Paragraph Law Provisions 3500 Regulations under 1921 law (issue of July 8, 1922) relating to stamp tax on issues, sales and transfers of stock and sales of products for future delivery. (See exhaustive Table of Contents beginning on'page 709.) 3547 Regulations under 1921 law (1922 Edition: June 12, 1922) relating to stamp taxes on documents, fully indexed on the blue-page index at the back of this Stamp Taxes division 3743 Taxable and tax-free issues upon a merger of corpora- tions. (March, 1921.) 3994 Exchange of non-par for par value stock on reorganiza- tion. (February 21, 1921.) 3997 Marconi Wireless Telegraph Co. vs. Duffy. District Court decision, 1918 Act. Transfer of right to receive stock. (May 31, 1921.) 3998 Transfer of stock from trustee to substituted trustee, when such transfer results wholly from operation of law. (February, 1921.) 4000 Transfer of stock to substituted trustee under the Massachusetts law. (May 4, 1921.) 4001 Nominal transfer of title to stock on death of trustee to surviving trustee or trustees. (March 15, 1921,) 4002 Use of rubber stamps on certificates in case of transfers of stock to broker for tale and from broker to pur- chasing customer. (April 19, 1921.) . . . 4003 Draft* payable in terms of foreign currency, accepted or delivered within U. S. (September 20, 1921.), 4004 Trade acceptance given in settlement of balance due on open export account is not exempt, as it is not incident to the process of export. (November 4, 1921.) 4005 Extension or renewal of promissory note by extension of mortgage by which secured. > (March31, 1921.) 4008 Drafts covering bunker coal supplied in this country to foreign steamship company. (April 13, 1921.. 4009 Fidelity Trust Co. vs. Lederer. District Court de- cision, 1918 Act. Trust certificates issued under Pennsylvania plan held to be taxable as "Certifi- cates of Indebtedness." (July 14, 1921.) 4010 The matters listed above are indexed. Special Reliance of original-issue agents on statement of officials of corporation as to "actual value" of its non-par value stock (Jan. 26, 1922) 4016 Special Original issue tax liability on # certificate representing more than one share having actual value of less than $100 (Tan. 26, 1922) . . . . 4019 Special Transfer of stock owned by a partnership to the indi- vidual members thereof (Feb. 3, 1922) 4020 Special Indemnity and surety bonds under the 1918 Act (Feb' ruary 15, 1922) 4021 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Taxes Supplementary Page 1. 8-24-22. STAMP TAXES.— RUNNING TABLE OF CONTENTS. — Continued. Rulings, Regulations, Opinions and Decisions under the Stamp Tax Law. — Continued. T. D. Subject Paragraph 3289 i Arts. 4(h), 4(1), and 5(i), Reg. 40 (191 8 Act) amended.— Issues of stock subject to tax (February 21, 1922) 4025 Special Stamps of large denominations in proper aggregate amount may be affixed to permanent corporation record accompanying proxies in lieu of separate stamps to the respective proxies (May 27, 1922). . 4029 Special Transfer of stock standing in name of brokerage firm, to and into name of successor firm, is taxable (Nov. 4, 1921) .. .. 4032 3364 Treasury Decision designation for Regulations 55 (1922 Edition) beginning on page 737 4034 3380 Treasury Decision designation for Regulations 40 (1922 Edition) beginning on page 709 4035 Special Transfer of stock from banking institution to its nom- inee is taxable (August 16, 1922) 4036 Insert this page immediately before the blue Stamp Tax Index. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Taies Supplementary Page 2. 1-12*22. STAMP TAX INDEX. [The references are to paragraph numbers.} Abstracts of title. .3865 Acceleration of maturity, provision for, in instrument, effect of. .3751 Acceptance, for payment at future date. .3788 Of deed without proper stamps prohibited. .3831 Or delivery in the United States of time draft payable in foreign country. .3804 Or delivery in United States, Alaska, or Hawaii, of time draft against shipment from Virgin Islands, Philippines, and Porto Rico. .3807 Time draft or check, taxable on, in United States. .3884 Act of October 22, 1914, documentary stamps issued under. .3984 Act of October 3, 1917, documentary stamps issued under. .3984 Present regulations generally applicable to stamp taxes under. .3974 Actual value, basis of tax on exchange of properties. .3840 Measure of the tax where consideration for deed is left open. .3832 Additional bond, secured by mortgage, subject to tax. .3748 Additional cancellation, when required. .3982 Adhesive stamps, cancellation of. .3981 Affixing stamps. .3987 Agent, deed to principal by. .3858 Agreement, as to who pays for stamps, not prohibited. ,3785, 3973 Extending maturity of mortgage bond. .3748 Extending mortgage, subjects bond to tax. .3748 Alaska: Passage tickets to. .3884 Time drafts covering shipments from, to Canal Zone. .3805 Ambassadors, passage tickets issued to. .3880 Articles manufactured in foreign countries, stamps on. .3980 Assessment, stamp tax to be reported for, when. .3991 Assessments and taxes, when deductible. .3875 Assignee, power of attorney to. .3906 Assignment, of insurance policy, power of attorney contained in. .3903 Of interest in bond. .3755 Of stock, power of attorney in connection with. .3912 Power of attorney contained in. .3906 Assistant treasurers, stamps to be delivered to. .3979 Attorney in fact, to transfer stock, appointment of. .3908 Authentication by trustee, provision for, in instrument, effect of. .3751 Authority for regulations, section 1309. .8009 Bills of sale, conditional. .3758 Board of directors, resolution of, authorizing an officer of the corporation to sell, etc.. .3900 Resolution of, authorizing person not an officer to sell, etc.. .3900 Bond, accompanying real estate mortgage. .3746 Additional. .3748 Business property investment. .3754 Delivery essential to issue. .3744 Executed in Canada and delivered in the United States. .3761 For value of stamps, may be required. .3979 Indemnity or fidelity. .(No tax on such under 1921 Act.) Instrument assigning interest in. .3755 Instrument styled a bond and under seal. .3753 Instruments issued by corporations in numbers, under a trust indenture. .3751 Issued by school district. .3763 Issued in satisfaction of insurance policies. .3762 Mortgage, agreement extending maturity of. .3748 New, given for same indebtedness, subject to tax. .3748 Notation on. .3765 Not mandatory to give. .3979 Of indebtedness, Schedule Al . .3520, 3744, 4010 Of War Finance Corporation. .3820 Or stocks, pro forma power of attorney in printed assignment on. .3908 Renewed by agreement extending mortgage accompanied by bond. .3747 Resolution of board of directors authorizing officer to sell, etc. . . 3900 Resolution of board of directors authorizing person not an officer to sell, etc. .3900 Stamps to be affixed to. .3749 Temporary, stamps to be affixed to. .3750 To bear legend. .3749 Copyright 1922, by The Corporation Trust Compmny. WAR TAX SERVICE Stamp Tax — Index Page 1. 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Building and loan associations, deeds of. .3846 Deeds to. .3856 Proxies to vote stock of. .3893 Bunker coal, drafts covering. .4009 Burial site, deed to. .3853 Canada, bonds executed in, and delivered in United States. .3761 Passage tickets issued in United States, on orders purchased in. .3886 Passage tickets sold in United States from ports not in. .3889 Passage tickets to ports not in. .3887 Promissory note executed and mailed in. .3829 Promissory note executed and mailed to payee in. .3830 Canal Zone, time drafts covering shipments to. .3805 Cancellation of stamps. .3981 Additional. .3982 Capital stock, conveyance by coowners in consideration of. .3867 Conveyance by corporation to owner of. .3869 Conveyance from old to new corporation on reorganization. .3567 Deed from one corporation to another owning. .3873 Power of attorney to sell, etc., taxable, unless. .3912 Certificates, interim. .3750 Stamps affixed to. .3750 Certificates of deposit. .3756 Of indebtedness, Schedule Al . .3520, 3744, 4010 Certificates, of indebtedness, issued by receivers. .3759 Of interest, business property investment bond taxed as. .3754 Of Morris plan banks. .3756 Scrip dividend. .3752 Certificates of indebtedness defined. .3757, 4010 Business property investment bond not taxable as. .3754 Conditional bills of sale not. .3758 Issued by Director General of Railroads, promissory notes secured by. .3820 Issued by receivers. .3759 Scrip dividend certificates or warrants taxable as. .3752 Trust certificates. .4010 Cestui qui trust, conveyance to, from trustee, without consideration. .3871 Checks, and drafts payable otherwise than at sight or on demand. .3783, 4004, 400 ; Drafts, and promissory notes, Schedule A5 . .3534, 3783, 4004, 4009 Liability to tax determined by form or face of. .3787 Post-dated. .3828 Claim for refund to be presented to collector. .3972 Clerk of court, deed by. .3839 Collector, claim for refund to be presented to. .3972 Copy of power of attorney filed with. .3914 Delivery of stamps by. .3979 Reports of. .3989 Stamps for sale by. .3978 Stamps rendered useless, may be exchanged by. .3986 And revenue agent to report. .3889 Collectors and revenue agents. .3989 List of Collectors, .page 1711 Commissioner, deed executed by; tax on. .3834 Computation of tax on deed executed by sheriff, referee, or commissioner. .3834 Conditional bills of sale. .3758 Confession of judgment, warrant of attorney authorizing. .3909 Consideration, conveyances without. .3861 Lor deed left open, measure of the tax. .3832 Value of, basis of tax. .3832 Contracts, and options for purchase of real estate. .3849 Lor sale of real property. .3864 Conveyance, actual value at time of; measure of tax. .3832 By coowners in consideration of capital stock. .3867 By corporation to an officer through third party. .3876 By corporation to owner of all the capital stock. .3869 By mortgagor to mortgagee, measure of tax. .3870 By old corporation to new corporation on reorganization. .3567 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 2. 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Conveyance: — concluded. In consideration of payment of obligations. .3873 Of land in consideration of maintenance. .3845 Of property subject to equity of redemption. .3844 Of real estate in foreign country. .3862 Through third party. .3876 To trustee, or from trustee to cestui qui trust, without consideration. .3871 To United States. .3872 Transfer of title to real estate by judgment or decree not taxable as. .3874 Validity of unstamped deeds. .3877 Without consideration. .3861, 3869, 3871 Conveyances, Schedule A6. .3536, 3831 Coowners, conveyance by, in consideration of capital stock. .3867 Copartnership, see partnership. Copy of power of attorney, filed in executive department. .3914 Filed with collector of internal revenue. .3914 Corporation, authority to secretary of, to transfer stock on the books. .3907 Conveyance of realty by old to new corporation on reorganization. .3567 Conveyance by, to an officer through a third party. .3876 Conveyance by, to owner of all the capital stock. .3869 Coupons attached to obligation of. .3822 Deed from one, to another. .3873 Defined. .3896 Directors of, officers. .3892 Instruments issued by, in numbers, etc.. .3751 Powers of attorney by, to resident agents. .3904 Proxies sent out by, may be stamped after execution and delivery. .3897 Proxiestto vote for officers of, and for other purposes. .3895 Resolution of board of directors authorizing officer to sell, etc.. .3900 Resoluuion of board of directors authorizing person not an officer to sell, etc.. .3900 Revenue stamp required on each instrument executed under general power of attorney granted to person not an officer. .3901 Stock in, a valuable consideration. .3847 County officer, deeds by. .3851 ■ Coupons, or notes, covering interest. .3822 Not subject to tax. .3822 Creditor, deed to trustee for benefit of. .3855 Customhouse entries for consumption or warehousing, Schedule A7..3537, 3878 Customhouse entries by United States officials and representatives of foreign countries. . 3878 Customs bonded warehouses, withdrawal entries from, Schedule A8 . .3538, 3879 Withdrawals of goods from. .3879 Debenture, business property investment bond not taxable as. .3754 Debentures, Schedule Al. .3520, 3744 Debtor, deed by, for benefit of creditor. .3855 Decree of State court, transferring title to real estate. .3874 Deductions, taxes and assessments, when. .3875 Deed, by executor. .3868 By husband and wife to "straw man". .3857 By State, county, or municipal officer. .3851 Confirming title. .3863 Conveying mine. .3843 Conveying property sold under foreclosure or execution. .3839 Conveying real estate in foreign country. .3862 Dated prior to April 1, 1919, but delivered after that date. .3837 Delivered between December 1, 1917, and April 1, 1919, taxable under Act of October 3, 1917. .3837 Delivered prior to April 1, 1919. .3836 Executed and delivered on or after April 1, 1919. .3836 Executed by sheriff, referee, or commissioner, tax on. .3834 From agent to principal. .3852 From one corporation to another. .3567, 3873 In consideration of payment of obligations. .3873 In escrow. .3838 Of building and loan association. .3846 Of release. .3850 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 3. 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Deed : — concluded. Of trust. .3850 On exchange of properties. .3840 Partition. .3860 Quit-claim. .3848 To a burial site. .3853 To a State. .3852 To building and loan association. .3856 To cover gift. .3854 To trustee for benefit of creditor. .3855 Validity of unstamped deeds. .3877 When exempt from tax. .3854 Deeds in escrow. .3838 Definitions, "certificates of indebtedness". .3757, 4010 "Corporations" . 3896 "Foregoing". .3745 "Insurance". .3948 "Insurer". .3947 "Issue". .3952 "Other instrument". .3950 "Policy of insurance". .3949 "Premium". .3954 "Premium charged". .3953 "Promissory note". .3808 "Sold". .3835 "United States". .3955 "Whereby insurance is made or renewed". .3951 Definitive bonds. .3750 Dalivery, includes mailing. .3898 Of bonds, essential to issue. .3744 Of draft in United States. .3786 Of power of attorney. .3898 Of stamps by collector to Assistant Treasurer of the United States, etc.. .3979 Or acceptance in United States, Alaska, or Hawaii, of time draft against shipment from Virgin Islands, Philippines, and Porto Rico. .3807 Or acceptance in the United States of time draft payable in foreign country. .3804 Time draft or check taxable on, in United States. .3784 and draft, accepted for payment at future date. .3788 and note, payment of interest on. .3824 Denomminations of documentary stamps. .3977 Deposit' certificate of. .3827 Deposit of stock as security, power of attorney given in connection with. .3912 Depositaries, stamps to be delivered to designated. .3979 Deputy, power of attorney authorizing, to have access to safe. .3915 Power of attorney authorizing, to have access to and control of contents of safe. .3915 Diplomatic representatives, passage tickets issued to. .3880 Director General of Railroads, promissory notes secured by certificates of indebtedness issued by. .3820 Directors, of corporation officers. .3892 Documentary stamps, additional cancellation required. .3982 Cancellation of. .3981 Issued. .3977 ■Issued under act of October 22, 1914. .3984 Issued under act of October 3, 1917. .3984 Only to be used. .3983 Rendered useless. .3986 Documentary stamp taxes, applicability of regulations. .3974 Dower, conveyance of right of. .3842 Draft, accepted for payment at future date. .3788 Against actual shipment. .3790 Drawn abroad on foreign payee, and foreign drawee. .37S6 Exports. .3792, 4005 Liability to tax determined by form or face of. .3787 Payable "on arrival of car". .3787 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 4. / 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Drafts, and checks payable otherwise than at sight or on demand. .3783, 4004, 4009 Checks and promissory notes, Schedule A 5. .3534, 3789, 4004, 4009 Drawee, foreign, draft drawn abroad on. .3786 Payee or endorsee to see that tax is paid. .3785 Duties of officers . . 3988, 3992 Effective date. .3743, 3956 Encumbrances, placed on property in connection with sale not deductible. .3833 Resting on real estate before sale only to be deducted. .3833 Endorsee, drawee, or payee to see that tax is paid. .3785 Entries, for withdrawal of goods or merchandise from customs bonded warehouses. .3879 Customhouse, for consumption or warehousing, Schedule A 7. .3537, 3878 Equity of redemption, conveyance of property subject to. .3844 Escrow, deeds in. .3838 Evasion of tax. .3970 Exchange of real properties, tax on deeds. .3840 Exchange of stamps rendered useless. .3986 Exchange orders, passage issued on. .3886 Execution, deeds to cover transfers of property sold under. .3839 Executive department, copy of power of attorney filed in. .3914 Executor, deeds by. .3868 Export bonds, insurance covering. .3966 Exports to foreign country, time draft covering. .3791, 4005 Drafts directly and indirectly involved with. .3792, 4005 Extension of promissory note, by extension of mortgage. .3813, 4008 Extension of stamp tax, Schedule A of revenue act of 1918 an extension of Schedule A of revenue act of 1917. .3975 Failure to affix stamps. .3970 Federal land banks. .3814 Federal officials, passage tickets to. .3880 Federal reserve bank officer, power of attorney authorizing to assign United States bonds. . 3916 Fidelity Trust Co. vs. Lederer. .4010 Food administration grain corporation; promissory notes. .3819 Forbearance, suspension of payment or. .3821 Foreclosure, deeds to cover transfers of property sold under a. .3839 Foreclosure sale, tax on deed. .3834 "Foregoing" defined. .3745 Foreign country, conveyance of real estate in. .3862 Stamps on articles manufactured in. .3980 Time draft payable in. .3804 Foreign draft, delivered in United States. .3786 Foreign drawee, draft drawn abroad on. .3786 Foreign governments, promissory notes issued by, .3817 Foreign insurance policies, Schedule A 13. .3543, 3946 Foreign payee, draft drawn abroad with. .3786 Foreign representatives, customhouse entries by. .3878 Passage tickets issued to. .3880 Form 1, not to be used in reporting tax paid for stamps. .3991 Form 8, quarterly reports on. .3990 Forms, table of. .page 1703 Former stamp tax acts. .3585, 3976 General power of attorney, granted by corporation to person not an officer. .3901 Gift, deed to cover. .3854 Government, copy of power of attorney filed in executive department of. .3914 Government bonds, power of attorney to sell or transfer. .3905 Grantee, in deed liable for tax. .3831 Or vendee to pay the tax. .3839 Grantor, in deed liable for tax. .3831 Hawaii, passage tickets to. .3884 Time drafts covering shipments to Canal Zone. .3805 Husband and wife, deed by, to "straw man". .3857 Incumbrance, see encumbrances. Indebtedness, certificates of, issued by receivers. .3759 Indemnity and fidelity bonds. .(No tax on such under 1921 Act.) Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 5. 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Indenture, stamps may be affixed to. .3749 Indorsement, of payment of interest in advance. .3825 Initials and date, to be written or stamped on stamps. .3981 "Insurance" defined. .3948 Insurance policies, bonds issued in satisfaction of. .3762 Powers of attorney contained in assignments of. .3903 "Insurer" defined. .3947 Interest, notes or coupons covering. .3822 Payment of, in advance after maturity of promissory note. .3825 Payment of, on demand note. .3824 Interest notes, separated from or in form to be separated from principal obligation. .3822 Subject to tax. .3822 Interim certificates. .3750 Stamps affixed to. .3750 Internal-revenue taxes, postage stamps not to be used for. .3985 Investment bond, business property. .3754 "Issue" defined. .3952 Issue, of bonds over period of years; stamps to be affixed to indenture, when. .3749 Of stock, regulations covering tax on. .3992 Joint-stock land bank mortgage, promissory notes secured by. .3814 Judgment note, warrant of attorney in, authorizing confession of judgment. .3909 Judgment, or decree of State court transferring title to real estate. .3874 Lands, tenements or other realty, what constitute. .3841 Lease, of real property. .3866 Warrant of attorney in. .3910 Legend, to be borne by bonds where stamps are affixed to the indenture. .3749 Liability of parties, both parties to taxable instrument liable for stamps. .3973 Liability to tax, determined by form or face of check or draft. .3787 Life maintenance, conveyance of land in consideration of. .3845 Mailing, constitutes delivery. .3898 Maintenance, conveyance of land in consideration of. = 3845 Marconi Wireless Telegraph Co. of America vs. Duffy (273 Fed. 197) . .3998 Master in chancery, deed by. .3839 Measure of tax, "conveyances". .3832 "Foreign insurance policies". .3965 "Promissory notes". .3808 Mexico, passage tickets issued in United States, on orders purchased in. .3886 Passage tickets sold in United States from ports not in. .3889 Passage tickets to ports not in. .3887 Military forces, passage tickets issued to. .3880 Mines, deeds conveying. .3843 Ministers, foreign, passage tickets issued to. .3880 Morris-plan banks, certificates of. .3756 Mortgage, bond renewed by agreement extending. .3747 Joint-stock land bank, promissory note secured by. .3814 Power of sale embodied in, not taxable. .3902 Securing promissory note, effect of extension. .3813, 4008 Mortgagee, conveyance by mortgagor to. .3870 Power of sale to, in mortgage. .3902 Mortgagor, conveyance by, to mortgagee. .3870 Movable property, insurance on. .3968 Municipal officer, deeds by. .3851 Naval forces, passage tickets issued to. .3880 Newfoundland, passage tickets issued to. .3888 New bond, given for same mortgage indebtedness, subject to tax. .3748 New stamps, required on packages of playing cards, when. .3919 Nonpayment of taxes, deeds conveying property sold for. .3851 Notation, on bonds. .3749, 3750 Notes, for deferred payments, amount if not deductible. .3833 Extension. .3811, 3812, 4008 Given as security. .3811 Or coupons covering interest. .3822 Payable on demand promissory notes. .3S10 Renewal. .3811, 3812, 4008 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 6. 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Offer in compromise, report of. .3990 Officers, directors of corporations are. .3892 To make investigations. .3988 Open policies. .3959 Optional registration, provision for instrument, effect of. .3751 Options, and contracts for purchase of real estate. .3849 "Other instrument" defined. .3950 Packages, see parcel-post packages. Parcel-post packages, Schedule. .(No tax on such under 1921 act.) Partnership property, reconveyance of, by receivers. .3859 Partition deeds, when subject to tax. .3860 Passage tickets, Schedule A9. .3539 Issued on exchange orders. .3887 Issued on exchange orders purchased in Canada or Mexico. .3886 Issued to certain foreign representatives. .3880 Issued to Federal and State officials. .3880 Issued to military and naval forces. .3880 Issued to private individuals. .3882 Prepaid orders for. .3885 Sold in United States from ports not in United States, Canada, or Mexico. .3889 To Hawaii and Alaska. .3884 To Newfoundland. .3888 To Porto Rico and Philippine Islands. .3883 To ports not in United States, Canada, or Mexico. .3887 Payee, foreign, draft drawn abroad with. .3786 Drawee or indorsee to see that tax is paid. .3785 In Canada, promissory note executed and mailed to, in the United States. .3830 In United States, promissory note executed and mailed to, in Canada. .3829 Payment, suspension of, or forbearance. .3821 Penalties. .3970 Pennsylvania plan trust certificates. .4010. Philippines, passage tickets to. .3883 Time drafts covering shipments from. .3807 Time drafts covering shipments to. .3806 Place of manufacture, stamps may be affixed at. .3980 Playing cards, Schedule A 12. .3542, 3919 Person receiving packages of, for sale, on which stamps are broken. .3919 Policies executed before April 1, 1919, premiums on. .3956 "Policy of insurance" defined. .3949 Policy loan agreements. .3826 Policy loan and premium extension agreements, when not taxable. .3826 Policy to be retained two years. .3961 Porto Rico: Passage tickets to. .3883 Time draft covering shipments from. .3807 Time drafts covering shipments to. .3806 Postage stamps, not to be used for internal-revenue taxes'. .3985 Post-dated checks. .3828 Postmaster, stamps to be delivered to. .3979 Post stamping, separate report not required in each instance. .3990 Power of attorney, authorizing deputy to have access to safe. .3915 Authorizing deputy to have access to and control of contents of sale. .3915 Authorizing officer of Federal reserve bank to assign United States bonds deposited as security. .3916 Authorizing vendee of shares of stock to transfer same. .3913 Contained in assignment, for valuable consideration. .3906 Contained in assignment of insurance policy. .3903 Copy of, printed on form provided by Government and filed in executive depart- ment. .3914 Executed and delivered before April 1, 1919. .3918 From corporation to resident agent. .3904 General, to person not an officer; revenue stamp required on each instrument executed under. .3901 Including sale, assignment, or transfer of stock. .3913 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 7. 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Power of attorney, — concluded. Pro forma, in printed assignment on bonds or stocks. .3908 Instrument appointing attorney in fact to transfer stock on books of corporation. .3907 Instrument authorizing secretary of corporation to transfer stock on books of corpo- ration not taxable as. .3907 Mailed abroad to party in United States. .3911 Mailed in United States to point abroad. .3911 Resolution of board of directors, when not taxable as. .3900 Tax on, when due. .3898 To sell or transfer Government bonds. .3905 To sell, etc., shares of capital stock, taxable, unless. .3912 Power of sale, embodied in mortgage not taxable. .3902 Powers of attorney, Schedule All. .3541, 3898 "Premium" and "premium charged," defined. .3953, 3954 Premium, not definitely determined. .3948 Premium extension agreements. .3826 Prepaid orders, for passage tickets. .3885 Presumption as to evasion of tax. .3964 Principal, deed by agent to. .3858 Private individuals, passage tickets issued to. .3882 Proceeds of draft covering exports to a foreign country, draft drawn against. .3791, 4005 Products for future delivery, sale of: regulations in regard to. .3647 Pro forma power of attorney, in assignment. .3906 In printed assignment on stock or bonds. .3908 Promissory note, certificate of deposit not taxable as. .3827 Conditional bills of sale in form of. .3757 Coupon covering interest not a. .3822 Defined. .3808 Executed and mailed in Canada. .3829 Executed and mailed to payee in Canada. .3830 Extension or renewal of, by extension of mortgage. .3813, 4008 Food Administration Grain Corporation notes. .3819 Given as security. .3811 Given to Federal land banks and joint-stock land banks. .3814 Instrument containing essential features of, issued by corporation in numbers, under trust indenture, a bond. .3751 Issued by foreign government. .3817 Measure of tax. .3809 Note payable on demand is. .3810 Payment of interest in advance after maturity of. .3825 Policy loan and premium extension agreement taxable as, when. .3826 Renewal of. .3812, 4008 Secured by certificate of indebtedness issued by Director General of Railroads. .3820 Secured by joint-stock land-bank mortgage. .3814 Secured by obligations of United States. .3818 Secured by United States bonds. .3818 Warrant of attorney in, authorizing confession of judgment. .3909 Promissory notes, drafts, and checks, Schedule A 5. .3534, 3783, 4004, 4009 Promulgation of regulations. .3993 Prosecution recommended, separate report required. .3990 Proxies, Schedule A 10. .3540, 3890 Executed and accepted before April 1, 1919. .3894 Sent out by corporations, may be stamped after executed and delivery. .3897 Stamp may be affixed and canceled by either party. .3891 Tax on, attaches to instrument. .3890 To vote for officers and for other purposes. .3895 To vote stock of building and loan associations. .3893 Purchase money, time draft to secure. .3802 Purchase of stamps. .3978 Quarterly reports. .3990 Quit-claim deeds. .3848 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 8. 1-12-22, STAMP TAX INDEX, [The references are to paragraph numbers.] Real estate, conveyance of, by coowners, in consideration of capital stock. .3867 Conveyance of, by corporation to owner of capital stock. .3869 Conveyance of by old to new corporation on reorganization. .3567 Conveyance to officer of corporation by corporation. .3876 Deed by executor conveying parcels of. .3868 Deed conveying, to a State. .3852 In foreign country, conveyance of. .3862 Judgment or decree of State court transferring title to. .3874 Options and contracts for purchase of. .3849 Sold for nonpayment of taxes, deeds conveying. .3851 Sold to United States Government. .3872 Real estate mortgages, bonds accompanying. .3746 Real property, contracts for sale of. .3864 Leases of. .3866 What constitutes, determinable by law of State where located. .3841 Realty, what constitutes. .3841 Receipt, Form 1, not to be used in reporting tax paid for stamps. .3991 Receivers, certificates of indebtedness issued by. .3759 Reconveyance of partnership property by. .3859 Recommendation of prosecution, separate report required. .3990 Reconveyance, of partnership property by receivers. .3859 By building and loan association. .3856 By "straw man". .3857 Records of policies issued. .3971 Redemption of stamps. .3986 Referee, deed executed by, tax on. .3834 Refund, for stamps. .3972 Regulations 40 (under 1918 Act), covering issue, sales, and transfers of stock, and sales of products for future delivery. .3546 Regulations 55 (under 1918 Act), covering stamp taxes on documents. .3743 Generally applicable to stamp taxes under act of October 3, 1917. .3974 Promulgation of. .3993 Release, deeds of. .3850 Renewal, agreement extending maturity of mortgage bond taxable as. .3748 Indorsement of payment of interest in advance after maturity of promissory note, a 3825 Of bond, agreement extending mortgage accompanied by bond, operates as. .3747 Of promissory note. .3812, 4008 Of promissory note by extension of mortgage. .3813, 4008 Payment of interest on demand note not a. .3824 Reports, how marked. .3989 Resident agents, powers of attorney by corporations to. .3904 Returns, not required. .3971 Revenue Act of 1918 effective date. .3743 Revenue Act of 1921 . . 3500 Schedule A. .3520 Title XI, Stamp taxes, Section 1100. .3500 Section 1101. .3501 Section 1102. .3502 Section 1103. .3507 Section 1104. .3513 Section 1105. .3514 Section 1106. .3516 Section 1107. .3517 Section 1300. .8000 Section 1303. .8009 Section 1312. .8007 Section 1316. .8056 Revenue Agents, reports of. .3989 Revenue agents and collectors to report. .3989 Revenue officers to make investigations. .3988 j Round-trip tickets. .3889 Sale of stock, power of attorney in connection with. .3913 Sale of stock, regulations in connection with. .3590 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 9. 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] Sale, power of, embodied in mortgage. .3902 Sales of products for future delivery, regulations covering tax on. .3647 Schedule A, revenue act of 1918, an extension of Schedule A of revenue act of 1917. .3975 Schedule A, Revenue Act of 1921. .3520 School districts, bonds issued by. .3763 Scrip dividend certificates, or warrants. .3752 Security, bonds of indebtedness, executed and delivered as. .3760 Promissory notes given as. .3811 Section 1100. .3500 Section 1101. .3501 Section 1102. .3502 Section 1103. .3507 Section 1104. .3513 Section 1105. .3514 Section 1106. .3516 Section 1107. .3517 Section 1300. .8000 Section 1303. .8009 Section 1312. .8007 Section 1316. .8056 Separate reports, to be made. .3989 When not required. .3990 Sheriff, deed executed by. .3834, 3839 Sight draft, accompanied with instructions. .3787 When taxable. .3787 "Sold" defined. .3835 Stamp deputy collectors, stamps for sale by. .3978 Stamp tax acts, former. .3976 Stamp tax, to be reported for assessment only where instruments can not be stamped. . 3991 When not to be reported for assessment. .3991 Stamp taxes, present regulations generally applicable. .3974 Title XI. .3500 Schedule A. .3520 Under Revenue Act of 1918. .3974 Stamps, affixed and canceled not to be again used. .3972 Affixed to interim certificates. .3750 Affixed to temporary bonds. .3750 Assistant treasurers of United States, stamps to be delivered to. .3979 Both parties to taxable instrument responsible for affixing. .3973 Documentary, issued. .3977 May be affixed to indenture, when. .3749 May be affixed to proxies by corporation . 73897 Necessary amount of, to be affixed to indenture at time of each issue of bonds. .3749 New, on packages of playing cards, when required. .3919 Not to be defaced by cancellation. .3981 Of value of 10 cents or more, cancellation of. .3982 On articles imported into the United States. .3980 On articles manufactured in foreign countries. .3980 On imported articles, may be affixed at place of manufacture. .3980 On proxies, may be affixed and cancelled by either party. .3S91 On time drafts, who pays for, subject for adjustment between parties thereto. .3785 Refund for. .3972 Removal from instrument. .3972 Rendered useless. .3986 Revenue, required on each instrument executed under general power of attorney by person not an officer. .3901 To be affixed to bonds. .3749 Two or more may be used, when. .3987 Where purchased. .3978 Who_shouldaflix. .3831 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 10. 1-12-22. STAMP TAX INDEX. [The references are to parargaph numbers.] Stamps, documentary, additional cancellation required. .3982 Cancellation of. .3981 Issued under act of October 22, 1914. .3984 Issued under act of October 3, 1917. .3984 Only to be used. .3983 Standing timber. .3841 State, deeds to. .3852 State officials, passage tickets issued to. .3880 State officer, deeds by. .3851 Stock, authority to secretary of corporation to transfer, on the books. .3907 In corporation a valuable consideration. .3847 Of building and loan association, proxies to vote. .3893 Power of attorney authorizing vendee to transfer. .3913 Or bonds, pro forma power of attorney in printed assignment on. .3908 Or bonds, resolution of board of directors authorizing an officer of the corpora- tion tc sell, etc.. .3900 Or bonds, resolution of board of directors authorizing person not an officer to sell, etc.. .3900 Stock: original issue. . 3547 Stock: sale and transfer. .3590 "Straw man," deed by husband and wife to. .3857 Surety bonds. .(No tax on such under 1921 act.) Suspension of payment or forbearance. .3821 Tax, attaches to instrument. .3899 Liability to, determined by form or face of draft. .3787 Not measured by number of parties to power of attorney. .3899 On conveyance of land in consideration of maintenance, how measured. .3845 On deed, executed by sheriff, referee, or commissioner, how computed. .3834 On deed, how computed. .3833 On deeds on exchange of properties. .3840 On proxies, not measured by number of grantors or grantees. .3890 On time draft or check, by whom paid. .3785 Payment of, on deed on foreclosure or execution. .3839 Taxability of foreign insurance policies. .3946 Taxes and assessments, when deductible. .3875 Temporary bonds. .3750 Through ticket. .3889 Timber, standing. .3841 Time draft, covering exports to foreign country. .3791, 4005 Covering period of transit to seaboard. .3803 Covering shipment to Canal Zone. .3805 Covering shipment to Virgin Islands, Philippines, and Porto Rico. .3806 Covering shipment from Virgin Islands, Philippines, and Porto Rico. .3807 Delivered or accepted in the United States. .3804 Draft against actual shipment taxable as. .3790 Drawn against proceeds of draft covering exports to foreign country. .3791 4005 Or check, when taxable. .3784 Payable in foreign country. .3804 To secure purchase money. .3802 Trade acceptance taxable as. .3789, 4005 Title, abstract of. .3865 Deed confirming. .3863 To real estate, judgment or decree of State court transferring. .3874 Title XI, Stamp taxes. .3500 Trade acceptances. .3789, 4005 Transfers of stock, power of attorney in connection with. .3913 Transit to seaboard, time draft covering period of. .3803 Transfers of stock, regulations covering tax on. .3590 Trust certificates as certificates of indebtedness. .4010 Trust, deeds of. .3850 Trust indenture, instruments issued by corporations in numbers, under. .3751 Trustee, conveyance by, to cestui qui trust, without consideration. .3871 Conveyance to, without consideration. .3871 Deed to, for benefit of creditor. .3855 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 11, 1-12-22. STAMP TAX INDEX. [The references are to paragraph numbers.] "United States," denned. .3955 United States, bonds executed in Canada and delivered in . .3761 Conveyance to. .3872 Includes States, District of Columbia, Hawaii, and Alaska. .3784 Passage tickets issued in, to ports not in United States, Canada, or Mexico. .3886 Passage tickets sold in United States from ports not in. .3889 Passage tickets to ports not in. .3887 Power of attorney mailed in, to point abroad. .3911 Power of attorney mailed in foreign country to point in. .3911 Time drafts covering shipments from, to Canal Zone. .3805 United States bonds, power of attorney authorizing Federal reserve bank officer to assign. . 3916 Promissory notes secured by. .3818 United States obligations, promissory notes secured by. .3818 United States officials, customhouse entries by. .3878 Passage tickets issued to. .3880 Unstamped instruments. .3964 Validity of unstamped instruments. .3877 Valuable consideration, stock in a corporation is a. .3847 Value, actual, basis of tax on exchange of properties. .3840 Actual, measure of tax, when. .3832 Vendee, of shares of stock, power of attorney authorizing transfer by. .3913 Or grantee to pay the tax. .3839 Verification of amount of tax. .3961 Virgin Islands, time drafts covering shipments from. .3807 Time drafts covering shipments to. .3806 War Finance Corporation bonds. .3820 Warrant of attorney, in a judgment note authorizing confession of judgment. .3909 In a lease. .3910 In a promissory note authorizing confession of judgment. .3909 Warrants, scrip dividend certificates or. .3752 "Whereby insurance is made or renewed" denned. .3951 Withdrawal entries from customs bonded warehouses, Schedule A 8. .3538, 3879 Withdrawal of goods, or merchandise, entries for. .3879 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Stamp Tax — Index Page 12. » ♦ * CALENDAR FOR EXCISE TAXES AND GUIDE TO EXCISE TAXES REGULATIONS. (See other side.) CALENDAR FOR EXCISE TAXES. Returns: Monthly on or before the last day of the month, each month's return to cover the transactions of the preceding month. Tax: Monthly at the time of filing the return, (or before the last day of the month). GUIDE TO EXCISE TAXES REGULATIONS. Law Section Subject Regulations Sec. 900. Manufacturer's sales tax (Tax based on price for which article is sold or leased.) No. 47. — Page 910 Return and payment of tax 1[4663 and ^4698 Sec. 901. Colorable sales and leases No. 47— Page 926, ^[4652 Sec. 902. Works of art No. 48.— Page 934 Return and payment of tax 1(4752 By agents . ,f4753 Sec. 903. Return and payment of tax (as noted above and below). Sec. 904. Manufacturer's sales tax (Tax based on so much of the amount for which article is sold or leased as exceeds a specified price.) No. 47. — Page 910 Return and payment of tax *|4663 and ^4689 Sec. 905 Jewelry, etc No. 48— Page 934 Return and payment of tax 1(4752 Sec. 906. Bona fide prior contracts made No. 47. — Page 93 1 , # ;4686 INSERT THIS SHEET TO FACE PAGE 901. 1-2-22. EXCISE TAXES BEING TITLE IX OF THE REVENUE ACT OF 1921. TITLE IX— Excise Taxes. [Articles Sold or Leased by the Manufacturer or Importer.] [Tax based on price for which article is sold or leased.] 4500 Sec. 900. That from and after January 1, 1922, there shall be levied, assessed, collected, and paid upon the following articles sold or leased by the manufacturer, producer, or importer, a tax equivalent to the following percentages of the price for which so sold or leased — 4501 (1) Automobile trucks and automobile wagons (including tires, inner tubes, parts, and accessories therefor, sold on or in connection therewith or with the sale thereof), 3 per centum; 4502 (2) Other automobiles and motor cycles (including tires, inner tubes, parts, and accessories therefor, sold on or in connection therewith or with the sale thereof), except tractors, 5 per centum; 4503 (3) Tires, inner tubes, parts, or accessories for any of the articles enumerated in subdivision (1) or (2), sold to any person other than a manufacturer or producer of any of the articles enumerated in subdivision (1) or (2), 5 per centum; 4504 (4) Cameras, weighing not more than 100 pounds, and lenses for such cameras, 10 per centum; 4505 (5) Photographic films and plates (other than moving-picture nlms), 5 per centum; m iblftfc rBua foiiiw j's oohq srft Vo siefed srl* no bofuqmoo sd HfiHa noaiarto 4506 (6) Candy, 3 per centum; t jfl3m33i«ji vfis Hgno-iffj idcfftnw stems' lfstygf gban^atf ~t& fisa&al t ztise noaiaq 4507 (7) Firearms, shells, and cartridges, except those sold for the use of the United States, any State, Territory, or possession of the United States, any political subdivision thereof, or the District of Columbia, 10 per centum, jijnad rbua d8ubo oS Jnatni dim (£) to no3i3d d >ua Drt3 ad ot nsJfil ddJIfjffa bpsosaif %0 bo?,&i da llBfl« pidfiJ 3 Bri J .Ipalssqai rra moil osJinU arLt . oJai sncmoo 33jbrtifi noqu t 39J£lo b^JiriU 3rfi ni bi£q [Method of Handling Taxes Payable by Vendee.] 4534 (d) The taxes payable by the vendee or lessee under subdivision (a), shall be paid to the vendor or lessor at the time the sale or lease is consummated, and collected, returned, and paid to the United States by such vendor or lessor in the same manner and subject to the same penalties and interest as provided by section 903. 4535 (e) Any refund by the vendor or lessor under subdivision (b) or (c) shall be made at the time the sale or lease is consummated. Upon the failure of the vendor or lessor so to refund, he shall be liable to the vendee or lessee for damages in the amount of three times the amount of such refund, and the court shall include in any judgment in favor of the vendee or lessee in any suit for the recovery of such damages, costs of the suit and a reasonable attorney's fee to be fixed by the court. [The Term "Dealer" Defined.] 4536 (f) A vendee who purchases any article with intent to use it in the manufacture or production of another article intended for sale shall be included in the term "dealer," as used in this section. Frauds on Purchasers. 4537 Sec. 1326 [of Title XIII of the Revenue Act of 1921]. That whoever in connection with the sale or lease, or offer for sale or lease, of any article, or for the purpose of making such sale or lease, makes any statement, written or oral, (1) intended or calculated to lead any person to believe that any part of the price at which such article is sold or leased, or offered for sale or lease, consists of a tax imposed under the authority of the United States, or (2) ascribing a particular part of such price to a tax imposed under the authority of the United States, knowing that such statement is false or that the tax is not so great as the portion of such price ascribed to such tax, shall be guilty of a misdemeanor and upon conviction thereof shall be punished by a fine of not more than $1,000 or by imprisonment not exceeding one year, or both. [Export Sales.] 4538 Sec. 1305 [of Title XIII of the Revenue Act of 1921]. That under such rules and regulations as the Commissioner with the approval of the Secretary may prescribe, the taxes imposed under the provisions of Copyright 1922, by The Corporation Trust Company. WAR TAX 905 SERVICE 1-2-22. EXCISE TAXES LAW. Titles VI, VII or IX shall not apply in respect to articles sold or leased for export and in due course so exported. Under such rules and regulations the amount of any internal-revenue tax erroneously or illegally collected in respect to exported articles may be refunded to the exporter of the article, instead of to the manufacturer, if the manufacturer waives any claim for the amount so to be refunded. [Articles Purchased from and Sold to Virgin Islands.) 4539 Sec. 1304 [of Title XIII of the Revenue Act of 1918, which section has not been repealed]. That there shall be levied, collected, and paid in the United States, upon articles coming into the United States from the Virgin Islands, a tax equal to the internal-revenue tax imposed in the United States upon like articles of domestic manufacture; such articles shipped from such islands to the United States shall be exempt from the payment of any tax imposed by the internal-revenue laws of such islands: Provided, That there shall be levied, collected, and paid in such islands, upon articles imported from the United States, a tax equal to the internal-revenue tax imposed in such islands upon like articles there manufactured; and such articles going into such islands from the United States shall be exempt from payment of any tax imposed by the internal-revenue laws of the United States. [Overpayments and Ovecollections.] [See Section 1304, Revenue Act of 1921, at 1[8018 herein.] [Special Methods for Collecting Certain Taxes.] [See' Section 1301, Revenue Act of 1921, at 1(8012 herein.] [General Penalty Provisions.] [See law provisions beginning at H8014 herein.] [General Administrative Provisions.] [Read under "Miscellaneous Matters" at the back of the book.) Copyright 1922, by The Corporation Trust Company. WAR TAX 906 SERVICE 2-1-22. (2) 17-11-22. EXCISE TAXES REGULATIONS. MANUFACTURER'S EXCISE TAXES CHARACTER OF TAX LhVJt CTEf. 01 TAX AMOUNT OF TAX SECTION 900. (1) Automobile track, wagons, etc (2) Automobiles, mdsr cycles, ctc- (4) Cameras and lenses (10) CigarkolJcrs.de (//) Automatic Bending machines. SECTION 904: (!) Trunk,.. (3) Valises, suitcases, etc... (4) Purses, pocketboobs, etc . (5) Portcblc lighting fixtures - (6) Fens / swear (or affirm) that the forcgolnl Is a true return of ti: t allowable by lax. Sworn to and subscribed before mc Otis . ! due In respect to the aboce-mcnUoncJ articles for the month of 192 ,andthaltht i deducted for overpayment (Name) or (Witness) lis day of (See paragraph 4 on back) (Title) < Return with remittance should be sent to the Collector of Internal Revenue for your district end not to the Commissioner of Internal Keve- nnc at Washingtoc, D. C. (Sec instructions, par. 4. on reverse of this form.) If you havo nothing to report, make notation to that effect on this form and return to the Collector of Internal Revenue. ORIGINAL RETURN-T-Tbie form must be returned to the Collector of Internal Revenue MANUFACTURER'S EXCISE TAXES CHARACTER OF TAX CHARACTER OF TAX AMOUNT OF TAX (2) Automobiles, motor cycles, etc (3) Tires, parts, etc If) Cameras and lenses f>) Photographic films and plates (?) Firearms, shell,. <* IS) Hunting and bowi c kniccs . (9) Dlrlr knttes. doggers, etc... (13) Hunting garments, etc. (14) Yachts, motor boats, tt, SECTION 904: (3) Valises, suitcases, etc.. (4) Purses, pocketbooks, etc Portable lighting fixtures Tolalurr. tent for month of Tola I amount of lax due... Penally 25% Penalty 5% (or affirm) that the foregoing Is a true return of the czmeunt of lax due In respect to the aboennentloned articles for the month of . Sworn U and subscribed before im this day of /« Signed , 192 i and ihdtthe a mount deducted for ooerpaymenl (Name) or (Witness) (See paragraph 4 on back) (Title) or (Witness) Return with remittance should be sent to the Collector of Interna! Revenue for your district and not to the Commissioner of Internal Reve- nue at Washington, D. C. (See instructions, par. 4, on reverse of this Term.) If you have nothing to report, make notation to that effect on this form and return to the Collector of Internal Revenue. %— 11638b D'.TUCATE RETURN— Thii form mutt be relumed to the CoDector of Internal Revenue [Obverse of Form 728.] Copyright 1922, by The Corporation Trust Company. WAR TAX 907 SERVICE 2-1-22. (2) 10-17-22. EXCISE TAXES REGULATIONS. INSTRUCTIONS. (For full instructions, seo Regulations No. 47, Revised.) 1. TAX.— Section 900 of the Revenue Act ofl 921 provides: "That from and after January 1, 1922, there shall be levied, assessed, collected, ati.I paid upon the following articles sold or leased by the manufacturer, producer, or importer, a tax equivalent to the following percentages of the price lor which so sold or leased : p. "(1) Automobile trucks and automobile wagons (including tires, inner tubes, parts, and accessories therefor, sold on or in connection therewith or with the sale thereof) _ _ „ 3 per cent. "(2) Other automobiles and motor cycles (including tires, inner tubes, parts, and accessories therefor, sold on or in con- nection therewith or with the sale thereof), except tractors _ _ 5 per cent. " (3) Tires, inner tubes, parts, or accessories for any of the articles enumerated in subdi virion (1) or (2), sold to any person other than a manufacturer or producer of any of the articles enumerated in subdivision (1) or (2) 5 per cent " (4) Cameras, weighing not more than 100 pounds, and lenses for such cameras 10 per cent "(b) Photographic films and plates (other than moving-picture films) _ _ 5 per cent. "(7) Firearms, shells, and cartridges, except those sold for the use of the United States, any State, Territory, or possession of the United States, any political subdivision thereof, or the District of Columbia. : 10 per cent. " (8) Hunting and bowie knives. _ 10 per cent. " (9) Dirk knives, daggers, sword canes, 3tiletio8, and brass or metallic knuckles _ 100 per cent. " (10) Cigar or cigarette holders,and pipes composed wholly Or in part of meerschaum or amber humidors, and smoking stands 10. pur cent. "(11) Automatic slot-device vending machines — - - 5 percent. Automatic slot-device weighing machines 10 per cent. (If the manufacturer, producer, or importer of any such machine operates it for profit, he shall pay a tax in respect to each such machine put into operation equivalent to 5 per centum of its fair market value in the case of a vend- ing machine, and 10 per centum of its fair market value in the case of a weighing machine.) " (12) Liveries and livery boots and hats... - — 10 per cent. " (13) Hunting and shooting garments and riding habits 10 per cent. " (14) Yachts and motor boats not designed for trade, fishing, or national defense; and pleasure boats and pleasure canoes if sold for more than$100 , — 10 per cent." »— 11536 2. Section 904 of the Revenue Act of 1921 provides: " That from and after January 1, 1922, there shall be levied, assessed, collected, and paid, in lieu of the taxes imposed by section 904 of the Revenue Act of 1918, upon the following articles sold or leased by the manufacturer, producer, or importer, a tax equivalent to 5 per centum of so much of the price for which so sold or leased as is in excess of the price hereinafter specified as to each such article: " (1) Carpets and rugs, including fibre, on the amount in excess of $4.50 per square yard in the case of carpets and $0.00 per square yard in the case of rugB; "(2) Trunks, on the amount in excess of $35 each; "(3) Valises, traveling bags, suit cases, hat boxes used by travelers, and fitted toilet cases, on the amount in excess of $25 each; "(4) Purses, pocketbooks, shopping and hand bags, on the amount in excess of $5 each, "(5) Portable lighting fixtures, including lamps of all kinds and lamp shades, on the amount in excess of $10 each; "(6) Fans, on the amount in excess of $1 each." 3. COMPUTATION OF TAX.— The tax under sections 900 and 904 is based on the sale price of the goods sold and should be computed on each transaction. 4. RETURNS AND PAYMENT OF TAX.— Return with remittance covering taxes due in any month must be in the hands of the Collector of Internal Revenue (or his authorized repreEentative^ of the district in which the principal office or place of businebS of tbe person making the return islocated on or before the last day of the succeeding month. Returns must be signed and sworn to before an officer authorized to administer oaths, but if the tax is less than $10 the return may be signed or acknowledged before two subscribing witnesses. 5. CREDITS. — In case of any overpayment of tax due to an error in calculation, credit may be taken therefor against taxes due upon any sub- sequent monthly return. Credit may also be taken as outlined in the regulations. A complete and detailed record of such overpayment must be kept by the person taking credit therefor. In case credit is taken on this return for an overpayment made on a previous return , hill information must be attached showing the reasons therefor and designating the kind of tax , the month for which th6 previous return was filed, and the date of payment. In the case of illegal or erroneous payment, such asexports, nontaxable articles, etc., claim for refund on Form 46 must be filed. G. RECORDS. — Every manufacturer, producer, or importer required to make returns must keep such records as will clearly show each taxable- transaction, in order that returns may be easily verified by revenue officers. 7. PEN AI.TD3 S. — Failure to file on time, 25 per cent of tax. Failure to pay on time, 5 per cent of tax and 1 per cent interest a niuuth. Severe penalties for failure to file returns or for false or fraudulent returns. ' 2—11688 ntunmnmima UNITED STATES INTERNAL REVENUE Form 738— Revised Sept., 1922 RECEIPT FOR PAYMENT OF MANUFACTURER'S EXCISE TAXES 192 THIS RECEIPT NOT TO BE DETACHED BY TAXPAYER NOT VALID UNLESS RECEIPTED BY CASHIER TAXPAYER WILL ENTER AMOUNT PAID IN THE SPACE PROVIDED THEREFOR NAME AND ADDRESS DATE PAID AMOUNT PAID (CASlllElt'8 &T4ICT) 2— HUM [Reverse of Form 728 and tax receipt form.] Copyright 1922, by The Corporation Trust Company. WAR TAX 908 SERVICE 2-1-22. (2) 11-6-22. EXCISE TAXES REGULATIONS. MISCELLANEOUS EXCISE TAXES (Title IX, Sections 902 and 905, of the Revenue Act of 1921) CHARACTER OF TAX. RATE OF TAX. AMOUNT OF TAX. Section 902— Sculpture, pninlinfs, ddutry, ui porxtUtiu, intnza _ ,.. Section SOS— s% i% 1 (State whether indivi'lual ownc-r of business, member of Aim, rr it officer lateral of corporation or duly authorized manager or agent, gi\ e titlo) Sworn (o W ,ui:rribeJ hcjorc me this Jay cj 192 (N»3ii) or ^iUm) (,Seo paragraph 3 uo bick) (T.UeJ of (.Wilnr a»> GRKINAL RETURN— This form rami be returned to She CoDecio.- at Internal Revenue Return with remittance should be sent to the Collector of Internal Revenue for your district and not to the Commissioner of Interna] Reve- nue at Washington, D. C. (See Instructions, par. 3, on reverse of this form.) If you have nothing to report, make notation to that effect on this form and return to the Collector of Internal Revenue. (Obverse of Form 728-A.] INSTRUCTIONS. (For full instructions, see Regulations No. 48, Revised.) 1. TAX.— Section 902 of the Revenue Act of 1921 provides: "That there shall be levied, assessed, collected, and paid upon sculpture, paintings, statuary, art porcelains, and bronzes, sold by any person other than the artist, a tax equivalent to 5 per centum of the price for which co sold. This section shall not apply to the sale of any such article (1) to an educational institution or public art museum, or (2) by any dealer in such articles to another dealer in such articles for resale." Section 905 of the Revenue Act of 1921 provides: "That on and after January 1, 1922, there shall be levied, assessed, collected, and paid (in lieu of the tax imposed by section 905 of the Revenue Act of 1918) upon all articles commonly or commercially known as jewelry, whether lea! or imitation ; pearls, precious and semiprecious stones, and imitations thereof ; articles made of, or ornamented, mounted or fitted with, precious meluls or imitations thereof or ivory (not including surgical instruments, eyeglasses, and spectacles); watches; clocks; opera glasses; lorgnettes; marine glasses; field glatses; and binoculars; upon any of the above when sold by or for a dealer or hi3 estate for consumption or use, a tax equivalent to 5 per centum of tne price for which so sold." 2. COMPUTATION OF TAX. — Any person other than the artist who sells any of the articles enumerated in section 902 is required to make returns based on sales. Any dealer who sells any of the articles enumerated in section 905 is required to make returns based on salc3. 3. RETURNS AND PAYMENT OF TAX. — Return with remittance covering taxes collected in any month must be in the hands of the Collector of Internal Revenue (or his authorized representative) of the district in which the principal office or place of business of the person making the return is located on or before the last day of the succeeding month. Returns must be signed and sworn to before an officer authorized to administer oaths, but if the tax is less than $10 tb.9 return may be signed or acknowledged before two subscribing witnesses. 4. CREDITS. — In case of any overpayment of tax due to an error in calculation, credit may be taken therefor against taxes due upon aay subsequent monthly return. Credit may also be taken as outlined in the regulations. A complete and detailed record of such overpayment I must be kept by the person taking credit therefor. In case credit is taken on this return for an overpayment made on a previous return, full information must be attached stowing the reasons therefor and designating the kind of tax, the month for which the previous return was filed and the date of payment. 5. RECORDS. — Every person required to make returns under sections 902 and 905 must keep such records as will clearly show each taxablo transaction, in order that returns may be easily verified by revenue officers. S " 6. PENALTIES.— Failure to file on time, 25 per cent of tax. Failure to pay ©n time, 5 per cent of tax and 1 per cent interest a month. Severe penalties for failure to filo returns or for false or fraudulent returns. [Reverse of Form 728-A.] RECEIPT FOR PAYMENT OF MISCELLANEOUS EXCISE TAXES Month of .. .... 192 THIS RECEIPT NOT TO BE DETACHED BY TAXPAYER NOT VALID UNLESS RECEIPTED BY CASHIER TAXPAYER WILL ENTER AMOUNT PAID JN THE SPACE PROVIDED THEREFOR NAH E AND ADDRESS DATE PAID AMOUNT PAID (Cashier's Stamp) [Form 728-A tax receipt form. Copyright 1922, by The Corporation Trust Company. WAR TAX 909 SERVICE 2.1-22. () 11-6-22. Reg* 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. REGULATIONS 47 Relating to the EXCISE TAXES ON SALES BY THE MANUFACTURER Under Sections 900 and 904 of Title IX of the Revenue Act of 1921. [Promulgated January 6, 1922.] [Released for publication February 1, 1922.] CONTENTS. Paragraph. Sections 900 and 904. Imposition of tax: Article 1. Effective date 4540 2. Use of terms 4541 3. Basis of tax 4542 4. Discounts and expenses 4553 5. Exchanges 4558 6. Credit for taxes already paid 4562 7. Who is a manufacturer 4564 8. Tax payable by manufacturer 4570 9. When tax attaches 4576 10. Sales to the Government or a State 4581 Section 900 (1) (2). Automobiles: Article 11. Automobiles: Scope of tax 4582 12. Automobile trucks and automobile wagons 4587 13. Other automobiles and motor cycles 4595 Section 900 (3). Automobile parts and accessories: Article 14. Tires, inner tubes, parts and accessories sold to manufacturers 4601 15. Definition of "parts". 4611 16. Definition of "accessories" 4623 Section 900 (4). Cameras: Article 17. Cameras , 4630 Section 900 (5). Films: Article 18. Photographic films and plates 4631 Section 900 (6). Candy: Article 19. Candy 4632 Section 900 (7). Firearms: Article 20. Firearms, shells, and cartridges 4635 Section 900 (8) (9). Hunting knives: Article 21. Hunting knives, dirk knives, dagger:, etc 4636 Section 900 (10). Smokers' articles: Article 22. Cigar and cigarette holders, pipes, humidors, and smoking stands.. . 4637 Section 900 (11). Slot machines: Article 23. Automatic slot-device machines 4638 Section 900 (12). Liveries: Article 24. Liveries and livery boots and hats 4639 Section 900 (13). Hunting garments: Article 25. Hunting and shooting garments and riding habits 4640 Section 900 (14). Pleasure boats: Article 26. Yachts and motor boats 4641 Section 900 — Continued. Manufacturer also retailer: Article 27. Manufacturer also retailer 4643 Section 900 — Continued. Repeal of former taxes: Article 28. Repeal of former taxes 4651 Section 901. Colorable sales: Article 29. Colorable sales 4652 Section 904: Article 30. Carpets and rugs 4654 31. Trunks 4658 32. Valises 4659 33. Purses • • • 4 660 34. Portable lighting fixtures 4o61 35. Fans 4662 Copyright 1922, by The Corporation Trust Compmmy. WAR TAX 910 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. Paragraph. Section 903. Return and payment of tax: Article 36. Return and payment of tax 4663 Section 1304 (1918 Act). Trade with possessions of United States: Article 37. Trade with possessions of United States 4669 Section 1300. Extension of existing statutes: Article 38. Aids to collection of tax 4670 Section 1302. Penalties: Article 39. Penalties 4671 Section 1304. Credits and refunds: Article 40. Credits and refunds 4675 Section 1305. Exports: Article 41. Exemption of export sale 4677 42. Proof of exportation 4682 Section 906. Transfer of burden of tax: Article 43. Contract of sale before August 15, 1921 4686 44. Contract of sale before August 15, 1921 4687 45. Contract of sale before August 15, 1921 4688 46. Return of tax 4689 47. Meaning of "dealer" 4694 Section 1316. Fractional part of cent: Article 48. When fractional part of cent may be disregarded 4695 Section 1325. Medium of payment of tax: Article 49. Payment of tax by uncertified checks 4696 50. Procedure with respect to dishonored checks 4697 Section 1326. Misrepresentation of tax: Article 51. Misrepresentation of tax 4698 Section 1303. Authority of regulations: Article 52. Promulgation of regulations 4699 Imposition of tax. 4540 Art. 1. Effective date. — The tax is imposed on all articles sold or 4500 leased by the manufacturer, producer, or importer on or after January 4521 1, 1922, even though manufactured, produced, or imported before that date. 4541 Art. 2. Use of terms. — In these regulations, for convenience, unless obviously inapplicable, the term "manufacturer" is used to include also "producer" and "importer;" the term "sale" or "sold" to include "lease" of "leased;" the term "purchaser" to include "lessee," and the term "vendor" to include "lessor." The term "person" is used to include partnerships, corporations, and associations, as well as individuals. 4542 Art. 3. Basis of tax. — The tax is imposed on the sale by the manu- facturer and should be returned and paid by him whether the sales price is actually collected or not. It is measured by the price for which the article is sold by the manufacturer and not by the list price where that differs from the actual sales price. If the price of a taxable article is increased to cover the tax, and the article is sold at such price, including the tax, the tax is on such increased price. 4543 The manufacturer may reimburse himself in the amount of the tax by agreement with the purchaser in the following manner: (a) By quoting the selling price and the tax in separate and exact amounts, and where invoices are rendered, by segregating these amounts on the invoices as outlined in examples (1) and (6) below; or (b) by stating to the purchaser in advance of the sale what portion of the quoted price represents the price charged for the article and what portion represents tax, and where invoices are rendered by invoicing in the manner outlined in examples (2) and (3) Copyright 1922, by The Corporation Trust Company. WAR TAX 911 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. below, in which cases the amount of the tax need not be included in the price of the article in computing the tax. 4544 Where goods are ordered direct from the manufacturer with no agreement as to price, the tax is based on the amount billed or in- voiced to the purchaser as the selling price. Mere statements or agreements that the quoted or contract price includes the tax do not operate to exclude any part thereof from tax, unless the price is billed in the manner outlined in example (1), (2), (3), or (6) below. 4545 Where a lump sum is specified as the price of a taxable article or articles, and other articles not taxable and not a component part of the taxable articles are included in the price, the tax attaches to the entire amount unless the selling prices of the taxable and nontaxable articles are segregated. In such case the tax will be measured by the price specified as the selling price of the taxable article or articles (examples 4 and 5). The following examples illustrate the method by which the manufacturer may separate the tax from the selling price in invoicing goods to the purchaser. 4546 Example (1). A, the manufacturer, quotes a selling price to B of $1 and^bills the goods to B as: "Article No. 1. selling price, $1; tax, $0.05." 4547 Example (2). A, the manufacturer, quotes a selling price of $1.05, stating that the price includes a tax of 5 cents, and bills the goods to B as: "Article No. 1, selling price $1.05, 5 cents of the total represents tax." 4548 Example (3). A, the manufacturer, quotes a selling price of $1.05, stating that 1-21 of the price represents tax, and bills the goods to B as: "Article No. 1, selling price $1.05, 1-21 of the total represents tax." It should be noted that example (3) applies only to articles taxable under section 900, and not to articles taxable under section 904. 4549 The tax in examples (1), (2), and (3) is computed upon $1, the quoted and actual selling price. 4550 Example (4). A, the manufacturer, quotes a cost price or contracts to sell goods at $1.05, including tax, and bills the goods to B as: "Article No. 1, selling price including tax $1.05." The tax is computed upon $1.05, the quoted and invoiced selling price. 4551 Example (5). A manufacturer sells an automobile to B, including insurance, gas, and oil, and bills it as: "One car, $2,150." The tax is based on the full amount of $2,150. 4552 Example (6). If in example (5) the invoice separates the charges into items as, "car $2,000, gas and oil $20, insurance $30, tax $100," the tax is based on $2,000, the selling price of the car as specified. 4553 Art. 4. Discounts and expenses. — A discount for cash or discount made subsequently to the sale can not be deducted in computing the price for the purpose of the tax. 4554 An adjustment in price, where articles are sold over a period of time, under an agreement for a quantity rebate, or an agreement for a rebate on goods remaining unsold in the hands of the dealer, and which were purchased by such dealer within a definitely specified period, in case of a decline in the market, is held not to be a discount made subsequently to the sale, and the tax, if originally computed on the gross price, maybe adjusted in the return for the month in which the price is finally determined. If in Copyright 1922, by The Corporation Trust Company. WAR TAX 912 SERVICE " 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. such cases the tax assumed to be due on the original selling price has been billed to the dealer and by him to the purchaser as a separate item, and collected from the purchaser, the overcollection of tax arising from the as- justment of the sale price under the contract between the manufacturer and the dealer must be refunded to the pruchaser. 4555 Commissions to agents and other expenses of sale are not deductible from the price. 4556 Freight and delivery charges are taxable as part of the sales price when the price to the purchaser includes transportation and delivery charges paid by the manufacturer, or when the amount charged the purchaser, whether billed as a separate item or not, does not represent the actual trans- portation charges. 4557 Freight and delivery charges are not part of the sales price when the goods are sold at the factory or f. o. b. cars at place of manufac- ture, when the transportation charges are paid by the purchaser as a specific item, or when the goods are sold delivered at a definite price less actual transportation charges to be paid by the purchaser. 4558 Art. 5. Exchanges. — If articles sold are returned and the sale entirely rescinded, no tax is payable, and if paid it may be credited against the tax included in a subsequent monthly return. (See article 40.) If a part only of the articles sold at one time is returned, and credit or rebate allowed by the vendor therefor, the portion of the tax to be credited will be only the proportion of the total tax paid which the amount allowed as a credit or rebate bears to the total sales price of all the articles. 4559 If an article is sold under a guaranty as to its quality or service and is thereafter returned and a rebate made pursuant to the guaranty, the manufacturer may claim as a credit against the tax included in a sub- sequent return such portion of the tax originally paid in respect of the article as is proportionate to the amount of the price refunded. 4560 Where any article taxable under section 900 or 904 is returned to the manufacturer thereof for adjustment, replacement, or exchange, under a guaranty as to quality or service, and a new article given pursuant to a guaranty, free or at a reduced price, the tax shall be computed on the actual price, if any, to be paid to the manufacturer for the new article. 4561 If an article is sold and thereafter, before use, exchanged for another article of a higher price, the purchaser paying the difference, the manufacturer should pay the tax on the second sale, but may take as a credit against such tax such part of the tax paid on the returned article, which the amount allowed as a credit for the return of such article on the second sale bears to the amount of the purchase price in the case of the first sale. The tax also attaches to the subsequent sale by the manufacturer of the article so returned. 4562 Art. 6. Credit for taxes already paid. — A manufacturer may take as a credit against the tax imposed on him in respect to the sale of any article taxable under section 900 an amount equal to any tax imposed under section 900 which he has reimbursed to the manufacturer from whom he pur- chased any article forming a component part (whether or not changed in form by process of manufacture) of the article sold by him and in respect to which tax is paid by him, provided the tax was billed to him as a specific item and in the exact amount of the tax. Similarly, he may take credit against a tax imposed on an article under section 904, a tax under the same section. Copyright 1922, by The Corporation Trust Company, WAR TAX 913 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. Credit is not allowed unless: (1) The article forms a compenent part of an article sold by such manufacturer and in respect to which a tax is payable by him; (2) such manufacturer has, in fact, reimbursed the manufacturer from whom purchased, who has himself, in fact, paid the tax upon which such credit is sought; (3) unless the taxpayer keeps such records and evidence as will clearly establish his right to the same. 4563 The following records and evidence will be deemed sufficient to establish this right of exemption: (1) Any record or statement show- ing the exact amount of tax paid upon such article; (2) a certificate or state- ment of the following tenor: "The undersigned hereby certifies that the articles on which credit for tax is claimed were tax paid and that said articles were used by in the further manufacture of other articles taxable under section 900 of the Revenue Act of 1921. (Signed) ." In cases of doubt, in order to avoid penalty for default if the claim is not estab- lished, the tax should be paid in full and application made for refund. 4564 Art. 7. Who is a manufacturer. — A manufacturer is generally a per- son who (1) actually makes a taxable article, or (2) by changes in the form of an article produces a taxable article, or (3) by the combination of two or more articles produces a taxable article. Under certain circum- stances, however, the person who actually makes, produces, or assembles the taxable article is not the manufacturer for the purpose of the tax. There may be several stages of manufacture and several manufacturers, each of whom must pay a tax. In such cases the tax attaches on successive sales, subject to the provisions as to credits (see art. 6.). The following examples are merely illustrative: 4565 Example 1. "A," an automobile manufacturer, sells an automobile in a knockdown condition but complete as to all the component parts. "B," a dealer, assembles these component parts into a complete usable automobile, without further manufacture, and sells the automobile. "A" is the manufacturer. 4566 Example 2. "A," an automobile body manufacturer sells an auto- mobile body in a knockdown condition but complete as to all its component parts, to "B," a dealer, who assembles these component parts into a complete usable automobile body, and installs it, or causes it to be installed on a chassis which he has purchased from a manufacturer who is a different person from the manufacturer of the body, and sells the com- pleted automobile. "A" is the manufacturer of the automobile body, but may sell the same to "B" tax free under the certificate provided for in article 14. "B" is the manufacturer of the automobile and subject to tax on the selling price of the completed automobile, but may take credit for the amount of tax paid by the manufacturer of the chassis. (See arts. 3 and 6.) 4567 Example 3. "A," a dealer or jobber, contracts with "B" for the manufacture of a taxable article, whereby "B" receives from "A" the cost of materials and labor plus a specified profit. "A" is the manu- facturer. 4568 Example 4. "A," a dealer or jobber, contracts with "B" for the manufacture of a taxable article, whereby "A" furnishes "B" all or a portion of the material to be used and pays "B" for the labor plus a specified profit. "A'' is the manufacturer. 4569 Example 5. "A," a dealer or jobber, owns a patent, trade-mark, formula, or recipe for a taxable article, and contracts with "B" for the manufacture thereof, the contract specifying that "B" can manufacture Copyright 1922, by The Corporation Trust Company. WAR TAX 914 SERVICE ^ * 95J - I ,,. ,,,, Mi,, w , , „ . m 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. the article only for "A"; that "A" will take the entire output; and that it will be sold by "A" as the manufacturer, "B's" name not appearing on the article. "A" is the manufacturer. 4570 Art. 8. Tax payable by the manufacturer. — The tax is to be paid by the manufacturer on all sales made directly by him or through an agent. 4571 If the manufacturer has a sales agent or sales agency to whom he only nominally sells an article, but retains an interest in the profits from the resale of the article, the taxable sale is that made by the sales agent or sales agency. 4572 On articles manufactured for a jobber by a foreign manufacturer, the jobber must pay the tax as the importer. 4573 A receiver or trustee in bankruptcy of a manufacturer conducting a business under court order is liable to the tax upon articles sold by him. 4574 Where a manufacturer consigns articles to a dealer, retaining owner- ship in them until they are disposed of by the dealer, the manu- facturer must pay the tax upon the basis of the manufacturer's selling price on all goods sold to the dealer, as shown by reports to be procured by him monthly from the dealer. Where the agent of a manufacturer makes a sale, it is to be treated as a sale by the manufacturer. 4575 Where a so-called sales agent or distributor is a separate corpora- tion and the sale to it is absolute and at prices and under terms and conditions such as ordinarily obtain between persons dealing at arm's length with no further payment or benefit accruing to the manufacturer upon resale or otherwise except the receipt of dividends on stock holdings, the taxable sale is that made by the manufacturer to such sales corporation even though all or substantially all of the stock of such sales corporation is held by or for the benefit of the manufacturer or the stockholders in the manufacturing corporation. Where, however, there are special arrangements between the manufacturer and the selling corporation such as special terms, prices, etc., the taxable sale is the sale by the selling corporation as the selling agent of the manufacturer. The same rule applies in the case of the selling corpora- tion which owns substantially all the stock of a manufacturing corporation. 4576 Art. 9. When tax attaches. — The tax attaches when the title to an article passes from the manufacturer to the purchaser pursuant to a contract of sale. 4577 When title passes is a question of fact dependent upon the intention of the parties as gathered from the contract of sale and the attendant circumstances. 4578 Where goods are segregated from other goods owned by the vendor and it is the intention of both the vendor and the purchaser at the time the goods are so segregated that they shall then belong to the purchaser, the title will be presumed to pass at such time. 4579 In the absence of an intention to the contrary the title is presumed to pass upon delivery of the article to the purchaser or to a carrier for the purchaser. 4580 In the case of a conditional sale, where title is reserved in the vendor until payment of the purchase price in full, the tax attaches (a) upon such payment, or (b) when title passes if before completion of the payments, or (c) when, before completion of the payments, the dealer disposes of the Copyright 1922, by The Corporation Trust Company, WAR TAX 915 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. sale by charging off by any method of accounting he may adopt the unpaid portion of the contract price, or (d) when the vendor discounts the notes of of the purchaser for cash or otherwise, or (e) when the vendor transfers to another his title in the article sold. 4581 Art. 10. Sales to the Government or a State. — The tax applies to articles enumerated in sections 900 and 904, except those enumerated under subdivision 7, section 900 (see art. 20), when sold to the United States Government. The same is true of articles sold to a State or political subdiv- sion thereof, even though they are to be paid for entirely out of public moneys and are to be used in the carrying on of governmental operation. Where the Government supplies a manufacturer with all materials and parts, except a small portion furnished by the manufacturer under a contract stipulating that the manufacturer shall be guaranteed a certain profit, no tax is payable. Articles manufactured for Government use in plants taken over and operated by the Government are not subject to tax. The rules applicable to the tax- ability of sales to the United States Government apply equally in the case of articles sold to foreign Governments. (See also art. 20.) • Automobiles. 4582 Art. 11. Automobiles: Scope of tax. — An automobile truck, auto- 4501 mobile wagon, or other automobile is a self-propelling vehicle de- 4502 signed to transport along highways and roads persons or property or both. 4583 Where the vehicle is capable of transporting both property and per- sons, the primary use for which it is designed will control as to whether it is taxable at 3 per cent under subdivision (1) as an automobile truck or automobile wagon, or at 5 per cent under subdivision (2) as an "other auto- mobile." 4584 The act specifically exempts tractors. A tractor is a machine operated and controlled by its own motive power, and designed to draw or pull, as distinguished from carry, a load. So-called tractors or "semitractors," which carry a portion of the load, are taxable as automobile trucks or automobile wagons. 4585 Trailers are not taxable. A trailer is a vehicle not operated or con- trolled by its own motive power, but which is pulled or drawn behind another vehicle containing the motive power. So-called trailers or "semi- trailers" so designed that a portion of the load or the weight thereof is carried or borne by the tractor or "semitractor" are taxable as "parts" of auto- mobile trucks or automobile wagons. 4586 A usuable substantially completed automobile or automobile truck produced by assembling new parts of trucks or cars is subject to tax, but a rebuilt car is not subject to tax as such, although the new parts thereof are subject to tax when sold by the manufacturer. (See Arts. 12 and 13 for examples of articles taxable and not taxable, and Art. \5 for the classification of chassis.) 4587 Art. 12. Automobile trucks and automobile wagons. —The tax is 3 per cent of the price for which automobile trucks and automobile wagons are sold by the manufacturer. It applies to automobile trucks and automobile wagons primarily designed or adapted for the transportation of property along highways and roads, although persons may incidentally Copyright 1922, by The Corporation Trust Company. WAR TAX 916 SERVICE aoivaaa cl(? xat *av/ 2-1-22. Reg' 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. be transported at the same time, as outlined in article 11, and to automobile truck and automobile wagon chassis as denned in article 15. 4588 For example, fire apparatus, including fire engines, hose carts, hook and ladder trucks, water-tower trucks, etc., tank trucks for carrying oil, gasoline, water, etc., moving and furniture vans, and drays, delivery wagons, etc., are all taxable as automobile trucks and wagons. Auto- mobile hearses are taxable as automobile trucks or automobile wagons. 4589 An automobile truck or automobile wagon formed by joining to- gether a so-called tractor or "semitractor" which carries or bears a portion of the load, and a so-called trailer or "semitrailer" is taxable as a whole as an automobile truck or an automobile wagon. 4590 When sold separately the so-called tractor or "semitractor" is taxable as an automobile truck or automobile wagon, and the so-called trailer or "semitrailer" as a "part" of an automobile truck or automobile wagon. 459 1 Motor-driven machines for pulling or drawing vehicles around factories and railway stations, small trucks for handling baggage and trunks at railway stations and for transporting materials, articles, or goods around and adapted for restricted use in factory yards or elsewhere as distinguished from use on highways and roads, are not subject to tax. 4592 Self-propelling motor-driven machines, such as concrete mixers, stone crushers, excavating shovels, ditch diggers, etc., and machines which perform a mechanical function as they move along highways and roads, such as road graders, road scrapers, street sweepers, road sprinklers and oilers, are not taxable. Where, however, the mechanical part of a machine, as the mixing machine of a concrete mixer, the blades of a road scraper, the tank of a street sprinkler, or the boiler of a road oiler, is superimposed or mounted on a truck chassis, the chassis is taxable at 3 per cent when sold by the manufacturer. 4593 Motor-propelled wheel or rolling chairs, motor-driven machine-gun and artillery carriages of the tractor type, motor-driven railroad cars and vehicles designed and adapted solely for use on rails or tracks, and not capable of use on highways and roads, are not taxable. 4594 Any tires, inner tubes, parts, or accessories for automobile trucks and automobile wagons sold on or in connection therewith or with the sale thereof are taxable at 3 per cent as part of the selling price of the automobile truck or automobile wagon. This applies only to such tires, inner tubes, parts, or accessories as are not in excess of the quantities usually sold in the ordinary course of trade to a single customer at the time and in connec- tion with the sale of an automobile truck or an automobile wagon. Any quantity of tires, inner tubes, parts, or accessories in excess of this amount is taxable under subdivision (3) at 5 per cent of the selling price thereof. 4595 Art. 13. Other automobiles and motor cycles. — The tax is 5 per cent of the price for which such articles are sold by'the manufacturer. It applies to automobiles primarily designed for carrying persons, although property may incidentally be transported at the same time, as outlined in Article 11, and to other automobile chassis as defined in Article 15. 4596 It also applies to all motor cycles sold separately and to motor cycles sold with side cars attached. 4597 Automobiles that are designed and primarily adapted for the transport- ation of persons as distinguished from property are taxable as "other automobiles." For example, ordinary passenger or pleasure cars, taxicabs, Copyright 1922, by The Corporation Trust Company. WAR TAX 917 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. automobile busses, sight-seeing cars, hotel busses, omnibusses, police patrols, ambulances, cars used by fire department chiefs and marshals, mourners' coaches with accommodations for persons other than that afforded by the seat occupied in whole or in part by the driver, etc. 4598 Where an automobile chassis of such construction that it is ordi- narily used as an automobile truck or an automobile wagon is fitted with a body designed for the carriage of persons, the completed whole is taxable at 5 per cent as an "other automobile." 4599 A side car sold separately from a motor cycle is taxable as a "part" under subdivision (3). 4600 Tires, inner tubes, parts and accessories for other automobiles and motor cycles sold on or in connection therewith or with the sale thereof or separately are taxable at 5 per cent. Automobile Parts and Accessories. 4601 Art. 14. Tires, inner tubes, parts, and accessories sold to manufac- 4503 turers. — The words "tires, inner tubes, parts, or accessories" shall be understood to embrace only such tires, inner tubes, parts, or accessories as have reached such a stage of manufacture that they constitute articles commonly or commercially known as "tires, inner tubes, parts, or accessories," and shall not be understood to embrace raw materials used in the manufacture of such articles. 4602 Unvulcanized sheet rubber, liquid rubber vulcanizing cement, and friction fabrics are considered raw materials, and are exempt from tax. 4603 Any article which has reached a state of manufacture wherein it is in itself a component part or accessory, and is of such a nature that it may be used or attached by an ordinary repair man or individual user as distinguished from a manufacturer or producer, is subject to tax as a "part or accessory." 4604 Subdivision (3) exempts from tax sales of tires, inner tubes, parts, or accessories to a manufacturer or producer of automobile trucks, automobile wagons, other automobiles, motor cycles, tires, inner tubes, parts, or accessories. 4605 In order to come within the exemption of the statute, the sale must be made by a manufacturer and such manufacturer must, at the time the goods are shipped or sold (whichever is prior), have in his possession an order or contract of sale, with certificate of the purchaser printed thereon or in writing, permanently attached thereto, to the effect that the purchaser is a manufacturer of automobile trucks, automobile wagons, other automobiles, motor cycles, tires, inner tubes, parts, or accessories; that he is purchasing the articles in question as such manufacturer for resale in some form or manner, or for free replacement under contract or guaranty; and that he will account to the internal-revenue collector and pay the tax on the sale of such articles, unless such sales by him are exempted as provided in article 16 on account of being purchased for other uses or are made to another manufacturer of auto- mobile trucks, automobile wagons, other automobiles, motor cycles, tires, inner tubes, parts, or accessories for resale by him in some form or manner or for free replacement, in which case he will require the same form of certifi- cate from such manufacturer; that when such tires, inner tubes, parts, or accessories are sold other than on or in connection with the sale of new auto- mobile trucks, wagons, automobiles, or motor cycles he will pay the tax on such sales (unless exempted in accordance with the regulations); that when Copyright 1922, by The Corporation Trust Company. WAR TAX 918 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. such articles are sold on or in connection with the sale of such new vehicles he will pay the tax on the selling price of such vehicles, including such articles. 4606 Manufacturers furnishing such certificate will be deemed manufac- turers within the meaning of the law and subject to the tax imposed on sales of such articles by manufacturers, unless the sales are made to another manufacturer or producer of automobile trucks, automobile wagons, other automobiles, motor cycles, tires, inner tubes, parts, or accessories for resale by him in some form or manner or for free replacement under a contract or guaranty, who furnishes a certificate so stating. 4607 Jobbers or dealers, who are not manufacturers, and users who are not manufacturing for resale, are not entitled to purchase tax free under certificate. 4608 Following is a form of the certificate or statement which will be accepted and in substance must be strictly adhered to: The undersigned hereby certifies that he is a manufacturer or producer of automo- bile trucks, automobile wagons, other automobiles, motorcycles, tires, inner tubes, parts, or accessories, and that the tires, inner tubes, parts, or accessories purchased hereunder are purchased by him as such a manufacturer or producer for resale in some form or manner or for free replacement under contract or guaranty and agrees if any of the tires, inner tubes, parts, or accessories are sold by him exempt from tax to another manufacturer or producer of automobile trucks, automobile wagons, other automobiles, motor cycles, tires, inner tubes, parts, or accessories for like purposes he will require a similar certificate from such manufacturer or producer. The undersigned further agrees that in respect to all tires, inner tubes, parts, or accessories sold by him, unless such sale is made to such a manufacturer or producer, he will pay the tax on such sale direct to the internal-revenue col- lector, including it in his tax return covering the month in which such sale is made; said tax to be paid on the basis of the taxpayer's selling price of such articles when sold other than on or in connection with the sale of new automobile trucks, automobile wagons, other automobiles, motor cycles, tires, inner tubes, parts, or accessories, and on the selling price of such vehicles or articles when the same includes such articles. 4609 If it is impracticable to furnish a certificate for each order, a certificate covering all orders between given dates (such period not to exceed a month) will be accepted. If in any case such an order and certificate can not be produced on demand of any authorized agent of the department, the tax in respect to the sale will be considered in default. 4610 Where the form of certificate outlined in this article is used it must be in the exact form specified, except that when such form is used to cover orders for a period of one month the language may be altered to indicate that fact. 4611 Art. 15. Definition of parts. — A "part" for an automobile truck, automobile wagon, other automobile, or motor cycle is any article designed or manufactured for the special purpose of being used as or to re- place a component part of any such vehicle and which by reason of some peculiar characteristic is not such a commercial commodity as would ordin- arily be sold for general use and which is primarily adapted only for use as a component part of such vehicle. 4612 The term includes bodies, wheels, engines, springs, axles, radiators, etc. When sold separately a side car and a so-called trailer or "semi- trailer" so designed that a portion of the load or the weight thereof is carried or borne by the tractor or "semitractor" are taxable as "parts." 4613 Mere stock or commercial commodities, such as bolts, nuts, washers, screws, etc., though used as components for such vehicles, are not "parts" within the meaning of subdivision (3). Articles, however, which Copyright 1922, by The Corporation Trust Company. WAR TAX 919 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. ordinarily would be classed as commercial commodities become parts when, because of their design or construction, they are primarily adapted for use as component parts of such vehicles. 4614 Component parts of articles taxable under this definition are taxable when sold separately if they have reached such stage of manufac- ture that they are primarily adapted for use as a component part. Blow-out shoes are subject to tax as "parts" regardless of the fact that they may be made from old casings. 4615 A chassis provided with a "superstructure" of such design that it is without substantial additions adaptable for hauling heavy loads is an "automobile truck" or "automobile wagon" and taxable at the rate of 3 per cent when sold by the manufacturer thereof. The term "superstructure" means any chassis frame of steel or wood or other material which is adaptable by the addition of a few bolsters or planks for carrying a heavy load. A chassis not so equipped is an "other automobile" or a "part" taxable at the rate of 5 per cent when sold by the manufacturer thereof unless (1) the man- ufacturer has actual knowledge from the construction of the chassis which he sells that it is to be used as an automobile truck or automobile wagon or has in his possession at the time the chassis is shipped or sold (whichever is prior) an order or contract of sale with a certificate of the purchaser printed thereon or in writing permanently attached thereto, showing that the chassis specified in the order is to be so used, in which case the chassis will be taxable at the rate of 3 per cent when sold by the manufacturer thereof; or (2) unless the manufacturer has in his possession at the time the chassis is snipped or sold (whichever is prior) an order or contract of sale with certificate of the purchaser printed thereon or in writing permanently attached thereto, showing that the chassis specified in the order is to be used by him in the further man- ufacture and sale of an automobile truck, automobile wagon, or other auto- mobile, in which case the chassis may be sold as a "part" free from tax if the purchaser furnishes the certificate provided for in article 14, for purchasing parts tax free. In the case of a chassis which is taxable as an automobile truck or automobile wagon at the rate of 3 per cent, the manufacturer of the chassis must return the tax to the Government in all instances. 4616 It should be noted that a chassis which is essentially an automobile truck or automobile wagon chassis can not be sold tax free under the certificate provided for in article 14. The exemption from tax in the sale of a chassis can be taken advantage of only in the sale of a chassis that is essentially a passenger car chassis (as distinguished from an automobile truck or automobile wagon chassis), and which is to be used by the pur- chaser in the further manufacture and sale of an automobile truck, auto- mobile wagon, or other automobile. 4617 In case the purchaser of a tax-paid chassis further completes the chassis by the addition of a body and sells the completed automobile truck, automobile wagon, or other automobile, the tax must be paid by him on his selling price of the complete automobile truck, automobile wagon, or other automobile less any tax previously paid by the manufacturer of the chassis from whom he purchased it. (See Arts. 3 and 6.) 4618 A manufacturer who purchases from the manufacturer thereof tires, inner tubes, parts, or accessories for use in further manufacturing an automobile truck, automobile wagon, other automobile or motor cycle, may purchase them tax exempt by furnishing the certificate provided for in article 14. Copyright 1922, by The Corporation Trust Company. WAR TAX 920 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. 4619 In all cases where a subsequent manufacturer does not furnish the certificate provided for in article 14, and the original manufacturer pays the tax thereon, if the subsequent manufacturer uses such tires, inner tubes, parts, or accessories in the manufacture and sale of an automobile truck, automobile wagon, other automobile, motorcycle, tire, inner tube, part, or accessory, he may take credit for such tax paid by the original man- ufacturer, in the same manner as is provided in the case of a chassis. 4620 If a person manufactures for sale separately parts or accessories and is also engaged in the business of repairing and rebuilding automobile trucks, automobile wagons, other automobiles, or motor cycles, such parts or accessories used for repair or rebuilding purposes are subject to taxation upon the amount charged for the entire job, unless the amount charged for the parts so used is billed separately, in which case the tax will attach to the sale price of the parts only. 4621 A concern which does not manufacture for sale separately any part or accessory, but is engaged in doing strictly a repair business, and makes only occasionally a part which may be needed for an immediate repair job performed by it, is not considered a manufacturer and is not re- quired to pay any tax in respect to parts so manufactured and used. 4622 A person, partnership, or corporation engaged in the business of building over automobile tops or bodies for installation on new or old chassis is not considered to be doing strictly a repair business, even though all such tops or bodies are manufactured as needed for an immediate job, but is held to be a manufacturer of automobile "parts or accessories" and subject to a tax as such. 4623 Art. 16. Definition of accessories. — An "accessory" for an auto- mobile truck, automobile wagon, other automobile, or motor cycle is any article designed to be attached to or used in connection with such vehicle to add to its utility or ornamentation and which is primarily adapted for use in connection with such vehicle, whether or not essential to its operation. 4624 The term "accessories" includes, for example, automobile tops, back and side curtains, horns, speedometers, self-starters, spot lights, shock absorbers, tire pumps, pressure gauges, and hydrometers. 4625 Articles which have a general commercial use and which are not especially designed and peculiarly adapted for use in connection with automobile trucks, automobile wagons, other automobiles, or motor cycles are not subject to tax as "parts" or "accessories." Thus a wrench or other tool of a kind ordinarily sold in hardware stores for general purposes is not subject to tax when sold separately, but if incorporated in an automobile tool kit, designed, intended, advertised, or held out for use on an automobile as distinguished from garage or shop equipment, is taxable as part of the completed kit. 4626 A wrench or other tool of special design or construction primarily adapted for use in connection with automobiles is taxable. 4627 If any doubt exists as to the special adaptability of any article, the fact of its sale by the manufacturer to be used with an automobile, or to an automobile accessories dealer, would determine its taxability. 4628 Robes, goggles, and lunch kits are not subject to tax. Asbestos brake-band linings, generator tubing, and radiator hose are not sub- ject to tax unless sold in prepared sizes, lengths, shapes, or with such fittings as make them adapted for use only on or in connection with automobiles. Copyright 1922, by The Corporation Trust Company. WAR TAX 921 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. 4629 Parts or accessories for automobile trucks, automobile wagons, other automobiles, or motorcycles primarily adapted for use on or in con- nection therewith when sold for any other purpose are not taxable provided the purchaser files with his order a statement that such parts or accessories are to be used on or in connection with another article of commerce not enumerated or included in subdivisions (1), (2), or (3) of section 900. For example, a self-starter primarily adapted for use on an automobile if sold to a manufacturer of motor boats, such manufacturer stating in his order that it is to be used in the manufacture of a motor boat and not upon an auto- mobile, is not taxable. Cameras 4630 Art. 17. Cameras 'and lenses. — The tax [is 10 per cent of the price 4504 for which cameras weighing not more than [1 00 pounds, and lenses for such cameras, are sold by the manufacturer. Stands and tripods are not to be weighed in computing the weight of the camera. Process and motion-picture cameras are subject to the tax. Toy cameras are taxable if capable of taking a picture. Parts of cameras other than lenses are not taxable, unless sold in combination with a camera. Films 4631 Art. 18. Photographic films and plates. — The tax is 5 per cent of the 4505 manufacturer's selling price of photographic films and plates, other than moving-picture films. X-ray plates are taxable as photographic plates. Motion-picture film cut up and placed in packets inclosed in a patented wrapper and known as dental films are taxable under this section. Unsensitized squeegee, and ferrotype plates are not taxable. Candy 4632 Art. 19. Candy. — Candy within the meaning of this subdivision — 4506 (a) Includes chocolate creams, bonbons, gumdrops, jelly drops, jelly beans, imperials, caramels, stick candy, lozenges, taffies, candy kisses, wafers, fudges, or Italian creams, nougats, peanut brittle, sugared almonds, chocolate-covered fruits and nuts, glace or candied fruits and nuts not specified in paragraph (b) of this subdivision; pop corn and other cereals or cereal products not specified in paragraph (b) of this subdivision, mixed with or covered with molasses, sugar, or other sweetening agent; hard candies, plain and chocolate-covered marshmallows; candy cough drops sold in bulk and without remedial claims; sweetened licorice; sweet chocolate and sweet- milk chocolate, whether plain or mixed with fruit or nuts, not specified in paragraph (b) of this subdivision; maple sugar mixed with fruit, nuts, etc., not specified in paragraph (b) of this subdivision; and all similar articles how- ever designated; but 4633 (b) Does not include cereal breakfast foods, cake and pastries, bitter chocolate which needs the addition of sugar before it becomes pleasing to the taste, powdered chocolate, maple sugar or sirup not mixed with nuts, etc., rnarshmallow paste, glace or candied fruit peel and citron, or sweet chocolate, glace or candied fruits and nuts sold by the manufacturer under circumstances where it is obvious from the condition of the product, method of packing, or from other facts in connection with the sale, that it will not be consumed in the form in which it is then sold. Copyright 1922, by The Corporation Trust Company. WAR TAX 922 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. 4634 Where a manufacturer sells candy which is packed or put up for sale in a fancy or plain box or container the tax is computed upon the selling price of the candy and container, whether the container is billed separately or not. However, where candy is purchased and the purchaser selects a fancy box or container in which the candy is placed the tax attaches to the selling price of the candy and not to the cost of the box. In such cases, if the sale is billed, the container and candy must be billed as separate items. Firearms 4635 Art. 20. Firearms, shells, and cartridges. — A firearm is any weapon 4507 from which shot is discharged by an explosive. For the purpose of the act, firearms include only portable firearms, as pistols, revolvers, rifles, carbines, machine guns, shotguns, and fowling pieces. Shells and cartridges include projectiles for all such portable arms when in such com- pleted state that they may be discharged from firearms without further manufacture. Knives 4636 Art. 21. Hunting knives, dirk knives, daggers, etc. — A hunting or 4508 bowie knife is a knife with a blade over 3 inches in length, having a 4509 sharp point and one cutting edge, especially adapted for sticking, skinning, and cutting game. The knife may be of a rigid type, carried in a sheath, or it may be of a clasp type, containing devices other than the blades. Hunting and bowie knives are subject to a tax of 10 per cent of the manufacturer's selling price, whereas the weapons described in (9) are subject to a tax of 100 per cent upon the price for which sold by the manu- facturers . Smokers' Articles 4637 Art. 22. Cigar and cigarette holders, pipes, humidors, and smoking 4510 stands. — For the purpose of the tax a humidor is either (1) a device for maintaining moist atmosphere in any receptacle used for holding tobacco products, or (2) a portable receptacle used for holding tobacco prod- ucts and fitted with a device for maintaining moist atmosphere therein. A smoking stand is (1) a tobacco ash tray having a pedestal and base, or (2) a stand supporting two or more ash trays in an upright position from a common base and designed to be placed on a table, desk, floor, or other surface. Cigar and cigarette holders and pipes, made wholly or in part of briar or other material, as distinguished from meerschaum, and fitted with a mouthpiece of amber, are taxable under section 900, even though ornamented, mounted, or fitted with precious metals or imitations thereof, or ivory. Cigar and cigarette holders and pipes with no meerschaum or amber in their composition are not taxable under section 900, but if ornamented, mounted, or fitted with precious metals or imitations thereof, or ivory, are taxable under section 905. (See Regulations 48) [page 934]. Slot Machines 4638 Art. 23. Automatic slot-device machine. — A machine used for both 4511 vending and weighing is taxable as a weighing machine. For the purpose of the tax fair market value is deemed to be the average Copyright 1922, by The Corporation Trust Company. WAR TAX 923 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. wholesale price at which like machines have been sold by the manufacturer at wholesale during the month next preceding the month in which such machine is put into operation. In case there has been no prior sale of such machines, fair market value is deemed to be the average wholesale price for which similar machines are sold at the time the taxable machine is put into operation. Automatic machines operated by a hand lever released by dropping a coin are taxable as automatic machines. Liveries 4639 Art. 24. Liveries and livery boots and hats. — For the purpose of the 4512 tax the enumerated articles include the liveries and uniforms, hats, and caps, of personal or domestic servants as maids, nurses and like help, or doormen, footmen, pages, bell boys, ushers and similar employees of clubs, hotels, theaters, cafes, stores, bakeries, safe-deposit companies, newspapers and similar places; but uniforms otherwise taxed, and the uni- forms of employees of public-service corporations, such as railroads, telegraph, and telephone companies, are not taxable. Uniforms manufactured for any of the personal or domestic servants mentioned in this article are defined to be such uniforms as are of a description, character, or design prescribed by the person in whose service they are worn as an evidence of such service and possess some distinctive characteristic to distinguish them from ordinary dress. A chauffeur's uniform is not taxable as a livery unless it has some distinctive characteristic to distinguish it from civil dress. The following uniforms are not taxable under this section: Uniforms of members of an orchestra (not employed by a hotel or similar place); private watchmen; court attendants; letter carriers; elevator conductors and oper- ators, or other similar employees of a public building; police reserves; Indians in the United States Indian Service; hospital attendants (private and public hospitals); Army and Navy officers and students at military schools; bands and musical organizations (when sold to the organization or to an individual member); actors or participants in any theatrical production; attendants of public zoological parks, museums of art and natural history; officers of steam- ship companies; chauffeurs of taxicab companies, if such taxicab companies are adjuncts of public service corporations; fraternal organizations, G. A. R., Spanish War Veterans, and the American Legion; overalls. Hunting Garments 4640 Art. 25. Hunting and shooting garments and riding habits. — Hunting 4513 and shooting garments and riding habits are deemed to include clothing primarily adapted for use in hunting, shooting, and riding, and commonly so used, such as hunting coats, sleeveless and other; duck shooters' jackets and coats; shooting caps and hats; shell belts; ladies' divided skirts and shell skirts; ladies' riding coats, men's riding breeches and coats, riding hats and caps. Leather puttees and canvas or other leggings are not taxable as hunting or shooting garments or riding habits. Pleasure Boats 4641 Art. 26. Yachts[jand motor^boats. — Yachts and motor boats include 4514 vessels driven by steam, sail, or motor and not designed for^trade, fishing, or national defense. Vessels adapted to the public transpor- Copyright 1922, by The Corporation Trust Company. WAR TAX 924 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. tation of persons or property, or both, or for the carrying on of a commercial enterprise, are designed for trade. Thus, excursion steamers, freighters, pilot boats, lighters, and the like are designed for trade. To be classed as designed for fishing a vessel must be adapted to commercial fishing carried on as a means of livelihood. Vessels built according to plans and specifica- tions previously approved by the Navy Department are held to be designed for national defense and are not taxable. The sale of vessels constructed according to a design adapted to racing, to the personal comfort or con- venience of the owner, or to official use other than in national defense, is taxable as the sale of a yacht or motor boat not designed for trade, fishing, or national defense. 4642 Pleasure boats include small open boats driven by oars, paddles, or sails, not capable of long trips, when adapted for pleasure or recreation of the owner or lessee. The sale thereof is taxable if the selling price is greater than $100. Manufacturer also Retailer 4643 Art. 27. Manufacturer also retailer. — It should be noted that the pro- 4515 visions of this subdivision apply only to articles taxable under sec- tion 900. 4644 By "customarily sells" is meant a bona fide practice of selling the same article at both wholesale and retail, in substantial quantities, and not mere occasional sales at wholesale, with the bulk of the business done at retail. Only a manufacturer who does a legitimate wholesale and retail business and holds himself out as a wholesaler as well as a retailer with respect to the goods sold will be entitled to compute the tax upon goods sold at retail on the price for which like articles are sold by him at wholesale. 4645 It should be noted that the provision of the law is that the tax in respect to retail sales shall be computed "on the price for which like articles are sold" at wholesale. To take advantage of this provision, there- fore, it is necessary that a manufacturer shall have sold identical articles both at wholesale and at retail, in order to arrive at a basis for computing the tax. 4646 In arriving at the basis of tax on retail sales, if a manufacturer has but one regular wholesale selling price or rate of discount from list, the basis of tax on all sales, whether wholesale or retail, is the same — that is, his regular wholesale selling price. 4647 If a manufacturer sells regularly at wholesale at two or more rates of discount, it will be necessary for him to arrive at his average whole- sale selling price to determine the basis of tax on retail sales; and this must be done by dividing the sum of the actual wholesale selling prices of the article in question by the total number of such articles so sold, and not by the process of "averaging discounts." 4648 Except as provided herein, the basis of tax on retail sales for any given calendar month shall be the manufacturer's actual average wholesale selling price for the same month. But if the manufacturer desires to pass the tax on as such and to bill his customer a definite amount as tax previous to the determination of his actual average wholesale selling price for that month, he may base the tax on his average wholesale selling price for the second calendar month preceding that in which such retail sale is made, provided no change has been made in the meantime in his retail list price; if his retail list price has been changed, the average wholesale price deter- mined as aforesaid must be adjusted accordingly, so that the amount upon Copyright 1922, by The Corporation Trust Company. WAR TAX 925 3ERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. which the tax is based will bear the same proportion to the retail list price then in force as the average wholesale price for the second preceding month bears to the retail list price then in force. 4649 For example, the tax on retail sales made in June may be based on the manufacturer's average wholesale selling price for the same article during the month of April, provided he has made no change in his retail list price of the article. If in April his retail list was $15 and his average whole- sale price was $10, and in June his retail list price had been increased 20 per centum, to $18, the average wholesale price or basis of tax would be likewise increased 20 per centum, to $12. 4650 For the purpose of the tax, a wholesale sale is held to be a sale to a vendor for resale, or a sale to a consumer or user in wholesale quantity as distinguished from a sale to a consumer or user at a wholesale price. All sales at wholesale are subject to tax on the basis of the actual selling price of each article sold. (See Art. 3.) Repeal of Former Taxes 4651 Art. 28. Repeal of former taxes. — The present taxes, under section 4516 900 of the 1921 Act, supersede the excise taxes imposed by section 900 of the Revenue Act of 1918 upon the sale of automobiles, musical instruments, sporting goods, chewing gum, cameras, toilet soaps, and similar articles. The Revenue Act of 1918 remains in force for the assessment and collection of all taxes which have accrued thereunder, and for the imposition and collection of all penalties or forfeitures which have accrued and may accrue, in relation to any such taxes. In the case of any tax imposed by section 900 of the Revenue Act of 1918, if there is a tax imposed by the present statute in lieu thereof, the provision imposing such tax remains in force until the corresponding tax under the present statute takes effect. See section 1400 of the statute [1f8076]. Colorable Sales 4652 Art. 29. Colorable sales. — If a manufacturer, through the device of 4517 a selling branch or in any other manner, contrives to sell under the market price, with the result of benefiting his business or with the intent to cause such benefit, the tax shall be based on the fair market value of the articles and not on their nominal selling price, such fair market value to be determined by the Commissioner in each instance. (See Art. 8.) 4653 If a manufacturer sells a taxable article to a subsidiary corporation at less than the fair market value thereof, the tax shall be based on the selling price of the subsidiary corporation. Carpets and Rugs 4654 Art. 30. — For the purpose of the tax, carpets and rugs shall include 4522 all merchandise commonly or commercially known as carpets, rugs, or matting, either woven or felted, and whether used as floor cover- ings or otherwise, or mats when used as floor covering. 4655 A rug shall beheld to be distinguishable from carpet when manufac- tured as one piece or made by the manufacturer from breadths which are united so as to form one piece, of a distinctive manufacture, size, shape, and design, figured or plain. Carpet, when sold by the yard and sewed together so as to produce a certain size or design desired by the purchaser, shall not be deemed to be a rug within the meaning of the act. Copyright 1922, by The'Cotpotittion Trust Company. WAR TAX 926 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. 4656 The unit of measurement is the square yard. Therefore, the size of a rug or the quantity of carpet shall be so calculated as to be capable of applying the tax thereto at so much per square yard. All lineal yardage, whether the strips be wider or narrower than 36 inches, must be converted into square measure. For example, a lineal yard of carpet of the ordinary width of 27 inches contains but three-quarters of a square yard. If such carpet is sold for more than $3.37j^ per lineal yard, it is taxable, because $3.37j^ per lineal yard is equivalent to $4.50 per square yard. Fringe will not be considered in computing the yardage. 4657 If carpet is sold at a specified price per yard and such price includes sewing, sizing, or laying, the tax shall attach to the combined price in excess of $4.50 per rquare yard, unless the sewing, sizing, or laying is billed separately, in which case the tax attaches only to the price of the carpet in excess of $4.50 per square yard. Trunks 4658 Art. 31. For the purpose of the tax the term "trunks" shall be 4523 held to include all receptacles which are commonly or commercially designated as trunks, designed to be used wherin to convey the effects of a traveler. It shall not, however, be held to include articles such as hampers, packing boxes or cases, nor chests designed to be used wherein to convey tools, medicine, or silver. Valises, Bags, Etc. 4659 Art. 32. For the purposes of the tax valises, traveling bags, and 4524 suit cases shall include all receptacles which are commonly or com- mercially designated as such or designed to be used wherein o carry in the hand the effects of a traveler. Hat boxes shall include any receptacle designed to be used wherein to convey hats in traveling. Fitted toilet cases shall not be imited in meaning to those designed and used for travel ng pur- poses, but shall include all receptacles of any form whatsoever (other than purses, pocketbooks, shopping and hand bags, as defined in Art. 33) designed and fitted to contain toilet articles. Purses, Pocketbooks, Etc. 4660 Art. 33. For the purpose of the tax purses shall be deemed to include 4525 all receptacles used for carrying money on or about the person. The term "pocketbook" is broader in meaning than "purse," and includes any receptacle other than a purse for carrying money, papers, cards, memor- anda, etc., in the pocket or on or about the person. The term "shopping and hand bags" shall include all bags, whether or not fitted with toilet articles, designed to be carried in the hand or on the arm for the purpose of conveying commodities or personal effects; but it shall not include articles such as valises, traveling bags, suit cases, and fitted toilet cases mentioned in article 32. The fact that a purse, pocketbook, hand or shopping bag is fitted with or for toilet articles does not take it from this subdivision nor make it taxable under the provisions of article 32. Portable Lighting Fixtures 4661 Art. 34. For the purpose of the tax, portable lighting figures and 4526 portable lamps shall be deemed to include all lighting devices adapted for interior illumination and not designed to be affixed permanently Copyright 1922, by The Corporation Trust Company. WAR TAX 927 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. in one location, and all articles commonly or commercially known as such, irrespective of the principle of illumination used. A portable lamp and shade, even though sold at the same time, shall not be regarded as a single item, but as separate items, and in computing the tax the manufacturer shall be entitled to a separate $10 deduction as to each item. For example, if the selling price of a lamp is $50 and a shade $30, even though the two articles are sold to one purchaser, the tax on the sale of the lamp will be $2.00 and on the sale of the shade $1.00. Fans 4662 Art. 35. For the purpose of the tax, fans shall be deemed to include 4527 those articles commonly or commercially known by this name, designed to produce movements of the air by waving in the hand. Return and Payment of Tax 4663 Art. 36. Return and payment of tax. — Each manufacturer of any of 4519 the articles hereinabove enumerated must make monthly returns under oath in duplicate on Form 728 (revised) [page 907], and pay the taxes imposed on such articles to the collector of internal revenue for the district in which his principal place of business is located. 4664 Any return may, if the amount of the tax covered thereby is not in excess of $10, be signed or acknowledged before two witnesses instead of under oath. Instructions for preparing will be found on the back of the form. 4665 The returns must be rendered and the tax paid in time to be in the office of the collector or zone deputy on or before the last day of each month, covering all the transactions of the preceding month, the first return to cover all transactions after January 1, 1922. 4666 Branch houses should in general make reports to the parent house, which is liable to make monthly returns of the sales of the branch house. An itinerant manufacturer should make return and pay the tax to the collector of the district where the sales were made. 4667 The books of every person liable to the tax shall be open at all times for inspection by examining internal-revenue officers. (As to penal- ties, see Art. 39.) 4668 The person responsible for the return and payment of the tax shall, in order that returns may be readily checked and verified by examin- ing internal-revenue officers, keep such records and memoranda as will clearly show the amounts of the sales of taxable articles for each month. Trade with Possessions of ^United States 4669 Art. 37. Trade with possessions of United States. — A sale which 4539 results in the shipment of articles into the United States from the Virgin Islands is taxable to the same extent as a sale of articles within the United States. Articles going into the Virgin Islands from the United States are free from tax in the United States. The same rules apply to trade with Porto Rico and the Philippine Islands. (See section 1000 of the Revenue Act of 1917, and Section V of the Act of August 4, 1909, as amended by Sec- tion IV, Subdivision C, of the Act of October 3, 1913.) The tax attaches, however, to articles shipped to other possessions of the United States, includ- ing the Canal Zone. Copyright 1922, by The Corporation Trust Company. WAR TAX 928 SERVICE 2-1-22. Keg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. Extension of Existing Statutes 4670 Art. 38. Aids to collection of tax. — In collecting the excise taxes the 8000 Commissioner has the benefit of all existing internal-revenue laws. 8001 In aid of the enforcement of the statute the Commissioner may re- soo> quire any person to keep specified records, to render returns and statements as directed, to submit himself and his books to examina- tion, and to comply with such regulations as may be prescribed. Penalties 467 1 Art. 39. Penalties. — Any manufacturer who fails to file a return 8014 within the time prescribed is liable under section 3176 to a penalty 8071 of 25 per cent of the amount of the tax, unless it is shown that the failure to file it was due to a reasonable cause and not to willful neglect. 4672 Any manufacturer who willfully files a false or fraudulent return is liable under section 3176 to a penalty of 50 per cent of the amount of the tax. 4 673 Any manufacturer who fails to pay a tax when due is liable under section 903 to a penalty of 5 per cent of the amount of the tax, together with interest at the rate of 1 per cent per month. (See Art. 36.) 4674 In addition to the above, under certain circumstances the penalties provided under section 1302 may also be imposed on any such manu- facturer and also on the officer, partner, or employee whose duty it was to perform the duties in respect of which the violat'on occurred. (See also sec. 906 and Art. 46.) Credits and Refunds 4675 Art. 40. Credits and refunds.— If a manufacturer overpays the tax 4535 due with one monthly return, or if, under section 906 of the statute he 8018 overcollects the tax, he may take credit for the overpayment or over- collection against the tax due with a succeeding return. If he over- collects the tax, he shall upon proper application refund the over-collection to the person entitled thereto, even though such amount has already been paid over to the collector of internal revenue and no corresponding credit has yet been secured. In case a credit is claimed, a statement shall be attached to the return setting forth fully the facts regarding alleged over- payment or overcollection. In the case of the overcollection of a tax, no credit for the amount overcollected shall be allowed until the manufacturer making the overcollection submits a sworn statement showing that the tax in each case so overcollected has been returned to the person making the overpayment, that no claim for a refund of any part of such amount has been filed with the collector or commissioner on behalf of any person who paid such amounts, and a complete list of such persons. It should be noted that a credit may be taken under section 1304 only in the case of overpayment or overcollection as distinguished from an illegal or erroneous payment or collection. 4676 In all cases where a tax has been collected or paid and such collection or payment is alleged to be illegal or erroneous, it will be necessary for the person so paying the tax to file claim for refund on Treasury Department Form 46 [page 1609]. For procedure with reference to claims for refunds see sections 3220 [1f8023.] and 3225 [T8047J of the Revised Statutes, as amended by sections 1315 and 1323 of the Revenue Act of 1921, and Regulations 14 (revised). Copyright 1922, by The Corporation Trust Company. WAR TAX 929 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. Exports 467 7 Art. 41. Sales for export. — The tax does not attach to the sale of an ^ 4538 article which is sold for export by the manufacturer and in due course so exported. 4678 An article may be sold for export but never exported or not exported in due course. Also, an article may be exported in due course by the purchaser, although not sold for export. 4679 In order to be exempt from tax, however, it is necessary that the article be both sold for export by the manufacturer and in due course so exported. ^ 4680 An article will be regarded as having been sold for export if the manu- facturer has in his possession at the time that title passes or of ship- ment (whichever is prior) (a) an order or contract of sale or document inci- dental thereto showing in writing that the manufacturer is to ship the article direct to a foreign destination; or (b) where the delivery is to be made to the purchaser or his agent within the United States, a certificate from such pur- chaser or agent, as the case may be, showing (1) that the article is purchased * either to fill a firm order then held by such purchaser requiring shipment to a foreign destination, or for shipment (or transportation) by him in due course to himself or to his agent or to his principal in a foreign country, or that the article is purchased to fill future orders calling for shipment thereof by the purchaser direct to a foreign destination, and (2) that the article^will be transported to a foreign destination in due course prior to use, resale, or further manufacture within the United States. 4681 In these cases the manufacturer, for a period of twelve months from the date when title passes or of shipment (whichever is prior), is excused from filing returns for the articles so sold. This temporary exemption becomes permanent upon the manufacturer's attaching to such order, con- * tract, or certificate before the expiration of such period of twelve months due proof of exportation (see Art. 42). On the other hand, if within such period of twelve months the manufacturer has not received and attached to such order or contract such "proof of exportation," then the temporary exemption ceases and the manufacturer shall include a tax on the sale of such article in his return for the month in which such period of twelve months expires. The order or contract of sale and certificate and the "proof of exportation" must be preserved by the manufacturer in such a way as to be readily accessible for inspection by internal-revenue officers. No sale shall be considered to be exempt from tax under section 1305 of the Act, unless its character as an export sale has been established in accordance with the above provisions. 4682 Art. 42. Proof of exportation. — By the term "proof of exportation" is meant an affidavit of the exporter (who, if not the manufacturer, must be the purchaser from the manufacturer or an agent of one or the other) containing the following information: (1) The name and address of manu- facturer; (2) the name and address of the exporter; (3) whether exporter is acting in his own behalf or as agent, and if agent name of principal; (4) a brief description of the article; (5) the date upon which the article was delivered to a carrier for transportation beyond the limits of the United States (or if not transported by carrier the actual date and manner of transportation out of the United States); (6) the name of carrier issuing export bill of lading, and if a carrier by sea, the name of vessel carrying the article and date of departure from United States; (7) destination of article; (8) statement that the article Copyright 1922, by The Corporation Trust Company. WAR TAX 930 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. was in fact exported in due course prior to use, resale, or further manufacture within the United States. 4683 Where the manufacturer is the exporter there may be attached to the original contract or order as proof of exportation, in lieu of the affidavit provided for in the preceding paragraph, (1) a copy of export bill of lading, or (2) a certificate by the agent or representative of the export carrier showing exportation of the article, or (3) certificate of mailing, where the article was shipped by parcel post. Where the exportation is accomplished by a person other than the manufacturer, the exporter must carefully preserve in his own files a copy of export bill of lading or other shipping document and all other papers bearing on the transaction, readily accessible for inspection by any authorized official of the United States. 4684 Where the exportation is accomplished by a person other than the manufacturer, the affidavit above required may cover all the articles received from the manufacturer upon any one contract or shipment, whether exported on different dates or shipped to different consignees. 4685 In any case where the manufacturer does not have in his possession, within the twelve months' period, proof of exportation as outlined herein, the manufacturer must pay the tax. Whenever proper proof of exportation is available, claim for refund of the amounts so paid may be filed. Transfer of Burden of Tax 4686 Art. 43. Contract of sale prior to August 15, 1921, of article taxed 4531 under section 900 or 904, 1921 Act, on which no corresponding tax was levied under section 900 of the 1918 Act. — If before August 15, 1921, "A," a manufacturer, made with "B," a dealer, a contract of sale for an article taxed under section 9C0 or 904 of the Revenue Act of 1921, and in respect to which no corresponding tax was imposed by section 900 of the Revenue Act of 1918, which does not permit the addition of the tax to the amount payable under the contract, then the liability for the tax is on "B," with the duty on "A" only to collect and pay it to the collector as provided in article 46. If, however, "A," before August 15, 1921, made a contract of the character described with any person other than a dealer as defined in article 47, no tax is payable in respect of the sale by him, since on August 15, 1921, no tax was in force on the sale of the articles. 4687 Art. 44. Contract of sale before August 15, 1921, of article taxable 4532 under section 900, 1918 Act, at rate greater than tax on same article under section 900, 1921 Act.— -If before August 15, 1921, "A," a man- ufacturer of candy taxable at 5 per cent under section 900 of the Revenue Act of 1918, made a contract with "B," a dealer or not, wnich included in the price stipulated in the contract the tax under section 900 of the 1918 Act, and the contract does not permit the deduction from the amount to be paid of the difference between the tax at 5 per cent under section 900 of the 1918 Act and the tax at 3 per cent under section 900 of the 1921 Act, "A" must refund to "B" so much of the amount of such difference as is not permitted to be deducted from the contract price. (See articles 40 and 46 as to credits for such refunds.) 4688 Art. 45. Contract of sale prior to August 15, 1921, of article taxable 4533 under section 900, 1918 Act, on which no corresponding tax under section 900, 1921 Act.— If before August 15, 1921, "A," a manufac- turer of chewing gum, taxable under section 900 of the 1918 Act, but not Copyright 1922, by The Corporation Trust Company. WAR TAX 931 SERVICE 2 1-22. Keg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. taxable under section 900 of the 1921 Act, made a contract with "EL" a dealer or not, which includes in the price stipulated in the contract the tax imposed under section 900 of the 1918 Act, and the contract does not permit the deduc- tion from the amount to be paid of such tax, "A" must refund to "B" so much of the amount of such tax as is not so permitted to be deducted from the con- tract price. (See articles 40 and 46 as to credit for such refunds.) 4689 Art. 46. Return of tax. — Each person receiving any payments referred 4534 to in section 906 of the statute shall collect the amount of the lax, if any, imposed by such section from the person making such pay- ments, and shall make monthly returns under oath in duplicate and pay Un- taxes so collected to the collector of the district in which his principal office or place of business is located. If sale is made on credit, other than on con- ditional sale, the manufacturer shall return the tax at the time of sale, but may defer collection thereof from the purchaser. 4690 Any person making a refund of any payment upon which the tax is so 4535 collected may repay therewith the amount of the tax collected on such payment, and if the tax on the sale in respect to which refund is made has been paid to the Government the amount of the tax so repaid to the pur- chaser may be credited against amounts included in any subsequent monthly return. (See also Art. 40.) 4691 The return must be made on Form 728 (revised) [page 907] in time to be in the office of the collector or zone deputy on or before the last day of the month following the month in which the sale is made, as provided in article 36. 4692 The tax shall, without assessment by the Commissioner or notice from the collector, be due and payable to the collector at the time fixed for filing the return. 4693 If the tax is not paid when due, there shall be added as a part of the tax a penalty of 5 per cent, together with interest at the rate of 1 per cent for each full month from the time when the tax became due. 4694 Art. 47. Meaning of "dealer." — The term "dealer" includes not only 4536 dealers in the ordinary sense — that is, persons engaged in the business of selling articles — but also a person who purchases an article with the intention of using it in the manufacture or production of any article in- tended for sale. The term does not include a person buying an article for his personal consumption or use. The United States, a State, Territory, or a political subdivision thereof, or a foreign Government, purchasing an article for its own use is not a dealer. Fractional Part of Cent 4695 Art. 48. When fractional part of cent may be disregarded. — la the 8019 payment of taxes, a fractional part of a cent may be disregarded un- less it amounts to one-half cent or more, in which case it shall be increased to 1 cent. Medium of Payment of Tax 4696 Art. 49. Payment of tax by uncertified checks.- Collectors may accept 8020 uncertified checks in payment of excise taxes, provided such checks are collectible at par — that is, for their full amount, without any deduction for exhange or other charges. The collector will stamp on the face of each check before deposit the words, "This check is in payment of an Copyright 1922, by The Corporation Trust Company. WAR TAX 932 SERVICE 2-1-22. Reg. 47, Rev. Manufacturer's Sales Taxes. EXCISE TAXES REGULATIONS. obligation to the United States and must be paid at par. No protest," with his name and title. The day on which the collector receives the check will be considered the date of payment so far as the taxpayer is concerned, unless the check is returned dishonored. If one check is remitted to cover two or more persons' taxes, the remittance must be accompanied by a letter of trans- mittal stating (a) the name of the drawer of the check; (b) the amount of the check; (c) the amount of any cash, money order, or other instruments included in the same remittance; (d) the name of each person whose tax is to be paid by the remittance; (e) the amount of the payment on account of each person; and (f) the kind of tax paid. 4 69 7 Art. 50. Procedure with respect to dishonored checks. — If the bank on which any such check is drawn should refuse to pay it at par, the check should be returned through the depositary bank and be treated in the same manner as a bad check. All exepnses incident to the attempt to collect such a check and the return of it through the depositary bank must be paid by the drawer of the check to the bank on which it is drawn, since no deduction can be made from amounts received in payment of taxes. See section 3210 of the Revised Statutes. If any taxpayer whose check has been returned uncollected by the depositary bank should fail at once to make the check good the collector should proceed to collect the tax as though no check had been given. A taxpayer who tenders a certified check in payment for taxes is also not released from his obligation until the check has been paid. Sec chapter 191 of the Act of March 2, 1911 (36 Stats. 965). Misrepresentation of Tax 4608 Art. 51 . Misrepresentation of tax. — If a manufacturer or other vendor 4537 misrepresents the tax he is guilty of a misdemeanor and is liable to a fine of $1,000 and to imprisonment'for a year. This provision is designed, among other things, >o prevent a vendor adding more than the amount of the tax to the price of an article and representing that the increase is due to the tax. Authority for Regulations 4 639 Art. 52 Promulgation of regulations. — In pursuance of the statute 8009 the foregoing regulations arc hereby made and promulgated and all rulings inconsistent herewith are hereby revoked. D. H. BLAIR, Commissioner of Internal Revenue. Approved January 6, 1922 [Released for publication February 1, 1922]: A. W. MELLON, Secretary of the Treasury. Copyright 1922, by The Corporation Trust Company. WAR TAX 933 SERVICE', 2-1-22. Reg. 48, Rev. Works of Art and Jewelrv. EXCISE TAXES REGULATIONS. REGULATIONS NO. 48 Relating to the EXCISE TAXES on WORKS OF ART AND JEWELRY under SECTIONS 902 AND 905 OF TITLE IX OF THE REVENUE ACT OF 1921. [Promulgated January 12, 1922.] [Released for publication February 1, 1922.] CONTENTS. General Provisions. Article Paragraph 1. Basis of tax 4700 2. Rescission of sales 4701 3. Tax payable by vendor 4702 4. When tax attaches 4703 5. Giving of premiums 4704 6. Sale to the United States or a State 4705 Sec. 902.— Works of Art. 7. Effective date 8. Taxable sales 9. Taxable sales: Examples 10. Sales by the artist 11. Articles taxed: Sculpture 12. Articles taxed: Paintings 13. Articles taxed: Statuary 14. Articles taxed: Art porcelains . * 15. Articles taxed: Bronzes 16. Articles taxed: Frames Sec. 905. — Jewelry. 17. Effective date 4717 18. Use of terms 4718 19. Articles taxpaid under other acts 4719 20. Consumption or use 4720 21. Jewelry 4722 22. Articles not taxable 4727 23. Pearls, precious and semiprecious stones and imitations thereof 4729 24. Articles made of, or ornamented, mounted or fitted with precious metals or imitations thereof or ivory 4730 25. Watches and clocks ' 4736 26. Opera glasses, lorgnettes, marine glasses, field glasses, and binoculars 4737 27. Secondhand articles 4738 28. Repairs 4739 Administrative Provisions. 29. Exemption of export sale 4741 30. Proof of exportation 4746 31. Trade with possessions of the United States 4750 32. Return and payment of tax 4752 33. Returns by agents 4753 34. Credits and refunds 4754 35. Fractional part of cent 4755 36. ' Penalties 4756 37. " Promulgation 4757 4706 4707 4708 4709 4710 4711 4712 4713 4715 4716 Copyright 1922, by The Corporation Trust Company. WAR TAX 934 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. GENERAL PROVISIONS 4700 Article 1. Basis of tax. — The tax is measured by the price for which 4518 the article is sold. It is on the actual sales price of the goods, and 4528 not on the list price, where that differs from the sales price. If the price of a taxable article is increased to cover the tax, the tax is on such increased price. Where, however, the tax is billed as a separate item, such amount need not be included in the price of the article in computing the tax. The tax is payable in respect to a sale made whether or not the purchase price is actually collected. A discount for cash or other discount made subsequently to the sale can not be deducted in computing the price for the purpose of the tax. Where, however, articles are sold over a period of time under an agreement for a quantity rebate, the tax,' if originally computed on the gross price, may be adjusted in the return for the month in which the price is finally determined. Commissions to agents and other expenses of sale are not deductible from the price. If articles are sold and the delivery charges to point of delivery are paid by the purchaser as a specific item, or if they are sold delivered at a sum less delivery charges to be paid by the purchaser, such charges need not be included as a part of the price of the goods; but if the vendor sells goods at a delivered price and pays the delivery charges, he is not entitled to make any deduction on account of the inclusion in the price of such charges. 4701 Art. 2. Recission of sales. — If articles sold are returned and the sale entirely rescinded, no tax is payable, and if paid it may be credited against the tax included in a subsequent monthly return. See Article 34. If part only of articles sold at one time is returned, and credit or rebate allowed by the vendor therefor, the portion of the tax to be credited will be only the proportion of the total tax paid which the amount allowed as credit or rebate bears to the total sale price of all the articles. If an article is sold and thereafter exchanged for another article of a higher price, the purchaser paying the difference, the vendor should pay the tax on the second sale, but may take as a credit against such tax the proportion of the tax paid on the returned article which the amount allowed as a credit for the return of such article on the second sale bears to the amount of the purchase price in the case of the first sale. 4702 Art. 3. Tax payable by vendor. — The tax is to be paid by the vendor on all sales made direct by him or through an agent, whether a sales agent, broker, .or auctioneer. In the case of articles taxable under section 905, where an article is consigned to a dealer, the taxable sale is that made by the consignee, provided the article is sold for consumption or use. 4703 Art. 4. When tax attaches. — The tax attaches when the article is sold; that is to say, when the title to it passes from the vendor to the purchaser. When title passes is a question of fact, dependent upon the intention of the parties as gathered from the contract of sale and the attendant circumstances. Where goods are segregated from other goods owned by the vendor and it is the intention of both the vendor and the purchaser at the time the goods are segregated that they shall then belong to the purchaser, the title will be presumed to pass at such time. In the absence of any inten- tion to the contrary the title is presumed to pass upon delivery of the article to the purchaser or to a carrier for the purchaser. In the case of a con- ditional sale, where the title is reserved until payment of the purchase price Copyright 1922, by The Corporation Trust Company, WAR TAX 935 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelrv. EXCISE TAXES REGULATIONS. in full, the tax attaches (a) upon such payment, or (b) when title passes if before completion of the payments, or (c) when before completion of the pay- ments, the dealer disposes of the sale by charging off by any method of accounting he may adopt the unpaid portion of the contract price, or (d) when the vendor discounts the notes of the purchaser for cash or otherwise, or (e) when the vendor transfers his title in the article sold to another. 4 704 Art. 5. Giving of premiums. — The giving of so-called "premiums" in return for wrappers, labels, coupons, trading stamps, or other scrip delivered or sold in connection with the sale of a commodity is a sale within the meaning of section 902 and section 905 if the premium is within the class of articles enumerated in those sections. In such cases the tax attaches at the time title in the premium passes to the person receiving it in exchange for such scrip, and is to be computed on the fair market value of the premium at such time. No tax attaches to the gift of an article which if sold would be taxable. Premiums given in return for wrappers, labels, coupons, trading stamps, or other scrip are not considered as gifts. 4705 Art. 6. Sale to the United States or a State. — The tax applies to articles enumerated in sections 902 and 905 when sold to l he United States, or to a State or political subdivision ihereot for use in earn ibg W its governmental ope ra tio n s . WORKS OF ART 4706 Art. 7. Effective date. — The tax applies to all sales made on or 4518 after January 1, 1922. 4707 Art. 8. Taxable sales. — The tax imposed by section 902 is on any sale of the articles enumerated other than a sale by the actual artist, or to an educational institution or public art museum, or by any dealer in such articles to another dealer in such articles, for resale. The tax attaches whether the sale is made directly or through an agent. If made through an agent the tax is payable by the owner, but the agent may make return and pay the tax for the owner. A receiver conducting a business under court order is liable to the tax upon articles sold by him. When a person other than the artist consigns articles, retaining ownership in them until the}' are disposed of by the consignees, such person must pay the tax upon all such goods sold by the consignee. 4708 Art. ^Taxable sales: Examples. — The tax applies to all sales from private owner to private owner, or from private owner to dealer, or from dealer to private owner, and the tax to be paid upon each such sale is to be reckoned upon the full amount of the price for which the article was sold. For example, a picture is sold by a private owner to a dealer for $10,000; the private owner must pay a tax of 5 per cent of $10,000, or $500, but if this picture is thereafter sold to another dealer for $15,000, and the second dealer in turn sells the picture to a third dealer for $20,000, no tax is payable on such sales by one dealer to another for the purpose of resale. However, if the third dealer sells the painting to a private collector for $25,000, the third dealer must pay a tax of 5 per cent of $25,000, or $1 ,250. Should the private owner sell it to another private owner for $30,000, the former must pay a tax of 5 per cent of $30,000, or $1,500. Copyright 1922. by The Corporation l>nst Company. WAR TAX 936 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. 4709 Art. 10. Sales by the artist. — Sales by the artist are not taxable. By "artist" is meant the individual who by his own hands, com- pletely or as to the important part so far as the article's artistic merit is concerned, produces the article. The artist's sale may be made directly or through a dealer, commission merchant, or other person. The exempt sale is only the original sale by the artist. If the artist regains title to an article and again sells it, such sale is taxable. Sculpture 4710 Art. 11. Articles taxed: Sculpture. — The term "sculpture" means any production (whether antique or modern, and whether original, replica, copy, or reproduction) which is cut or carved by hand from marble, stone, alabaster, agate, crystal, jade, lapis lazuli, or other semiprecious stone, terra cotta, ivory, bone, wood, clay, wax, metal, or any other substance, and which is of such a character that the use to which under general custom or ordinary usage it should be put (irrespective of the use to which the purchaser intends to put it) is entirely or principally an ornamental or decorative one as distinguished from a useful or utilitarian one. The following list, not intended to be exhaustive, is given to show the class of articles embraced within this definition, Aiz: Statues, statuettes, figures, figurines, groups, busts, haut or bas-reliefs, plaques, pedestals, vases, flower bowls, or holders, jardinici\ s, brackets, fountains, sundials, book ends, paper weights, cabinet pieces or curios, and the numerous articles included within the term bric-a- brac, when such articles are cut or carved by hand. The term "sculpture" shall not be understood to include (a) such articles as are in the nature of material, work, or labor furnished in connection with the erection or con- struction of a building and which form an integral part thereof, or (b) cut glassware, or engravings on metal, wood, shell, stone, or other substance, or (c) furniture, altars^ candlesticks, chandeliers, railings, gates, doors, memorial monuments, tombstones, or other articles designed primarily for a useful purpose. Paintings 47 11 Art. 12. Articles taxed: Paintings. — The terms "paintings" means any pictures, images, likenesses, scenes, designs, or sketches, wholly or in part in oil, mineral, water, or other colors on canvas or other textile, wood, paper, metal, plaster, or other material, {a) whether antique or modern, (b) whether originals, replicas, copies, or reproductions, and (c) whether or not intended for reproduction by printing or other processes. The term "paintings" shall not be understood to include (i) such as are in the nature of work or labor furnished in connection with the erection or construction of a building and which form an integral part thereof; (2) furniture, windows, tableware, toilet articles, glove, handkerchief, candy, or other fancy boxes, menu, place, greeting, and similar cards, stationery, candlesticks, signs, placards, desk fittings, and other articles of utility when the same arc orna- mented or decorated with oil, mineral, water, or other colors; (3) such as are produced wholly or in part by stenciling, printing, or other mechanical pro- cess; and (4) pastels or drawings. The term "drawings" as used in this article shall include only pictures, images, likenesses, scenes, designs, or sketches produced by means of lines. Copyright 1922, by The Corporation Trust Company. WAR TAX 937 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. Statuary eo\* 4712 Art. 13. Articles taxed: Statuary. — The term "statuary" means any production (whether anique or modern and whether original, replica, copy, or reproduction) cut, carved, or otherwise wrought by hand^from marble, stone, alabaster, agate, crystal, jade, lapis lazuli, or other semi- precious stone, terra cotta, ivory, bone, wood, clay, wax, metal, or other sub- stance, when such production is a representation in the round of the human or 'animaljform (irrespective of size), whether real, mythical, fabulous, or allegorical. %The term "statuary" shall not be understood to include (a) such productions as are in the nature of material, work, or labor furnished in con- nection with the erection or construction of a building and which form an integral part thereof, (b) dolls or toys, or (c) such productions as are designed for a primarily useful purpose. Art Porcelains 4713 Art. 14. Articles taxed: Art porcelains.-— The term "art porcelains" means that class of articles, such as statues, statuettes, figure?, figurines, groups, busts, haut or bas-reliefs, plaques, pedestals, vases, flower bowls or holders, jardinieres, brackets, fountains, sundials, cabinet pieces or curios, and the numerous articles included within the term bric-a-brac by whatever process made (except as provided in the following paragraph) when such articles are made wholly or in chief value (a) of any ceramic production of translucent ware, of hard or soft paste, whether vitrified or semi-vitrified, by whatever name known; or (b) of that which is commonly or commercially known as porcelain, in either case, whether or not decorated, colored, or ornamented, whether modern or antique, and whether originals, replicas, copies, or reproductions, which are of such a character that the use to which under general custom or ordinary usage they should be put (irrespective of the use to which the purchaser intends to put them) is entirely or principally an ornamental or decorative one as distinguished from a useful or utilitarian one. 4714 The term "art porcelains" shall not be understood to include (a) such articles as are in the nature of material, work, or labor furnished in connection with the erection or construction of a building and which form an integral part thereof, (b) tableware or other articles designed for a primarily useful purpose, or (c) such articles as are duplicated by the manufacturer in commercial quantity wholly or chiefly by the ordinary mechanical processes of manufacture. Articles shall not be deemed to be duplicated in commercial quantity if they are ordinarily sold by the manufacturer in quantities of less than'a dozen. Bronzes 4715 Art. 15. Articles taxed: Bronzes. — The term "bronzes" means that r class of articles covered by "sculpture" and "statuary" as defined in articles 11 and 13 by whatever process made, when such articles are made wholly or in chief value of that substance which is commonly or commercially known as bronze, whether such articles are modern or antique, and whether originals, replicas, copies, or reproductions, which are of such a character that the use to which under general custom or ordinary usage they should be put (irrespective of the use to which the purchaser intends to put them) is entirely or principally an ornamental or decorative one as distinguished from a useful or utilitarian one. The term "bronzes" shall not be understood to include (a) architectural bronzes, (b) such articles as are in the nature of Copyright 1922, by The Corporation Trust Company. WAR TAX 938 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. material, work, or labor furnished in connection with the erection or con- struction of a building and which form an integral part thereof, (c) medals, memorial or commemorative tablets, or (d) such articles as are designed for a primarily useful purpose. The sale to an artist by a foundry of a casting made from the artist's model is not subject to the tax. Frames 4716 Art. 16. Articles taxed: Frames. — If a taxable article is sold in a frame, the tax attaches to the price for which both the article and the frame are sold. If, however, the article is sold without the frame, the tax applies only to the price at which the article itself is sold. The frame, however, if sold separately, may be taxable under section 905 of the Revenue Act of 1921. JEWELRY 4717 Art. 17. Effective date. — The tax is effective as to all sales made on 4528 or after January 1, 1922. 4718 Art. 18. Use of terms. — For the purpose of the tax and as used in these regulations, the term "dealer" means any individual, partner- ship, association, or corporation engaged in the business of selling for profit any of the enumerated articles to a purchaser for consumption or use, and the estate of such a dealer. Thus, a dealer may be a manufacturer, jobber, wholesaler, retailer, mail-order house, installment house, trustee in bank- ruptcy, receiver, pawnbroker, or peddler, if the sale is for consumption or use; but a casual sale, not in the course of trade or business, by an individual of any of the enumerated articles, does not constitute the vendor a "dealer" within the meaning of section 905. An auctioneer or broker is a dealer within the meaning of the act in respect to all sales made by him of articles in which he has title, but not in respect to articles which he is selling as an agent. 4719 Art. 19. Articles tax paid under other acts. — The tax is on the sale by or for a dealer or his estate when any of the enumerated articles are sold for consumption or use, whether or not a tax under any other law has been previously paid on such articles. 4720 Art. 20. Consumption or use. — An article is sold "for consumption or use" within the meaning of section 905 of the act if it is sold for any other purpose than to be sold, leased, or otherwise disposed of for profit, whether or not after change in form by process of manufacture. 4721 Unless the purchaser is a wholesaler, retailer, or manufacturer cus- tomarily engaged in the business of selling or further manufacturing the articles in respect to which the applicability of the tax is in question, the sale to such purchaser will be deemed to be for consumption or use, unless the contrary is clearly shown. Common or Commercial Jewelry 4722 Art. 21. Jewelry. — The following articles are taxable as jewelry: 4723 (1) Articles to be worn on the person or apparel for purpose of adorn- ment, which according to general custom or ordinary usage are worn so as to be displayed, such as brooches, rings, chains, cuff buttons, necklaces, Copyright 1922, by The Corporation Trust Company. WAR TAX 939 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. fobs, and shoe buckles. Such articles are taxable regardless of the substance of which made (except as provided in subdivision (I) of article 22), and regardless of their utilitarian value. 4 724 The term "worn on the person" as ffsid in this paragraph does not include articles to be carried in the hand or hung over the arm, such as bags or purses. 4725 (2) Articles to be carried in the hand, or hung on the arm, or carried or worn concealed on the person, whether in pocket or bag or under the outer garment, such as cigarette cases, eyeglass cases, pencils, powder boxes, garter buckles, purses or hand bags. Such articles are taxable as jewelry only if made of or ornamented, mounted or fitted with pearls, precious or semiprecious stones, or imitations thereof; but if so made, ornamented, mounted, or fitted, they are taxable regardless of their utilitarian value. See also article 24. 4726 (3) Articles not taxable under the following articles may be taxable by reason of being articles commonly or commercially known as jewelry, real or imitation. It should be carefully noted that the rulings in this article are only as to articles taxable as jewelry. Articles which arc not taxable as jewelry may be taxable under articles 23 or 24. Thus a cigarette case, if made of, or ornamented, mounted, or fitted with a precious metal or imitation thereof, although not taxable under this article is taxable under article 24. It should also be noted that the examples given in this article are not intended to be exhaustive, but merely illustrative. Articles Not Taxable 4727 Art. 22. Articles not taxable. — (1) The following articles of personal adornment are not taxable under section 905, unless ornamented, mounted or fitted with pearls, precious or semi-precious stones, or imitations thereof: (a) Articles made of textiles or feathers; (b) hat trimmings (not including hatpins); (c) shoe trimmings (not including buckles); (d) buttons ordinarily worn permanently attached to wearing apparel. 4728 (2) Articles used as ornaments for wearing apparel are taxable if coming within the classification of subdivision (1) or (2) of article 21, or if within the provisions of any of the following articles: Pearls, Stones, and Imitations 4729 Art. 23. Pearls, precious and semiprecious stones and imitations thereof. — The tax attaches to the sale of all pearls and precious or semiprecious stones, whether real or imitation, cut or uncut, whether or not drilled, mounted, or matched, and whether or not temporarily or permanently- strung, and whether with or without clasps. Articles Made of Precious Metals or Imitations or Ivory 4730 Art. 24. — Articles made of, or ornamented, mounted or fitted with precious metals or imitations thereof or ivory. — The term ''precious metals" includes silver, gold, platinum, and all metals more valuable than these. The term "imitations thereof" includes only platings or alloys of any of the above materials. 4731 The following articles are not taxable under the clause of section 905 construed in this article: (1) Articles made of imitation ivory; (2) surgical instruments, eyeglasses and spectacles; (3) articles merely orna- mented or overlaid with gold or silver leaf or paint, such as picture frames, books, and Christmas cards. Copyright 1922, by The Corporation Trust Company. WAR TAX 940 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. 4 732 Glassware, china, pottery, and like articles are only taxable if orna- mented, mounted or fitted with precious metals or imitations thereof, but are not taxable when ornamented with gold or silver leaf or paint. 4733 It should be carefully noted, however, that the articles above enumer- ated, although not taxable as "articles made of, or ornamented, mounted, or fitted with, precious metals or imitations thereof or ivory," may be taxable as jewelry. Thus a hatpin with a head of imitation ivory is taxable as jewelry. For articles taxable as jewelry see article 21. 4734 Shoe buckles not attached to shoes are taxable as jewelry under section 905, regardless of the material of which made, if they are ornamented, mounted, or fitted with pearls, precious or semi-precious stones, or imitations thereof. Shoe buckles made of or ornamented, mounted or fitted with precious metals or imitations thereof, or ivory, are taxable under section 905. 4735 Fountain pens equipped with gold pen points are taxable on the total price for which such pens are sold. Watches and Clocks 4736 Art. 25. Watches and clocks. — Watch or clock movements sold separately are taxable. Watch or clock cases sold separately are taxable when made of or ornamented, mounted, or fitted with precious metals or imitations thereof or genuine ivory. Watches and clocks sold complete are taxable regardless of the substance of which made. Watch or clock cases and movements sold separately, but intended to be used together, are taxable. 4737 Art. 26. Opera glasses, lorgnettes, marine glasses, field glasses, and binoculars.— The enumeration in the statute includes only portable instruments. Instruments of the character enumerated, which by reason of their size or weight are ordinarily mounted upon tripods or other bases, are not taxable. Second-hand Articles 4738 Art. 27. Second-hand articles. — Articles coming within the enumera- tion of section 905 are not exempt from taxation when sold by a dealer for consumption or use at second-hand or after being used, but are taxable on the price for which sold. Repairs 4739 Art. 28. Repairs. — Ordinary repairs which do not increase the value of the article repaired are not taxable, but repairs involving the addition of precious metals or imitations thereof, or ivory, are taxable upon the price of the added parts, which will be presumed to be the price charged for the job, unless the contrary is shown. 4740 Repairs which are merely such as to put the article in a serviceable condition as originally sold and which do not increase the original value of the article repaired, even though such repairs involve the addition of precious metals or imitations thereof, or ivory, are not taxable under section 905. However, repairs involving the addition of precious metals or imitations thereof, or ivory, not falling in the above class, or pearls, precious and semiprecious stones and imitations thereof, are taxable upon the price of the added parts, which will be presumed to be the price charged for the job unless the contrary is shown. Copyright 1922, by The Corporation Trust Company. WAR TAX 941 SERVICE 2-1-22. Reg. 48, Rev.^ Works of Art and Jewelry. EXCISE TAXES REGULATIONS. ADMINISTRATIVE PROVISIONS Exports 4741 Art. 29. Sales for export. — The tax does not attach to the sale of 4538 an article which is sold for export by the vendor, and in due course so exported. 4742 An article may be sold for export but never exported, or not exported in due course; also, an article may be exported in due course by the purchaser, although not sold for export. 4743 In order to be exempt from tax, however, it is necessary that the article be both sold for export by the vendor and in due course so exported. 4744 An article will be regarded as having been sold for export if the vendor has in his possession at the time that title passes or of shipment (whichever is prior) (a) an order or contract of sale or document incidental thereto showing in writing that the vendor is to ship the article direct to a foreign destination; or (b) where the delivery is to be made to the purchaser or his agent within the United States, a certificate from such pur- chaser or agent, as the case may be, showing (1) that the article is purchased either to fill a firm order then held by such purchaser requiring shipment to a foreign destination, or for shipment (or transportation) by him in due course to himself or to his agent or to his principal in a foreign country, or that the article is purchased to fill future orders calling for shipment thereof by the purchaser direct to a foreign destination, and (2) that the article will be trans- ported to a foreign destination in due course prior to use, resale, or further manufacture within the United States. 4745 In these cases the vendor, for a period of 12 months from the date when title passes or of shipment (whichever is prior), is excused from filing returns for the articles so sold. This temporary exemption becomes permanent upon the vendor's attaching to such order, contract, or certificate before the expiration of such period of 12 months due proof of exportation (see Art. 30). On the other hand, if within such period of 12 months the vendor has not received and attached to such order or contract such "proof of exportation," then the temporary exemption ceases and the vendor shall include a tax on the sale of such article in his return for the month in which such period of 12 months expires. The order or contract of sale and certifi- cate and the "proof of exportation" must be preserved by the vendor in such a way as to be readily accessible for inspection by internal-revenue officers. No sale shall be considered to be exempt from tax under section 1305 of the act unless its character as an export sale has been established in accordance with the above provisions. 4746 Art. 30. Proof of exportation. — By the term "proof of exportation" is meant an affidavit of the exporter (who, if not the vendor, must be the purchaser from the vendor or an agent of one or the other) containing the following information: (1) The name and address of vendor; (2) the name and address of the exporter; (3) whether exporter is acting in his own behalf or as agent, and if agent name of principal; (4) a brief description of the article; (5) the date upon which the article was delivered to a carrier for transportation beyond the limits of the United States (or if not transported by carrier the actual date and manner of transportation out of the United States); (6) the name of carrier issuing export bill of lading, and if a carrier by sea, the name of vessel carrying the article and date of departure from Copyright 1922, by The Corporation Trust Company. WAR TAX 942 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. mm*mm United States; (7) destination of article; (8) statement that the article was in fact exported in due course prior to use, resale, or further manufacture within the United States. 4747 Where the vendor is the exporter there may be attached to the original contract or order as proof of exportation, in lieu of the affi- davit provided for in the preceding paragraph, (1) a copy of export bill of lading, or (2) a certificate by the agent or representative of the export carrier showing exportation of the article, or (3) certificate of mailing, where the article was shipped by parcel post. Where the exportation is accomplished by a person other than the vendor the exporter must carefully preserve in his own files a copy of export bill of lading or other shipping document and all other papers bearing on the transaction, readily accessible for inspection by any authorized official of the United States. 4748 Where the exportation is accomplished by a person other than the vendor, the affidavit above required may cover all the articles received from the vendor upon any one contract or shipment, whether exported on different dates or shipped to different consignees. 4749 In any case where the vendor does not have in his possession, within the 12-months' period, proof of exportation as outlined herein, the vendor must pay the tax. Whenever proper proof of exportation is available, claim for refund of the amounts so paid may be filed. Trade with Possessions of the United States 4750 Art. 31. Trade with the possessions of the United States. — Section 4539 1304 of the revenue act of 1918 provides as follows: That there shall be levied, collected, and paid in the United States, upon articles coming into the United States from the Virgin Islands, a tax equal to the internal- revenue tax imposed in the United States upon like articles of domestic manufacture; such articles shipped from such islands to the United States shall be exempt from the payment of any tax imposed by the internal-revenue laws of such islands: Provided, That there shall be levied, collected, and paid in such islands, upon articles imported from the United States, a tax equal to the internal-revenue tax imposed in such islands upon like articles there manufactured; and such articles going into such islands from the United States shall be exempt from payment of any tax imposed by the internal-revenue laws of the United States. 4751 A sale which results in the shipment of articles into the United States from the Virgin Islands is taxable to the same extent as a sale of articles within the United States. Articles going into the Virgin Islands from the United States are free from tax in the United States. The same rules apply to trade with Porto Rico and the Philippine Islands. See section 1000 of the revenue act of 1917 and Section V of the act of August 4, 1909, as amended by Section IV, subdivision C, of the act of October 3, 1913. The tax attaches, however, to articles shipped to other possessions of the United States, including the Canal Zone. Return and Payment of Tax 4752 Art. 32. Return and payment of tax. — In accordance with the law 4519 sections here cited, every person liable for the tax in respect to the 4529 sale of any of the articles enumerated in section 902 or section 905 4530 must make monthly returns under oath in duplicate (except that if 8010 the amount of tax covered thereby is not in excess of $10 such returns may be signed and acknowledged before two witnesses instead of under oath), and pay the taxes imposed on such articles to the collector of Copyright 1922, by The Corporation Trust Company. WAR TAX 943 SERVICE 2-1-22. Reg. 48, Rev. Works of Art and Jewelry. EXCISE TAXES REGULATIONS. internal revenue for the district in which his principal place of business is located. If he has no place of business, return should be made to the collector for the district in which he resides. An itinerant dealer should make return and pay the tax to the collector of the district where the sales are made. The returns shall be made on Form 728A (Revised) [see page 909J. Instructions for preparing the return will be found on the back of the form. The returns are to be rendered and the tax paid on or before the last day of each month covering the transactions of the preceding month. The first return musi cover all transactions from January 1 to January 31, 1922, both inclusive, and is to be made on or before February 28, 1922. The books of every person liable to the tax shall be open at all times for inspection by examining internal- revenue officers. Returns By Agents 4753 Art. 33. Returns by agents. — Every auctioneer, agent, factor, broker, dealer, or other person selling any of the articles enumerated in section 902, as agent for the owner, unless such owner is the artist, shall make monthly return under oath to the collector for the district in which his principal place of business is located, stating as to each article sold for any such owner the name and address of such owner, the date and amount of the sale, and a brief description of the article. Credits and Refunds 4754 Art. 34. Credits and refunds. — If a person overpays the tax due with 8018 one monthly return, he may take credit for the overpayment against the tax due with a succeeding return. For the procedure with reference to claims for refund see Regulations No. 14 (revised) and sections 13 15 and 1323 of the revenue act of 1921, reenacting sections 3220 [* 8023J and 3225, [1[8047] of the Revised Statutes, as amended. Fractional Part of Cent 4755 Art. 35. Fractional part of cent. — In computing the tax a fractional 8019 part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to a full cent. Penalties 4756 Art. 36. Penalties.— [See 1f4520, 1J4530, 114537, 1J8014, 1J8073, H8074.] Authority for Regulations 4757 Art. 37. Promulgation. — In pursuance of the statute the foregoing 8009 - regulations are hereby made and promulgated and all rulings incon- sistent herewith are hereby revoked. D. H. BLAIR, Commissioner of Internal Revenue. Approved January 12, 1922 [Released for publication Februarv 1, 1922]: A. W. MFL'LON, > Secretary of the Treasury. Copyright 1922, by The Corporation Trust Company. WAR TAX 944 service 4-6-22. (2) 6-1-22. EXCISE TAXES REGULATIONS. (T. D. 3307.) 4758 Cash Discounts. — Article 4 [*[4553] of Regulations 47 (Revised 4553 December 1921) is amended to read as follows: 4759 Art. 4. Discounts and Expenses. — A discount made subsequently to the sale can not be deducted in computing the price for the purpose of the tax. 47 60 Where articles are sold with the understanding that if paid for within a certain period the purchaser may take a cash discount, and the purchaser elects to take advantage of this provision of the contract of sale, the amount of such d scount is deductible in determining the sale price of the article. 4 761 An adjustment in price, where articles are sold over a period of time, under an agreement for a quantity rebate, or an agreement for a rebate on goods remaining unsold in the hands of the dealer, and which were pur- chased by such dealer within a definitely specified period, in case of a decline in the market, is held not to be a discount made subsequently to the sale. 4 7 62 The tax in the above cases, if originally computed on the gross price, may be adjusted in the return for the month in which the price is finally determined. If in such cases the tax assumed to be due on the original selling price has been billed to the dealer and by him to the purchaser as a separate item, and collected from the purchaser, the overcollection of tax arising from the adjustment of the sale price under the contract between the manufacturer and the dealer must be refunded to the purchaser. 4763 Commissions to agents and other expenses of sale are not deductible from the price. 4764 Freight and delivery charges are taxable as part of the sales price when the price to the purchaser includes transportation and delivery charges paid by the manufacturer, or when the amount charged the purchaser, whether billed as a separate item or not, does not represent the actual trans- portation charges. 4765 Freight and delivery charges are not part of the sales price when goods are sold at the factory or f. o. b. cars at place of manufacture, when the transportation charges are paid by the purchaser as a specific item, or when the goods are sold delivered at a definite price less actual transportation charges to be paid by the purchaser. (T. D. 3307, signed by Commissioner D. H. Blair, and dated March 20, 1922.) (T. D. 3312.) 4766 Revenue Act of 1918. — Decision of Court. — Ouija boards held to be 4651 taxable as games. — (Syllabus only.) — The scope of the Sales Tax is comprehensive and not limited to the articles named in Section 900 Subdivision 5 of the Revenue Act of 1918. In its broadest sense a game is "a play or sport for amusement." In its restricted and more generally applied sense it is "a contest for success or superiority in a trial of chance, skiil or endurance, or any two or all of the three combined." (Century Dictionary.) The word "games" as used in Section 900 Subdivision 5 of the Revenue Act of 1918, does not mean the games themselves, but the instrumentalities used in playing them, and includes ouija boards, the purpose of which is to supply amusement and diversion. Size alone does not make a game a child's toy and a "wee" ouija board is not exempt from taxation as a child's toy. The Copyright 1922, by The Corporation Trust Company. WAR TAX 945 SERVICE *-6-22. (2) 6-1-22. EXCISE TAXES REGULATIONS. rule that taxing acts are to be construed most strongly against the Govern- ment only applies in cases where doubt remains after all recognized rules for ascertaining a statute's meaning have been tried. Doubt as to the meaning of a word is often removed by consideration of the legislative intent as shown by the entire statute. Gould v. Gould, 245 U. S. 151, and other cases dis- tinguished. The findings and practice of the administrative officers of the Government are presumed to be based on fair conclusions as the result of investigation required of them by Sections 3165 and 3172 R. S., as amended by the Revenue Act of 1918. Judgment of the United States District Court for the District of Maryland (273 Fed. 531), affirmed. 4767 (The decision [syllabus only] of the United States Circuit Court of Appeals for the Fourth Circuit in the case of Baltimore Talking Board Company, Incorporated v. Miles, Collector, affirming the United States District Court for the District of Maryland (273 Fed. 531), the syllabus of which appears above [^4766] is published not as a ruling of the Treasury Department, but for the information of internal revenue officers and others concerned.) (T. D. 3312, March 29, 1922.) {Decision.) (Revenue Act of 1918 but applicable to 1921 Act.) May 16, 1922. Sweet chocolate manufactured and sold for consumption in the form sold, and not for cooking or domestic purposes, is within the meaning of the word "candy" and so sales thereof by the manufacturer are subject to tax as sales of "candy." United States Circuit Court of Appeals for the First Circuit. John F. Malley, Formerly Collector of Internal Revenue, Defendant, Plaintiff in Error, v. Walter Baker & Co., Limited, Plaintiff, Defendant in Error. Error to the District Court of the United States For the District of Massachusetts. 4768 Anderson, J. The ultimate question in this case is whether all, or 4506 any, of the sweet chocolate manufactured and sold by the defendant 4632 in error, herein called the plaintiff, is subject to a 5 per tent excise- tax as candy, under the provisions of Title 9, section 900, of the Revenue Act of 1918 (40 Sts. 1122), and the regulations made by the Com- missioner of Internal Revenue under authority granted by this act. 4769 Between February 24 and August 31, 1919, the plaintiff made sales of such chocolate aggregating $635,137.30, and under protest paid the 5 per cent tax thereon, amounting with interest to December 5, 1921, to $35,232.25. Suit to recover this tax came on for trial before the District Court with a jury. After much evidence on both sides had been taken, much of it having little or no bearing on the real issue, the court below found and ruled that the word "candy" had no special trade significance different Copyright 1922, by The Corporation Trust Company. WAR TAX 946 SERVICE 6-1-22. EXCISE TAXES REGULATIONS. from its meaning in ordinary speech; that the regulations of the Commissioner hereinafter set forth were invalid as an attempt to extend the natural meaning of the language of the statute; that chocolate is an independent substance used directly for food and, though used in the manufacture of candy, is not candy within the meaning of this tax act; and ordered a verdict for the plaintiff in the full amount claimed. The case comes here on writ of error. 4 770 The Revenue Act, supra, provides: "There shall be levied, assessed, collected, and paid upon the following articles sold or leased by the manufacturer, producer, or importer, a tax equivalent to the following percentages of the prices for which so sold or leased ... (9) Candy, 5 per centum." 47 71 The Commissioner ot Internal Revenue, under the usual grant of power found in such statutes, promulgated regulations duly approved on May 1, 1919, by the Secretary of the Treasury. Article 22 of these regula- tions is as follows: "Candy- — Candy within the meaning of the act includes chocolate creams, bonbons, gum drops, jelly drops, jelly beans, imperials, caramels, stick candy, losenges, taffies, candy kisses, wafers, fudges, or Italian creams, nougats, peanut brittle, sugared almonds, chocolate covered fruits and nuts, glace or candied fruits and nuts, popcorn and other cereals and cereal products mixed with or covered with molasses, sugar or other sweetening agent, hard candies, plain and chocolate covered marshmallows, candy cough drops and sweetened licorice not taxed as cough drops, sweet chocolate and sweet milk chocolate whether plain or mixed with fruit or nuts ; and all similar articles hozvever designated. It does not, however, include cereal breakfast foods, cake and pastries, nor bitter chocolate which needs the addition of sugar before it becomes pleasing to the taste. If a manufacturer of glace or candied fruits at the time the goods are shipped or sold (whichever is prior) has in his possession an order or contract of sale with certificate of the purchaser printed thereon or in writing and permanently attached thereto snowing that such fruits so purchased are to used in the manufacture of food products, such as ice cream, cakes, and pastries, the sale thereof shall not be taxable. Where a manufacturer of candy sells in connection with the sale of his own product candy which he has bought from another manufacturer, and on which he has performed no further process of manufacture, the tax attaches only to such portion of the goods sold as have been manufactured by him." Particularly pertinent words we have italicized. 4772 On May 10, 1919, the Commissioner ruled as follows: "Sweet chocolate sold in parcels of such size and shape that it is com- monly purchased and consumed as candy by the general public is taxable as candy, but sweet chocolate sold in large packages not as candy but intended for further manufacturing purposes is not taxable provided the manufacturer has in his possession a certificate of the purchaser in writing showing that the chocolate so purchased is to be used for further manufacturing purposes." 4 7 73 This ruling applies to sweet chocolate the exemption procedure "ap- plicable under the regulation, supra, to glace and candied fruits. 47 74 Article 22 of the regulations was revised in December, 1920, so that, while still covering affirmatively "sweet chocolate and sweet milk chocolate, whether plain or mixed with fruit or nuts," it by the addition of paragraph (b) excluded. "sweet chocolate, glace or candied fruits or nuts sold by the manufacturer used under circumstances where it is obvious from the condition of the Copyright 1922, by The Corporation Trust Company. WAR^TAX 947 SERVICE 6-1-22. EXCISE TAXES REGULATIONS. product, method of packing or from other facts in connection with the sale, that it will not be consumed in the form in which it is then sold." 47 75 The Commissioner, on January 25, 1921, in response to inquiry from the plaintiff, applied in detail the regulation to the plaintiff's business, as disclosed, and also ruled that, "upon the submission of evidence from the taxpayer, claims already rejected will be reopened and allowed in the amount representing tax paid on products herein held not taxable. Action on pending claims will be held in abeyance for further evidence." 4776 It thus appears that, even after suit brought, the Department was. ready to entertain claims for taxes paid on sweet chocolate "sold for use in a form other than that in which it is sold by the manufacturer." 4777 In the plaintiff's declaration, it admitted in each of the five counts, referring to the certificate called for by the ruling of May 10, 1919, supra, — that it had "no such certificates with respect to the chocolate upon the sale of which the tax was assessed, and says that it was impossible for the purchaser to determine at the time of the sale of such chocolate whether it would be used for further manufacture or not," The record does not sup- port this allegation of the impossibility of obtaining such certificates. No reason is apparent why in much, if not all, of the business such certificates could not have been obtained. But this was not made the exclusive method of distinguishing sweet chocolates intended for consumption, as such, from sweet chocolate intended as a food ingredient; any reasonable method of showing the determinative facts was available to this plaintiff. 4778 At the trial it was agreed that: "An analysis if the various brands of chocolate upon which the tax in suit was paid would show the following percentages of sugar: Between 60 and 65 per cent in 'Caracas' chocolate. Between 50 and 55 per cent is 'German's' chocolate. Between 50 and 55 per cent in 'Century' and 'Vanilla' chocolate. Between 30 and 35 per cent in 'Dot' chocolate. Between 50 and 55 per cent in 'Eagle' chocolate. 47 79 It was also agreed that an annexed schedule showed the. sales of the various brands from February 24 to April 30, 1919. Sales for the months of May to August, inclusive, were shown only in the aggregate. Assuming, as we fairly may, that the schedule for February, March and April is fairly typical of the whole period of about seven months, it is clear that about half of the sales in question consisted of the Caracas sweet choco- late, which contains from 60 to 65 per cent of sugar; and that the sales of the Dot chocolate, containing only from 30 to 35 per cent of sugar, were not more than about 10 per cent of the aggregate. All the other brands con- tained from 50 to 55 per cent of sugar. The necessary inference, therefore, is that the sweet chocolates sold, taken as a mass, were considerably more than half sugar. 4780 It is a matter of common knowledge, and the evidence and numerous exhibits also show, that this sweet chocolate is manufactured in cakes and bars, adapted for consumption as candy, packed in convenient, cartons for sale as candy, advertised as "delicious for eating," or "excellent as a confection," and sold in large quantities over the candy counters, and consumed, at least in substantial part, in the form put out by the manu- facturer for such consumption. Plainly, it is a mixture, about half and half of sugar and chocolate, sometimes with flavoring material like vanilla, and Copyright 1922, by The Corporation Trust Company. WAR TAX 948 SERVICE 6-1-22. EXCISE TAXES REGULATIONS. in the form in which it is put up and marketed, intended to cater to the same tastes and to appeal to the same class of consumers as arc chocolate bonbons (barely distinguishable in composition) and other well-known forms of candy or confectionery. Sugar, "the appeal to the sweet tooth," is, of course, the basic ingredient in all candy. Sweet chocolate is a most toothsome form of sugar compound. 4781 Plaintiff's chief contention is that this sweet chocolate product is in its entirety, food, and not candy within the fair meaning of the act. This view was adopted by the District Judge, who held it all exempt from the tax, denying the defendant's request to submit to the jury an issue "as to the proportion of the total sales of each exhibit which was used for domestic or cooking purposes." 4782 We think this was error. We construe the statute as the Commis- sioner construed it. While, as it is a tax statute, reasonable doubts must be resolved in favor of the tax-payer, we can see no such reasonable doubts as to the legislative intent to tax such products as sweet chocolate when manufactured, and sold for consumption in the form sold, and not for cooking or domestic purposes. 4783 Revenue Acts are not penal statutes. See Cliquofs Champagne, 3 Wall. 114, 145, where the court said: "Revenue laws are not penal laws in the sense that requires them to be construed with great strictness in favor of the defendant. They arc rather to be regarded as remedial in their character, and intended to prevent fraud, suppress wrong, and promote the public good. They should be so construed as to carry out the intention of the legislature in passing them, and most effectively accomplish these objects." To the same effect is the case of United States v. Hodson, 10 Wall. 395, 406, where Mr. Justice Swayne said: "Revenue statutes are not to be regarded as penal and therefore to be construed strictly. They are remedial in their character, and to be construed liberally to carry out the purposes of their enactment." 4784 The Circuit Court of Appeals for the Third Circuit in Carbon Steel v. Lewellyn, 258 Fed., 533, 534, stated the rule as follows: "In ascertaining the true construction of the law, and thus carrying out its purpose, this court must necessarily put itself in the position of Congress when it enacted the law, and from the circumstances and surroundings then existing and the general proposition then in ^ iew, seek to ascertain, from what was meant to be done, how best to construe and apply what was done." 4 785 See also same case, 251 U. S. 501; Worth Brothers v. Lederer, 251 U. S. 507; Baltimore Talking Board Co., Inc., v. Miles, 273 Fed. 531; Citizens Bank v. Parker, 192 U. S. 73; American Security Co. v. District of Columbia, 224 U. S. 491. 4786 Looking at the statute as a whole, it is clear that Congress, impelled by the expenses of the W T orld War, intended to lay a pretty heavy tax on luxuries as distinguished from necessaries. Candy, manufactured and consumed in tremendous quantities because of the well-known and extraor- dinary American appetite for sweets, was regarded as a luxury. 4787 But this sweet chocolate product consists, as already noted, more than half of sugar. Sugar is far more important as a food element than is chocolate. Sugar is admittedly the basic ingredient of candy. To hold, as the court below held, that sweet chocolate is not candy because chocolate is also food, falls logically little short of holding that candy is not Copyright 1922, by The Corporation Trust Company. WAR TAX 949 SERVICE 6-1-22. EXCISE TAXES REGULATIONS. candy because sugar is also food. Nuts and practically all the other ingredients of candy, except perhaps some of the flavoring materials, are also food. We cannot agree with the court below that sweet chocolate is not candy simply because made up about half and half of chocolate and sugar, — each of which is a food. Some other test must be found. Sugar compounds are admittedly candy, when manufactured, advertised, sold and consumed as candy and not as a food ingredient. The distinction turns not so much on the composition of the arliclc as on the way or form in which it is sold and upon the use made of it by its purchasers. 4788 We think the court below erred in holding invalid this distinction made by the Commissioner as to sweet chocolate. The plaintiff's contention, in effect adopted by the District Court, that the tax was on the product, — sweet chocolate, — and applicable to all or to none of it, is unten- able. The use or destination of the product may well have been made by Congress the basis of classification for taxing purposes. Coal and diamonds are chemically much alike; practically and for tax purposes they are radically different. We think the test applied by the Commissioner was consonant with the statute. Apart from the weight given Department rulings and regulations in such cases, our construction of the act conforms to that of the Commissioner; it seems to us fairly plain. 4789 But it is elementary that, if ambiguity is found in a' statute or when it is necessary to determine a fact upon which the operation of a statute is made to depend, the regulations made by the department charged with the administration of the act are to be given great, sometimes practically controlling, weight. See Edwards, Lessee v. Darby, 12 Wheat. 206, 212; • Houghton v. Payne, 194 U. S. 88, 96; Komada v. United States, 215 U. S. 392; Jacobs v. Pritchard, 223 U. S. 200, 214; Houston v. Si'. Louis Independent Packing Co., 249 U. S. 479; Noble v. Union River Logging R. R. Co., 147 U. S. 165; Coopersville Co-op. Creamery Co. v. Lemon, 163 Fed. 145; United States v. llealey, 160 U. S. 136, 141; Robertson v. Downing, 127 U. S. 607, 613. Cf. American Casualty Co. v. United States, 251 U. S. 342 at 349, where the court by Mr. Justice Clarke said: "It is settled by many recent decisions of this court that a regulation by a department of Government, addressed to and reasonably adapted to the enforcement of an act of Congress, the administration of which is confided to such department, has the force and effect of law if it be not in conflict with express statutory pro\ isions." Citing United States v. Grimaud. 220 U. S. 506; United States v. Birdsall, 233 U. S. 233, 251 ; United States v. SmuIL 2$6 V. S. 405, 409, 41 1 ; United States v. Moorhead, 243 U. S. 607. 4790 It comes to this: Congress intended that various compounds of sugar and other ingredients, practically all of which arc also foot! ingredients should, when compounded, sold and consumed as candy — a luxury be subjected to this tax. The distinction undertaken to be made by the Depart- ment that sweet chocolate should be taxed when put up and sold in such form as to indicate that it was to be consumed as candy is consumed, and not taxed when it was obvious from the packing or other circumstances surrounding the transaction that it was to be merely an ingredient for further manufacture, is a sound distinction. At any rate unless this distinction is Copyright 1922, by The Corporation Trust Company. WAR TAX 950 SERVICE 6-1-22. (2) 6-26-22. (3) 10-30-22. (4) 11-29-22. EXCISE TAXES REGULATIONS. made, it is difficult to see how candy can be taxed at all; for, as already stated, candy is in its main characteristics sugar compounds intended for luxury, taste-gratifying, consumption. When somewhat less than half of a toothsome sweet is chocolate — also a common ingredient of candy compounds — the resultant is not transmuted into food within the fair meaning of this tax statute, if the compound is sold and consumed as confectionery or candy. 4791 The eighteenth assignment of error brings before us the refusal of the court below to submit to the jury the question of what proportion of the sweet chocolate in question was used for cooking or domestic purposes. This assignment must be sustained. The burden of proof is on the plaintiff to show that the taxes collected was illegal or the assessments excessive. Anderson v. Farmers' Loan & Trust Co., 241 Fed. 322; New York Life Ins. Co. v. Anderson, 263 Fed. 527, 530; Germantown Trust Co. v. Lederer, 263 Fed. 672; Bailey v. R. R. Co., 22 Wall. 604, 638; Black Fed. Cases, sec. 547; Skafer v. Craft, Collector, 144 Fed. 907, 909; South. Pacific v. Lowe, Collector, 328 Fed. 847, 849; Cohen v. Lowe, Collector, 234 Fed. 474, 476. 4792 The plaintiff is not entitled to recover more than the amount that it can show it paid as a tax on such portions of the product in question as were not sold and used as candy within the meaning of the Department's regulation. The judgment of the District Court is reversed and the case is remanded to that court for further proceedings not inconsistent with this opinion; and the plaintiff in error recovers costs in this court. (T. D. 3344.) 4793 [This Treasury Decision consists of a reprint of the opinion in Malley 4768 vs. Walter Baker & Company, Limited, which is reproduced in full, above, beginning at ^4768. — The Corporation Trust Company.] (T. D. 3358.) 4794 Discounts and Expenses. — Revocation of T. D. 3307. — Treasury 4553 Decision 3307 [ < ![4758] is hereby revoked as of date July 1, 1922, 4758 and Article 4 of Regulations 47 (revised December, 1921 [1|4553]) is restored to read as it stood prior to the promulgation of the above mentioned Treasury Decision. (T. D. 3358, signed by Commissioner D. H. Blair, and dated June 22, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 951 SERVICE 10-30-22. (2) 11-29-22. EXCISE TAXES REGULATIONS. (T. D. 3401.) 47 85 Revenue Act of 1918. — Decision of Court. — Ouija boards held to be 4766 taxable as games. — [This Treasury Decision (Oct. 18, 1922) reprints the decision of the 4th Circuit Court of Appeals in the case of Balti- more Talking Board Co. (Inc.) vs. Miles, Collector, (280 Fed. 658), as reported in T. D. 3312 [Tf4766]. "for the purpose of correcting typographical errors in T. D. 3312," merely, adding, incidentally, that "Certiorari was denied in U. S. Supreme Court, 6-5-22, 42 Sup. Ct. 590."— The Corporation Trust Company.] (T. D. 3412.) Exports under the Revenue Act of 1917: Decision of Court. 4796 1. Nature of Tax Imposed by Section 600. 4680 The tax imposed by Section 600 of the Revenue Act of 1917 is upon the sale of the particular articles named in the Statute, not upon their manufacture. 4797 2. Exports — Sales Within United States for Export- — Constitu- tionality. Where goods are sold and delivered by the manufacturer within the United States and are later exported by the purchaser, the purchaser, and not the manufacturer, is the exporter, and a tax levied upon such sale is not a tax upon exports, in violation of Article 1, Section 9, of the Constitution of the United States, even though such sale was made with the knowledge and intention of the manufacturer that the articles sold would be immediately exported, and the articles were, in fact, so exported. 4 7 98 3. Exports — Sale and Delivery Within United States, What Con- stitutes. A sale by a manufacturer to a foreign purchaser through the latter' s agent resident in the United States and consummation of such sale by delivery to the agent through delivering the goods to a steamship com- pany at its dock in New York and taking a receipt therefor and deliver- ing such receipt to the agent, the agent later bringing about the ship- ment abroad by himself taking out the bill of lading and other shipping documents, is a sale and delivery by the manufacturer within the United States and hence taxable. 4799 (The decision of the United States District Court for the Southern District of New York in the case of A. G. Spalding and Bros. v. William H. Edwards, Collector, the syllabus of which appears above is pub- lished not as a ruling of the Treasury Department, but for the information of internal revenue officers and others concerned.) (T. D. 3412, signed by Commissioner D. H. Blair, and dated November 24, 1922.) Copyright 1922, by The Corporation Trust tympany. WAR TAX 952 SERVICE 12-6-22. EXCISE TAXES REGULATIONS. (T. D. 3415.) 4800 Automobile Accessories: Article 16 of Regulations 47 (Revised 4624 December, 1921) amended. — The second paragraph of Article 16 of Regulations 47 (Revised December, 1921), in order to eliminate the word "hydrometers," is hereby amended to read as follows: "The term Accessories' includes, for example, automobile tops, back and side curtains, horns, speedometers, self-starters, spot lights, shock absorbers, tire pumps, and pressure gauges." (T. D. 3415, signed by Commissioner D. H. Blair, and dated December 2, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 953 SERVICE 12-6-22 SALES (EXCISE) TAXES. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Sales and Excise Taxes Law Provisions. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph Law Provisions 4500 Reg. 47 Manufacturer's and producer's excise taxes (revision of January 6, 1922). (Indexed on the blue sheets following). .. . 4540 Reg. 48 Works of art and jewelry taxes regulations (revision of January 12, 1922). (See exhaustive Table of Contents on page 934.) 4700 3307 Art. 4, Reg. 47, amended. — Cash discounts (March 20, 1922) 4758 3312 Court decision, 1918 Act. Ouija boards held to be taxable (April 5, 1922) 4766, 4795 Decision Malley vs. Walter Baker & Co., Ltd., 1918 Act. Sweet chocolate as candy (May 16, 1922) 4768 3344 Treasury Decision designation for Malley vs. Walter Baker & Co., Ltd., case (H4768). (June 10, 1922) 4793 3358 Art. 4, Reg. 47, restored to original form.-— T. D. 3307 [1J4758] revoked. — Cash discounts and expenses (June 22, 1922) 4794 3401 Correcting typographical errors in T. D. 3312 above. . 4795 3412 Spalding and Bros. vs. Edwards: Court Decision. — Exports under the 1917 Act 4796 3415 Art. 16, Reg. 47, amended. — Automobile accessories 4800 Insert this page immediately before the blue "Saies Taxes" icdex. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Sales (Excise) Taxes Supplementary Page 1. 2-1-22. INDEX TO MANUFACTURER'S SALES TAXES REGULATIONS. See page 934 for taxes on works of art and jewelry. [Government index with references changed from "articles" to "paragraphs."! Accessories, tires, inner tubes, etc.. .4594,4601, 4623 Agents, sales by. .4570, 4652 Authority for regulations. .4699 Automobiles: Defined. .4582 Parts and accessories for. .4601, 4623 Road machines, exempt. . 4592 Taxability of. .4587, 4595 Vehicles for use on rails, exempt. . 1 593 Automobile trucks and wagons. .4587 Basis of tax, computation. .4542 Boats. .4641 Branch houses, returns by. . 4666 Busses. .4597 Cameras. . 4630 Canal Zone. . 4669 Candy. .4632 Carpets. . 4654 Certificates: For exemption from tax. .4562, 4605, 4629 Form of. . 4608 Printed on order blanks. .4615 Chassis, taxability of. .4615 Cigar holders, etc.. .4637 Clothing: Liveries. . 4639 Collection of taxes, extension of existing statutes. .4670 Commissions to agents, deduction of. .4555 Computation of tax, fractional part of cent. .4542, 4553, 4695 Conditional sales. .4580 Contracts of sale, before law took effect. .4686, 4687, 4688 "Cost-plus" contracts. .4581 Credit: Evidence necessary to obtain. .4562 For over payment of tax. .4675 Goods used in further manufacture. .4562 On returned goods. .4558 "Customarily sells," at wholesale and retail. .4643 Dealer: Defined. .4694 Burden of tax on. .4542 Definitions: Accessories. .4623 Chassis. .4615 Parts. .4611 Repairer. .4621 Tires, etc.. .4601 Wholesale and retail. .4643 Delivery charges, deduction of. .4553 Discount, deduction of in computing price. .4553 Dishonored checks. .4697 Effective date. .4540 Exchange of goods, tax in cases of. .4558 Exemption: Certificate for. .4608 Goods used in further manufacture. .4562, 4605 Jobbers not exempt. .4607 Sale of boats. .4641 Sale of firearms. .4581 Uniforms . .4639 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Manufacturer's Sales Taxes. — Index Page 1. 2-1-22 INDEX TO MANUFACTURER'S SALES TAXES REGULATIONS. See page 934 for taxes on works of art and jewelry. The references are to paragraph numbers. Export: Sales for, exempt. .4677 Proof of. .4682 Fans. .4662 Films. .4631 Firearms: Tax on . . 4635 Sales of, to United States and States. .4581 Fire engines, etc.. .4588 Fractional part of cent. .4695 Freight charges, deduction of in computing sale price. .4556 Glace fruits, nuts, etc.. .4632 Government, sales to, tax in case of. .4581 Government sales of firearms. .4581 Humidors . .4637 Hunting garments. .4640 Imposition of tax. .4540 Increased price to absorb tax. .4542 Inspection of books. .4667, 4670 Island possessions. .4669 Itinerant merchant, return of. .4666 Knives . .4636 Lamps . . 4661 Liveries . .4639 Manufacturer, defined. .4564 Manufacturer also retailer. .4643 Misrepresentation of tax. .4698 Motion-picture cameras. .4630 Motor busses. .4597 Motorcycles, tax on. .4596 Motors for use on rails. .4593 "National defense," boats designed for. .4641 Payment of tax: Dishonored checks. .4697 Due date. .4665, 4692 Uncertified checks. .4696 Penalties: Delinquency in payment, 5 per cent. .4673, 4693 Failure to file return. .4671 Misrepresentation of tax. .4698 Philippines, trade with. .4669 Pipes, etc.. .4637 Portable lighting fixtures. .4661 Porto Rico. .4669 Possessions of the United States, trade with. .4669 Proof of exportation. .4682 Purses. .4660 Raw materials. .4601 Rebates. .4553, 4558 Receiver in bankruptcy liable for tax. .4573 Refunds, claims for. .4675 Refunds of tax to vendor. .4675 Refunds of tax on rescission of sale. .455S Repairer, manufacturing small parts. .4621 Repeal of former acts. .4651 Return of tax. .4663, 4689 Due date of. .4665, 4692 Returned goods. .4558 Riding habits. .4640 Road machines, etc.. .4592 Rugs. .4654 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Manufacturer's Sales Taxes. — Index Page 2. -1-22 INDEX TO MANUFACTURER'S SALES TAXES REGULATIONS. See page 534 for taxes on works of art and jewelry. The references are to paragraph numbers. Sale price. .4542, 4553 Sales agency. .4571 Sales to Government, State, etc.. .4581 Selling branch. .4652 Side cars for motorcycles. .4599 Slot machines. .4638 Smokers' articles. .4637 Taxable as jewelry. .4637 Sweet chocolate. .4632 Tax: Basis of. .4542 Manufacturer's liability for. .4570 Passing of title. .4576 Payment of. .4696 Repeal of former acts. .4651 Taxable articles used in further manufacture: Automobiles, parts, etc.. .4604 Temporary exemption, certificates. .4680 Tires, inner tubes, etc., tax on. .4594, 4601 Title, passing of. .4576 Tractors, tax on. .4584, 4590 Trailers, tax on. .4585, 4590 Transfer of burden of tax. .4686 Trucks, automobiles, etc.. .4587 Trunks. .4658 Uncertified checks. .4696 Uniforms, exempt goods. .4639 Taxed as liveries. .4639 United States not a dealer. .4694 Valises. .4659 Vehicles for use on rails. .4593 Virgin Islands. .4669 Weighing machines. .4638 . Wholesaler also retailer. .4643 X-ray plates. .4631 Yachts. .4641 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Manufacturer's Sales Taxes. — Index Page 3. 3-22-22. SALES (EXCISE) TAXES. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Sales and Excise Taxes Law Provisions. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph Law Provisions - 4500 Reg. 47 Regulations under the 1918 law (revision of December 27, 1920) relating to the excise taxes on sales by the manu- facturer, as amended and supplemented (but see page 907) to December 20, 1921. (See exhaustive Table of Contents beginning on page 908) ....... 4540- 3307 Art. 4, Reg. 47 amended— Cash discounts (March 20, 1922). . .... 4758 Insert this page immediately before the yellow guide card * 'Telegraph and Telephone.' Copyright 1922, hy The Corporation Trust Company. WAR TAX SERVICE Sales (Excise) Taxes Supplementary Page 1. 5% • $ 1-2-22. (2)2-28-22. TAX ON TELEGRAPH AND TELEPHONE MESSAGES. BEING TITLE V OF THE REVENUE ACT OF 1921. CALENDAR. Returns: On or before the last day of the month following that for which the return is made. Tax: Amount of tax due to accompany return. TITLE V.— TAX ON TELEGRAPH AND TELEPHONE MESSAGES. 5500 Sec. 500. That from and after January 1, 1922, there shall be levied, assessed, collected, and paid, in lieu of the taxes imposed by section 500 of the Revenue Act of 1918— 5501 (a) In the case of each telegraph, telephone, cable, or radio, dispatch, message, or conversation, which originates on or after such date within the United States, and for the transmission of which the charge is more than 14 cents and not more than 50 cents, a tax of 5 cents; and if the charge is more than 50 cents, a tax of 10 cents; Provided, That only one payment of such tax shall be required, notwithstanding the lines or stations of one or more persons are used for the transmission of such dispatch, message, or conversation; and [Tax on Leased Wire and Talking Circuit Special Service.] 5502 (b) A tax equivalent to 10 per centum of the amount paid after such date to any telegraph or telephone company for any leased wire or talking circuit special service furnished after such date. This sub- division shall not apply to the amount paid for so much of such service as is utilized (1) in the collection and dissemination of news through the public press, or (2) in the conduct, by a common carrier or telegraph or telephone company, of its businesses such; [The United States and the States are Exempt.] 6503 (c) No tax shall be imposed under this section upon any payment received for services rendered to the United States or to any State or Territory or the District of Columbia. The right to exemption under this subdivision shall be evidenced in such manner as the Commissioner, with the approval of the Secretary, may by regulation prescribe. [Refund on partially used passage, seat, berth, and stateroom tickets, and mileage books.] 5504 (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, refund shall be made of the proportionate part of the tax collected under subdivision (c) or (d) of section 500 of the Revenue Act of 1918 on tickets or mileage books purchased and only partially used before January*!, 1922. Copyright 1922, by The Corporation Trust Company. WAR TAX 1101 SERVICE 1-2-22. (2)2-28-22. TELEGRAPH AND TELEPHONE TAXES LAW [Tax paid by person paying for the Service.] 5505 Sec. 501. That the taxes imposed by section 500 shall be paid by the person paying for the services or facilities rendered. [Returns and Payment to the Government of Collected Taxes.] 5506 Sec. 502. (a) That each person receiving any payments referred to in section 500 shall collect the amount of the tax, if any, imposed by such section from the person making such payments, and shall make monthly returns under oath, in duplicate, and pay the taxes so collected to the collector of the district in which the principal office or place of business is located. 5507 (b) Any person making a refund of any payment upon which tax is collected under this section may repay therewith the amount of the tax collected on such payment; and the amount so repaid may be credited against amounts included in any subsequent monthly return. 5508 (c) The returns required under this section shall contain such informa- tion, and be made at such times and in such manner, as the Com- missioner, with the approval of the Secretary, may by regulation prescribe. 5509 (d) The tax shall, without assessment by the Commissioner or notice from the collector, be due and payable to the collector at the time so fixed for filing the return. If the tax is not paid when due, there shall be added as part of the tax a penalty of 5 per centum, together with interest at the rate of 1 per centum for each full month, from the time when the tax became due. [General Administrative Provisions of Law.] [Read under "Miscellaneous" at back of the book.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1102 SERVICE 1-2-22. (2>2-28-22. (3) 11-15-22. TELEGRAPH AND TELEPHONE REGULATIONS. — 1921 ACT. TofmK7-R»^8^im TAX 0N TELEGRAPH AND TELEPHONE MESSACSS-(7ifc V, Section 500, Rereaae Ad of 1321) C!:>^ACTER OF TAX JUTE OF TAX AMOUNT OF TAX (a) Telegraph, ielcLhcr*. and tad:': me^ages _ _ _ _ 5c and 10c ; / yJKar (or affirm) fiat the foregcir.g h a irae return of the amcurtl -of lex eolieeted on Lie ahcilt.-ip.eniicr.etl service for ihe mcnili of — . 192..... and U.ai the amount deducted fcr ot'.rp vjmerd is aHooMt hy lew. [.til oOtrpayrr.ent for month of _ _ .....i92 P*r.*l 5% - ■■ (St*t3 abettor -a6.i- . J .^. ■ ■ of n':i3«». morjb*!- -M ticn. c- i,' " j Swn arJ .uixr/W it/en rv lift Jcy (S*j paragraph 2 on back) (Title) or (Wltnesa) Retam with ro.*lt'a*f* should be ur.t to the Collector of Interne! Heveoae fcr roar dLslric ?j5d l.ot to the Commissioner of Internal Bove. na: At W aaMna^er;. I>- C. (See Instructions, par. Z. on reverse of this - ....... . — — ■ form.) I. 7cr! Hato noiuir.y to report, make uoiatlua to thai effect on this ORIGINAL RETLfuN— Thet Urra tiU be -rft^as«3 til tha Co!St:Ux si Internal R 4 «wsb !arm *» Cciloctor of Internal Revenue. 2—11518 [Obverse of Form 727 J INSTRUCTIONS. (For full Instructions, see Regulations Mo. 67, Revised.) Section 500 of the Revenue Act of 1921 imposes the following taxes upon telegraph and telephone messages: (a) In the case of each telegraph, telephone, cable, or radio, dispatch, message, or conversation, which originates within the United States, and for the transmission of which the charge is more than 14 cents and not more than 50 cents, a tax of 5 cente; and if the charge is more than 50 cents, a tax of 10 cent3. 1 ...... (jb) A tax of 10 per centum of the amount paid to any telegraph or telephone company for any leased-wiro or talking-circuit special service furnished. This subdivision shall not apply to the amount paid for so much of such service as is utilized (1) ia the collec- tion and dissemination of news through the public press, or (2) in the conduct, by a common carrier or telegraph or telephone company, of its business as such. 1. COMPUTATION CP TAX.— The tax is imposed and must be computed and collected upon each separate service rendered and not upon the aggregate of charges made. 2. BETTJS.N3 AND PAYKEtfT OF TAX. — Return with remittance covering taxes collected in any month must be in the hands of the Collector of Internal Revenue (or his authorized representative) of the district in which the principal office or place of business of the person making the return ia located on or before the last day of the succeeding month. Returns mu3t be signed and sworn to before an officer author- ized to administer oaths, but if the tax is less than $10 the return may be signed or acknowledged before two subscribing witnesses. 3. CREDITS.— In case of any overpayment of tax due to 9n error in calculation, credit may be taken therefor against taxes due upon any subsequent raonth'y return. Credit may also be t&ksrt as outlined ia'the regulations. A complete and detailed record of such overpayment must b? kept by the p-.rson taking credit therefor. In case credit is taken on this return fcr an overpayment made on a previous return, full information mast be atfeichc-d shewing the renvois therefor and designating the kind of tax, and the month for which the previous return was filed and the date of payment. 4. RECORDS. — Everv person, corporation, partnership, or association required to make this return must keep such records as will clearly show all charges upon vhicn tax k required to be collected, in order that returns may be easily verified by revenue officers. 5. PENALTIES.— Failure to filt on time, 25 per cent of tax. .Failure to pay on time, 5 per cent of tax and 1 per cent interest a month. Severe penalties for failure to file returns or for false or fraudulent returns. [Reverse of Form 727.J UNITED STATES INTERNAL REVENUE Form 727— Revised Sept., 1922 RECEIPT FOR PAYMENT OF TAX ON TELEGRAPH AND TELEPHONE MESSAGES , 192 THIS RECEIPT NOT TO BE DETACHED BY TAXPAYER NOT VALID UNLESS RECEIPTED BY CASHIER TAXPAYER WILL ENTER AMOUNT PAID IN THE SPACE PROVIDED THEREFOR NAME AND ADDRESS DATE PAID AMOUNT PAID (CiSBTIIt'S STAMP) [Form 727 tax receipt form.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1 103 SERVICE 2-28-22. (2)^1 1-1 5-22. Reg. 67, Rev./ 1922. TELEGRAPH AND TELEPHONE REGULATIONS. — 1921 ACT. REGULATIONS 57, REVISED.— 1921 ACT. [Promulgated February 15, 1922.] [Released for publication February 28, 1922.] RELATING TO THE TAX ON TELEGRAPH, TELEPHONE, RADIO, AND CABLE FACILITIES UNDER THE REVENUE ACT OF 1921. TABLE OF CONTENTS. PART I. TRANSMISSION OF DISPATCHES, MESSAGES, AND CONVERSATIONS. IMPOSITION OF TAX. Paragraph Article 1. Imposition of tax — Transmission 5510 2. Imposition of tax — Carrier 5512 ORIGIN OF MESSAGE DETERMINES TAXABILITY. 3. Origin within United States 5514 4. Reversed or collect messages 5517 5. Effective date of law 5518 BASIS, RATE AND COMPUTATION OF TAX. 6. Basis for computation — Amount of charge 5519 7. Franks 5523 8. Overtime telephone messages 5524 9. Messages transmitted under contract 5525 EXEMPTIONS. 10. Business of transmitting carrier 5526 11. Charges of 14 cents or less 5527 12. Services rendered to the United States, or to any State or Territory, or to the District of Columbia 5528 13. Political subdivisions of State or Territory 5529 14. Government agencies 5530 15. Evidence of right to governmental exemption 5531 16. Foreign diplomats 5535 17. Evidence of right to exemption of foreign diplomats 5538 PART IL LEASED WIRE AND TALKING CIRCUIT SPECIAL1SERVTCE. IMPOSITION OF TAX. 18. Imposition of the tax — Meaning of leased wire and talking circuit special service 5539 19. Private branch exchange service 5544 20. Tie lines .. .. 5545 21. Private lines and extension lines 5546 22. Intercommunication and interior systems 5547 23. Long-distance terminals 554S BASIS, RATE AND COMPUTATION OF TAX. 24. Basis for computation of tax 5549 25. Computation of tax — Effective date 5552 26. Computation of tax — Service performed between a point within and a point without the United States 5553 Copyright 1922, by The Corporation Trust Company. WAR TAX 1104 SERVICE 2-28-22. Reg. 57, Rev.. 1922. TELEGRAPH AND TELEPHONE REGULATIONS. — 1921 ACT. EXEMPTIONS. Paragraph Article 27 Governmental and of foreign diplomats 5554 28. Public press ' 5555 29. Business of common carrier or telegraph or telephone company 5558 PART III. PAYMENT, COLLECTION, RETURN, AND REMITTANCE OF TAXES. 30. Payment of taxes 5563 31. Collection of taxes 5564 32. Credit for taxes 5565 33. Records 5566 34. Returns — Contents 5567 35. Returns — Where and when rendered 5569 36. Extension of time 5570 37. Remittance of taxes collected • \ 5571 CREDITS AND REFUNDS. 38. Credit for overpayment 5572 39. Refund of overpayment 5573 40. Refund of overcollection 5574 PENALTIES. 41. Penalties 5575 AUTHORITY FOR REGULATIONS. 42. Promulgation of regulations 5578 PART I. TRANSMISSION OF DISPATCHES, MESSAGES, AND CONVERSATIONS IMPOSITION OF TAX. 5510 Article 1. Imposition of the tax. — Transmission. — The tax is im- 5500 posed upon the transmission of a message or conversation, by tele- 5501 phone, telegraph, radio, or cable. Transmission includes services rendered and facilities provided by the carrier necessary or inci- dental to the actual movement of the message; for example, messenger service utilized in the movement of a toll message. 551 1 Transmission begins when the message is delivered by the sender to the carrier or its agent, and continues until its receipt by the addressee or his agent. Where, therefore, a message passes by the combined facilities of several lines, there is one message and one transmission. But where a sender uses a telephone toll message to reach a telegraph office to secure the transmission of a telegraph message, the place of delivery of the telegraph message by the sender to the carrier is the telegraph office, and the transmission of the telegraph message begins there. The telephone message is a separate message and as such subject to the provisions of the act. 5512 Art. 2. Imposition of tax — Carrier. — The tax applies to transmis- sion services when rendered for hire, whether or not the agency rendering them is a common carrier. Accordingly, a carrier of dispatches, messages, or conversations by telegraph, telephone, cable, or radio is held Copyright 1922, by The Corporation Trust Company. WAR TAX 1105 SERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS. -1921 ACT. to be any person, corporation, partnership, or association who or which, for hire, furnishes the services or facilities described or referred to in section 500, subdivisions (a) and (b) of the acM^^%kCj £~ * f* M 5513 ^Therefore, where the lessee of a leased wire or talking circuit special ■ service transmits messages for hire, he is a carrier of such messages and liable to the provisions of the act relative to the collection, report, and payment of the taxes thereon. »* r$ m ttf — K * " f$ ORIGIN OF MESSAGE DETERMINES TAXABILITY. 5514 Art. 3. Originating with the United States. — The tax is upon the transmission by telephone, telegraph, radio, or cable of dispatches, messages, and conversations originating within the United States. 5515 Messages transmitted from a point within the United States to a point without the United States are subject to the provisions of the act unless sent with charges "reversed" or "collect." Messages transmitted from a point without the United States to a point within the United States are not subject to the tax, unless sent with charges "reversed" or "collect." 5516 The term "United States" includes the States, the Territories of Alaska and Hawaii, and the District of Columbia; it also includes all inland waters (such as rivers, lakes, bays, etc.) lying wholly within the United States, and, where an international boundary line divides inland waters, the parts of such inland waters as lie within the boundary of the United States; and also the waters known as a marine league from low^tide on the coast line. Radio messages sent from ships within the above limits are therefore subject to the provisions of the act. 551 7 Art. 4. Reversed or collect messages. — The point of origin of mes- sages transmitted with charges "reversed" or "collect" is the point at which the charge is collectible; that is, the point of receipt of the message by the addressee. 551 8 J Art. 5. Effective date offthe law. — The tax imposed under sub- divisions (a) and (b) of section 500 of the Revenue Act of 1921 is in lieu of the tax imposed under subdivisions (f) and (g) of section 500 of the Revenue Act of 1918 and is upon the transmission by telephone, tele- graph, radio or cable, of dispatches, messages, and conversations originating on or after January 1, 1922. The rate of taxation is the same under both acts. The provisions of the Revenue Act of 1918 are effective as to all tax- able services or facilities furnished between midnight of March 31, 1919, and midnight of December 31, 1921; the provisions of the Revenue Act of 1921 do not apply to services or facilities furnished prior to midnight of December 31, 1921, but do apply to such services or facilities furnished subsequent to midnight of December 31, 1921. The time of the payment of the charge is immaterial. BASIS, RATE, AND COMPUTATION OF TAX. 5519 Art. 6. Basis, rate, and computation of tax. — The basis for the com- putation of the tax is the amount of the charge for the transmission of the message. (As to the meaning of transmission, see art. 1.) The term "the charge" means the amount charged by the carrier for the transmission of the particular message. Such charge may be due in money, services, or in any other valuable consideration. Copyright 1922, by The Corporation Trust Company. WAR TAX 1106 SERVICE 2-28-22-1 Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS, 1921 ACT. 5520 Only two amounts of tax are provided, 5 cents and 10 cents, imposed as follows: 6521 (1) 5 cents on messages the charge for the transmission of which is more than 14 cents and not more than 50 cents. 5522 (2) 10 cents on messages the charge for the transmission of which is more than 50 cents. 5523 Art. 7. Franks. — If the message is in fact transmitted free, no tax applies; but if the carrier in fact makes a charge, in money, services, or any other consideration, for the transmission of the message, the tax applies and is to be computed upon the amount of the charge imposed. 5524 Art. 8. Overtime telephone messages. — The tax on overtime tele- phone messages is to be computed upon the total charge for the transmission of the message. The amount of the initial rate for such messages is immaterial. 5525 Art. 9. Messages transmitted under contract. — Where, by contract, a telegraph, telephone, radio, or cable company agrees, in considera- tion of the payment of a lump sum or of the performance of services, to transmit messages on frank, such messages are subject to the tax imposed by this section (500 (a) ) of the act. The tax on each such message is to be computed upon the amount of the regular established charge for the trans- mission of similar messages for ordinary customers, calculated at the regular fixed rate provided in the tariffs of the transmitting carrier. The questions as to whether such messages relate to the operation of the business of a com- mon carrier and whether they are "on line" or "off line" are immaterial. Thus, a telegraph company agrees to transmit over its lines on a railroad line all messages relating to railroad business "free" and all such messages over its lines off the railroad lines "free" to an amount not exceeding $10,000 per year calculated at its regular rates, and all messages over that amount at half rates, in consideration of services to be performed by the railroad in the transportation of men and materials of the telegraph company. All such messages, whether "on line" or "off line," and whether "free" or at half rates, are subject to the tax provided by this section (500 (a) ) of the act. The tax must be computed, collected, and paid upon each such message. EXEMPTIONS. 5526 Art. 10. Exemptions — Business of transmitting carrier. — The transmission of messages involved in the conduct of the business of the transmitting carrier, as such, is not subject to the tax. 5527 Art. 11. Exemption — Charges of 14 cents or less. — Dispatches, messages, or conversations, for the transmission of which by tele- graph, telephone, radio, or cable the charge is 14 cents or less, are not sub- ject to tax. (As to the meaning of transmission, see Art. 1 ; as to the com- putation of the tax, see Arts. 6-9.) 5528 Art. 12. Exemption — Services rendered to the United States or to 5503 any State or Territory or to the District of Columbia. — Telephone, telegraph, cable, and radio dispatches, messages, and conversations relating to Government business, which originate in the United States and Copyright 1922, by The Corporation Trust Company. WAR TAX 1107 SERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS.— 1921 ACT. which are a charge against the Treasurer of the United States, the District of Columbia, a State, or Territory, and are paid from the funds thereof, are exempt from the tax. Messages, conversations, and dispatches which ar- not paid from such funds are not exempt from tax, even though they relate to Government business. 5529 Art. 13. Political subdivisions of State or Territory. — The words "State" and "Territory" as used in section 500 (c) of the act and in article 12 (above) include political subdivisions thereof, such as counties, cities, towns, and other municipalities. 553 0 Art. 14. Government agencies. — Services rendered to agencies of the United States are, subject to the conditions prescribed in article 12, exempt from tax. Such agencies include the American National Red Cross, United States Shipping Board, Emergency Fleet Corporation, Federal Farm Appraisers, Federal Land Banks, Federal Reserve Banks, Panama Railroad Co., and similar agencies supported by Government funds. 5531 Art. 15. Evidence of right of exemption. — Where a message is accepted and transmitted by a carrier as a Government message and entitled as such to exemption under section 500 from the tax on charges for transmission thereof, the right to such exemption shall be evidenced in one of the following ways: 5532 fa) Payment of such charge directly to the carrier by the Govern- ment to which the services are rendered. 5533 (b) A standard form of exemption certificate for use of the Federal Government, substantially in form following: Treasury Department Form Exemption Certificate. tax ox transmissions by telegraph, telephone, radio and cable. (Date.) Sender Place of receipt Addressee \ Place of delivery Place of payment of charges Name of carrier collecting charges Other indentification of message, conversation, or dispatch I certify that the transmission charges on the message or messages to which this exemption certificate is attached have been or will be paid by the United States, and such charges thereon amounting to $ are exempt under section 500 of the revenue act of 1921 from the tax imposed by said act. (Signature of Government officer or employee.) (Federal department or establishment.) (Title.) Penalty for fraudulent use, $1,000 and imprisonment. Note. -Agents of telegraph, telephone, radio, and cable companies should not accept this certificate unless satisfied, through the production of proper credentials or otherwise, that the person who signed it is an officer or employee of the Federal Government. A separate exemption certificate will be required for each message when paid for as a separate item, but where periodical payments are made for services rendered to Government officers or departments •• blanket certificate may be accepted as evidence of right to exemption. ^ Copyright 1922, by The Corporation Trust Company. WAR TAX 1108 SERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS . — 1 92 1 ACT. 5534 A form of exemption certificate substantially in accord with the above form should be provided by the States, the Territories of Alaska and Hawaii, and the District of Columbia, or the political subdiv- isions thereof, for the use of officials and employees. 5535 Art. 16. Exemptions — Foreign diplomats. — (a) Ambassadors, min- isters, and other properly accredited diplomatic representatives of foreign Governments to the United States are exempt from the payment of taxes upon the transmission of messages sent by or for them. 5536 (b) The exemption does not apply to consuls or to any officials of foreign Governments other than those specified in paragraph (a). 5537 (c) The exemption does not apply to messages the charge for the transmission of which is paid by a foreign Government, except in the cases provided for in paragraph (a). 5538 Art. 17. Evidence of right to exemption. — The following form may be used to secure exemption when signed by an ambassador, minister, or any other properly accredited diplomatic representative of a foreign Government: (Date.) I certify that this message from to over is transmitted by attached to my and is exempt from tax. ) )1 3 1 (llSX 01 i', 291lH nOlSnsJXd t>fl£ 29H-il--SiS 3 /iT*X I\£----i*A A- -p. ■ (Title.) (Address.) LEASED WIRE AND TALKING CIRCUIT SPECIAL SERVICE. IMPOSITION OF TAX. 5539 Art. 18. Imposition of the tax — Leased wire or talking circuit 5502 special service. — The tax is imposed upon the amount paid for any leased wire or talking circuit special service. 5540 Leased wire special service. — Leased wire special service includes exclusive leases of wires and also contracts by which the carrier agrees to furnish a circuit (that is, a wire or wires, instruments and electrical energy) for the transmission of messages in Morse characters or by spoken word between specified points or offices during specified hours. Operators may or may not be employees of the carrier. 5541 For administrative purposes it is held that where the area covered by leased wire special service is served by a local telephone exchange, tolls not being charged upon messages transmitted between points within such area, such special service does not come within the provisions of the act. Copyright 1922, by The Corporation Trust Company. WAR TAX 1109 SERVICE i bnti noij&e>i niimmo3i9jfiI .££ .)tA Y*aa PART II. 2-28-28. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS. -1921 ACT. 5542 Talking circuit special service. — r J alking circuit special service is a limited class of leased wire special service and refers in such service where the transmission is telephonic. 5543 Such a talking circuit may by contract have one terminal at a switch- board of the carrier, allowing connection with any telephone within the local exchange area of the operating station. Such additional exchange and other incidental service is included in the term "talking circuit special service." 5544 Art. 19. Private branch exchange service. — Amounts paid for private branch exchange service (called P. B. X. service) where the exchange equipment is located on the premises of the lessee and is used for intercom- munication between departments of the business or parts of the premises of the lessee, are not subject to tax. Any amount paid for special service at the central exchange in the handling of calls from such a private branch exchange is included in the term "private branch exchange service.'' 5545 Art. 20. Tie lines. — The term "tie line" is used to denote a line connecting two private branch exchanges. The amount paid for rental of a tie line connecting two or more private branch exchanges located within an area served by a local telephone exchange without charging tolls, is to be considered part of the amount paid for private branch exchange service and is not subject to tax. But a tie line connecting two or more private branch exchanges not within the same local telephone exchange area, tolls being ordinarily imposed upon the transmission of messages between the points of location of the private branch exchanges, is a leased wire and the amount paid for the rental thereof is subject to the provisions of this section of the act. 5546 Art. 21. Private lines and extension lines are subject to the same distinction and same rules as tie lines. 5647 Art. 22. Intercommunication andjnterior systems are subject to the same provisions as private branch exchanges. 5548 Art. 23. Long-distance terminals. — Amounts paid for a long- distance terminal, consisting of a special terminal loop from a local toll position or a long line switchboard to the subscriber's premises, and used only for long-distance calls at the regular toll, are not subject to the tax im- posed by this section of the act. Messages transmitted over such wires are subject to the "message tax" provided for in section 500 (a). BASIS, RATE, AND COMPUTATION OF TAX. 5549 Art. 24. Basis, rate, and computation of the tax. — The tax imposed is to be computed at 10 per cent of the amount paid for the services specified. 5650 The amount paid includes the contract consideration and all addi- tional charges therein provided, including salaries of operators if in the employ of the carrier, charges for equipment, instruments, and other apparatus, drops intermediate to the terminals, branch or "leg" lines, ex- change service, and overtime service. It also includes charges for incidental additional service, including charges for "service connection," "termination," Copyright 1922, by The Corporation Trust Company. WAR TAX 1110 TERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS.— 1921 ACT. and "moves" when such are involved in the special service contracted for; such charges not involved in such special service are not subject to the tax. 5551 In the payment of any tax under this section a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to one cent. (Sec. 1306 [^[8019] of the act.) 5552 Art. 25. Computation of tax — Effective date. — The tax provided in section 500 (b) applies where (a) the amount paid for such service is paid after -January f, 1922, and (b) the service is furnished after January 1, 1922. Therefore, where leased-wire special service was furnished on or after January 1, 1922, but the consideration therefor had been paid prior to that date, the tax imposed by section 500 (b) of the Revenue Act of 1921 does not apply, but the tax imposed by section 500 (g) of the Revenue Act of 1918 would apply if such consideration were paid subsequent to April 1, 1919. Where such service was furnished prior to or on April 1, 1919, the tax imposed by section 500 (g) of the Revenue Act. of 1918 or by section 500 (b) of the Revenue Act of 1921 does not apply, regardless of the date of the payment of the charges therefor. 5553 Art. 26. Computation of tax — Service performed between a point within and a point without the United States. — When leased wire or talking circuit special service is furnished between a point or points within the United States and a point or points without the United States and there is in the contract no reasonable established division of charges as domestic and foreign, the tax shall be paid and collected upon the amounts paid for incidental services or facilities furnished within the United States plus that proportion of the general contract consideration as the wire mileage within the United States bears to the total wire mileage contracted for. Where there is a reasonable division of charges as domestic and foreign provided in the contract, the tax shall be paid and collected upon the amounts specified as payments for services or facilities rendered within the United States. EXEMPTIONS. 5554 Art. 27. Exemptions— Services to United States, the States, the District of Columbia, and to Foreign Diplomats. — The exemptions of services rendered the United States, a State or Territory and the District of Columbia, and foreign diplomats described in Articles 12 to 17 above, apply also to this section of the act. 5555 Art. 28. Exemptions—Public press. — The tax does not apply to the amount paid for so much of such special service as is utilized in the collection and dissemination of news through the public press. "Public press" is not restricted to newspapers or to any particular portion of the product of printing presses. Magazines, periodicals, trade and scientific publications, published for the information of the public, are included. Organizations such as the Associated Press and the United Press are also included. 5556 "News" is a word to be liberally construed. Accounts of current events, public announcements, information relating to finance, science, commerce, religion, civic, or other public organizations are held to be news. Copyright 1922, by The Corporation Trust Company^ WAR TAX 1111 SERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS. — 1921 ACT. 5557 The exemption does not apply to the publisher or to the publication as such. The exemption applies only to the amount paid for so much of such service as is utilized in the collection and dissemination of nevjs in the public press. If, however, a contract between a person or company engaged in the collection and dissemination of news through the public press and a carrier provides for leased wire or talking circuit special service to be utilized exclusively in the business mentioned, the carrier is not required to collect the tax upon the amounts paid under such contract in the absence of actual knowledge on the part of the carrier that the service is being used for other purposes. The exemption has no application to the transmission of messages. 5558 Art. 29. Exemption — Services utilized in the conduct of business of common carrier or telegraph or telephone company. — The tax does not apply to the amount paid for so much of such special service as is utilized in the conduct, by a common carrier or telegraph or telephone com- pany, of its business as such. 5559 A common carrier is one who undertakes, for hire or reward, to transport the goods or person of such as choose to employ him from place to place. 5560 The exemption does not apply to common carriers, telegraph and telephone companies, as such. It applies only to the amount paid for so much of such service (leased wire or talking circuit) as is utilized in the conduct by a common carrier, telegraph or telephone company, of its business as such. 5561 Where, however, a contract between a common carrier (or tele- graph or telephone company) and a telegraph, telephone, radio, or cable company provides for leased wire or talking circuit special service to be utilized exclusively in the conduct of the business of the common carrier (or telegraph or telephone company) as such, the telegraph, telephone, cable, or radio company is not required to collect the tax upon the amounts paid under such contract in the absence of actual knowledge on the part of the company that the service is being used for other purposes. 5562 The exemption does not apply to contracts which provide merely for the transmission of messages. Thus, where a telegraph or tele- phone company agrees by contract with a railroad to transmit, on frank or otherwise, the messages of such railroad, its officials, or employees, in a cer- tain manner or upon certain terms, such a contract is a contract providing for the transmission of messages, and each such message is subject to the ''message" tax. (See Art. 9 above.) No exemption exists by reason of such contract. The exemption applies only to leased wire or talking circuit special service utilized by a common carrier in the conduct of its business as such. Thus where a telegraph or telephone company agrees by contract to set apart a certain wire or wires for the use of a railroad in the conduct of its business as such, the amounts paid for such service are not subject to tax. A proviso in such a contract to the effect that when such wire or wires arc not being used by the railroad they may be used by telegraph or telephone company for the transmission of commercial messages will not change the character of the contract. Copyright 1922, by The Corporation Trust Company. WAR'TAX 1112 SERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS. -1921 ACT. PART III. PAYMENT, COLLECTION, RETURN, AND REMITTANCE OF TAXES. 5563 Art. 30. Payment of taxes.— Taxes imposed by section 500 (a) and 5505 (b) shall be paid by the person from whom the carrier collects the 5506 charges for the services or facilities rendered. 5564 Art. 31. Collection of taxes. — All such taxes shall be paid to and collected by the officers, agents, or other employees of the carrier to which the charges for the services or facilities are due. 5565 Art. 32. Credit. — Where credit is extended by a carrier to a sender or addressee for the payment of charges for the transmission of a message, or to the lessee of special service for the payment of charges for such service, and such charges are not paid, the tax nevertheless applies and the carrier is liable for the collection thereof. 5566 Art. 33. Records. — Records and accounts of telegraph, telephone, radio, and cable companies showing records of (1) all dispatches, messages, or conversations originating on the lines of such company, the charge for the transmission of which is over 14 cents, whether taxable or not, (2) leased wire and talking circuit special services rendered by the company, and (3) evidences of the right of exemption of dispatches, messages, con- versations, and special service upon which tax is not collected, such records to contain sufficient information to determine the taxability of the message or service and the amount of tax, if any, upon same, shall at all times be open to the inspection of officers of the Treasury Department. 5567 Art. 34. Returns — Contents. — The returns of a telephone, tele- graph, radio, or cable company shall be rendered oh Form 727 (Re- vised) [page 1103] and shall include (a) all taxable dispatches, messages, or conversations originated by it or on its lines and (b) such leased wire or talking circuit special services, as are recorded and accounted for by the reporting company and reflected in its billing records for the month, following its usual business routine. 5568 Taxable messages which originate at the stations of rural or farmers' line associations and which are recorded and billed by the telephone company operating the exchange to which such stations are connected for service should be included in the return of said operating company. Taxable messages, if they originate at the station of such rural or farmers' line asso- ciations and are not recorded or billed by the operating company, should be reported by such association. 5569 Art. 35. Returns— When and where rendered. — Returns must be made for each calendar month. Such returns must be made under oath, in duplicate, and must be filed with the collector of the district in which the principal office or place of business of the company is located on or before the last day of the calendar month following the month for which return is made. Where a return covers a tax of $10 or less it may be signed and acknowledged before two witnesses, instead of under oath. Copyright 1922, by The Corporation Trust Company. WAR TAX 1113 SERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS. -1921 ACT. 5570 Art. 36. Extension of time. — Where it is found impossible to make the proper return within the prescribed time, request may be filed with the collector for an extension of time, and upon a proper showing the collector is authorized to fix a definite time in each instance within which the return may be filed, such extension of time not to exceed 60 days. 557 1 Art. 37. Remittance of taxes collected. — The tax is due and payable by the person collecting the tax to the collector of internal revenue at the time fixed for filing the return. CREDITS AND REFUNDS. Law 1|8018, 1[8023. 5572 Art. 38. Credit for overpayment. — Any individual, corporation. 5507 partnership, or association that has paid to the collector of internal revenue, as a tax under section 500 of the act, any amount erro- neously or illegally assessed or collected or any amount in excess of the amount of the tax actually imposed by that section for the month covered by that payment, may claim credit for such overpayment against the amount of the tax imposed by that section which is due upon any other monthly return thereafter made in the same behalf on Form 727 (Revised). Such credit will only be granted, however, if, in making the claim, the instructions printed on the back of that form are carefully followed. 55 73 Art. 39. Refund of overpayment. — Air- individual, corporation. partnership, or association that has paid to the collector of internal revenue, as a tax under section 500 of the act, any amount erroneously or illegally assessed, or any amount in excess of the amount of the tax actually imposed by that section for the month covered by that payment, or any amount as a penalty for the collection of which there was no authority, may secure a refund of the amount so overpaid by filing with the collector to whom such payment was made a propeilv prepared claim on Form 46 (revised) [Form 843]. 5574 Art. 40. Refund of overcollection.- E\ cry individual, corporation, partnership, or association that has collected from an}' person, as a tax under section 500 of the act, any amount in excess of the amount of the tax imposed by that section actually due from such person, shall upon proper application promptly refund such amount to the person entitled thereto, even though such amount has already been paid oyer to the col- lector of internal revenue and no corresponding credit (see art. 38) or refund (see art. 39) has yet been secured. An}- person making a refund of an}- pay- ment upon which tax is collected under this section ma}- repay therewith the amount of the tax collected on such payment. PENALTIES. 5575 Art. 41. Penalties.- (1) Section 502 (d) of the act specifically pro- 5509 \ ides that the taxes under section 500 shall (without assessment by the Commissioner or notice from the collector) be due at the time fixed for filing this return, and if the tax is not paid at such time there t>ha 11 be added as part of the tax a penalty of 5 per cent, together with interest at the rate of 1 per cent for each full month from the time when the tax becomes due. Copyright 1922, by The Corporation Trust Company. WAR TAX 1114 SERVICE 2-28-22 Reg. 57, Kev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS. — 1921 ACT. 5576 (2) [See Sec. 1302, H8014.] 5677 (3) Section 3176 of the Revised Statutes [1J8073], as amended and reenacted, provides that in case of any failure to make and file a return within the prescribed time there shall be added to the tax 25 per cent of its amount. 5578 (4) Section 3176 of the Revised Statutes [If 8073], as amended and reenacted, further provides that in case a false or fraudulent return is willfully made there shall be added to the tax 50 per cent of its amount. AUTHORITY FOR REGULATIONS. 5579 Art. 42. Promulgation of regulations. — In pursuance of this pro- vision of the act [Tf8009] the foregoing regulations are hereby made and promulgated and all rulings inconsistent with them are hereby revoked. D. H. Blair, Commissioner of Internal Revenue. Approved February 15, 1922 [Released for publication February 28, 1922.] A. W. Mellon, Secretary of the Treasury. Copyright 1922, by The Corporation Trust Companv. WAR TAX 1115 SERVICE 2-28-22. TELEGRAPH AND TELEPHONE REGULATIONS. — 1 92 1 ACT. (T. D. 3255.) 5580 Collection of tax on amounts paid for transportation service only 5504 partially rendered before January 1, 1922 and adjustments of tax in adjusting overcharges. — Subdivisions (a), (b) and (e) of Section 500 of the Revenue Act of 1918 impose tax on amounts paid for transporta- tion. The provisions of the 1918 Act imposing tax on charges for transporta- tion service are repealed effective January 1, 1922 by the Revenue Act of 1921. Cases will arise where the transportation service will be only partially performed before January 1, 1922. It is held that tax imposed by sub- divisions (a), (b) and (e) of the Revenue Act of 1918 applies to amounts prepaid for transportation in cases where the shipments are made before January V, 1922, but does not apply in cases where the charges are "collect'" on shipments made before but arriving at destination on or after Januarv 1, 1922. 5581 Transportation companies have been authorized as set forth in Article 115, Regulations 49, Revised, to adjust tax in adjusting overcharges, taking credit on any subsequent return for tax so adjusted. In order to terminate this authority uniformly and at a time that will make it practicable for the credits to be taken on returns made by the carriers, it is directed that in adjusting overcharges and in redeeming unused and partially used tickets and mileage books, no adjustments be made of tax after December 31, 1921. It is suggested that transportation companies, as soon as practicable, advise all claimants who have claims pending or who file claims after December 31, 1921, that claim for refund of tax should be filed on Treasury Department Form 46, with the Commissioner of Internal Revenue within four years from time tax was paid, claim being barred by statute of limitations if received after such time. In the event the transportation companies retain the freight receipts, express receipts, redeemed tickets, or mileage books as part of their files on a claim, it will facilitate handling claim filed with the Commissioner for refund of the tax if the transportation companies will, when adjusting the transportation charge, furnish to the claimant a statement or certificate containing the following information, retaining a copy thereof in their files: (a) Number assigned claim by transportation company. (b) Amount of charges refunded on the claim. (c) Amount of tax actually collected on the refunded amount. (d) Date (or dates) on which tax was collected. 5582 In order that right to refund may be established it will be ne cess a r) for claimant to either furnish the original receipts, showing payment Of tax or to furnish the above statement or certificate in lieu thereof. (T. D *255. signed bv Commissioner D H. Blair, and dated fVcenjher 6, 1921 (T. D. 3256.) 5583 Refund of tax provided by subdivision (d) of section 500 of the 5504 Revenue Act of 1921.— Subdivision (d) of Section 500 of the Revenue Act of 1921 provides as follows: "(d) Under regulations prescribed by the Commissioner with the approval of the Secretary, refund shall be made of the proportionate part of the tax collected Under subdivision (c) or (d) of section 500 of the Revenue Act of 1918 on tickets or mileage books purchased and only partially used before January 1, 1922." Copyright 1922, by The Corporation Trust Company. WAR TAX 1116 SERVICE 2-28-22. (2) 7-18-22. (3) 7-27-22. TELEGRAPH AND TELEPHONE REGULATIONS.— 1921 ACT. 6684 No tax should be collected on the charge for a ticket or mileage book sold before January 1, 1922, if no part of it can be used until on or after January 1, 1922. 6686 Where, however, tax has been collected under subdivision (c) or (d) of Section 500 Revenue Act of 1918 on a ticket or mileage book which is only partially used before January 1, 1922, the tax applicable and proportionate to the unused part of such ticket or mileage book may be refunded. 5586 Claim for refund should be filed by the person paying the tax, on Form 46 [page 1609] which should show the following: (a) Statement of the facts on which claim is based. (b) Statement that no claim is pending nor will any be filed with the transportation company for adjustment of the tax. (c) Statement that the unused part of the ticket or mileage book, in con- nection with which relund is requested, if in hands of claimant when claim is filed, has been marked to show the amount of tax for which claim has been filed. 6587 The claim should ako be supported by a statement from an agent of the transportation company (or from a collector of internal revenue if such information can be furnished by him) giving the following data concern- ing the ticket or mileage book in connection with which refund is requested: (a) the number, (b) date of purchase, (c) price paid, (d) the proportionate part remaining unused on January 1, 1922, and (e) the proportionate amount of tax applicable to the unused part. (T. D. 3256, signed by Commissioner D. H. Blair, and dated December 6, 1921.) (T. D. 3369.) 6588 To construe the law as imposing a tax on messages transmitted under 5525 contract (as with a railroad company) is warranted. — The decision [syllabus only] of the United States District Court, Southern District of New York, in the case of The Western Union Telegraph Company v. The Delaware, Lackawanna and Western Railroad Company, the syllabus of which appears below [1(5589-5590] is published not as a ruling of the Treasury Department, but for the information of internal revenue officers and others concerned. (T. D. 3369, signed by Commissioner D. H. Blair, and dated July 12, 1922.) 5589 1. Messages transmitted on frank — Method of testing legality of reg- ulations — Friendly suit between telegraph company and carrier. — Where a telegraph company paid the tax imposed on telegraph messages by Section 500 (f) of the Revenue Act of 1918, as construed and applied by Article 9 of Regulations No. 57, on messages transmitted by it without charge for a railroad company under a contract providing for the mutual interchange of services between such companies, the validity of such tax should be raised by a proceeding to recover the taxes back, and the legality of the regulations could not be tested in any manner convenient to such companies, as in a friendly suit to which the Government is not a party. 5590 2. Same — Section 500 (f) construed — Validity of Art. 9, Regulations No. 57. — Section 500 (f) of the Revenue Act of 1918, levying a tax on telegraphic messages, must be construed to cover all messages trans- mitted for an economic consideration — money or money's worth — and no differentiation can be made between exchanges and cash-paid services; Copyright 1922, by The Corporation Trust Company. WAR TAX 1117 SERVICE 7-18-22. (2) 7-27-22. TELEGRAPH AND TELEPHONE REGULATIONS. —1 921 ACT. therefore, the tax attaches to messages transmitted by a telegraph company without charge for a railroad company under a contract providing for the mutual interchange of services between such companies, and Art. 9 of Reg- ulations No. 57 (providing that where a telegraph company agrees, in con- sideration of the payment of a lump sum or of the performance of services, to transmit messages on frank, such messages are subject to the tax) is not invalid as being without the scope of the statute. (Syllabus referred to in T5588.) (T. D. 3377.) 5591 Demurrage charges as a part of charge for transportation.- 1917 and 1918 Acts. — The decision [syllabus onlyl of the United States District Court, Southern District of Ohio, Western Division, in the cases of The Proctor & Gamble Company v. United States and The Buckeye Cotton Oil Company v. United States, the syllabus of which appears below [^[5592-5593] is published not as a ruling of the Treasury Department, but for the information of internal revenue officers and others concerned. (T. D. 3377, signed by Commissioner D. H. Blair, and dated July 22, 1922.) 5592 1. Demurrage Charges — Cost of Transporation. — Demurrage is a part of the charge for transportation, and, conceding that its purpose is primarily to prevent the detention of cars, the enforcement of its payment is also to be regarded as a part of the charge of transportation. The demurrage charge is a proper one, whether it be regarded as, or as re- lating to, facilities of shipment, services in connection with the delivery of goods, or the storage or handling of the same. 5593 2. Suit for Recovery of Taxes — Payment Under Duress or Protest Necessary. The payment of taxc^ under duress or protest is a necessary prerequisite to a suit for their recovery. (Svllabus referred to in Copyright 1922, by The C»rfri*\on Trust Lemptny. WAR TAX 1118 SERVICE 7-27-22. TELEGRAPH AND TELEPHONE.— RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Telegraph and Telephone Taxes Law Provisions. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph References. T. D. Subject Paragraph Law Provisions 5500 Reg. 57 Regulations under 1921 law (Revision of February 15, 1922) (Fully indexed on tiie blue sheets following 5510 3255 Collection of tax on amounts paid for transportation service only partially rendered before January 1, 1922 and adjustments of tax in adjusting over- charges. (December 6, 1921) 5580 3256 Refund of tax on tickets or mileage books. (De- cember 6, 1921) 5585 3369 Decision of U. S. District Court in W. U< Telegraph Co. vs. D. L. & W. R. R. Co.— Validity of tax on messages transmitted under contract (T. D. dated July 12, 1922). 5583 3377 Decision of U. S. District Court in Proctor and Gamble Co. vs. U. S., etc. — Demurrage as part of charge for transportation, 1917 and 1918 Acts (T. D. dated July 22, 1922) 5591 Insert this page immediately before the blue "Telegraph and Telephone" index. Copyright 1922, by Tht Corporation Trust Company, WAR TAX SERVICE Telegraph and Telephone Taxes Supplementary Page 1. t i i i 2-28-22. INDEX TO TELEGRAPH AND TELEPHONE REGULATIONS. [Government index with references changed from "Articles" to "paragraphs.") Agencies of United States, exemption. .5530 Ambassadors, exemption. .5535, 5538 American National Red Cross, exemption. .5530 Associated Press, exemption. .5555 Authority for regulations. .5578 Basis of tax: leased wire and talking circuit special service. .5549 Transmission of messages, etc. .5519 Carrier: Definition. . 55 12, 5559 Dispatches, messages, etc. .5512 Exemption. . 5558 Leased wire special service. . 5540 Messages of, transmitted under contract. .5525 Charge, definition. .5519 Claim: Credit for overpayment of tax. .5572 Refund of overcollection of tax. .5574 Overpayment of tax. .5573 Collect messages. .5515 Collection of taxes. . 5564 Combined facilities of several lines. .5511 Common carrier, definition. .5559 Computation of tax, leased wire and talking circuit special service. . 5549-5553 Transmission of messages, etc. .5519-5525 Consuls, exemption. .5536 Contract, messages transmitted under. .5525 Credit: Overpayment of tax. .5572 Payment of charges, effect. . 5565 Definitions: "Carrier". .5512, 5559 "Charge". .5519 "Common carrier". .5559 "News". .5556 "Public press". .5555 "State". .5529 "Territory". .5529 "Transmission'. .5510 "United States". . 5516 Diplomats, exemption. .5535, 5538 District of Columbia, exemption. .5528 Effective date and application of law. .5518 Emergency Fleet Corporation, exemption. . 5530 Evidence of right of exemption. .5531, 5538 Exemptions: Associated Press. .5555 Charges of 14 cents or less. .5527 Common carriers. . 5559 District of Columbia, services rendered to. .5528 Evidence of right. .5531, 5538 Foreign diplomats. .5535, 5538 Governmental agencies. . 5530 Governmental business. .5528 Leased wire and talking circuit special service. .5555, 5558 Public press. . 5555 States, services rendered to. . 5528 Telephone and telegraph companies. .5526, 5558 Territories, services rendered to. .5528 United Press. . 5555 United States, services rendered to. .5528 Extension lines. .5546 Copyright 1922, by The Corporation Trust Comply, WAR TAX SERVICE Telephone and Telephone Taxes. — Index Page |. INDEX TO TELEGRAPH AND TELEPHONE REGULATIONS. The references are to paragraph numbers. False or fraudulent return, penalty. . 5575 Federa Ifarm appraisers, exemption. . 5530 Federal Land banks, exemption. . 5530 Federal Reserve banks, exemption. . 5530 Foreign Government, exemption. . 5537 Frank, taxability of message sent under. . 5523 Governmental agencies, exemption. .5530 Governmental business, exemption. . 5528 Imposition of tax: Carrier. .5512 Leased wire and talking circuit special service. .5539 Transmission. .5510 Inspection of records of telephone, etc., companies. . 5566 Intercommunication and interior systems. . 5547 Leased wire special service, imposition of tax. . 5540 Long-distance terminals. . 5548 Magazines, exemption. . 5555 Moves, charges for. . 5550 News, definition. . 5556 Origin of message, determination of taxability. .5514-5518 Overcollection of tax, refund. . 5574 Overpayment of tax: Credit. .5572 Refund. .5573 Overtime telephone messages, computation of tax. .5524 Panama Railroad Co., exemption. .5530 Payment of taxes. .5563 Penalty for nonpayment. .5575 Penalties. .5575 Periodicals, exemption. .5555 Place of filing returns. .5569 Private branch exchange service. . 5544 Private lines. . 5546 Promulgation of regulations. . 5578 Public press: Definition. .5555 Exemption. . 5555 Railroads: Leased wire and talking circuit special service. .5558 Messages of, transmitted under contract. .5525 Rate of tax: Leased wire and talking circuit special service. .5549 Transmission of messages, etc. .5520 Record of telephone, etc., companies, inspection. .5566 Red Cross, exemption. . 5530 Refund: Overcollection of tax. .5574 Overpayment of tax. .5573 Remittance of taxes collected. .5571 Returns: Contents. . 5567 Delay, penalty. .5575 False or fraudulent, penalty. .5575 Place of filing. .5569 Time. .5569, 5570 Reversed messages. .5515 Scientific publications, exemption. .5555 Service connection charges. .5550 State: Definition. . 5529 Exemption. . 5528 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Telegraph and Telephone Taxes. — Index Pagej2. 2-28-22. INDEX TO TELEGRAPH AND TELEPHONE REGULATIONS. The references are to paragraph numbers. Talking circuit special service: Basis of tax. .5549 Computation of tax. .5549-5553 Extension lines. . 5546 Imposition of tax. .5539 Intercommunication and interior systems. .5547 Long-distance terminals. . 5548 Private branch exchange service. . 5544 Private lines. . 5546 Rate of tax. . 5549 Tie lines. . 5545 Telephone and telegraph facilities combined. .5511 Telegraph and telephone companies, exemption. .5558 Termination charges. .5550 Territory: Definition. .5529 Exemption. .5528 Tie lines. . 5545 Time: Filing returns. .5569, 5570 Furnishing leased wire and talking circuit special serviceas determining taxability. .5552 Origin as determining taxability of messages, etc.. .5518 Penalty for delay in filing returns. . 5575 Trade publications, exemption. . 5555 Transmission, definition. .5511 United Press, exemption. . 5555 United States: Definition. .5516 Exemption. .5528 Services performed partly within and partly without. .5553 Taxability of messages originating^ within or without. .5514-5518 United States Shipping Board, exemption. .5530 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Telegraph and Telephone Taxes. — Index Page 3. ) > i t r < <9 ) ) ) > ) ) o ( I ( ) 22 TAX ON ADMISSIONS AND BEING TITLE VIII OF THE REVENUE ACT OF 1921. CALENDAR. Returns: On or before the last day of the month following that for which the return is made. Tax: Amount of tax due to accompany return. TITLE VIII. — ADMISSIONS. 6500 Sec. 800. (a) That from and after January 1, 1922, there shall be levied, assessed, collected, and paid, in lieu of the taxes imposed by section 800 of the Revenue Act of 1918 — [Regular Admission in Excess of 10 cents Being Charged.] Jrjonsd orii ox Ybviautax? (A) oiunj ,j(i?idw jo ebstappi.^ US zaomim < ^ 6501 (1) A tax of 1 cent for each 10 cents or fraction thereof of the amount paid for admission to any place on or after such date, including ad- mission by season ticket or subscription, to be paid by the person paying for such admission; but where the amount paid for admission is 10 cents or less, no tax shall be imposed; sniniEJnifiiTi to 10 YiilkqiDihurn 'lorijo io .s^bIIi/ ,nwoJ t vlio x nc ^nivoiqmi [Tickets Sold by Ticket Agencies J 6502 (2) Upon tickets or cards of admission to theaters, operas, and other places of amusement, sold at news stands, hotels, and places other than the ticket offices of such theaters, operas, or other places of amusement, at not to exceed 50 cents in excess of the sum of the established price therefor at such ticket offices plus the amount of any tax imposed under paragraph (1), a tax equivalent to 5 per centum of the amount of such excess; and if sold for more than 50 cents in excess of the sum of such established price plus the amount of any tax imposed under paragraph (1), a tax equivalent to 50 per centum of the whole amount of such excess, such taxes to be returned and paid, in the manner and subject to the penalties and interest provided in section 903, by the person selling such tickets; [Tickets Sold by Theaters in Excess of Established Price.] 6603 (3) A tax equivalent to 50 per centum of the amount for which the proprietors, managers, or employees of any opera house, theater, or other place of amusement sell or dispose of tickets or cards of admission in excess of the regular or established price or charge therefor, such tax to be returned and paid, in the manner and subject to the penalties and interest provided in section 903 [If 45 19 herein], by the person selling such tickets; [Boxes or Seats Owned or Leased.] 6604 (4) In the case of persons having the permanent use of boxes or seats in an opera house or any place of amusement or a lease for the use of such box or seat in such opera house or place of amusement (in lieu of the tax imposed by paragraph (1)), a tax equivalent to 10 per centum of the amount for which a similar box or seat is sold for each performance or exhibi- CoPyright 1922, by The Corporation Trust Company. WAR TAX 1301 SERVICE 1-2-22. TAX ON ADMISSIONS AND DUES LAW. tion at which the box or seat is used or reserved by or for the lessee or holder, such;' tax to be paid by the lessee or holder; and [Cabarets and Other Similar Entertainments. 1 6605 (5) A tax of cents for each 10 cents or fraction thereof of the amount paid for admission to any public performance for profit at any roof garden, cabaret, or other similar entertainment, to which the charge for admission is wholly or in part included in the price paid for refreshment, service, or merchandise; the amount paid for such admission to be deemed to be 20 per centum of the amount paid for refreshment, service, and merchan- dise; such tax to be paid by the person paying for such refreshment, service, or merchandise. [Specific Exemptions.] 6506 (b) No tax shall be levied under this title in respect to (1) any ad- missions all the proceeds of which inure (A) exclusively to the benefit of religious, educational, or charitable institutions, societies, or organizations, any post of the American Legion or the Women's Auxiliary units thereof, societies for the prevention of cruelty to children or animals, or societies or organizations conducted for the sole purpose of maintaining symphony orches- tras and receiving substantial support from voluntary contributions, or of improving any city, town, village, or other municipality, or of maintaining a cooperative or community center moving-picture theater — if no part of the net earnings thereof inures to the benefit of any private stockholder or in- dividual; or (B) exclusively to the benefit of persons in the military or naval forces of the United States; or (C) exclusively to the benefit of persons who have served in such forces and are in need; or (2) any admissions to agri- cultural fairs if no part of the net earnings thereof inures to the benefit of any stockholders or members of the association conducting the same, or admissions to any exhibit, entertainment, or other pay feature conducted by such association as part of any such fair, — if the proceeds therefrom are used exclusively for the improvement, maintenance and operation of such agricultural fairs. [The Term " Admission' \ Defined.] 6607 (c) The term "admission" as used in this title includes seats and tables, reserved or otherwise, and other similar accommodations, and the charges made therefor. [Price to be Printed on Each Ticket.] 6508 (d) The price (exclusive of the tax to be paid by the person paying for admission) at which every admission ticket or card is sold shall be conspicuously and indelibly printed, stamped, or written on the face or back of that part of the ticket which is to be taken up by the management of the theater, opera, or other place of amusement, together with the name of the vendor if sold other than at the ticket office of the theater, opera, or other place of amusement. Whoever sells an admission ticket or card on which the name of the vendor and price is not so printed, stamped, or written, or at a price in excess of the price so printed, stamped, or written thereon, is guilty of a misdemeanor, and upon conviction thereof shall be fined not more than $100. Copyright 1922, by The Corporation Trust Company. WAR TAX 1302 SERVICE (li 1-2-22 (2)1-23-22 TAX ON ADMISSIONS AND DUES LAW. TITLE VIII.— DUES. 6609 Sec. 801. That from and after January 1, 1922, there shall be levied, assessed, collected, and paid, in lieu of the taxes imposed by section 801 of the Revenue Act of 1918, a tax equivalent to 10 per centum of any amount paid on or after such date, for any period after such date, (a) as dues or membership fees (where the dues or fees of an active resident annual member are in excess of $10 per year) to any social, athletic, or sporting club or organization; or (b) as initiation fees to such a club or organization, if such fees amount to more than $10, or if the dues or membership fees (not including initiation fees) of an actfve resident annual member are in excess of $10 per year; such taxes to be paid by the person paying such dues or fees: 6610 Provided, That there shall be exempted from the provisions of this section all amounts paid as dues or fees to a fraternal society, order, or association, operating under the lodge system. 651 1 In the case of life memberships a life member shall pay annually, at the time for the payment of dues by active resident annual members, a tax equivalent to the tax upon the amount paid by such a member, but shall pay no tax upon the amount paid for life membership. (Returns and Payment of Taxes.] 6612 Sec. 802. That every person receiving any payments for such admission, dues, or fees, shall collect the amount of the tax imposed by section 800 or 801 from the person making such payments. Every club or organization having life members, shall collect from such members the amount of the tax imposed by section 801. In all the above cases returns and payments of the amount so collected shall be made at the same time and in the same manner and subject to the same penalties and interest as provided in section 502 [%5006 herein]. [General Administrative Law Provisions.] [Read under "Miscellaneous Matters" at the back of the book.] ADMISSIONS REGULATIONS. The Government is about to promulgate revised regulations bearing on the admissions taxes as imposed by the Revenue Act of 1921. These will be reproduced for the Service as soon as available for that purpose. Copyright 1^22, by The Corporation Trust Company. WAR TAX 1303 SERVICE This page will remain in blank. WAR TAX 1304 SERVICE 1-23-22. (2) 10-17-22. TAX ON ADMISSIONS AND DUES REGULATIONS. TAX ON ADMISSIONS AND DUES (Title VIII, Sections 803-802, Revenue Act of 1921) Note: Ticket brokers are not to report tax on this form. Taxes duo from such brokers must be reported on Form 729-A, Revised. ADMISSIONS — CHARACTER OF TAX AMOUNT OF TAX DUES — CHARACTER OF TAX AMOUNT OF TAX (a) Admissions — ~- $ $ (J) Initiation fees _ _ (c) Roof gardens, cabarets, and similar entertainments (g) Life members _ _ — / swear (or affirm) thai the foregoing Is a true return of the amount of tax collected on admissions and dues for the month of , / 92 , and that the amount deducted for overpayment is allowable by law. Signed Less Oder payment for month of. , 192 — Total amount of tax due (State whether individual owner of buaineas, member of firm, orif officer of corporation, club, or organisation, or duly authorised manager or agent, give title.) Sworn to and subscribed before me this day of 192 "(Nun*)or (Witaeaa) (r^eVareerepb'eVrbMk)"" "(Title) o7(Witne«i)" Return with remittance should be sent to the Collector of Internal Revenue for your district and not to the Commissioner of Internal Reve- nue at Washington, V. C. (See instructions, par. 6, on reverse of this form.) If you have nothing to report, make notation to that effect on this form and return to the Collector of Internal Revenue. . 2—11840 ORIGINAL RETURN — This form mutt be returned to the Collector of Internal Revenue TAX ON ADMISSIONS AND DUES (Title VIII, Sections 800-802, Revenue Act of 1921) Note: Ticket brokers ere not to report tax on this form. Ti-xos due from such brokers must be reported on Form 729-A, Revised. ADMISSIONS — CHARACTER OF TAX AMOUNT OF TAX DUES — CHARACTER OF TAX AMOUNT OF TAX (a) Admissions... — _ s W Dues _ i (i) Leases, etc., of boxes and seals — (c) Roof gardens, cabarets, and similar entertainments (/) Initiation fees _ Total tax collected. _ / swear (or affirm) that the foregoing Is a true return of the amount of tax collected on admissions and dues for the month of — — , 192 , and that the amount deducted Total amount of tax due Penalty 25% _ for overpayment is allowable by law. Signed _ _ (Stave whether individual < aation, or duly authorised manager or a Sworn to and subscribed before me this ... (TiUe) or (W.tnes.) Return with remittance should be sent lo the Collector of Internal Revenue for your district and not to the Commissioner of Internal Reve- nue at Washington, D. C. (See instructions, par. 6, on reverse of this form.) If you have nothing to report, make notation to that effect on this form and return to the Collector of Internal Revenue. DUPLICATE RETURN— This form must be relumed to the Collector of Internal Rerenue [Obverse of Form 729,] Copyright 1922, by The Corporation Trust Company. WAR TAX 1305 SERVICE 1-23-22. (2) 10-17-22. TAX ON ADMISSIONS AND DUES REGULATIONS. INSTRUCTIONS. (Tor full Instructions, see Regulations No. 43, Parts 1 and 2, Revised.) Sections 800-802 of the Revenue Act of 1921 impose the following taxes upon admissions and dues: 1, ADMISSIONS. — (a) Regular admissions. One cent for each 10 cents or fraction thereof of the amount paid for admission to any place. This tax shall not be imposed where the amount paid for admission is 10 cents or less. (6) Tickets sold at news stands, hotels, and places other than the ticket offices of theaters, operas, or other places of amusement, at an advance of not more than 50 cents in excess of the established price, 5 per cent of such excess; when sold for more than 50 cents advance, 50 per cent of such excess in addition to the tax imposed by (a) above. (SUCH TAX MUST BE REPORTED ON FORM 729-A, REVISED. COMPLETE INSTRUCTIONS ARE GIVEN ON FORM 729-A, REVISED, FOR REPORTING THIS TAX.) (c) Tickets sold by theaters in excess of the established price, 50 per cent of such excess, in addition to tax imposed by (a) above. (d) Leases of boxes and seats. In lieu of tax imposed by (a) above, a tax of 10 per cent of the amount for which a similar box or seat is sold for eacn performance at which box or seat is used or reserved. (e) Cabarets. One and one-half cents for each 10 cents or fraction thereof of the admission price; admission price is deemed to be 20 per cent •of the amount paid for service and merchandise. . . .. . 2. DUES. (a) Ten per cent of amount paid to any social, athletic, or sporting organization, where the dues of an active resident annual member are in excess of $10. f „, . .„. .. , (6) Initiation fees. Ten per cent of the amount paid to any social, athletic, or sporting organization, (1) if such lees exceed $10, or (2) if dues of an active resident annual member exceed $10. . . ., , , ,, , . (c) Life members. Tax equivalent to that of active resident annual member to be paid at the time of payment of dues by such resident members. 3 EXEMPTIONS.— (a) Duts or fees paid to fraternal societies operating under the lodge system. (6) Admissions all the proceeds of which inure (a) exclusively to the benefit of religious, educational, or charitable institutions, societies, or organizations any post of the American Legion or the woman's auxiliary units thereof, societies for the prevention of cruelty to children or animals, or?ociet ; es or organizations conducted for the sole purpose of maintaining symphony orchestras and receiving substantial support from voluntary contributions, or of improving any city, town, village, or other municipality, or of maintaining a cooperative or community center moving-picture theater— if no part of the net earnings thereof inures to the benefit of any private stockholder or individual; or (6) exclusively to the benefit of persons in the military or naval forces of the United States; or (c) exclusively to the benefit of persons who have served in such forces and are in need; or (2) any admissions to agricultural fairs if no part of the net earnings thereof inures to the benefit of any stockholders or members of the i— nW association conducting the same, or admissions to any exhibit, entertainment, or other pay feature conducted by such association as part of any such fair, if the proceeds therefrom are used exclusively for the improvement, maintenance, and operation of such agricultural fairs. Claim, however, must be made for exemption on Form 755. 4. WHO MUST MAKE RETURN, COLLECT, AND PAY TAX.— Any person or organization receiving payment for admissions or dues or being a club and having taxable life members must collect the tax from" the person paying admission, dues or fees, except in 1 (6) and 1 (c) above, when vendor must pay tax on the excess charge. 6. COMPUTATION OF TAX.— Tax on admissions is imposed on each payment, or upon each single admission. In the case of admissions by season ticket or subscription, the tax applies to the amount paid for each season ticket or subscription. 6. RETURNS AND PAYMENT OF TAX.— (a) Admissions. Return with remittance covering taxes on admissions collected in any month must be in the hands of the Collector of Internal Revenue (or his authorized representative) of the district in which is located the place or business of the person making such return and payment on or before the last day of the month following that for which it is made. See Art. 41, Reg. 43, Part 1 (Revised), and footnote. (b) Dues. Return with remittance covering taxes on dues collected in any month must be in the hands of the Collector of Internal Revenue (or his authorized representative) of the district in which is located the principal office or place of business of the person making such return and payment on or before the last day of the month following that for which it is made. 7. CREDITS.— In case of overpayment of tax due to an error in calculation, credit may be taken therefor upon any subsequent monthly return. Credit may also be taken as outlined in the regulations. A complete and detailed record of such overpayment must be kept by the person taking credit therefor. In case credit is taken on this return for an overpayment made on a previous return, full information must be attached showing the reasons therefor and designating the kind of tax, and the month for which the previous return was filed and the date of -Every person or organization required to make a return must keep such records as will show all payments, admissions, or members upon which tax is re quired to be collected, in order that returns may be easily verified by revenue officers. 9. ADMISSION TICKETS.— The price of the ticket shall.be conspicuously and indelibly printed, stamped, or written on the face or back of that part of the ticket which is to be taken up by the management of the theater, opera, or other place of amusement, together with the name of the vendor, if sold other than at the ticket office of the theater, opera, or other place of amusement. Penalty of not more than $100 for viola- tion of the clause. . 10. PENALTIES.— Failure to file on time, 25 per cent of tax. Failure to pay on time, 6 per cent of tax and 1 per cent interest a month. Severe penalties for failure to file returns or for false or fraudulent 'returns. „ rum, om RECEIPT FOR PAYMENT OF TAX ON ADMISSIONS AND DUES Kt~~lU „/ m THIS RECEIPT NOT TO BE DETACHED BY TAXPAYER NOT VALID UNLESS RECEIPTED BY CAonifcK TAXPAYER WILL ENTER AMOUNT PAID EN THE SPACE PROVIDED THEREFOR NAME AND ADDRESS DATE PAID AMOUNT PAID (CiSBDU'* StAW) ' J-11530* . [Reverse of Form 729 and tax receipt form.) Copyright 1922, by Th* Corporation Trust Company. WAR TAX 1306 SERVICE Reg. 43, Rev. — Part II. Dues, TAX ON ADMISSIONS AND DUES REGULATIONS. REGULATIONS NO. 43 (REVISED) PART 2 Relating to the TAX ON DUES (Promulgated January 11, 1922. Released for publication January 23, 1922.) [Fully indexed at the end of this section.] 0513 Article 1. Payments within time scope of the Act.— The tax im- 6509 posed under section 801 of the Revenue Act of 1921 applies only to amounts paid on or after January 1, 1922, "for any period after such date," as dues or membership fees, or as initiation fees, to any social,- athletic, or sporting club or organization, provided such dues or fees are in excess of the amounts therein specified. 65? 4 However, a tax at the same rate and on identically the same basis was imposed under section 801 of the Revenue Act of 1918. This tax became effective April 1, 1919, and dues or fees paid after January 1, 1922, for a period prior to that date and while the 1918 Act was in force are taxable thereunder. Dues and fees paid prior to January 1, 1922, but for a period after that date, are likewise taxable under the 1918 Act. 651 5 Art. 2. Rate and basis of tax. — The rate of the tax imposed by the Revenue Act of 1921 is 10 per cent of any amount paid as dues or membership fees or as initiation fees to clubs or organizations coming within its provisions. It applies to any amount paid (a) as dues or membership fees where the dues or membership fees of an active resident annual member are in excess of $10 per year; or (b) as initiation fees, if such fees amount to more than $10, or if the dues or membership fees (not including initiation fees) of an active resident annual member are in excess of $10 per year. Amounts paid for life memberships are not subject to the tax, but life mem- bers shall pay annually, at the time for the payment of dues by active resident annual members, a tax equivalent to the tax upon the amount paid by such a member. (See art. 11.) 651 S If the dues or membership fees of an active resident annual member are in excess of $10 per year, the tax applies to the entire amount paid either as dues or membership fees or as initiation fees. The fact that the tax does not attach to dues or membership fees, where the dues or member- ship fees of an active resident annual member are not in excess of $10 per year, does not imply that exemption to the extent of $10 applies where the dues or membership fees exceed this amount. In other words, no deduction is authorized in computing the tax due if the dues or membership fees are taxable under the Act. 651 7 Likewise, if the dues or membership fees of an active resident annual member are in excess of $10 per year, amounts paid by other classes of members are taxable even though the dues or membership fees of such members are less than $10 per year. (See art. 9.) 6518 Art. 3. Clubs and organizations included. — Dues or membership fees, or initiation fees, paid to any social, athletic, or sporting club or Copyright 1922, by The Corporation Trust Company. WAR TAX 1307 SERVICE 1-28-22. R(pg. 43, Rev. — Part II. Dues. TAX ON ADMISSIONS AND DUES REGULATIONS. organization, excepting fraternal societies, orders, or associations, operating under the lodge system (see art. 7), if in excess of the amounts specified by the Act, are subject in toto to the tax imposed by section 801. The Act includes not only "clubs'' but also "organizations" of a social, athletic, or sporting character. ©51© Art. 4. Determination of character of club. — The purposes and activities of a club and not its name determine its character for the purpose of T the Tax on Dues. Every club or organization having social, athletic, or'sporting features is presumed to be included within the meaning of the phrase, "any social, athletic, or sporting club or organization," untii the contrary has been proved, and the burden of proof is upon it. Every such club or organization, therefore, unless it falls within the express exemp- tion of the Act (see art. 7, below), must collect, return, and pay over the tax imposed by the Act, unless and until it has satisfied the Commissioner of Internal Revenue that it is not in fact "social, athletic, or sporting" within the meaning of the Act as defined in these regulations. (See arts. 5 and 6, below.) If any such club or organization desires to claim that it is not in fact "social, athletic, or sporting" it shall submit to the collector its charter or constitution and by-laws, together with a statement as to its actual pur- poses, activities, practices, and facilities, the character of its expenditures, and such other evidence as may be requested. Upon consideration of the evidence submitted the collector will determine whether or not such club or organization is included within the provisions of the Act. If, however, the collector is in doubt as to whether or not the club or organization is "social, athletic, or sporting," he will refer the statement and accompanying papers to the Commissioner for decision. When a club or organization has been held not to be a "social, athletic, or sporting" club or organization, it need not thereafter make a return of tax on dues or fees, or any further showing with respect to its status under the law, unless it changes the character of its organization or operations or the purpose for which it was originally created. Collectors will keep a list of all clubs or organizations held not to be "social, athletic, or sporting" clubs or organizations, to the end that they may occasionally inquire into their status and ascertain whether or not they are observing the conditions upon which their exemption is predicated. If the collector decides that the club or organization is included within the provisions of the Act and the club or.organization is not satisfied with his decision, it may request that the matter be referred to the Commissioner of Internal Revenue at Washington for a ruling, and this will be done. If the collector or the Commissioner decides that the club or organization is not included within the provisions of the Act, then on the filing with the collector to whom the tax has been paid of a properly prepared claim (see art. 15 below) on Form 46 (Revised), the amount of tax already paid to the collector will be refunded to the club or organization for repayment by it to the original taxpayers. 6520 Art. 5. Social clubs. — Any organization which maintains quarters or arranges periodical dinners or meetings, for the purpose of afford- ing its members an opportunity of congregating for social intercourse, is a "social * * * c l u b or organization" within the meaning of the Act, unless its social features are not a material purpose of the organization but are subordinate and merely incidental to the active furtherance of a different and predominant purpose, such as, for example, religion, the arts, or business. Copyright 1922, by The Corporation Trust Company. WAR TAX 1308 SERVICE 1-23-22. Reg. iS, Rev.— Part II. Dues. TAX OK ADMISSIONS AND DUES REGULATIONS. The tax does not attach to dues or fees of a religious organization, singing society, chamber of commerce, commercial club, trade organization, or the like, merely because it has incidental social features, but, if the social features are a material purpose of the organization, then it is a "social * * * club or organization" within the meaning of the Act. An organization that has for its exclusive or predominant purpose religion or philanthropic social service (or the advancement of the business or commercial interest of a city or community) is so clearly not a "social * * * club or organization" that its possession and use of a building furnished with social-club facilities does not render taxable dues or fees paid to it. Most fraternal organizations are in effect social clubs, but if they are operating under the lodge system payments to them are expressly exempt. (See art. 7, below.) 6521 Exam-pies. — (1) Neither a Young Men's Christian Association nor a Young Men's Hebrew Association is a social club within the mean- ing of the Act, for the predominant purpose of each is religion and philan- thropic social service. 6522 (2) A social settlement which provides, among other things, dances and other social opportunities for a slum neighborhood is supported by contributions. Any person contributing $15 a year is called a "member" of the settlement association. Such contributions are not taxable, for such a settlement is not a social club within the meaning of the Act, as its pre- dominant purpose is philanthropic social service. 6523 (3) An automobile dealers' association is organized and operated for the purpose of maintaining a social organization of persons residing in a certain city and engaged in the manufacture or sale, or both, of automobiles and their accessories, and for the further purpose of affording its members opportunity and inducement to enjoy healthful indoor games, and to acquire skill and efficiency therein, and promote social welfare and social intercourse between the members, thereby promoting their mental and bodily health, and further by debates and discussions between them- selves at their meetings promote interest in automobile transportation, traffic, and knowledge of the industry in the city, and also to enable its members to cooperate in holding an annual automobile show and in securing judicious and needed legislation for the protection and advancement of the automobile industry in the city. This organization is a social club within the meaning of section 801. 6524 Art. 6. Athletic or sporting clubs. — Tennis, golf, boxing, boating, canoe, fishing, and hunting clubs, and any organization (of which the members are individuals) for the practice or promotion of athletics or sports, are included within the meaning of the words of the Act, "athletic, or sporting club or organization." A local, sectional, or national "athletic or sporting" association, the membership of which is composed wholly or partly of member clubs, is not within the scope of the Act. The possession and use of a gym- nasium, swimming pool, or other athletic facilities by an organization having religion or philanthropic social service for its exclusive or predominant purpose does not bring the organization within the class of athletic or sporting clubs or organizations. 6525 Examples. — (1) An intercollegiate athletic association, whose mem- bership is composed not of individuals but of the track teams of a group of colleges, is not within the scope of the Act, and dues and fees paid to it by the member teams are not taxable. Copyright 1922, by The Corporation Trust Company. WAR TAX 1309 SERVICE Reg. 43, Rev. — ] TAX ON ADMISSIONS AND DUES REGL LATIONS. 6526 (2) Dues and fees paid for membership in a Young Men's Christian Association or Young Men's Hebrew Association are not taxable, although they entitle the member to the use of a gymnasium, swimming pool, or other athletic facilities. 6527 Art. 7. Exempt organizations.— The Revenue Act of 1921 expressly 6510 exempts from tax "all amounts paid as dues or fees to a fraternal so- ciety, order, or association, operating under the lodge system." "Oper- ating under the lodge system" means carrying on its actjvTtieg under a form of organization that comprises local branches, charterr *; by a parent organiza- tion and largely self-governing, called "lodges," "chafers," or the like. 6528 Examples. — (1) An organization, formed for purely social purposes by Masons of the higher degrees, consisting of locai "lodges" and a "grand lodge," falls within the exemption. 6529 (2) Dues and fees paid to a "chapter" of a college fraternity are exempt from tax. 6530 (3) Dues and fees paid to a "local" of a labor union are free from tax. 653 1 (4) A national organization, of a social, athletic, or sporting character, comprising no local bodies but organized as a single and nation-wide unit, to which each member belongs directly, does not fall within the exemp- tion, 6532 (5) Dues and fees paid by members of a local organization among the students of a college which is similar to chapters of the larger college fraternities are not exempt from tax. 6533 Art. 8. Foreign clubs. — Dues or fees paid to a club located outside of the United States and having no branch or organization in the United States are not taxable. 6534 Art. 9. Dues or membership fees. — The Revenue Act of 1921 imposes a tax of 10 per cent on any amount paid as dues or member- ship fees (including recurrent assessments and penalties incurred by failure to pay promptly) to any club which is within the terms of the act: Provided, That the regular dues or membership fees (including recurrent assessments levied upon all active resident annual members but not including penalties incurred by failure to pay promptly) of an "active resident annual member" of such club are in excess of $10 per year. "An active resident annual member" is a member who is neither a life nor a nonresident member, but who in other respects enjoys full club privileges, as distinguished from the restricted privileges enjoyed by a person holding an associate or other partial membership. 6535 Thus in the case of a club or organization the regular dues or mem- bership fees of which are less than $10 per year, but which levies an assessment on its active resident annual members each year, if the regular dues or membership fees, plus the assessment, exceed $10 per year, the tax is applicable. The tax would likewise apply in the case of a club or organiza- tion which collects no regular dues or membership fees but meets its expenses by levying assessments on its members as funds are required, provided, of course, the assessments aggregate more than $10 per year for members who enjoy the full privileges of the club or organization. 6536 Where the dues or membership fees, determined in the manner herein outlined, of an active resident annual member are in excess of $10 per year, dues or membership fees paid by other classes of members, Copyright 1922, by The Corporation Trust Company. WAR TAX 1310 SERVICE 1-23-22. Reg. 43, Rev.— Part II. Dupb. TAX ON ADMISSIONS AND DUES REGULATIONS. whether or not they are in excess of $10 per year, are subject to the tax. So, also are extra charges which are imposed upon members for the privilege of using certain additional facilities for a period of time, as, for example, an additional charge of $60 per annum imposed upon members of a country club for the privilege of using the golf links. A "greens fee" charged to a guest is not taxable, unless the right or privilege granted in return is for a period of time, such as a season. A fine imposed for the violation of rules promulgated by a club or organization would be neither dues nor membership fees within the meaning of the Act, and therefore not taxable. 6537 As to the time for payment of the tax, see article 12. 6538 Examples. — (1) A certain social club has "members," nonresident members, associate members, and junior members. "Members" pay an initiation fee of $15 and regular dues of $10 per year. Associate members pay an initiation fee of $10 and regular dues of $5 per year. Nonresident members and junior members pay still less. In the case of this club a "member" is clearly the "active resident annual member" specified in the Act. As a "member's" regular dues are not in excess of $10 per year, none of the dues or membership fees paid by any member of the club are taxable. (The initiation fee of $15 paid by a "member" is taxable.) 6539 (2) A certain athletic club had members, dues, and fees precisely the same as those of this social club, except that the initiation fee of "members" is $10 and the regular dues of "members" are $15 per year. As these dues are in excess of $10 per year, in this case all dues paid to the club by members of any class are subject to tax. 6540 (3) The same athletic club levies in a certain year, in addition to its regular dues, an assessment of $10 on every associate member and provides a penalty of $1 if it be not paid within a month after due. This assessment is taxable, and so is the penalty if it be imposed. 6541 (4) A member of this same athletic club violates the house rules and is suspended until he pays a fine of $15. As a fine is neither dues nor membership fees, this $15 payment is not taxable. 6542 (5) A certain golf club's dues are $15 per year. Of this amount $10 is expended in the purchase for the member of a season ticket to a municipal golf course. The whole $15 is, nevertheless, taxable as dues. 6543 (6) A certain golf club charges a "green" fee of $1 for each guest that uses the course. Such a fee is not paid "as dues or membership fees," and is, therefore, not taxable as such. 6544 (7) The members of a certain curling club pay annual dues of $20. By the payment of $10 extra per year the privilege of skating on the club's rink can be secured for the member's family. A payment of this extra $10 is taxable as a membership fee. 6545 (8) A certain social club, the regular dues of which are $15 per year, has honorary members who pay no dues, but pay assessments when levied. Such members must pay tax on the amounts paid for assessments. 6546 (9) A tennis club in which the annual dues are $10, levies an assess- ment of $2 per year on each member to cover cost of tennis balls. The dues, fees, and assessments paid by members of this club are taxable. 6547 (10) A certain club, the dues and fees of which are taxable, requests a "subscription" of a definite amount from each resident member. Amounts paid by reason of such request are taxable. 6548 (11) A social club, the annual dues in which are $10, levies an assess- ment of $5 on members. The tax applies with respect to amounts paid as dues, fees, and assessments. Copyright 1922, by The Corporation Trust Company. WAR TAX 1311 SERVICE lc28 r 22.TT «,„.!_ i:i Reg. 43, Rev.— Part II. Dut*. TAX ON ADMISSIONS AND DUES REGULATIONS. 6549 (12) A certain social club, the dues and fees of which are taxable, passes a resolution providing that no membership dues or fees shall be collected from members who are in the military service of the United States. Such members thereafter pay no dues or fees and are therefore not liable for payment of tax with respect to membership in the club, but this does not relieve life members who are in the military service from payment of the tax on their life memberships. 6550 (13) A certain golf club, the dues and fees of which are taxable, issues to wives of members cards entitling them to the use of the course for one year, making a charge of $10 therefor. The amounts paid for such cards are taxable. 6551 (14) The membership of a certain social club is composed of its stock- holders. No dues are collected, but the expenses of the club are met by annual assessments of the necessary amount on each share of stock. If a stockholder enjoying full privileges of the club must pay assessments aggre- gating more than $10 per year, then the tax applies with respect to all pay- ments made to the club by any stockholder, whether in excess of $10 per year or not. 6552 Art. 10. Initiation fees. — Any amount paid as initiation fees to a club or organization coming within the provisions of section 801 of the Act is subject to the 10 per cent tax imposed thereunder (a) if such fees amount to more than $10, or (b) if the dues or membership fees (not including initiation fees) of an activejresident annual member are in excess of $10 per year. 6553 If the prescribed initiation fees amount to more than $10, the tax attaches regardless of the amount of dues or membership fees paid by an active resident annual member. On the other hand, if the initiation fees amount to less than $10, the tax dees not apply unless the dues or member- shipTfees, exclusive of initiation fees, of an active resident annual member are in excess of $10 per year. If such dues or membership fees are in excess of $10 per year any amount paid as initiation fees is taxable whether or not such initiation fees amount to more than $10. 6554 Where the application of the tax to initiation fees depends upon the amount paid as dues or membership fees by an active resident annual member, recurrent assessments (but not penalties incurred by failure to pay promptly) are to be considered in ascertaining whether such dues or member- ship fees are in excess of $10 per year. 6555 The term "initiation fee" includes any payment to the club required for becoming a member, whether evidenced by a certificate of member- ship or a share of stock in the club or not. Thus, it includes amounts paid to such clubs or organizations for stock where the purchase of such stock is required as a prerequisite of membership. This applies only to stock pur- chased from the club or organization and not to amounts paid for stock purchased from retiring members or other sources. 6556 Examples. — (1) In the case of the social club described in the first example of article 9, above, an initiation fee paid by a "member" is taxable because it amounts to more than $10, but initiation fees paid by members of the other classes are not taxable. 6557 (2) In the case of the athletic club described in the second example in article 9, above, initiation fees paid by members of any class are taxable, because the regular dues of "an active resident annual member" are in excess of $10 per year. Copyright 1922, by The Corporation Trust Company. WAR TAX 1312 SERVICF 1-23-22. Reg. 43, Rev. — Part II. Dues. TAX ON ADMISSIONS AND DUES REGULATIONS. 6558 (3) A certain tennis club is a stock corporation and each new member has to buy a share of stock in the club. The amount paid for this share of stock is taxable as an initiation fee. 6559 (4) The land of this same tennis club is owned by a corporation, organized for that purpose, in which many of the club members own stock. Money being desired to buy additional land, it is decided to admit no new members to the club except such as will buy, in addition to the share of stock in the club itself, one share of stock in the land-owning corporation. Money paid for this stock in the land-owning corporation is not taxable as an initiation fee. 6560 (5) The same tennis club, at a later stage of its career, drops the requirement of the purchase of stock in the land-owning corporation, but requires each applicant for membership, in addition to paying for his share of stock in the club corporation, to purchase a first-mortgage bond secured by the club property. The amount paid for this bond is not taxable as an initiation fee. 6*361 Art. 11. Life Membership. — Amounts paid for life membership are 6511 not taxable under the Revenue Act of 1921. Neither were such payments subject to the tax imposed under section 801 of the Revenue Act of 1918; but they were taxable under the Revenue Act of 1917. The fact that tax was collected on amounts paid for life membership while the latter Act was in force does not entitle holders of life memberships who paid such tax to exemption from paying annually under the 1918 and 1921 Acts a tax equivalent to that paid by active resident annual members. Some clubs provide that active resident annual members, who have regularly paid dues or membership fees as such shall, after a specified period of time, for example, 10 years, automatically become life members without being required to pay further dues or membership fees. In such cases amounts paid as dues or membership fees during the period of active resident annual membership are not paid for life membership within the meaning of the Act. They are paid as dues or membership fees and are taxable as such. The tax likewise attaches to amounts paid for membership for more than one year but for less than life, such as 10-year or 20-year memberships. However, unless the holders of such memberships are required to pay annual dues or membership fees, or recurrent assessments, they are exempt from the annual tax imposed on active resident annual members and life members. If any dues or member- ship fees or assessments are levied on such members they are taxable. 6562 The annual tax imposed on life members under the Revenue Act of 1921 is measured or determined by the tax paid by active resident annual members, to be computed in the manner outlined in article 9. The annual tax must be paid by life members whether or not they actually avail themselves of the privileges of membership to which they are entitled. 6563 As to the time for the payment of the tax, see article 12. 6564 Examples. — (1) A certain tennis club has the following classes of membership: Honorary, life voting, voting, nonresident, women's, and junior. Here evidently a voting member is the "active resident annual member'' specified in the Revenue Act of 1921. A life voting member pays $500 on admission and is exempt from dues. The dues of a voting member are $30 a year, payable in advance in three installments of $10 each, payable January 1, May 1, and September 1, or February 1, June 1, and October 1, or March 1, July 1, and November 1, or April 1, August 1, and December 1, depending on the date on which the voting member was admitted to member- Copyright 1922, by The Corporation Trust Company. WAR TAX 1313 SERVICE 1-23-22. Reg. 43, Rev.— Part II. Dues. TAX ON ADMISSIONS AND DUES REGULATIONS. ship. If any installment is not paid on or before the 15th day of the month in which it is due a penalty of $2 must also be paid. In this case each life voting member must pay (to the club, for the Government imposes on it the duty of collection) a tax of $1 on May 1 and September 1, 1922, and on Janu- ary 1 , 1923, etc. If any one of these taxes is not paid to the club on or before the 15th day of the month in which it is payable, the tax will be $1.20 instead of $1. If it happens that an assessment of $20, in addition to the regular dues and payable November 15, 1922, is levied on the voting members, then a tax of $2 from each life voting member must also be paid on that date to the club. If the $500 life voting membership fee was paid before November 1 , 1917, or on or after April 1, 1919, it is not itself taxable, but if paid on or after November 1, 1917, and before April 1, 1919, it is subject to a tax of $50 under the Revenue Act of 1917. G565 (2) A certain golf club has two classes of members, life members and "members/' A life member pays $1,000 on admission and is exempt from dues. A "member's" dues are $60 a year, a $30 installment for January — June being payable April 1, and a $30 installment for July- !;ecembcr being payable October 1. In the case of this club it is clear that a ''member" is the "active resident annual member" specified in the Revenue Act of 1921. John Smith is elected a life member of this club in February, 1919. and in that month pavs his $1,000 fee and a tax of $100 thereon, under the Revenue Act of 1917. ' Under the Revenue Acts of 1918 and 1921 he will have to pay (to the club, for the Government imposes on it the duty of collection) on' April 1, 1919, a tax of $1.50, and on October 1, 1919, April 1 [ 1920, etc.. a tax of $3 — the same taxes as those Acts impose on a "member." (£3) A certain social club has three classes of members, life members, active members, and associate members. The regular dues of the acti • - members (clearly the "active resident annual members" specified in the Revenue Act of 1921 — see art. 9, above) are $10 per year. Edwin UovU became a life member in 1916, paying a fee of $100. That payment Ms not taxable. Nor does he have to pay any annual tax under the Revenue Act of 1 92 1 . For by that Act he is to pay the same annual tax as "an active resident annual member," and as the regular dues of "an active resident annual member" are not in excess of $10 per year, such a member pays no tax whatsoever. (Sec art. 9, above.) 6G6 7 (4) A certain club the dues and fees of which are taxable has life members who do not avail themselves of the privileges of member- ship. Each of such life members must pay the tax imposed by section 801 of the Revenue Act of 1921 so long as he holds a life membership in the club. 6563 (5) A certain social club the dues and fees of which are taxable passes a resolution providing that no membership dues or fees shall be col- lected from members who are in the military service of the United States. Such members thereafter pay no dues or fees and are therefore not liable for payment of tax with respect to membership in the club, but this does not relieve life members who are in the military service from payment of the tax on their life memberships. COLLECTION, RETURN, AND PAYMENT OF TAX. 6569 Art. 12. Duty to collect, return, and pay tax. — Every club, organi- 6512 zation, corporation, partnership, or individual receiving any taxable payment for dues or fees must, at the time of such receipt, collect the tax from the person making such payment. And there rests on such person the Copyright 1922, by The Corporation Trust Company. WAR TAX 1314 SERVICE i-23-22. Reg. 43, Rev —Part II. Dues. TAX ON ADMISSIONS AND DUES REGULATIONS. corresponding duty of then paying such tax. Where the dues or membership fees are payable in periodical installments, the tax shall be collected as and when each installment is paid. In the case of recurrent assessments the tax is due and shall be collected and paid when such recurrent assessments are paid. The tax on initiation fees is due and payable at the time of payment of such fees. 6570 Every club or organization having life members taxable under the Revenue Act of 1921 must collect from such life members the tax imposed on them by that Act. And such life members must, on their part, promptly pay such tax. It shall be collected and paid "at the time for the payment of dues by active resident annual members. " Thus, if the dues or membership fees of an active resident annual member, or if another desig- nation is used, the member whose privileges correspond to those usually enjoyed by active resident annual members (see art. 9), are payable in periodi- cal installments the tax due from life members becomes due and shall be collected and paid as and when these installments are paid. If recurrent assessments are levied on active resident annual members, there shall be collected from life members at the time such assessments are paid a tax equivalent to 10 per cent of the amount so paid. 6571 A monthly return and payment of all taxes collected must be made in accordance with the provisions of article 13, below. 6572 Art. 13. Records, returns, and payments. — Every "social, athletic, or sporting club or organization," unless expressly exempted from the Tax on Dues, or unless free from that tax because neither the initiation fees of any class of its members nor the regular dues or membership fees of an "active resident annual member" exceed $10 per year, shall keep an up-to-date record showing the number of its members of each class. It shall also keep a record in which shall be entered each day (1) under the head of "Life member- ship:" (a) the number of life members from whom a life membership tax has been collected on that day, and (b) the total amount of tax so collected; and (2) under the head of each other class of membership: (a) the number of members of that class paying on that day dues or membership fees or initiation fees, (b) the total amount so paid by members of that class, and (c) the total amount of tax collected on such payments. Every such club or organization shall make up each month from this daily record a return in duplicate on Form 729 (revised), in accordance with the instructions printed on the back of that form. This return must be made under oath, unless the amount of the tax returned is $10 or less, in which case it may be signed or acknowledged before two witnesses instead of being under oath. This return together with the amount of the tax must be in the hands of the collector of internal revenue of the district in which is located the principal office or place of business of the person making such return and payment, on or before the last day of the month following that for which it is made. (For penalties see art. 17, below.) A copy of Form 729 (revised) [page 1305] will, as far as possible, be mailed each month to every club or organization that filed a return for the pre- ceding month, but a failure to receive such copy will not, of course, excuse a failure to return and pay the tax. A return must be made for each month whether or not taxable dues or fees have been collected. Where a club has no tax to report during any month, this fact should be noted on the return filed for that month. The records above described shall be preserved in the office of the club or organization for a period of two years in such a manner as to be readily accessible on request to internal revenue officers. Copyright 1922, by The Corporation Trust Company. WAR TAX 1315 SERVICE 1-23-22. Reg. 43, Rev— Part II. Dues. TAX ON ADMISSIONS AND DUES REGULATIONS. 6573 Examples: (1) A member of a club the dues and fees of which are taxable fails to pay his dues and is carried for a specified time before being expelled. Such member is not liable for payment of tax with respect to unpaid dues so long as they remain unpaid, but should the club succeed in collecting dues covering the period during which the member was delinquent it must account for the tax. 6574 (2) A member of a club the dues and fees of which are taxable refuses to pay the tax to the club. The club should report the case to the collector of internal revenue for the district in accordance with article 17 of these Regulations. There is, however, nothing in the law to prevent a club paying the tax for its members if it desires to do so. 6575 Art. 14. Credit to club for overpayment. — If a club, organization, 8018 corporation, partnership, or individual overpays or overcollects the 8023 tax due with one monthly return, credit for the overpayment or overcollection may be taken against the tax due with a succeeding return. In case a credit is claimed, a statement shall be attached to the return setting forth fully the facts regarding the alleged overpayment or over- collection. In the case of the overcollection of a tax, no credit for the amount overcollected shall be allowed until the club, organization, corporation, partnership, or individual making the overcollection submits a sworn state- ment showing that the tax in each case so overcollected has been returned to the person making the overpayment, that no claim for a refund of any such amount has been filed with the collector or Commissioner on behalf of any of the members who paid such amounts, and a complete list of such members. 6576 Art. 15. Refund of overpayment. — Any club, organization, corpora- tion, partnership, or individual that has paid to the collector of internal revenue, as a tax under section 801 of the Revenue Act of 1918, or section 801 of the Revenue Act of 1921, any amount erroneously or illegally assessed, or any amount in excess of the amount of the tax actually imposed by those sections for the month covered by that payment, or any amount as a penalty for the collection of which there was no authority, may secure a refund of the amount so overpaid by filing with the collector to whom such payment was made a properly prepared claim on Form 46 (revised). When a club or organization seeks to secure a refund to it of an amount collected by it from its members and then paid over by it to the collector of internal revenue, the claim on 46 (revised) must be accompanied by a list of members who paid such amount and by a sworn statement of a club officer that no claim for a refund of any such amount has been filed with the collector or Commissioner on behalf of any such members. 657 7 Art. 16. Refund by club of overcollection. — Every club, organiza- tion, corporation, partnership, or individual that has collected from any person, as a tax under section 801 of either the Revenue Act of 1918, or of 1921, any amount erroneously or illegally assessed, or any amount in excess of the amount of the tax imposed by that section actually due from such per- son, shall upon proper application promptly refund such amount to the person entitled thereto, even though such amount has already been paid over to the collector of internal revenue and no corresponding credit (see art. 14, above) or refund (see art. 15, above) has yet been secured. Copyright 1922, by The Corporation Trust Company. WAR TAX 1316 SERVICE 1-23-22. Reg. 43, Rev.— Part II. Dues. TAX ON ADMISSIONS AND DUES REGULATIONS. 6573 PENALTIES Act or Default Penalized "Failure to make and file" return "within the time prescribed" (when return not filed later and reasonable cause shown for failure to file in time). Willfully making "false or fraudulent return." Failure to pay tax when due Failure by any "person"* to "pay, collect, or truly account for and pay over any such tax, make any such return or supply any such informa- tion at the time or times required by law or regulation." Willful refusal by any "person"* to "pay, collect, or tru y account for and pay over any such tax, make such return or supply such information at the time or times required by law or regula- tion," or willful attempt "in any man- ner to evade such tax." Willful refusal by any "person"* to "pay, collect, or truly account for and pay over any such tax." Penalty Applicable 25 per cent addition to tax (to be collected as part of tax or if tax already col- lected then in same man- ner as tax). 50 per cent addition to tax (to be collected as above). 5 per cent addition to tax and 1 per cent interest for each full month from time tax due. Penalty of $1,000. not more than Fine of not more than $10,000, or Imprisonment for not more than one year, or both. 100 per cent* addition to tax . t Section of Revenue Act of 1921 Section 3 176, U. S. Revised Statutes, as re- enacted by sec- tion 1311. Do. 502 (d). 1302 (a). 1302 (b). 1302 (c). *"Person" includes "an officer or employee of a corporation or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs." (Section 1302 (d) [^[80 17].) f"No penalty shall be assessed under this subdivision for any offense for which a penalty may be assessed under authority of section 3176 of the Revised Statutes, as amended," the substance of which is stated above. (Section 1302 (c) [^[8016].) 6579 Art. 17. Penalties. — The scope of the penalties applicable to the Tax 5509 on Dues is so broad that reference will be made only to their most ^ 8014 common applications. Every club or organization, on which there 8071 rests a duty (see art. 13, above) to file a monthly return on Form 729 (revised), that fails to hie such return, and to pay over the tax due thereon, during the month which follows that for which such return should be made, is subject to certain automatic penalties. A mere failure to file the return within the following month causes to automatically accrue the 25 per cent penalty imposed by section 3176 of the Revised Statutes, as amended. P The 50 per cent penalty computed on the total tax liability accrues when the return filed is false or fraudulent. A mere failure to pay over the tax within Copyright 1922, by The Corporation Trust Company, WAR TAX 1317 SERVICE 1-23-22. Reg. 43, Rev— Part II. Dues. TAX ON ADMISSIONS AND DUES REGULATIONS. the month following its receipt by the club or organization causes to auto- matically accrue, under section 502 (d) of the Revenue Act of 1921 [^[5509], a penalty of 5 per cent, and of interest at 1 per cent per month for each full month of delay. Every club member who fails to pay to his club at the proper time the amount of the tax on his dues or fees and every club or organization which fails to collect or truly account for and pay over such tax (see art. 13, above) is subject, under section 1302 of the Revenue Act of 1921, [ 1f80 1 4] , to a penalty of not more than $1,000. If this failure amounts to a willful refusal to pay or an attempt to evade the tax on the part of the club member, or a willful refusal to collect or truly account for and pay over such tax on the part of the club or organization, such willful refusal subjects the offender to a fine of not more than $10,000, or imprisonment for not more than one year, or both, and in addition a penalty of 100 per cent of the amount of the tax (see sees. 1302 (b) and (c) of the Revenue Act of 1921). It is the duty of the club officer who has charge of the collection of dues and fees to report to the collector of internal revenue the name and address of any member who refuses to pay his tax, together with the amount of the tax and such other information as will enable the collector to cause a proper investigation to be made. 6580 Example. — -A certain social club collects $1,000 of taxable dues each month, but carelessly fails to file a return for April, May, and June, 1922, until September 2, 1922. The taxes and automatically imposed penal- ties then due for those months would be as follows: April tax $100.00 25 per cent penalty 25.00 5 per cent penalty 5.00 3 months' interest 3.90 $133.90 May tax 100.00 25 per cent penalty 25.00 5 per cent penalty 5.00 2 months' interest 2.60 132.60 June tax ! 100.00 25 per cent penalty 25.00 5 per cent penalty 5.00 1 month's interest 1.30 131.30 Total of taxes and penalties $397.80 6581 In addition the club would be liable to a penaltv of not more than $1,000. AUTHORITY FOR REGULATIONS 658a Art. 18. Promulgation of regulations. — In pursuance of this pro- 8009 vision of the Act the foregoing regulations are hereby made and promulgated and all rulings inconsistent with them arc hereby revoked. C P. SMITH, Acting Commissioner of Internal Revenue. Approved January 11, 1922. jRcIcased for publication Jan. 23, 1922.] A. W. MELLON, . Secretary of the Treasury. Copyright 1922. by The Corporation Trust Company WAR TAX 1318 SERVICE 2-15-22. TAX ON ADMISSIONS AND DUES REGULATIONS. (T. D. 3282.) 6583 Revenue Act of 1918— Amendment to Art. 12, Reg. 43, Part II.— The first paragraph of Article 12, Regulations No. 43, Part II (Re- vised 1920), as amended by Treasury Decision No. 3246 [1[6938, 1921 War Tax Service], is hereby further amended to read as follows: "The Revenue Act of 1918 imposes a tax of 10 per cent on any amount paid as dues or membership fees (including recurrent assessments, assess- ments for running expenses, and penalties incurred by failure to pay promptly) to any club which is within the terms of the Act (see arts. 1-7, above) : Provided, That the regular dues or membership fees (including recurrent assessments, and assessments for running expenses, levied upon all active resident annual members but not including penalties incurred by failure to pay promptly) of an "active resident annual member" of such club are in excess of $10 per year. "An active resident annual member" is a member who is neither a life nor a nonresident member, but who in other respects enjoys full club privileges, as distinguished from the restricted privileges enjoyed by a person holding an associate or other partial membership." (T. D. 3282, signed by Commissioner D. H. Blair, and dated February 11, 1922.) (T. D. 3285.) 6584 Articles 9, 10, 11 and 12 of Reg. 43, Part II Amended— The first 6534 paragraph of Article 9, Regulations No. 43, Part II (Revised De- cember, 1921), is hereby amended to read as follows: "The Revenue Act of 1921 imposes a tax of 10 per cent on any amount paid as dues or membership fees (including recurrent assessments, assess- ments for running expenses, and penalties incurred by failure to pay promptly) to any club which is within the terms of the Act: Provided, That the regular dues or membership fees (including recurrent assessments, and assessments for running expenses, levied upon all active resident annual members but not including penalties incurred by failure to pay promptly) of an "active resident annual member" of such club are in excess of $10 per year. "An active resident annual member" is a member who is neither a life nor a nonresident member, but who in other respects enjoys full club privileges, as distinguished from the restricted privileges enjoyed by a person holding an associate or other partial membership." 6585 The third paragraph of Article 10, Regulations No. 43, Part II (Re- 6554 vised December, 1921), is hereby amended to read as follows: "Where the application of the tax to initiation fees depends upon the amount paid as dues or membership fees by an active resident annual member, recurrent assessments, and assessments for running expenses (but not penalties incurred by failure to pay promptly) are to be considered in ascertaining whether such dues or membership fees are in excess of $10 per year." 6586 The last two sentences of the first paragraph of Article 11, Regulations 6561 No. 43, Part II (Revised December, 1921), are hereby amended to read as follows: "However, unless the holders of such memberships are required to pay annual dues or membership fees, recurrent assessments, or assessments for running expenses, they are exempt from the annual tax imposed on active Copyright 1922, by The Corporation Trust Company. WAR TAX 1319 SERVICE 2-15-22. TAX ON ADMISSIONS AND DUES REGULATIONS. resident annual members and life members. If any dues or membership fees or such assessments are levied on such members they are taxable." 6587 The next to the last sentence of the first paragraph of Article 12, 6569 Regulations No. 43, Part II (Revised December, 1921), is hereby amended to read as follows: "In the case of recurrent assessments, and assessments for running ex- penses, the tax is due and shall be collected and paid when such assessments are paid." 6588 The last sentence of the second paragraph of Article 12, Regulations 6569 No. 43, Part II (Revised December, 1921), is hereby amended to read as follows: "If recurrent assessments or assessments for running expenses are levied on active resident annual members, there shall be collected from life members at the time such assessments are paid a tax equivalent to 10 per cent of the amount so paid." (T. D. 3285, signed by Commissioner D. H. Blair, and dated February 11, 1922.) Copyright 1922, by The Corporation Trust Company. WAR TAX 1320 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions: TAX ON ADMISSIONS AND DUES REGULATIONS. REGULATIONS NO. 43 (REVISED) PART I. Relating to the TAX ON ADMISSIONS (Promulgated February 15, 1922. Released for publication February 28, 1922.) [Fully indexed at the end of this section.] CHAPTER ONE. TAXES ON ADMISSIONS. Paragraph Basis, rate, and computation of tax 6589 Meaning of term "place" 6593 Meaning of "admission" 6601 Charges for rental of property or services 6608 Nontaxable payments 6637 CHAPTER TWO. LEASES OF BOXES OR SEATS. Basis, rate, and computation of tax 6657 Meaning of "lease" 6662 CHAPTER THREE. ROOF GARDENS, CABARETS, OR SIMILAR ENTERTAINMENTS. Basis, rate, and computation of tax 6669 Entertainments included 6680 CHAPTER FOUR. TAXES ON CHARGES IN EXCESS OF ESTABLISHED PRICE, Scope and basis of taxes 6688 Regular or established price defined 6690 Rate and computation of tax: Box-office sales 6694 Brokers' sales 6698 CHAPTER FIVE. EXEMPTIONS. Taxes to which exemption applies 6711 Basis of exemption 6720 Necessary character of organization 6723 Religious organizations 6729 Educational organizations 6735 Charitable organizations 6749 The American Legion 6754 Symphony-orchestra organizations 6755 Persons in the military or naval service 6757 Persons formerly in the military or naval service 6758 Municipal improvement societies 6760 Cooperative -or community-center moving-picture theater organizations 6763 Federal, State, or municipal governments 6765 Copyright 1922, by The Corporation Trust Company WAR TAX 1321 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. Paragraph Agricultural fairs: Basis of exemption » . T . vr . _ , ,. . 6766 Fairs and exhibits included *Jk*A , ?w54 6768 Claim for exemption 6777 CHAPTER SIX. TICKETS AND SIGNS. Tickets or other means to check admissions required 6784 Requirements applicable to? 'Jtjtket£^SJQ I .,2.1. .^.TfUTlCISLl v 6788 Printing of tickets, notice to be given 6805 Mechanical devices 6806 Signs to be posted 6807 CHAPTER SEVEN. COLLECTION, RETURN, AND PAYMENT OF TAX. Duty to collect, return, and pay tax: Tax on admissions 6S10 Taxes on charges in excess of established price 6815 Application for and certificate of registry 6817 Traveling shows 6819 Records: Taxes on admissions 6823 Taxes on charges in excess of established price 6825 Returns and payments 6826 Leases of places ;©WT -ilH-T^A-HD 6827 CHAPTER EIGHT. CREDITS AND FUNDS Credit for overpayment 6828 Refund of erroneous or illegal collection 6831 Refund of overcollection 6832 CHAPTER NINE. PENALTIES. Penalties 6834 Authority for and promulgation of regulations 6836 Copyright 1922, by The Corporation Trust Company. WAR TAX 1322 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. CHAPTER ONE Taxes on Admissions 6539 Art. 1. Basis, rate, and computation of tax. — Any amount, if in 6500 excess of 10 cents, paid for admission to any place (see Art. 2) is 6501 subject under these provisions of the Act to a tax of 1 cent for each 10 cents or fraction thereof of the whole amount so paid, which tax is to be paid by the person paying for such admission. This tax applies to the payment for admission, not to the admission itself , and as soon as payment for admission is made the tax applies, whether or not the admission itself ever takes place. 1 And the tax applies if the payment for admission occurs in the United States, even though the admission is to take place outside the territorial limits of the United States. No refund of the tax can be allowed by reason of nonuser unless the admission charge also is refunded (see Art. 45). 6580 The tax applies to the amount paid for each admission separately, and, therefore, if two or more admissions are paid for at once, the total tax is determined by computing separately the tax on each admission and by then adding together the taxes so obtained. In other words, the tax for 10 single admissions will always be 10 times the tax for each single admis- sion. In the case of season tickets or subscriptions which entitle the holder or subscriber to more than one admission the tax is computed on the amount paid without regard to the number of admissions involved. However, if two or more season tickets are paid for at the same time, the tax would be computed on each ticket separately, and the same rule would apply to sub- scriptions. 6591 Where a single charge is made to cover admission to more than one attraction under the same management the tax is computed on the basis of such charge. If separate charges are made for each attraction, the tax is computed on each such charge. For example, if a circus issues a combination ticket entitling the holder to admission and to the use of a reserved seat for $1.50 the tax due is 15 cents, whereas if separate tickets for admission and for a seat are sold for 75 cents each, the tax on each charge would be 8 cents, making a total of 16 cents. 6592 The amount paid for admission to any place is the amount which must be paid to the person controlling such admission in order to secure that privilege. If a ticket or card of admission is sold by the person controlling said admission for an amount in excess. of the regular or established price or charge therefor, the tax imposed by section 800 (a), paragraph (1), will apply to the entire amount for which it is so sold. In addition the theater or other place of amusement (or broker) selling such ticket or card of admission for an amount in excess of the regular or established price therefor will be subject to a tax on the amount of the excess charge. (See Chapter Four.) 6593 Art. 2. Meaning of the term "place." — The tax under these provi- sions of the Act is on "the amount paid for admission to any place." "Place" is a word of very broad meaning, and it is not defined or otherwise limited by the Act. But the basic idea it conveys is that of a definite location. The phrase, therefore, "to any place" does not narrow the meaning of the word "admission," except to the extent that it implies that the admission •The Act applies generally only to the mainland of the United States, Hawaii, and Alaska. Copyright 1922, by The Corporation Trust Company. WAR TAX 1323 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. is to a definite location on or beneath the surface of the earth, or to a structure whose location with relation to the earth is definitely fixed, at least tempor- arily. The "place" need not be within the territorial jurisdiction to which the act is applicable, for as has been noted (Art. 1) the tax applies to the payment, not to the admission. Places of amusement obviously constitute the most important class of places admission to which is subject to this tax. 6594 Examples. — (1) Each of the following is a "place" within the mean- ing of the Act: (a) An outdoor amusement park, and such attractions therein as a scenic railway, a merry-go-round, a roller coaster, a Ferris wheel, a toboggan slide, a bump-the-bumps, a whip, a dip-the-dips, a speed-o- plane, a hilarity hall, and a dance hall. (b) An observation tower on top of a high building. (c) A grandstand built for the purpose of viewing a parade passing in the street or a baseball game in an adjoining baseball park. (d) A cave. (e) A space inclosed in which are seats from which to watch the bathing along the beach. (f) A floating theater operating along a river, anchored or moored for each performance. 6595 (2) None of the following is a "place" within the meaning of the Act: (a) A railway car (unless rendered stationary by sidetacking or removal from track). (b) A street car (unless rendered stationary by sidetracking or removal from track). (c) A steamboat (unless anchored or moored). (d) A sight-seeing automobile. (e) A railroad train or a boat following the course of a boat race. 659 6 (3) Where an admission charge is made to a dancing pavilion and an additional charge is made, in the case of each dance, for admiscion to the dancing floor within this pavilion, admission to the dancing floor (as well as admission to the pavilion) is admission to a "place" within the mean- ing of the Act. 659 7 (4) A tennis tournament is a contest and not a "place" and, there- fore, an amount paid by a player to "enter" such a tournament is not "paid for admission to any place" within the meaning of the Act. On the other hand, the grandstand at the tennis tournament is a "place" within the meaning of the Act. 6598 (5) Amounts paid for rides in an airplane making exhibition nights are not taxable. It is not material that the flights start and termi- nate in a fair ground. Amounts paid for admission to a building or other inclosure to view an airplane are, however, taxable. 6599 (6) Admissions to the amusements called "shoot-the-chutes" and "the Old Mill" are taxable. A charge for admission to small boats operated and propelled by means of a current of water confined to a narrow channel which determines the course and direction of the boats, is taxable as an admission to a place. However, an amount paid for a ride on a boat in an open lake or stream where the boat may be steered in any direction or take any course desired is not taxable. 6600 As to the application of the tax where the charge includes the rental of property or services, see Article 4. Copyright 1922, by The Corporation Trust Company. WAR TAX 1324 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6601 Art. 3. Meaning of "admission." — The tax is imposed on "the 6507 amount paid for admission to any place." It applies only to amounts in excess of 10 cents which must be paid in order to gain admission to a place (see Art. 1). Hence the tax will not apply to voluntary contri- butions where no payment is required for admission to such place nor to payments made under certain other conditions (for which see Art. 5). The term "admission" primarily means being permitted the right or privilege to enter into a place. However, the Act specifically provides that it shall also include "seats and tables, reserved or otherwise, and other similar accommo- dations." A charge for their use, therefore, in any place, must be treated as a taxable charge for admission, and not as a rental charge, which would escape those taxes. (See Art. 4.) So an amount paid for the right to use a reserved seat in a theater or circus, a table in a roof garden, a seat in a hotel room or window to view a parade, or the like, is taxable. This is true whether the charge made for the use of the seat, table, or similar accommc* dation is combined with an admission charge proper to form a single charge, or is separate and distinct from an admission charge, or is itself the sole charge. 6602 Where an original admission charge carries the right to remain in a place, or to use a seat, table, or other similar accommodation for a limited time only, and an additional charge is made for an extension of such time, the extra charge is paid for "admission" within the meaning of the Act. For instance, amounts paid for second or repeat rides on roller coasters and merry-go-rounds are paid for "admission." Other examples which will illustrate the principle stated herein follow: 6603 Examples. — (1) Where 75 cents is paid for general admission to a circus and then 50 cents is paid for a reserved seat, the latter amount, equally with the former, is "paid for admission" within the meaning of the Act. 6604 (2) Where $10 is paid to a hotel to reserve a table for celebrating New Year's eve, this amount is "paid for admission" within the meaning of the Act. 6605 (3) An amount paid for the use of a swinging beach chair at a coast resort is not "paid for admission" within the meaning of the Act unless it is located in a space so enclosed or set apart as to constitute a place. (See Art. 2.) 6606 (4) An amount paid for the use of a rolling or movable chair to be moved at the will of the occupant, no definite limits of space being set, is not "paid for admission to any place" within the meaning of the Act. (See Art. 2.) 6607 (5) While the use of a seat must be considered an "admission" within the meaning of the Act, an amount paid for a seat in a parlor car is not an "amount paid for admission to any place " because a parlor car is not a place within the meaning of the Act. (See Art. 2.) 6608 Art. 4. Charges for rental of property or services. — The provisions of this article do not relate to charges for "seats and tables . . . and other similar accommodations," which by the express terms of the Act are taxable as admissions (see Art. 3). Reference is here made to charges which are designated as rental or service charges, but which in fact may or may not represent, in whole or in part, admissions within the provisions of the Act. 6609 These charges are of two general classes, viz: (A) where there is a single undivided charge, and (B) where there are separate and Copyright 1922, by The Corporation Trust Company. WAR TAX 1325 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. distinct charges designated for admission and for rental or services. These will be considered in the order named. A. Where There Is a Single Undivided Charge 6610 A charge imposed on a person admitted to a place which is not in fact or name an admission charge, but is a bona fide charge for the rental of real or personal property or equipment, or for personal services, is not taxable. If a charge involving rental or service is designated as an admission charge it will be presumed that it is in fact a charge for admission. The tax will apply in such case unless it is conclusively proven that the charge, in whole or in part, is for rental or service, and the burden of proof will rest on the person asserting that it is of such a character. On the other hand, the designation of a charge as a rental or service charge will not avoid the application of the tax if it in fact represents a charge for admission. In such cases the following rules will be applied in determining the true character of the charge: 661 1 (1) If the charge actually includes the right to use property or equip- ment or the right to services, and applies only to persons availing themselves of the use of the property, equipment, or services provided, other persons being admitted free or not admitted at all, the tax does not apply. 6612 (2) If the charge (a) does not involve rental or service, or (b) is clearly unreasonable and excessive, the tax applies. 6613 (3) If persons are admitted who are not permitted to use property or equipment or avail themselves of the services afforded others, and persons' so admitted are required to pay the same charge as is imposed on persons to whom property, equipment, or services are furnished, the tax applies to amounts paid by all persons admitted. 6614 (4) If persons not permitted to use property or equipment, or to avail themselves of services, are required to pay a lesser charge than persons who are furnished property, equipment, or services, this lesser charge is taxable as an admission. 6615 In the situation outlined in the preceding paragraph, such part of the charge exacted from persons using property, equipment, or services as equals the charge imposed on persons not using such property, equipment, or services is deemed to represent an admission charge and is taxable as such. B. Where There Are Separate and Distinct Charges 6616 In cases where there is a charge (whether called an admission charge or not) generally applicable to persons admitted to a place, and also one or more bona fide separate charges for rental or services, as the case may be, then only the amount paid for the generally applicable charge is "paid for admission" within the meaning of the act. 6617 Examples. — (1) Where a charge is made for admission to a build- ing or inclosure in which a roller or ice skating surface is located, such charge is taxable the same as an admission to any other place of amuse- ment regardless of whether or not persons paying the charge are also furnished with skates and admitted to the skating surface without the payment of an additional amount. Therefore, where the manager of a skating rink makes a single charge of 50 cents for admission to a building or inclosure, the skating surface, and for the use of skates, the tax to be collected in this case is 5 cents. Copyright 1922, by The Corporation Trust Company. WAR TAX 1326 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. The same tax would be payable on this charge if it covered admission to the building or inclosure only. 6618 The building or inclosure in which the skating surface is located and the skating surface proper are separate places within the mean- ing of the law. Therefore, where single charges are made for admission to the building and the skating surface, the latter charge including the rental of skates, both charges are taxable as amounts paid for admission. For example, if a charge of 25 cents is made for admission to the building or inclosure and another charge of 25 cents covering rental of skates and admis- sion to the skating surface, the tax to be collected is 3 cents on each charge. 6619 Where bona fide separate charges are made for admission to the skating rink, skating surface, and for rental of skates, and persons using their own skates are required to pay the first two charges and no more, the tax attaches only with respect to the admission charges. For example, where 20 cents is charged for admission to the rink, 10 cents for admission to the skating surface, and 30 cents for skate rental, tax would not attach to the skate rental charge. 6620 Where no charge is made for admission to the skating rink and a single charge covers rental of skates and admission to the skating surface, tax attaches to the entire amount of this charge. 6621 Where a charge is made for admission to the skating rink and sep- arate charges are made for rental of skates and admission to the skating surface, the admission charges only are taxable provided persons using their own skates are required to pay the admission charges and no more. 6622 Whether a charge is made to the rink or not where persons using their own skates are not required to pay as much for admission to the skating surface as the charge exacted from persons who rent skates from the rink, the charge for admission to the skating surface shall be deemed to be the amount paid by persons using their own skates. For example, where 10 cents is charged for admission to the rink (or where no charge is made for admission to the rink), 10 cents for admission to the skating surface, and 30 cents for rental of skates — but a person using his own skates is required to pay 25 cents— the established price for admission to the skating surface is 25 cents'. 6623 (2) A certain golf club charges guests and other nonmembers a green fee" of $2 for each time they play on its course. This charge is not taxable as an amount paid for admissions. 6624 (3) In a certain amusement park is a tennis court which is rented for 50 cents per hour. This charge is clearly a rental charge for the use ot the court and is not "paid for admission" within the meaning of the Act. 6625 (4) A certain bathing establishment at a coast resort makes a "rental" _ charge of 50 cents, for which it furnishes a bathing suit, towel, and a dressing room. The patrons bathe in the ocean from an uninclosed beach. Were the 50 cents is clearly for rental and is not "paid for admission" within the meaning of the Act. 6626 (5) A 50-cent charge is made to everyone going out on a certain • n h j hin gP ier - ™s charge covers the use of fishing tackle. No one is allowed on the pier unless he fishes and everyone must pay the full charge whether he uses his own fishing tackle or not. In this case the amount paid is clearly paid for admission" within the meaning of the Act. 6627 (6) A certain dancing school charges admission and an additional iee, which is reasonable, for "instruction." It is only imposed on persons desiring dancing instruction. This instruction charge is evidently Copyright 1922, by The Corporation Trust Company. WAR TAX 1327 SERVICE Reg. 43, Rev. — Part I.— Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. paid for services and so is not "paid for admission" within the meanin? of the Act. 6628 (7) The charge for "admission" to a certain dance is only $1 per person, but each person is charged by the management a "hat- checking fee" of 50 cents. This checking charge is so clearly unreasonable that^the whole amount ($1.50) must be treated as an "amount paid for admission" within the meaning of the Act. 6629 (8) The manager of a dancing academy permits persons attending classes to dance either with instructors or with other patrons of the academy. Amounts paid by all patrons, including those attending as students, are taxable as admissions. 6630 (9) The manager of a so-called dancing academy employs a number of young ladies whom he pays a nominal sum for their services as dancing partners. Gentlemen are charged $1 for the privilege of dancing and ladies are permitted to dance free. The charges made to gentlemen under these circumstances must be regarded as amounts paid for admission within the meaning of the Act, and the manager must collect a tax of ten cents from each gentleman admitted to the dance hall. 6631 (10) Where 25 cents an hour is charged for the use of a rowboat on a pond in an amusement park, this amount is clearly paid for rental and is not an "amount paid for admission" within the meaning of the Act. 6632 (11) Where a child pays 25 cents for a "ride" around a track on a pony, the amount paid is clearly for the rental of the pony or the services of the attendant, or both, and is not an "amount paid for admission" within the meaning of the Act. 6633 (12) A certain bath establishment makes a charge of $1 for a "Turkish bath" and does not allow anyone not taking such a bath to enter the Turkish bath section of its establishment. This charge is clearly not an "amount paid for admission" within the meaning of the Act. 6634 (13) An amount paid for the use of a seat in the window of a hotel room, in order to watch a parade, would clearly be an amount paid for rental were it not that section 800 (c) of the Act expressly provides that the use of "seats and tables, reserved or otherwise, and other similar accom- modations," is included in the meaning of "admission" as used in the Act. In view of this provision of the Act such an amount must be treated as "paid for admission." If the whole room were rented, however, it is clear that the amount paid for it would not be "paid for admission." 6635 (14) A certain dance hall makes no charge for "admission" but forces everyone entering to pay 25 cents for "hat check privilege." The amount paid is clearly an "amount paid for admission." 6636 (15) A sanitarium makes a charge of 50 cents for the privilege of swimming in pools filled with medicated water and does not allow anyone not using the pools to enter that part of the establishment. This charge is not an amount paid for admission within the meaning of the Act. 6637 Art. 5. Nontaxable payments. — As stated in Art. 3, the tax imposed under section 800 of the Act applies only to amounts necessarily paid in order to gain admission to a place. Under peculiar circumstances amounts may apparently be paid for admission to a place, or in connection with such admission, which are not taxable as admissions. Instances in which this situation may arise, with examples to illustrate the principle involved, follow: Copyright 1922, by The Corporation Trust Company. WAR TAX 1328 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. A. Cooperative Parties 6638 Where a group or organization of persons cooperate in giving a dance or other function for its own entertainment, and the expenses are prorated amongst the members of such group or organization, the amounts paid under such an arrangement are not "paid for admission" within the mean- ing of the Act. Such payments represent each individual's share of the rental and services constituting the expense of the affair and are not taxable. The fact that a limited number of persons, outside of the group or organization, are invited to attend as free guests or that the individual share of the expense is fixed at an even figure will not make the tax apply if the affair is truly a cooperative party of the character above described. But if any guests are required or allowed to pay, or if any profit is sought or divided, then any amounts paid by the organizers or guests are paid for admission within the meaning of the Act, and are subject to tax. 6639 Examples. — (1) A men's bowling club decides to give a dance on a certain night and circulates a list to be signed by all members who care to attend. On securing the names and estimating the expenses, the share of each member is fixed at $2. (No charge, of course, is to be made to the partners brought by the members.) The dance is held without the use of tickets. The expenses proved to be less than expected, and there is a balance left on hand. This balance is refunded pro rata to those who paid $2. In this case it is plain that the amounts paid by the members are not "paid for admission" within the meaning of the Act. 6640 (2) A young men's club conducts a series of monthly dances and through friends and acquaintances establishes a mailing list of per- sons to whom invitations are sent each month. A charge of $2 is imposed on each couple who attend, though no tickets are used. That amount is clearly an "amount paid for admission" within the meaning of the Act. 6641 (3) A certain social club sends out to its members and certain non- members invitations and tickets to a musicale, the price of the tickets being $1.50 each. Such a ticket is necessary to secure admission to the musicale. In this case the $1 .50 is clearly an "amount paid for admission" within the meaning of the Act. 6642 (4) A group of 10 young men desire to give a dance and propose to defray the expenses by selling 100 $2 tickets. Each member agrees to sell 10 tickets or to pay the full price thereof. A payment of $2 for such a ticket is clearly an "amount paid for admission" within the meaning of the Act. B. Rental of Entire Place 6643 Where a person or organization acquires the sole right to use any place or the right to dispose of all the admissions to any place for one or more occasions, the amount paid for such right is not subject to the tax on admissions. Such a transaction constitutes a rental of the entire place and of the attraction, if any, whether or not it is so designated. How- ever, if the person or organization in turn sells admissions to the place the tax will apply to amounts paid for such admissions (see Art. 42). 6644 Examples. — (1) A local lodge, desiring to entertain the delegates to a national convention of its order, contracts with a theater to pay SI, 200 for its entire seating capacity for a particular performance in the course of a long run of an attraction. This transaction is in effect a rental Copyright 1922, by The Corporation Trust Company. WAR TAX 1329 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. of the theater and the attraction for that performance and the $1,200 is not an "amount paid for admission" within the meaning of the Act. As to the position occupied by the lodge with respect to admissions to the performance in question, see Art. 42. 6645 (2) A certain public dance hall, where public dances are held every night by its proprietors, is rented by them to a certain social club for a certain night for $150. The club charges its members the same fee as that charged by the proprietor of the hall on other nights. The $150 is not an "amount paid for admission," but the amount paid by each member is an "amount paid for admission," within the meaning of the Act. C. Purchase of Property 6646 In some cases entrance to a place is granted only to such persons as have made a purchase of property of some sort, which must be exhibited to secure admission, but which is not taken from the holder on his admission. In such a case, unless the sale appears, by reason of the undesir- ability or lack of value of the article, to be a mere subterfuge, the amount paid for such article is not an "amount paid for admission" within the meaning of the act. 6647 Examples. — (l) Where a person, in order to be admitted to an entertainment, is required to purchase a 25-cent "thrift stamp," which is to remain his property, the amount paid for the stamp is not an "amount paid for admission" within the meaning of the Act. 6648 (2) A certain amusement park company makes the purchase of two 15-cent tickets a requirement of admission to its park. These tickets are kept by the purchaser and can be used by him in payment of an}- charges for admission to attractions within the park. Within the mean- ing of the Act, the amount paid for these two tickets is not "paid for admis- sion" to the amusement park but is "paid for admission" to the particular attractions for which they are used. (Unless the amusement park company is exempt from tax there will be a tax of 2 cents on each of these tickets — see Art. 1 — to be paid at the time they are paid for. This tax applies even if such a ticket is good in payment of a nontaxable rental — for example, of a row-boat — as well as for a taxable admission to an attraction, because it can not be told for which it will be used. But if the park company sells two distinct kinds of 15-cent tickets, one kind good for a taxable admission to an attraction and the other not, then the 2 cents tax will apply only on the former kind, and if the person entering the park takes two tickets of the latter kind, then he will have no tax to pay on them.) D. Memberships 6649 An amount paid to become regularly entitled to v the privileges of a club or other organization, as member or otherwise, is not an "amount paid for admission," even though one of the privileges be the right to enter a clubhouse, club grounds, gymnasium, swimming pool, or the like. But where the chief or sole privilege of a so-called membership is a right of admis- sion to certain particular performances or to some place on a definite number of occasions (as contrasted with a more or less unlimited right to enter a clubhouse or other place as many times as desired during a year or some other period), then the amount paid for such so-called membership is an "amount paid for admission" within the meaning of the Act. A tax is levied under Copyright 1922, by The Corporation Trust Company. WAR TAX 1330 SERVICE 3-2-22. Reg. 43, Rev. — Part I.— Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. certain circumstances on amounts paid as initiation fees or as dues or member- ship fees to certain classes of clubs or organizations, and also upon life mem- bers of such clubs, by section 801 of the Act. For this tax, called the "Tax on Dues," see Part 2 of these Regulations, under separate cover. 6650 Examples. — (1) Where one of the privileges of membership in a tennis club is the right of free admission to its grounds at all times, including the days on which the annual tennis tournament is in progress, neither the dues paid by such a member nor any part thereof can possibly be considered an "amount paid for admission" to such tennis tournament within the meaning of the Act. 6651 (2) Where a so-called membership in a musical club costs $10 a year and the chief or sole privilege of membership is the right to a ticket to each of five musical entertainments, the amount paid for this so-called membership is an "amount paid for admission" within the meaning of the Act. 6652 (3) A certain athletic club has "swimming memberships," with annual dues of $15, giving certain privileges, chief among which is the right to use the club swimming pool on any Tuesday, Thursday, or Saturday during the year. In this case neither the $15 nor any part thereof can be considered as "paid for admission" within the meaning of the Act. E. Contributions 6653 Since the tax applies only to amounts necessarily paid for admission, it follows that contributions or donations voluntarily made, before or after admission to a place, are not taxable. 6654 Examples. — (1) Where everyone attending an exhibition given in a public park, freely open to the public, is requested during the course of the performance to make a contribution to the expenses of the exhibition and a tag is given to each contributor, an amount so contributed is not "paid for admission" within the meaning of the Act. 6655 (2) Where oil paintings are exhibited without any entrance fee being charged, but at the close of the explanatory lecture a statement is made that contributions to pay the expenses of the exhibition will be cheerfully received, an amount so contributed is not "paid for admission" within the meaning of the Act. 6656 (3) A certain baseball game is played on Sunday, in a State where amusements charging admissions are not allowed on that day, and, therefore, admission is made free to all, but, in order to make up as far as possible for the lack of admission fees, score cards are sold at an excessive price to such as will buy. An amount paid for such a score card is not "paid for admission" within the meaning of the Act. However, if the purchase of a score card at a fixed price is obligatory on all persons admitted, then amounts paid therefor are taxable, provided the price is in excess of 10 cents. CHAPTER TWO Leases of Boxes or Seats 6657 Art. 6. Basis, rate, and computation of tax. — In/the case of a per- 6504 son having the permanent use or a lease for the use of a box or a seat in any opera house or other place of amusement (see Art. 7), Copyright 1922, by The Corporation Trust Company. WAR TAX 1331 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. the tax imposed by section 800 (a) (l) of the Act on "the amount paid for admission to any place" does not apply.. Instead, the above provisions of the Act impose a tax on the right to the use of the box or seat equivalent to 10 per cent of the total amount that would be realized by the sale, at the established price, of the right to occupy a similar box or seat for each per- formance or exhibition during the period for which . such box or seat is reserved for the lessee or holder. In other words, the tax is based not on the amount, if any, actually paid for the box or seat, but on the amount that would be paid, at the established price, for admission and the use of similar accommodations — not on the actual use of the box or seat, but on the most extensive possible use. Note that the rate of the tax here is 10 per cent and not "1 cent for each 10 cents or fraction thereof," as it is under section 800 (a) (1). In the case of a box, if there is no box of similar size, the tax for each performance or exhibition is to be computed by calculating on the above basis the tax payable on a single box seat in the same part of the house and multiplying that amount by the number of seats in the box. If there is no box occupying a similar position, the tax for each performance or exhibition is to be computed by calculating, on the above basis the tax payable on a single seat in the same part of the house and multiplying that amount by the number of seats in the box. 6658 Examples .-— (1) The season of a certain professional baseball club runs from April 15 to October 15. The club sells six-seat boxes under contracts which entitle the holders to occupy the same on all occasions when attractions are presented on the field between those dates. There are 70 games scheduled for the season, and the price of a six-seat box for a single game (including general admission of six persons to the grandstand) is S10. In the case of the sale of a box under the above-mentioned contract, the tax to be collected from the holder at the time the contract is made is $70 (70 times 10 per cent of $10), and if extra attractions are presented on the field at any time during the period for which the box is held, additional tax equiva- lent to 10 per cent of the established price of a similar box must be collected on each such occasion, whether or not the box is occupied. 6659 (2) The same club sells box seats under contracts which entitle the holders to occupy the same on all occasions when attractions are presented on the field between April 15 and October 15. The price of one of these seats for a single game (not including general admission to the grand stand) is 50 cents. In the case of the sale of a seat under the above-mentioned contract the tax to be collected at the time the contract is made is $3.50 (5 cents for each of the 70 games scheduled), and if extra attractions are pre- sented on the field at any time during the period for which the seat is held, additional tax equivalent to 10 per cent of the established price of a similar seat must be collected on each such occasion, whether or not the seat is occupied. The person who occupies the seat will, of course, be required to pay tax on the amounts paid from time to time for general admission to the grand stand, but this tax should be collected only when payments are made for general admission. 6660 (3) The same club sells grand-stand seats under contracts which entitle the holders to occupy same on all occasions when attractions are presented on the field between April 15 and October 15. The price for one of these seats for a single game is 75 cents. In the case of the sale of a seat under the above-mentioned contract the tax to be collected at the time the contract is made is $5.25 iJ}/2 cents for each of the 70 games scheduled), Copyright 1922, by The Corporation Trust Company. WAR TAX 1332 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. and if extra attractions are presented on the field at any time during the period for which the seat is held, additional tax equivalent to 10 per cent of the established price of a similar seat must be collected, whether or not the seat is occupied. 6661 (4) The owners of a certain opera house, in leasing it to an opera company, reserve for their own use the whole parterre tier of thirty- live 6-seat boxes, paying therefore annually the sum of $70,000. These boxes are distributed among the various owners, $2,000 a year being paid for an annual lease of each. There are no similar boxes in the house, but the established price of each seat in the box in the next tier, which is less desirable, is $10 per seat. The number of performances during the season is fixed in advance at 100. Each lessee of such a box on paying the $2,000 for the season must pay a tax of at least $600 (100 times 10 per cent of 6 times $10), to be paid over in turn to the opera company and the collector of internal revenue. This minimum figure for the tax is based on the established price of the box seats which are the most nearly similar, but which are less desirable. If extra attractions are presented at any time during the period for which the box is leased additional tax equivalent to 10 per cent of the established price of a similar box must be collected on each such occasion, whether or not the box is occupied. 6662 Art. 7. Meaning of "lease." — This tax, as stated in Article 6, applies to cases where a person has the permanent use, or a lease for the use, of a box or seat in any opera house or other place of amusement. The only term here used that seems to need definition is the term "lease." The term "lease," as used in the foregoing provision of the law, means a continuous and exclusive right to use a particular box or seat for the term of the lease. The term "lease" does not include the right lo use a box or seat merely on the occasion of regular performances given by a particular company, but the contract must give the holder of the box or seat the right to use the same whenever an attraction of any kind is presented in that place during the continuance of the lease. To constitute a lease of a box or seat within the meaning of these provisions of the Act a formal document of lease is not necessary. 6663 Examples. — The following are examples of leases: (1) A person owning a theater leases it to a producing company, reserving the right to the perpetual use, without charge, of a certain box. 6664 (2) The owners of a certain opera house, in leasing it to an opera company, reserve for their own use the parterre tier of 35 boxes, paying annually $70,000. These boxes are distributed among the various owners at $2,000 for an annual lease. 6665 (3) A corporation owning a theater gives the exclusive right to the use of a particular box for a year to all stockholders owning 1,000 shares, or to a particular seat to all stockholders owning 500 shares. 6666 The following are examples of agreements which are not leases: (4) A person arranges with a certain theater to reserve for his use a certain seat in the orchestra for every Monday night during the year. The theater is a vaudeville house which has two performances every day, the attractions running for a period of a week. Such a reservation, being for only a small proportion of the total number of performances, is not a lease within the meaning of the Act. Copyriglit 1922, by The Corporation Trust Company. WAR TAX 1333 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6667 (5) A certain grand-opera company which owns the building used by it has a regular season of 10 weeks of opera every winter, per- formances being given every night, including Sunday, and also on Saturday afternoons. On Sunday afternoons during the opera season concerts are given under the auspices of the company by various singers of the company. Outside of the opera season the auditorium in which the opera is held is rented by the opera company for various public meetings and theatrical attractions, etc., in order to secure additional income for the support of the opera company. A certain person reserves a box for every performance of the opera during the season, this reservation not including the Sunday con- certs, nor, of course, the meetings and theatrical attractions outside of the opera season. This reservation does not constitute a "lease" within the meaning of the Act, because it does not give the holder of the box the right to use the same whenever an attraction of any kind is presented in the place. Any amounts paid for admission to this box under this reservation would, however, be taxable under section 800 (a) (1) unless exempted by the exemp- tion provisions of the Act. 666S (6) A certain choral society gives a series of 10 concerts every winter. The concerts are given Sunday nights in a theatre, the use of which is rented for these occasions. The society sells subscription tickets which entitle the holder to the use of a particular seat for all 10 of the concerts. Such a subscription is not a "lease" within the meaning of the Act. CHAPTER THREE Roof Gardens, Cabarets, or Similar Entertainments 6669 Art. 8. Basis, rate, and computation of tax. — The tax imposed under 6505 the above provisions of the act applies to amounts paid for admis- sion to any public performance for profit at any roof garden, cabaret, or similar entertainment, to which the charge for admission is wholly, or in part, included in the price paid for refreshment, service, or merchandise. If the admission charge, either in whole or in part, is so included, 20 per centum of the total amount paid for refreshment, service, or merchandise is deemed to be paid for admission. 6670 Jf a fixed admission charge is imposed and it is fair and reasonable in comparison with charges made for similar performances or entertain- ments under different circumstances, such charge is taxable under paragraph (1) of section 800 of the Act and the tax imposed under paragraph (5) above would not apply to amounts peid for refreshment, service, or merchandise. If such a-dmission charge is inadequate to cover the cost of the entertainment provided, 20 per cent of the charge for refreshment, service, or merchandise is taxable under paragraph (5). \\Tiere a specific, and apparently adequate, admission charge is made but the prices charged for refreshment, service, or merchandise during the entertainment are higher than at other times, the tax under paragraph (5) will apply to the amount paid for refreshment, etc., unless it is shown that the increase is due to other causes. 6671 The fact that tax is paid on the admission charge proper under para- graph (1) will not operate to reduce or abate the tax due on the price paid for refreshment, service, or merchandise. Twenty per cent of the Copyrigl.t 1922, by Th€ Corpora'; r I'ni-t Company. WAR TAX 1334 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. amount paid for the latter will be deemed to represent a charge for admission notwithstanding the payment of the specific but inadequate admission charge. 667 2 Charges commonly termed cover charges are not considered to be charges for admission within the provisions of paragraph (1). They represent charges for service and should be included in the total charge for refreshment, service, or merchandise. 6673 The rate of this tax is different from that imposed on admissions proper under paragraph (1). However, it is not a flat 3 per cent tax, but is at the rate of lj^ cents for each 10 cents or fraction thereof of the proportion (20 per cent) of the price paid for refreshment, service, or mer- chandise, which represents the charge for admission. In practice it is found more convenient to compute the tax on the basis of 1 3^ cents for each 50 cents or fraction thereof of the total amount paid for refreshment, service, or merchandise in connection with public performances or entertainments at roof gardens, cabarets, etc. The process is simpler and the result is always the same. 6674 Examples . — (1) A certain person invites four of his friends to attend a cabaret. No fixed charge is made for admission. His check for refreshments for the party amounts to $15.87. As 50 cents is contained in $15.87 thirty-one and a fraction times, the tax in this case is 48 cents (32 times \}/2 cents). 6675 (2) A certain person reserves a table for himself and three friends at a roof-garden entertainment and pays $12 for the reservation, this being the regular price. This being a charge for admission, and apparently being adequate, there is no tax in this case under these provision of the Act, but a tax of $1.20 is imposed by section 800 (a) (1) of the Act. The reser- vation of each seat at such a table must be evidenced by a ticket (see Article 30) and this ticket must comply with the provisions of Article 31. 6676 (3) A certain restaurant conducts a cabaret in its main dining room every evening from 8 to 12 o'clock. In this case a person who takes dinner in that dining room and leaves the room before 8 o'clock and who therefore does not witness the cabaret at all, is not subject to any tax under these provisions of the Act. 6677 (4) In this same restaurant there are other dining rooms so entirely separate from the main dining room that from them nothing that is going on in the main dining room can be either seen or heard. Xo cabaret performance or other entertainment is furnished in these other rooms. In this case no person dining in one of these other rooms, even during the time that the cabaret performance is going on in the main dining room, is subject to any tax under these provisions of the Act. 6678 (5) A hotel, running a cabaret, requires every person entering to purchase a 50-cent food check. This check is later accepted as 50 cents in payment of the food and other refreshments consumed. A certain person purchases such a check for 50 cents and spends an evening at the cabaret. His bill at the end of the evening comes to $8.33, and he pays it by handing in the check and paying $7.83 in cash. The 50 cents so paid for this check is not "paid for admission" within the meaning of the Act. The tax in this case is based on the $8.33 spent, and is 26 cents (17 times 1^ cents). 6679 (6) A certain man goes to a cabaret where there is a general admis- sion charge of 25 cents. The entertainment provided is very elab- orate, and this is reflected in the price of the food. His bill for food comes to $12.37. In this case there is an admission tax of 3 cents, due under Article Copyright 1922, by The Corporation Trust Company. WAR TAX 1335 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 1, on the 25 cents paid on admission. But as this amount is clearly inade- quate there is also a tax of 38 cents (25 times \]/2 cents), based on the amount paid for food. 6680 Art. 9. Entertainments included. — "Any public performance for profit at any roof garden, cabaret, or other similar entertainment" includes every public vaudeville or other performance or diversion in the way of acting, singing, declamation, or dancing, either with or without instrumental or other music, conducted for the profit of the management by professionals, amateurs, or patrons under the auspices of the management, in connection with the service of selling of food or other refreshment or mer- chandise at any room in any hotel, restaurant, hall, or other public place. Every form of entertainment so conducted is included, except instrumental music unaccompanied by any other form of entertainment. 6681 Examples. — (1) A proprietor of a dancing establishment provides for the serving of refreshments to his patrons. No charge is made for "admission" or for dancing. In this case the management is conducting an entertainment the admission charge to which is wholly included in the price paid for refreshments, and there will be a tax under these provisions of the Act. 6682 (2) A certain hotel provides a space in its dining room for dancing and charges 50 cents admission to everyone entering the room. The prices charged for food are not increased to cover the cost of the entertain- ment furnished. In this case the amount paid for admission is not included in the price paid for refreshment but is this separate 50-cent charge. This charge, therefore, is taxable as an "amount paid for admission" under section 800 (a) (1) of the Act and the tax is 5 cents. (See Art. 1.) 6683 (3) A certain other hotel maintains in its lobby a dancing floor surrounded by tables and serves refreshments to its patrons durin? the dancing hours. No charge is made for dancing. This is a case of a public performance for profit where the amount paid for admission is wholly included in the amount paid for refreshment and there will be a tax, therefore, under these provisions of the Act. 6684 (4) A certain other hotel conducts in a room adjoining its dinine room, during tea rime and in the evening, an entertainment in the form of dancing for its patrons. No charge is made to those desiring to dance. This case, as the one mentioned in the preceding example, is a case where the amount paid for admission to a public performance for profit is wholly included in the amount paid for refreshment, and there will, therefore, be a tax under these provisions of the Act. 6685 (5) A certain college alumni association gives a dinner to its members and invited guests, at a fixed charge per plate, at a certain hotel. Entertainers supplied by the hotel perform, and the diners themselves dance in an open space provided in the room. In this case, as the dinner is private, there is no tax, whether the cost of the cabaret performance is included in the charges per plate or is paid for in a lump sum by the alumni association. 6686 (6) A certain chamber of commerce gives a dinner, in honor of a distinguished man, at $5 a plate. Tickets are sold to anybody desir- ing to attend. Entertainment is furnished by performers supplied by ihe hotel where the dinner is served. In this case, as the entertainment is sup- plied by the hotel, it is clearly for profit, and as the affair is also public there is a tax under these provisions of the Act. This tax applies to each individual Copyright 1922, by The Corporation Trust Company. WAR TAX 1336 SERVICE 3-2-22. Reg. 43, Rev. — Part I.' — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. payment made for a dinner ticket and is 15 cents (10 times \}A cents; in each case. 6687 (7) A certain social club gives a dance at a hotel, charging $2 a ticket to both men and women. During an intermission in the dancing a light buffet supper is served. In this case the $2 is clearly paid for admis- sion, and there is a tax of 20 cents under section 800 (a) (1) of the Act (see Art. 1). CHAPTER FOUR Taxes on Charges in Excess of Established Price 6688 Art. 10. Scope and basis of taxes. — While two distinct taxes are 6502 imposed under the provisions of the Act quoted above — one on excess 6503 charges for tickets or cards of admission sold at places other than the ticket offices of the theaters, operas, or other places of amuse- ment for which they are valid for admission, and the other on excess charges imposed by the proprietors, managers, or employees of such places — they are on a common basis and the scope of each is the same. Hence there are certain rules generally applicable to both. These will be found in this and in the succeeding article. 6689 The tax on excess charges, whether imposed at the box office or by brokers, is of more limited application than the tax on admissions proper. The former attaches only to excess charges on tickets or cards of admission valid for admission to theaters, operas, or other places of amusement, whereas the tax on admissions attaches to amounts paid for admission to any place (see Art. 1). Thus, there are many cases where an admission tax is due which do not come within the scope of the excess-charge taxes. On the other hand, all cases to which the excess-charge taxes apply do not neces- sarily fall within the scope of Section (a) (1). As shown in Article 1, the full amount, including excess charges, paid for admission to the theater or person controlling the same is subject to the latter tax, which must be paid by the person paying for admission. However, excess charges paid to brokers or persons who do not control such admission are not regarded as payments for admission to any place and are not therefore subject to such tax. The taxes on charges in excess of the regular or established price (see Art. 11), whether the ticket or card of admission is sold at the box office or elsewhere, are to be paid by the person selling such ticket or card of admission. These taxes are therefore distinct from and in addition to the admissions' tax. 6690 Art. 11. Regular or established price defined. — By the "regular or established price" of admission is meant the full-rate price fixed by the person controlling such price at the beginning of the first sale or dis- tribution of tickets or cards valid on that occasion as the price to be charged for that particular class of admissions. The person in control has, of course, the power to fix the price to be actually charged for admission. He has, therefore, the power to determine the established or regular price. But as an established price is a matter of substance, not of name, the mere fact that he calls a price an "established price" does not make it such. Nor are the prices he charges for particular admissions necessarily the established or Copyright 1922, by The Corporation Trust Company. WAR TAX 1337 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. regular prices of such admissions. If he arbitrarily sets different prices on admissions, under similar circumstances, to accommodations in all substan- tial respects similar, these different prices will not be the established or regular prices of the respective admissions for which they are charged, but the lowest price among them will be the established or regular price of all such admissions. The established or regular price of admission can, of course, be uniform or can vary in accordance with the accommodations to which admission is granted, increasing from the price of a mere general admission through the various grades of accommodations to the best accommodations. Any scale of prices, adopted in good faith, in which the prices increase regularly with the increase of accommodation, will be considered to show the true established or regular prices of admission to such respective accommodations; but the variation of prices must be regular and based on a real difference of accommodation and not merely arbitrary. The established price of an admission need not be the same for different attractions or even for different performances of the same attraction; but when tickets have once been put on sale for a particular performance or attraction the price of admission for every accommodation at that performance or attraction has been established. Established prices of admission once so adopted are not affected by the mere sale of admissions at prices different from the ones so established. Nor can established prices once so adopted for any occasion be increased for that occasion. If sold at a higher price the excess charge will be taxable. Prices once established or adopted may be reduced, but in such case liability to excess-charge taxes with respect to all admissions sold at the original established prices can be avoided only by complying with the following conditions: 6691 (1) Any reduction of established price must include all admissions of that particular established price and must grant an equal reduction in the case of each; (2) such reduction must not result in setting a lower price on admission to certain accommodations than is charged on that occasion under similar circumstances for admission to accommodations which are in all substantial respects similar; (3) public notice must be promptly given of the reduction and of the fact that every person having paid for admission at the former established price can secure a refund at any reasonable time of the amount he paid in excess of the new established price; and (4) such refunds must be actually made promptly on request. 6692 The foregoing provisions of this article relate to single admissions, but they also control in the case of season tickets and subscriptions. A season ticket may be denned as a contract which entitles the holder to admission at all times during a season, or at regular specified times during the entire season. It may include admission to all performances for the season or at specified nights or performances during the entire season. A subscrip- tion ticket is one which is issued to a person who subscribes a sum of money to the expense of an entertainment or who agrees to bear a portion of the expense. thereof when the amount is ascertained. The established price for such ticket or subscription is the amount fixed (at the beginning of the sale of such ticket or subscription by the person controlling the price) as the price to be charged therefor. 6693 The price (exclusive of the tax imposed under paragraph (l) of section 800 (a)) at which every ticket or card of admission is sold must be conspicuously and indelibly printed, stamped, or written on the portion thereof which is to be taken up by the management of the theater, opera, or other place of amusement for which it is valid (see Art. 31). And if sold Copyright 1922, by The Corporation Trust Company. WAR TAX 1338 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. at a place other than the ticket office of the theater, opera, or other place of amusement the name of the vendor must also be shown (see Art. 31). A— BOX-OFFICE SALES 6694 Art. 12. Rate and computation of tax. — Where a proprietor, manager, 6503 or employee of any opera house, theater, or other place of amusement sells or disposes of any ticket or card of admission for an amount in excess of the regular or established price or charge therefor, as outlined in Article 11, the excess portion of the price for which it is so sold or disposed is subject to the tax of 50 per cent imposed under paragraph (3) of section 800 of the Act. The rate of the tax is always 50 per cent regardless of the amount by which the selling price exceeds the regular or established price. This tax is to be paid by the person selling or disposing of the ticket, and, as shown in Article 10, is distinct from, and in addition to, the admissions tax (Art. 1), which is to be paid by the person to whom the ticket is sold. 6695 The fact that this tax is on a percentage basis makes possible a tax involving a fraction of a cent. As the tax is based on each excess charge imposed, several items of tax each involving a fractional part of a cent may be due with each monthly return. These several fractions should be preserved or included in computing the total tax due with any given return. If the total thus obtained involves a fraction of a cent equal to one-half cent or more, it shall be increased to 1 cent; otherwise it shall be disregarded. 6696 Examples. — (1) The established price of the seats in the orchestra of a certain theater is $2. These seats are put on sale three weeks in advance. The running attraction being very popular, the management decides one Friday night to increase, by 25 cents, the price of all orchestra seats for the next week still unsold. In this case, as an increase so made can not affect the established price, that price remains $2. Therefore, a tax of 12J/2 cents is due from the theater in the case of each ticket for one of these seats sold for $2.25, in addition to the 23 cents tax payable by the purchaser of each ticket. In making its return at the end of the month the theater should add together all of these 12j^-cent taxes, and if the total sum ends in a half cent (as, for example, $227.37^), then the tax to be paid, complying with section 1306 of the Act, will be one-half cent greater than this amount (in other words, $227.38). 6697 (2) If, in the case outlined in the preceding example, the attrac- tion had proven unpopular, resulting in a reduction of the established price to $1.50, the management would be liable to a tax of 25 cents on each ticket or card of admission sold at the original established price of $2, unless the conditions enumerated in Article 11 were complied with. B— BROKERS SALES 6698 Art. 13. Rate and computation of tax. — The rate of the excess-charge 6502 tax in the case of cards or tickets of admission sold at news stands, hotels, and places other than the ticket offices of the theaters, operas, or other places of amusement, unlike that imposed on the proprietors, mana- gers, or employees of opera houses, theaters, or other places of amusement (see Art. 12), depends on the amount by which the selling price exceeds the regular or established price. If the excess charge is 50 cents or less, the rate of tax is 5 per cent of such excess charge; if more than 50 cents, the rate is 50 per cent of the excess charge. Copyright 1922, by The Corporation Trust Company. WAR TAX 1339 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6699 In determining the amount of the excess charge, the amount of any tax imposed under paragraph (1) of section 800 (a) is taken into consideration. That is to say, such tax is always added to the regular or established price and the sum so obtained is subtracted from the selling price. The remainder represents the excess charge, and the 5 per cent or 50 per cent tax applies according as the charge amounts to 50 cents or less or exceeds that amount. Where the excess charge is more than 50 cents, the whole amount of such excess charge is taxable at the 50 per cent rate. Thus, by way of illustration, if a ticket broker sells for $2.50 a ticket or card of admis- sion the regular or established price of which is $2, the excess charge is not 50 cents, but 30 cents. This is determined in the following manner: Established price $2.00 Admission tax thereon 20 Total 2.20 Sale price $2.50 Difference representing taxable excess charge 30 Tax due (5 per cent rate) 015 6700 Had the broker sold this ticket for $3, his tax liability would have been as shown below: Established price $2.00 Admission tax thereon 20 Sale price $3.0Q ^ a Difference, representing taxable excess charge 80 Tax due (50 per cent rate) 40 However, should the broker in each of the preceding examples reimburse himself by collecting from his customer the amount of the admission tax imposed under section 800 (a) (1), the total sale price of each ticket would then be $2.70 and $3.20, respectively, and the tax on the excess charges of $0.50 and $1 would be $0,025 and $0 50, respectively. 6701 No admission tax is due or collectible by the broker in this connection, since such tax has already been paid to and collected by the theater or person controlling the admission. 6702 The tax on excess charges applies to tickets or cards of admission to theaters, operas, or other places of amusement "sold at news stands, hotels, and places other than the ticket offices of such theaters, operas, or other places of amusement" at prices in excess of the regular or established prices at such ticket offices. Therefore, any person who in his individual capacity and not as an employee or representative of a theater, opera, or other place of amusement, sells or disposes of tickets or cards of admission at prices in excess of the regular or established prices at the ticket offices of such theater, opera, or other place of amusement is liable to the payment of this tax. This liability attaches whether or not the selling or disposing of such tickets or cards of admission is the principal business or occupation of such person. 6703 As this is a percentage tax, like that imposed on excess charges imposed by theaters, operas, or other places of amusement (see Art. 12), individual transactions will frequently result in a tax involving a. fraction of a cent. These fractional parts of cents should be preserved in computing the monthly total of tax due. If the grand monthly total involves a fraction of a cent equal to one-half cent or more, it shall be increased to 1 cent; otherwise it shall be disregarded. Copyright 1922, by The Corporation Trust Company. WAR TAX 1340 SERVICE 3-2-22. Reg. 43, Rev.— Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6704 It should be particularly noted that this tax is based on the amount charged in excess of the established price, not in excess of the price the broker pays. The fact that the broker himself may have paid the theater, opera, or other place of amusement more than the established price for a ticket or card of admission sold or disposed of by him does not affect the tax to be paid by the broker on an excess charge made by him. In other words, if a theater makes an excess charge to a broker, and the broker in turn makes an equal or greater excess charge to his customer, then both the theater and the broker must pay an excess-charge tax on the amount of the excess charge over the established price. 6705 Where a ticket is sold by a theater to a broker at the established price and it thereafter passes through the hands of one or more brokers before being sold to a user, each broker who sells the ticket for an amount in excess of the established price must pay the tax on the whole amount by which his selling price exceeds the amount of the established price of the ticket at the ticket office of the theater, opera, or other place of amusement plus the tax imposed on such established price under paragraph (1) of section 800 (a). For information as to the manner in which returns shall be made and the tax paid over by brokers, and as to how they may reimburse them- selves or take credit for taxes — both admission and excess-charge — paid by them, see Article 36. 6706 Examples. — (1) A certain ticket broker purchases from a theater a block of tickets for seats in the orchestra, the established price of admission to which is $2, and resells them at an excess charge of 50 cents per ticket. The taxes to be collected and paid by the theater and broker in this case are as follows: Theater Receives from broker Must pay to collector Established price ' $2.00 which it retains. Admission tax 20 which it must pay to collector $0.20 Total 2.20 Total 20 Broker Receives from customer Must pay to collector Established price $2.00 which he retains. Additional charge 20 which he retains as refund of admis- sion tax paid to theater. Excess charge 50 of which he must pay as tax to collector $0,025 Total 2.70 Total 025 6707 (2) In the preceding example had the theater charged the broker * $2.25 for the tickets, the established price of which was $2, and the broker in turn had increased the excess charge by 25 cents, the taxes to be collected by the theater and broker would have been as follows: Theater Receives from broker Must pay to collector Established price $2.00 which it retains. Excess charge 25 of which it must pay as tax to collector $0,125 Admission tax 23 which it must pay to collector 23 Total 2.48 Total 355 Copyright 1922, by The Corporation Trust Company. WAR TAX 1341 SERVICE Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. Broker Receives from customer Must pay to collector Established price $2.00 which he retains. Additional charge .23 which he retains as refund of admis- sion tax paid to theater. Excess charge .50 of which he must pay as tax to collector. . / . . '\, A . » ... $25 Total 2.73 Total 025 6708 (3) Again, had the theater charged the broker $2.50 for the $2 seats and the broker in reselling them had increased the excess charge by $1.25, the tax to be collected and paid by each would have been as follows: Theater Receives from broker Must pay to collector Established price $2.00 which it retains. Excess charge .50 of which it must pay as tax to collector $0.25 Admission tax 25 which it must pay to collector 25 Total 2.75 Total .50 Broker Receives from customer Must pay to collector Established price $2.00 which he retains. Additional charge 25 which he retains as refund of admis- sion tax paid to theater. Excess charge 1.75 of which he must pay as tax to collector $0,875 Total 4.00 Total 0.875 6709 (4) A ticket broker purchases from a theater a block of tickets for seats, the established price of admission to which is $2, and resells them at an excess charge of 50 cents per ticket. He has an arrangement with the theater, however, by which half this excess charge so received by him is to be paid to the theater as a rebate. In this case this rebate of 25 cents received by the theater is in fact an excess charge made by it. The theater, therefore, will be subject to a tax of 50 per cent of that amount (12j/£ cents) as a tax on an excess charge. The final result as to taxes, etc., will be the same, therefore, as that shown under example 2 above. 6710 (5) A theater-ticket agency procures tickets from various theaters with the privilege of returning an hour before the performance starts all tickets for that performance then unsold. Such agency charges for each ticket sold 10 cents more than the sum of the established price and the amount paid to the theater as an admission tax, and terms this 10-cent charge a "service charge." In this case it is clear that the 10-cent advance is in fact an excess charge and that the agency is liable for an excess-charge tax of cent. CHAPTER FIVE Exemptions 6711 Art. 14. Taxes to which exemption applies. — Two classes of taxes 6506 are imposed by section 800 (a): (1) A tax on admissions proper, which is to be paid by the person paying for admission^(see Chapter Copyright 1922, by The Corporation Trust Company. WAR TAX 1342 SERVICE 3-2-22. Reg. 43, Rev.- — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. One), and (2) a tax on charges in excess of the regular or established price, which is to be paid by the person selling or disposing of tickets or cards of admission at prices in excess of the regular or established price thereof (see Chapter Four). 6712 One of the conditions on which the exemption herein provided, in the case of organizations, societies, and persons coming under classi- fication (1), (A), (B), and (C), is predicated is that all the proceeds of the ad- missions must inure exclusively to the benefit of such organizations, societies, or persons. 6713 This exemption was clearly intended to apply to both classes of taxes. In cases where both taxes are applicable it frequently happens that the proceeds of the admissions and the proceeds of the excess charges will inure to the benefit of different persons; that is, an organization entitled to exemption may receive all the proceeds of the admission proper, while the proceeds of the excess charges may accrue to the benefit of an organization or persons not entitled to exemption. 6714 In such cases it is necessary, in order to put into effect the manifest intent of the law, to construe this exemption provision as applying separately to each of the taxes. So, where all the proceeds of admissions proper inure exclusively to the benefit of organizations or persons coming within this provision of the Act the exemption will apply with respect to such admis-- sions, even though the proceeds of the excess charges go to the benefit of non-. exempt organizations or individuals. Conversely, if all the proceeds of the excess charges inure exclusively to the benefit of exempt organizations or persons, such excess charges will be exempt from tax, although amounts paid for the admissions proper are taxable under paragraph (1) of section, 800(a). 6715 The term "all the proceeds" is held to mean all the proceeds of the admissions and excess charges, as the case may be, after the payment of reasonable expenses. These expenses need not necessarily be on a fixed or guaranty basis, but may also be based upon a certain percentage of the receipts or the number of admissions sold, provided the contingent feature of the contract is reasonable and operates solely for the benefit of an exempt organization or person. Thus, where services, property, rentals, and other items of expense are engaged on a percentage basis, or the amounts to be paid therefor are dependent in whole or in part upon the amounts received from the sale of admissions or from excess charges, the right to exemption is not neces- sarily defeated, unless the net proceeds after the deduction of all reasonable expenses do not inure exclusively to the benefit of an organization or person entitled to exemption under section 800(b) of the Act. Where, however, by reason of a contingent agreement as above described, the partial guaranty plus the percentage of the receipts equal an amount greater than the regular fixed price charged for the talent, then the exemption from admissions tax is defeated for the net proceeds of admissions do not inure exclusively to an exempt organization or person unless, of course, both the organization fur- nishing the talent and the organization giving the entertainment qualify as such. 6716 The essential qualifications of exempt organizations and persons are discussed in Arts. 15-28, infra. As to the procedure to be followed in securing exemption, see Art. 29. 6717 Examples. — (l) A woman's auxiliary of a charitable hospital in a large city gives an entertainment for the benefit of the hospital.^ The Copyright 1922, by The Corporation Trust Company. WAR TAX 1343 SERVICE .'3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMiSSIONS AND DUES REGULATIONS. established price of admission to all seats is $3. This organization, which qualifies as exempt under section 800(b), is largely made up of society women, and seats are very much in demand. A certain ticket broker secures a large number of them and sells them at $4 apiece. In this case the admissions proper are exempt from the Taxes on Admissions, in spite of the fact that the proceeds of the excess charges made by the broker go into his pocket. There- fore no admission tax need be charged to the broker or anyone else on the original sale of the tickets. However, he must pay an excess-charge tax of 50 cents on each ticket sold. 67 18 (2) A certain society circus, the established price of admission to which is $5, is given for the benefit of the Salvation Army. Many of the tickets to this circus are auctioned off by the management at a large advance in price and the proceeds of the auction also given the Salvation Army. In this case no taxes are imposed on either the admissions proper or the excess charges. 6719 (3) A certain charitable organization, which qualifies as exempt under section 800(b), purchases from the box office of a theater, in the regular way and at the established price, fifty $2 tickets. It sells them all for $5 apiece (exclusive of any admission tax) for the benefit of the charity. In this case an admission tax of 20 cents, based on the $2 paid to the theater, must be paid on each ticket at the time of its purchase. (Of course, it can if it desires collect 20 cents more to cover the admission tax it paid to the theater.) On the other hand, no excess-charge tax is due from the charitable organization on account of the sale of these tickets at an excess charge. 6720 Art. 15. Basis of exemption. — It is to be noted that the basis on which exemption rests in the case of organizations and persons coming within classification or subdivision (1) of this provision of the Act differs from that applicable in the case of agricultural fairs, which are covered by classification or subdivision (2). As shown in the preceding Art. (14), in the case of the first class of organizations or persons the right to exemption depends on whether all the proceed sol the admissions, or excess charges, as the case may be, inure exclusively to the benefit of such organizations or persons. Aside from this condition, it is only necessary, in order to secure exemption, to establish the character of the beneficiary organizations or persons. It is not necessary that the organization or persons selling the admissions, or controlling the affair to which the admissions are sold, be entitled to exemption so long as all the proceeds of such admissions inure to the benefit of an organization or person that qu 1 alines as exempt. In other words, the character of the organization or person receiving all the proceeds of the admissions or excess charges, and not the character of the organization or persons selling the admissions, determines whether or not exemption applies. Admissions to any place, regardless of the nature of the attraction or affair, are exempt if all the proceeds, as defined in Art. 14, inure exclusively to the benefit of an organization or a person or persons included in this provision of the Act. 6721 On the other hand, in the case of agricultural fairs, exemption applies only in respect to admissions to agricultural fairs as such, or to ex- hibits, entertainments, or other pay features conducted as part oi such fairs. Admissions to any other place would not be exempt even though all the pro- ceeds thereof inured exclusively to the benefit of an agricultural fair associa- tion. Copyright 1922, by Hie Corporation Trust Company. WAR TAX 1344 SERVICE 3-2-22. Keg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6722 On account of the different bases on which exemption is funded, as herein outlined, the two classes of cases will be dealt with separately in the following articles. First, with respect to — ORGANIZATIONS OTHER THAN AGRICULTURAL FAIRS 6 723 Art. 16. Necessary character of organization.— For an organization to be considered a religious, education, or charitable institution, society, or organization within the meaning of the Act: (1) It must have a definite organization, with officers, directors, or trustees, and the usual essential features (incorporation not being essential) of an association of its class; (2) it must have a purpose which as put into practice is religious, edu- cational, or charitable; and (3) its funds must be used solely in furtherance of such purpose, none of them being paid or otherwise distributed to any of its members except as charity or as reasonable compensation for services actually rendered. 6724 For an organization to be considered a " society for the prevention of cruelty to children or animals" it must comply with conditions (1) and (3) of the preceding sentence, and also with condition (2), except that in its case the purpose to be expressed and put into practice must be the specific purpose of the prevention of cruelty to children or animals, or both, and not one of the three general purposes mentioned in condition (2). 67 25 Societies or organizations conducting symphony orchestras must comply with conditions (1) and (3). Moreover, before exemption can be extended to such a society or organization it must affirmatively show (a) that the conducting of a symphony orchestra is its sole purpose, and (b) that it receives substantial support from voluntary contributions. 6726 Societies or organizations conducted for the purpose of improving any city, town, village, or other municipality must likewise comply with conditions (1) and (3), and must furthermore show that this is their sole purpose. The same rule applies to societies or organizations conducted for the purpose of maintaining cooperative or community center moving-picture theaters. 672? It should be carefully noted that, while exemption is granted only to organizations operating on a nonprofit basis, the mere fact that an organization is not organized or operated for gain or profit does not afford a basis for exemption. To be entitled to such exemption the organization must comply with the other conditions herein outlined. There is no require- ment, expressed or implied, that an institution, society, or organization to be included within these exemption provisions must be organized or operating in the L T nited States. 6728 As to the procedure to be followed in securing exemption, see Art. 29. 6729 Art. 17. Religious organizations. — Admissions, or excess charges, all the proceeds of which (after payment of reasonable expenses) inure exclusively to the benefit of religious institutions, societies, or organiza- tions are exempt from tax. Churches and theological seminaries are the commonest cases of religious institutions. Missions and missionary societies also clearly fall within the exemption. Church societies are religious societies only if they share in the religious purpose of the church. Nation-wide organizations which are not church organizations but which have as their purpose the furtherance of religion are religious societies. Copyright 1922, by The Corporation Trust Company. WAR TAX 1345 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6730 Examples. — (1) The members of a certain church form a club for social and athletic purposes and hold their meetings in one of the church buildings. In order to raise money for club purposes they give dances and other entertainments. In this case, as the club is not formed or operated for religious purposes, but purely for social and athletic purposes, admission to these dances and entertainments are not exempt on the ground that the club is a religious organization. 6731 (2) A certain church organizes a men's club to increase community feeling, and while the meetings are opened with prayer the club itself has no religious purpose and members of all religions and denominations are entitled to membership. This club, though holding its meetings in the church building itself, is not a religious organization within the meaning of the Act. 6732 (3) A certain church organizes a men's Bible class, which meets every Sunday to study the Bible. This class holds an entertainment in order to raise money to buy Bibles and maps to be used in its work. Admis- sions to the entertainment are exempt from tax, for the class is a religious organization within the meaning of the Act. 6733 (4) A club organized for the sole purpose of raising money to support a missionary is a religious organization within the meaning of the Act. 6734 (5) A Young Men's Christian Association or Young Men's Hebrew Association is a religious organization within the meaning of the Act. 6735 Art. 18. Education organizations. — Admissions, or excess charges, all the proceeds of which (after payment of reasonable expenses) inure exclusively to the benefit of institutions, societies, or organizations that are educational within the meaning of the Act as stated in this article and Art. 16, are exempt from tax. Schools, colleges, and universities, quali- fying under Art. 16, fall within this exemption. The same is true of any organization whose dominant purpose is the education of its members or of other persons. Education here includes musical education. It also includes physical education, so any organization, devoted to physical education pure and simple, and complying with Art. 16, is educational within the meaning of the Act; but if the element of sport enters into its purposes, then it can not be considered exempt as an educational society or organization. Admissions, or excess charges, are not exempt merely because the proceeds are to be used for an educational purpose — the character of the organization to which^they will inure is the test, not the purpose merely. Admissions, or excess charges, to contests or entertainments are exempt from tax where the proceeds are to be expended for athletic or other school, college, or university purposes by or under the direct supervision of the authorities of a school, college, or_uni- versity which qualifies under Art. 16. 6736 Examples. — (1) Admissions charged to a football game where the net proceeds are expended for athletic purposes under the^ direct supervision of the faculty of a college (neither organized nor operated for profit) are exempt from tax. ^ P 6737 (2) Admissions to a college baseball game the proceeds ofjwnich inure to a students' athletic association to be spent in their discre- tion, without any college supervision, for the support of athletic teams or other interests of the members of the association, are taxable. Copyright 1922, by The Corporation Trust Company. WAR TAX 1346 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6738 (3) A private school run for the profit of its proprietors (in other words, not qualifying under condition (3) of Art. 16) is not an edu- cational institution, society, or organization within the meaning of the Act. 6739 (4) A music-festival association is organized and operates in a city with the purpose of educating the community up to good music and cultivating its musical taste. It also complies with conditions (1) and (3) of Art. 16. This association is an educational organization within the mean- ing of the Act. Admissions, therefore, to a music festival given by it are exempt from tax. 6740 (5) Where an association maintaining a zoological park is a cor- poration not for profit, whose purpose is to exhibit animals and give instruction in connection therewith, admissions to the park are exempt from tax because they inure to an educational institution. 6741 (6) Where the pupils in a certain room in a certain school form an organization for pleasure and social purposes and give an entertain- ment, the proceeds of which are to be used to give a picnic, the admissions thereto are taxable, for such organization is not educational. 6742 (7) Admissions to an entertainment given by a college fraternity for its benefit are taxable, for such a fraternity is not educational within the meaning of the Act. 6743 (8) Admissions charged to an illustrated lecture, educational in character, where the net proceeds go to the lecturer, are taxable. 6744 (9) A Young Men's Christian Association or Young Men's Hebrew Association is an educational organization within the meaning of the Act. 6745 (10) The activities of a social settlement, incorporated "not for profit," consist chiefly of classes in English, mathematics, modern languages, manual training, sewing, cooking, etc. Entertainments are held from time to time to. raise money to help carry on these activities. Ad- missions to such entertainments are exempt from tax, for the settlement is clearly educational within the meaning of the Act. 6746 (11) A certain class in a county high school gives an entertainment of which the net proceeds are to be used to buy a victrola to be given to the school. In this case, if the principal of the school has joined, on behalf of the school, in an affidavit for exemption (see Art. 29), a certificate of exemption can be secured which makes the admissions exempt from tax. If, however, the victrola was to become the property of the class, to be removed from the school on its graduation, the exemption would not apply. 6747 (12) The Boy Scouts and Girl Scouts of America are educational organizations within the meaning of the Act. 6748 (13) A football game played between a college team and a team operating for profit, under an agreement whereby the receipts are to be divided on a percentage basis. The college team turns its share into the college treasury, while the opposing team's share is only sufficient to pay its actual expenses. Admissions to the game are taxable, since all the proceeds (see Art. 14) do not inure to the benefit of the college. 6749 Art. 19. Charitable organizations. — Admissions, or excess charges, all the proceeds of which inure exclusively to the benefit of chari- table institutions, societies, or organizations, complying with the conditions outlined in Art. 16, are exempt from tax. Any organization the primary purpose of which is benevolent or charitable comes within the meaning of the Copyright 1922, by The Corporation Trust Company. WAR TAX 1347 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. term "charitable" as used in the Act. An organization is not precluded from exemption merely because its gratuities are limited to its members and /or their dependents. 6750 Examples. — (1) Admissions to an entertainment given by a fraternal organization, the net proceeds of which inure to the exclusive use of a home for indigent and aged members and their dependents or a similar institution, not operated for profit, are exempt from tax. 6751 (2) An organization not qualifying as exempt under the provisions of the Act gives an entertainment and distributes the proceeds to certain deserving poor people whose names it has obtained from the Associ- ated Charities. In this case the admissions are taxable, for the proceeds do not inure to a charitable organization. If, however, the net proceeds had been turned over to the Associated Charities to be distributed by it in aid of the poor, the admissions would have been exempt from tax. 6752 (3) An association organized and operated for the relief of war- stricken people abroad, and also complying with conditions (1) and (3) of Art. 16 gives an entertainment and uses the proceeds in furtherance of its work. Admissions to this entertainment are exempt from tax, for it is a charitable organization within the meaning of the Act. 6753 (4) A relief association, organized by the police of a certain city for the sole purpose of providing a fund for the relief of dependents of deceased policemen, gives a baseball game and turns the proceeds into its treasury. Admissions to the game are exempt from tax. 6754 Art. 20. The American Legion. — Admissions or excess charges all the proceeds of which inure exclusively to the benefit of any post of the American Legion, or any women's auxiliary unit of the American Legion, are not taxable. 6755 Art. 21. Symphony orchestra organizations. — Admissions, or excess charges, all the proceeds of which inure exclusively to the benefit of an organization conducted for the sold purpose of maintaining a symphony orchestra and receiving substantial support from voluntary contributions — if no part of the net earnings thereof inures to the benefit of any private stock- holder or individual — are exempt from tax. 6756 The name by which an organized group of musicians is called is not. the test of whether or not such group is a symphony orchestra. To be a symphony orchestra it must have a personnel of sufficient size, quality, and ability to capably render symphonies, and must make them a regular part of its program. Bands and ordinary orchestras are clearly not included in the exemption. 6757 Art. 22. Persons in the military or naval service. — Admissions, or excess charges, all the proceeds of which (after payment of reasonable expenses) inure exclusively to the benefit of a person or persons in the military or naval forces of the United States, are exempt from tax. Soldiers and sailors, of course, constitute the chief classes of persons covered by this exemption, but it also includes nurses, male or female, and other members of such military or naval forces not ordinarily included within the term "soldiers and sailors." It does not include persons formerly but no longer members of such forces, whether in uniform or not, except as provided in Art. 23, nor does it include members of the National Guard of a State, even Copyright 1922, by The Corporation Trust Company. WAR TAX 1348 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. though the National Guard Organization is recognized by the Federal Govern- ment under the Act approved June 4, 1920, entitled "An Act to amend an Act entitled £ An Act for making further and more effectual provision for the national defense, and for other purposes,'' approved June 3, 1916, and to establish military justice," though it does include persons in the United States Military or Naval Reserve. It applies equally whether the proceeds inure exclusively to the benefit of a single person or of many persons if they are in the active service. An individual in the military or naval reserve engaged in the business of selling admissions for gain or profit would not be entitled to exemption. 6758 Art. 23. Persons formerly in the military or naval service.— Admis- sions, or excess charges, all the proceeds of which inure exclusively to the benefit of persons, individually or collectively, who have served in the military or naval forces of the United States, and are in need, are exempt from tax. This exemption applies to persons who have at any time served in any of the arms or branches of service specified in the preceding Article, and who are in need. The phrase "are in need" is held to mean in need of necessaries of life which such persons themselves are unable to provide by reason of physical or mental disability or other legitimate cause beyond their control. It includes necessaries for the personal use of ex-service men or women and also necessaries for members of their families who are legally dependent on them for support. 6759 It is not necessary that the needy condition should have been occas- ioned by or arisen out of their military or naval service, or to be in any way connected with or related to such service. Whether a person, or group of persons, is in need is a question of fact, and when exemption is claimed by or on behalf of persons coming within this class it is incumbent on the claimant to show the existence of the need. 6760 Art. 24. Municipal improvement societies. — Exemption is accorded to admissions, and excess charges, all the proceeds of which inure exclusively to the benefit of societies or organizations conducted for the sole purpose of improving any city, town, village, or other municipality — if no part of the net earnings thereof inures to the benefit of any private stockholder or individual. 6761 It is to be noted that the exemption applies only to societies or organi- zations the sole purpose of which is the improvement of cities, towns, villages, or other municipalities. It would not, therefore, include a municipal government itself (see Art. 26), for, while in a broad sense it may be said that such governments are designed for the improving of the communities they serve, the scope of their activities is wider than that of the organizations contemplated by this provision of the Act. 6762 By "improving" is obviously meant any work or undertaking looking to the introduction, inauguration, or betterment of any facility, agency, or other service or thing designed or maintained for the common use and benefit of all the people of the community. Organizations the purpose of which is to improve and beautify public roads, streets, parks, and other public utilities or services, to improve educational and health con- ditions, to raise funds for the acquisition and care of apparatus for a volunteer fire company, and the like, would come within the exemption. Copyright 1922, by The Corporation Trust Company. WAR TAX 1349 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6763 Art. 25. Cooperative or community-center moving-picture theater organizations. — No tax applies to admissions or excess charges all the proceeds of which inure exclusively to the benefit of societies or organiza- tions conducted for the sole purpose of maintaining cooperative or com- munity-center moving-picture theaters — if no part of the net earnings thereof inures to the benefit of any private stockholder or individual. 6764 The exemption covers not only admissions to cooperative or com- munity-center moving-picture theaters maintained by such societies or organizations, but also to any admissions all the proceeds of which inure exclusively to the benefit of such organizations. This exemption does not include community-center organizations, even though they maintain cooper- ative or community-center moving-picture theaters, if their purposes and activities extend beyond this one object. 6765 Art. 26. Admissions by or for the benefit of Federal, State, or Munici- pal governments.— The fact that the authority charging admissions or receiving the proceeds thereof is the United States or an agency thereof, or a State or Territory or political subdivision thereof, such as a county, city, town, or other municipality, does not make such admissions exempt. The Act specifically provides that the taxes on admission (Chapter One) shall be paid by the person paying for admission. It is not, therefore, a tax on the person or authority selling the admissions or receiving the proceeds thereof. AGRICULTURAL FAIRS 6766 Art. 27. Basis of exemption. — The tax on charges in excess of the 6506 regular or established price of admission has no application in the case of admissions to agricultural fairs (see Art. 15). Therefore, it is only necessary to consider under this head the tax on admissions imposed by paragraph (1) of section 800 (a). 6767 The exemption from this tax in this instance depends (1) on the nature of the place or exhibit to which admissions are sold, (2) on whether the fair or exhibit is conducted for financial profit, and (3), in the case of any exhibit, entertainment, or other pay feature, the disposition made of the proceeds therefrom. 6768 Art. 28. Fairs and exhibits included.— The exemption includes not only agricultural fairs as such, but also "any exhibit, entertainment, or other pay feature" conducted by an association conducting an agricultural fair, and as part of such fair. 6769 The term "agricultural fairs" includes, in general, all exhibitions of farm produce, live stock, poultry, flowers, or the like, held for the promotion or advancement of agriculture (which includes horticulture). It includes within its meaning any exhibition of animals, of a species whose chief utility is in connection with agriculture, held by an association organized to improve that species of animal and to disseminate knowledge concerning its breeding. 67 70 No limitation or restriction is imposed with respect to the character or nature of the exhibits, entertainments, or other pay features, admissions to which are exempted. It is only necessary that such exhibit, entertainment, or other pay feature (a) be conducted by the association conducting the agricultural fair, (b) as a part of such an agricultural fair, Copyright 1922, by The Corporation Trust Company. WAR TAX 1350 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. and (c) that the proceeds therefrom be used exclusively for the maintenance and operation of such agricultural fairs. If these conditions are satisfied, it is immaterial whether or not the exhibit, entertainment, or other pay feature is designed to promote or advance agriculture or its allied industries. The exemption # does not extend to admissions to exhibits, or features operated by concessionaires in connection with agricultural fairs, nor to admission to any place other than an agricultural fair or an exhibit or feature held in conjunc- tion with such a fair, even though all the proceeds inure exclusively to the benefit of an agricultural fair association. 6771 Examples. — (1) A retail grocers' association gives a food show lasting a week in a large hall in a city. The raw food products, the processes of manufacture, the finished food products, and the foods prepared for the table are all exhibited. Such an exhibition is not an agricultural fair within the meaning of the Act. 67 7 2 (2) A horse show held in a large city, where most of the horses exhibited are fancy riding and driving horses and the show is largely a social event, is not an agricultural fair within the meaning of the Act. 6773 (3) A horse fair held by a society organized to improve the quality of farm animals, the animals exhibited being chiefly of that class, is an agricultural fair within the meaning of the Act. 67 74 (4) A certain dog fanciers' association gives a dog show in a city. A large majority of the dogs exhibited belong to fancy and house varieties. Such a show is not an agricultural fair within the meaning of the Act. 67 75 (5) A poultry fanciers' association gives a poultry show, which is held with a particular view to teaching poultry farmers how to secure the largest possible number of eggs. Such a show is an agricultural fair within the meaning of the Act. 67 76 (6) An exhibition of articles of garden produce to stimulate a "garden movement" in the community is an agricultural fair within the meaning of the Act, and admissions to same are not taxable if no part of the net earnings thereof inures to the benefit of any stockholders or members of the organization conducting the exhibition. 67 7 7 Art. 29. Claim for exemption. — The benefit of exemption from Taxes on Admissions or Taxes on Excess Charges can only be secured by executing and filing an affidavit, on Form 755 (Revised), which may be obtained from any Collector of Internal Revenue. On this form must be shown the place and the occasion with respect to which exemption is desired. It must in every case be executed by an officer or duly authorized agent of the organization, or individual, in control of the admissions or excess charges involved. And, where the proceeds of the admissions or excess charges are for the benefit of an organization or of a person or persons not in control thereof, the beneficiary, whether an organization or individual, must join in executing the claim for exemption, space therefor being provided on Form 755 (Revised). 6778 The claim should be filed with the Collector of Internal Revenue for the district in which is located the place to which the admissions or excess charges covered by the claim are to be sold. It should be filed a con- siderable length of time prior to any occasion for which exemption is desired, and should be accompanied by evidence to establish the beneficiary's right to exemption under subdivision (b) of section 800. In the case of organizations Copyright 1922, by The Corporation Trust Company. WAR TAX 1351 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. claiming exemption thereunder, copies of their charters or constitutions and by-laws should be submitted in support of such claims. If these documents can not be furnished in any case a comprehensive statement, under oath, outlining the objects and purposes and the scope of the activities of the claim- ant organization will be required. Unless a claim is filed long enough before any given occasion to permit a full consideration and investigation if neces- sary and the rendering of a decision, and unless the decision is favorable to the claim, the person or authority in control of the admissions will be liable to the penalty prescribed by section 1302 ['18014] of the Act if tax due on the admissions is not collected. (See Chapter Nine.) 67 79 Collectors of Internal Revenue will notify claimants as to the allow- ance or disallowance of their claims, as soon as circumstances will permit, on Form 755-A. 6780 Examples. — (1) A certain social club gives an entertainment at which moving pictures are exhibited and charges $1 for admission. It contends that admissions to this entertainment are exempt from tax on the ground that the net proceeds are to be given to the local chapter of the Red Cross. In such case no claim for exemption can be considered unless the affidavit claiming such exemption is joined in, on behalf of the Red Cross chapter, by one of its officers. 6781 (2) A football game is to take place at a certain college between its team and that of a rival college. In this case, if an exemption certi- ficate is sought, the president of the college where the game is to be held must execute the affidavit for exemption. If the proceeds are to be divided then the president of the rival college must join in the affidavit. 6782 (3) The pupils in a certain room in a certain school give an enter- tainment the proceeds of which are to be used in buying a victrola to be given to the school. In this case, if it is desired to claim that the pro- ceeds are exempt, the principal of the school must, on its behalf, join in the affidavit for exemption. 6783 (4) A certain lodge gives a benefit for a company of United States soldiers. In this case the claim for exemption on Form 755 (Revised) must be executed by an officer of the lodge and joined in by an officer or other duly authorized member of the company of soldiers. CHAPTER SIX Tickets and Signs 6784 Art. 30. Tickets or other means to check admissions required.— 6508 The above [^[6508] is the only provision contained in the Act relating to tickets or cards of admission. It is not held to mean that the use of tickets or cards in all cases is mandatory; but where tickets or cards are not used some other method or system must be provided by which the num- ber of admissions sold and the tax due thereon may be ascertained and checked. Therefore, every place admission to which is taxable must provide either — 6785 (a) Tickets or cards of admision to evidence every admission which is subject to tax; or 6786 (b) A mechanical device which will register the number of persons entering the place. Copyright 1922, by The Corporation Trust Company. WAR TAX 1352 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6787 Exception: In the case of a person or organization who or which only makes charges for admission irregularly and occasionally and not more than six times a year, compliance with the foregoing requirements will not be necessary; but in such cases a correct record must be kept in accordance with Art. 39 giving all information necessary to enable revenue officers to determine the amount of tax due. 6788 Art. 31. Requirements applicable to tickets. — Where tickets or cards of admission are used they must comply with the following require- ments: 6789 (1) The price (exclusive of the tax to be paid by the person paying for admission) at which every ticket or card is sold must be conspicu- ously and indelibly printed, stamped, or written on that part of the ticket which is to be taken up by the management of the place for which it is valid for admission. This is a specific requirement of the Act itself. For adminis- trative purposes it is necessary to show not only the selling price but also (a) the regular or established price (see Art. 11), (b) the tax, and (c) the total of the price and tax. The regular or established price, the tax based thereon, and total shall appear on the face 1 of the portion of the ticket which is to be taken up by the management in the following or an equivalent form: Sale price Tax paid. Total If the ticket is sold at a price other than the regular or established price, the actual selling price, the tax based thereon, and the total shall be shown on the back of the portion of the ticket to be taken up by the management in the following or an equivalent form: Sale price Tax paid Total 1 In the case of strip tickets, the back may be used. 6790 And if the ticket is sold other than at the ticket office of the theater, opera, or other place of amusement, the name and address of the vendor mujst also be shown on the back of the same portion of the ticket. For penalties imposed in this connection see Article 46. 6791 The foregoing applies primarily to taxable admissions. As no tax is imposed on admissions of ten cents or less, it is only necessary that the price of such tickets be shown. This must be shown, since the require- ments of the Act in this matter apply to "every admission ticket or card" without regard to the price for which it is sold. Where admissions are exempt on other grounds, the tickets should show that fact. This may be done in the following or equivalent form: Established price Tax free. 6792 (2) The name of the place to which a ticket or card is valid for ad- mission must in all cases be shown thereon. Moreover, tickets must either show the date for which they are valid or must be serially numbered. If serially numbered tickets are used there must be a separate and distinct series for each established price. The numbers of each series must start Copyright 1922, by The Corporation Trust Company. WAR TAX 1353 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. with 1 and run continuously in regular order until 500,000 is reached, after which they may again start at 1 if so desired. In such case, however, a letter of the alphabet must precede or follow the serial number to distinguish the new series from the preceding series, and such letters must be used in turn until the alphabet is exhausted before starting again with the letter A. No place to which taxable admissions are sold shall have, or permit to be, at such place at the same time two or more rolls or series of tickets of the same established price bearing identical serial numbers which are not distinguished by different letters of the alphabet. Serially numbered tickets must be issued consecutively in the order of the serial numbers, and the letters of the alpha- bet, if any, of that particular series. 6793 Exceptions . — (a) Since tickets or cards of admission which are sold for 10 cents or less are not taxable, they need not be serially num- bered or dated. 6794 (b) In a limited class of cases, the use of so-called "hard tickets ,, used for repeated performances is permitted without requiring that they be serially numbered or dated. 6795 In each of these cases, however, the tickets or cards of admission must show the name of the place for which they are valid and the price. 6796 (3) In the case of bona fide season or subscription tickets a single ticket or card may be used to evidence more than one admission. In every other case, where several single admissions are sold or disposed of at one time, there must be separate or separable coupons to evidence each right to admission. Thus, in the case of combination tickets, issued by out- door amusement parks, which entitle the holder to admission to a number of different attractions, there must be a separate ticket or coupon for each such attraction. Furthermore, each separate ticket or coupon must either be dated or be serially numbered in accordance with requirements (1) and (2). If serial numbers are used on such combination tickets, each coupon thereof should bear the same serial number as the stub or cover of the ticket itself. 6797 (4) No person shall be admitted, unless admitted free, to any place admission to which is taxable, and which uses tickets or cards, except upon the presentation of a card or ticket complying with the preceding re- quirements. The ticket or card so presented or a portion thereof must be taken up, at the time of admission, by the management of the place, except in the case of a bona fide subscription or season ticket covering two or more admissions. Under ordinary circumstances the tickets or cards or portions thereof so taken u'p need not be preserved by the management of the place, but from time to time, on short notice from a collector of internal revenue or a revenue agent, the management must carefully preserve, until inspection by such officer, all tickets or cards or portions thereof taken upon the occa- sions designated in such notice. 6798 (5) In the case of roof gardens, cabarets, and places affording similar entertainment (see Chapter Three), the proprietors must furnish each guest upon payment of his bill for refreshment, service, or merchandise with a coupon receipt to be detached from such bill. All such bills shall be serially numbered and the coupon receipt in each case shall be numbered the same as its bill. The bill and coupon receipt shall each bear in indelible figures the total amount of the charge for refreshment, etc.. the tax thereon, which on the receipt shall be stated as "paid," and the sum total of such charge Copyright 1922, by The Corporation Trust Company. WAR TAX 1354 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. and tax. No such receipt shall be delivered except on collecting the amount of the tax so shown on such receipt as "paid." 6799 Examples. — (1) A certain theater has a regular charge of $2 for orchestra seats. It prints the following on the face of that part of the ticket which is taken up by the theater upon the admission of the ticket holder: Established price $2.00 Tax paid 20 Total 2.20 Two hundred of these tickets are sold by the theater to a certain broker. On selling these tickets he stamps with a rubber stamp on the back of the same part of the ticket the following: This ticket sold by Sale price $2.50 Jones & Co. Tax paid 20 27 West St., New York City. Total sale price. . 2.70 6800 (2) George Nelson purchases from Jones & Co. one of the tickets mentioned in the preceding example and finding that he is unable to attend the performance he resells this ticket to a friend for the same amount which he paid for it. When selling the ticket George Nelson draws two lines in the form of a cross through the left-hand portion of what the broker had stamped on the back of the ticket and adds his name and address, leaving the inscription on the back of the ticket as follows: is ticket sokUby~~*~"~ Sale price $2. 50 Sold by Geo. Nelson, j2^5~S357^ Tax paid 20 505 West 122d St. , mWl NewYSat^ TqW ^ pdce — 0 New York City. 6801 (3) A certain theater whose established prices are not the same for all attractions desires to print its tickets for the whole year in advance, To comply with the provisions of this Article and yet make it possible to change the established price for various attractions it has tickets printed in the following form: AMERICAN THEATRE I^l^'abli^dj>nc^ax^pa[djnd I total are as indicated by punch below SATURDAY EVENING ORCHESTRA Established J5 jj^ $ j ^ ^ .10 .15 .20 .25 1922 Tax paid .08 Total .T83 ★ $1.10 $1.65 $2.20 $2.75 * * * ★ Not raiid unless one star is punched out t,cO INS 1922 >! "-a RIGHT > I 00 Tickets so printed, if properly punched in advance of the opening of any sale or 'distribution of tickets for the performance for which they are issued, will fully comply with the requirements of Article 30, as well as with those of this Article. Copyright 1922, by The Corporation Trust Company. WAR TAX 1355 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6802 (4) Certain society women form an organization for the sole pur- pose of giving a single ball the net proceeds from which are to be given to a charity hospital. In this case, if it is decided to use tickets, the tickets must be marked with the "established price" in accordance with the provisions of this Article. No "tax paid" or "total" need be printed on the tickets, however, because the admissions are clearly exempt from tax, but "tax free" or its equivalent must appear in its stead. 6803 (5) A broker on reselling a ticket finds that by reason of the fact that it has previously passed through the hands of several other brokers and has been stamped by them, there -is not sufficient space on it for him to stamp the information required by the law and regulations. He may enlarge the ticket by pasting on to that part which will be taken up by the theater a slip of paper and stamp the required information on the same, but this must be done in such a way that the information placed on the ticket by former vendors will not be obscured. 6804 (6) A college procures tickets to be sold for admission to a foot- ball game, on admissions to which it has secured exemption from tax. The tickets must show the established price of admission and bear the words "Tax free." 6805 Art. 32. Printing of tickets — Notice to be Given. — Where tickets or cards of admission to any place for admission to which a charge is made are printed, manufactured, or sold by any person, it shall be the duty of that person to give prompt notice to the collector of internal revenue of the district in which is located the place to which admission is to be charged. Such notice shall state (1) the name and address of the person to whom the tickets are furnished and (2) the number of tickets furnished, and shall be accompanied by proofs or sample copies of the tickets themselves. If the tickets are serially numbered, the notice must also contain a statement as to such serial numbers. 680 6 Art. 33. Mechanical devices. — If a mechanical device is used instead of tickets or cards of admission, such device may be placed at the entrance or exit, or at any point en route through the place, but must be so arranged that every person admitted must himself cause it to register an admission and be so constructed that no change can be made in the record of admissions until at least 99,999 admissions are recorded, and then the only change possible must be the returning of the record to "0". 6807 Art. 34. Signs to be posted. — In the case of every place, admission to which is subject to tax, the proprietor or manager must keep con- spicuously posted at the outer entrance and near the box office one or more signs accurately stating each of the established prices of admission, and in the case of each such price the tax due and the sum total of the established price and the tax. 6808 Examples: The following are examples of such signs: (1) In the case of a "legitimate" theater: Admission Tax $0.20 .15 Total $2.20 $2.00 1.65 >*v*c\Vh- -VU. .-vv"v nvl.60 .10 l.ltf ........ ... ..... : .So 25 .08 .05 .03 .S5 .55 .28 Copyright 1922, by The Corporation Trust Company. WAR TAX 1356 SERVK1 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS . 6809 (2) In the case of a moving-picture theater: Balcony Admission 13c Admission Tax 2c Tax Orchestra 27c 3c Total 15c Total 30c CHAPTER SEVEN Collection, Return, and Payment of Tax. Law H5506, H5508-9, H6512, 1J8009-10 6810 Art. 35. Duty to collect, return, and pay tax — Taxes on Admissions. 6512 — Every individual, corporation, partnership, or association (1) receiv- ing any taxable payment for admission must collect the tax from the person making such payment at the time such payment is made; (2) being the proprietor or manager of an opera house or any other place of amusement in a case where any person has the permanent use or a lease for the use of a box or seat therein which is subject to tax must collect the tax from the owner or lessee of such box or seat; or (3) receiving payment for refreshment, service, or merchandise, which is taxable because including therein a charge for ad- mission to a public performance for profit, at any roof garden, cabaret, or other similar entertainment, must collect the tax from the person making such payment at the time of such payment. 681 1 A ticket broker or other person reselling a ticket at an advance over the former sale price may collect, and retain as a refund to him, the amount of admission tax already paid on that admission by him A theater issuing a ticket in exchange for a less expensive ticket and a cash balance must collect the admission tax due on the cash balance 68 1 2 If the permanent use or lease for the use of a box or seat is paid for, then the time for the collection of the tax is the same as that in the case of any other paid admission. If the right to use is granted free or is otherwise enjoyed without being directly paid for, then the tax must be collected at the time the right is granted. If these rules prove insufficient by reason of attempts at evasion or otherwise, to provide for the collection of the full tax due in any such case, then the proprietor or manager of the opera house or other place of amusement in which such box or seat is located shall collect each month, from the person entitled to the use of such box or seat, any balance of tax due from such person for the right to the use of such box or seat during the preceding month. 6813 In the rare cases where payment for refreshment, service, or mer- chandise is not made before or at the time of leaving the roof garden, cabaret, or other place of entertainment, payment must be treated as having been made and the tax must be then collected. Credit can be given for the amount paid for refreshment, service, or merchandise, if desired, but not for the tax. The tax must be collected not later than the departure of the person from the place of the performance at the conclusion of such perform- ance. 6814 In each case there rests on the respective person from whom the tax is to be collected the corresponding duty of then paying such tax. A monthly return and payment of all such collections must be made in accordance with the provisions of Art. 41. Copyright 1922, by The Corporation Trust Company. WAR TAX 1357 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 681 5 Art. 36. Duty to return and pay tax — Taxes on Charges in Excess of Established Price. — Every individual, corporation, partnership, or association selling or disposing of a ticket or card of admission at a price in excess of the established price of the admission for which such ticket or card is valid in a case where such excess is taxable shall make a monthly return and pay the tax due in accordance with the provisions of Art. 41. For penalties see Art. 46. 6816 A broker may reimburse himself in an amount equal to a tax im- posed under the provisions of section 800 (a), paragraph (1) of the Act, which he has paid to the vendor from whom he purchased the ticket, providing the selling price and tax imposed thereon under section 800 (a), paragraph (1), are properly stamped, printed, or written on the ticket in accordance with the provisions of section 800 (d) of the Act and Art. 31 of these Regulations. No credit can be taken, however, for any tax imposed under section 800 (a), paragraph (2) or (3), on excess charges and paid by the vendor from whom the broker purchased the ticket unless the broker claiming such credit obtains from the vendor a written statement that such vendor has paid or will pay the amount of tax on excess charges for which the purchasing broker claims credit. The statement must be preserved by the broker claiming credit in such a way as to be readily accessible for inspec- tion by internal revenue officers. (See Arts. 12 and 13.) 6817 Art. 37. Application for and certificate of registry. — Every individ- ual, corporation, partnership, or association (1) required by the provisions of the Act to collect any tax on admissions (see Art. 35) or (2) being the owner or lessee of any place which is ordinarily or at times leased to other persons who impose charges for admissions to it (see Art. 42) or (3) required to pay any tax on charges in excess of established price (see Art. 36) shall annually, on or before the first day of July, make an application for registry, by filling out Form 752 (Revised), with all information there called for, and duly executing it under oath. In cases falling within the first of the above classes (except such as are considered in Art. 38) such an application must be filed in the office of the collector of internal revenue of each district in which is located a place to which admissions are charged on account of which a duty to collect admissions taxes is imposed on the person making such application. In cases falling within class (2) the application must be filed in the office of the collector of internal revenue of each district in which such a place is owned or leased. In cases falling within class (3) the application must be filed in the office of the collector of internal revenue of the district in which is located the principal place of business of the person making the application, or in which is located his residence, if he have no fixed place of business. The collector, if satisfied that all the statements made in the application for registry are correct, will issue a certificate of registry on Form 753 (Revised) to the person who made such application. This certificate must be kept conspicuously posted in the principal place of business of such person, or be carried about with him, if he has no fixed place of business. 6818 Example. — A certain hotel has a number of rooms which it rents from time to time for dances and other parties. This hotel falls within class (2) of Art. 37 and must annually make application for registry. Copyright 1922, by The Corporation Trust Company. WAR TAX 1358 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6819 Art. 38. Traveling shows. — The proprietor or manager of every show, circus, exhibition, Chautauqua, or other amusement enterprise, which is traveling or itinerant, shall file the application for registry required by Art. 37 with the collector of internal revenue of the district in which the headquarters of such show is located, if it have an established headquarters. If it have no established headquarters, then the application shall be filed with the collector of the district in which such proprietor or manager resides. The certificate of registry, the daily record required by Art. 39, and a copy of each monthly return (see Art. 41) must be carried along with the show and exhibited on request to collectors of other districts or to internal revenue agents. 6820 This article applies only to shows, etc., which control the sale of tickets to their performances and the collection of tax on the same. It does not include, therefore, traveling theatrical attractions, lyceum enter- tainers, or the like, who perform in theaters or other places where the local management controls the sale of tickets and the collection of the tax. ' 6821 Examples. — (1) A certain Chautauqua has its main office in a cer- tain city. The lectures, entertainments, and other attractions which it furnishes constantly tour the country, moving from State to State. In this case the application for registry must be made with the collector of internal revenue of the district in which its main office is located. 6822 (2) A certain theatrical company, acting in a farce comedy, tours the country, playing in various theaters. All of these theaters .have certificates of registry, and they take care of all matters connected with the sale of tickets, collection of tax, etc. Such a company does not fall within the provisions of Art. 37 or 38 and is not required to apply for a certificate of registry at all. 6823 Art. 39. Records — Taxes on Admissions. — Every individual, corpora- tion, partnership, or association required by the provisions of the Act to collect any tax on admissions must keep or cause to be kept an accurate daily record showing (1) in the case of each class of Taxes on Admissions (a) all figures and other information necessary to determine the amount of tax due for that day, and (b) the amount of tax due for that day, and (2) the total amount due as Taxes on Admissions for that day. The proprietor or manager of the business must certify, over his signature, to the correctness of the daily record, and if any other person is directly interested in the proceeds of the amounts received for admission, he or his agent must also so certify it. Whenever in the course of the business a report is prepared daily or at some other regular interval or at any time by a treasurer or manager for the benefit of the proprietor, or by the proprietor, treasurer, or manager for the benefit of some other interested party, a sworn copy of such report must be attached to and made a part of such daily record. Indeed, if such a report contains all the information required above, no daily record other than the sworn copy of the report need be kept. But whatever information such a report may contain, a sworn copy of it must be made and kept. Such daily records, including such sworn copies of reports, must be kept on file at the box office of the place or at some other convenient location for a period of two years, in such a manner as to be readily accessible on request to internal revenue officers. Copyright 1922, by 1 he Corporation Trust Company. WAR TAX 1359 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6824 The records should be kept in substantially the following form: Page — MONTHLY RECORD OF ADMISSION TAX. Class of admissions, $ Month of Day of month Tickets sold Price Tax 1 ,2 3 4 5 6 7 To From To Total Tax due for s«ven days ending , 19...., $ NOTE —Under column "Tickets sold" show after (From) the number of the first ticket sold, and after (to) show the number of the last ticket sold. A separate record must be kept for each class of admissions. [Similar page for the 2nd, 3rd, and 4th seven-days of the month.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1360 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. Page— MONTHLY RECORD OF ADMISSION TAX. Class of admission, $ Month of Day of month Tickets sold Price Tax 29 30 To 31 To To Taxes due for the first seven days of the month $ Taxes due for the second seven days of the month $ Taxes due for the third seven days of the month $ Taxes due for the fourth seven days of the month $ Taxes due for last days of the month $ Total taxes due for the month $ See that each page is properly numbered, consecutively, for the entire year. When a year's records are complete, file away for reference and refill your book for another year. 6825 Art. 40. Records — Taxes on charges in excess of established price. — Every individual, corporation, partnership, or association required by the provisions of the Act to pay any tax on charges in excess of established price, must keep or cause to be kept a daily record which classifies all sales of tickets into classes in each of which all the tickets are identical in respect to (1) the place to which admission is granted by the ticket, (2) the established price (exclusive of admission tax) of the admission granted by the ticket, and (3) the actual price (exclusive of any amount representing an admission tax) at which that sale of the ticket is made. This daily record must show (1) in the case of each such class (a) all figures and other information necessary to determine the amount of tax due for that day, and (b) the amount of tax due for^that day, and (2) the total amount due as Taxes on Charges in Excess of Established Price for that day. Whenever in the course of the business a report is prepared daily or at some other regular interval or at any time by a treasurer or manager for the benefit of the proprietor, or by the proprietor, treasurer, or manager for the benefit of some other interested party, a sworn copy of such report must be attached to and made a part of such daily record. Indeed, if such a report contains all the information required above, no daily record other than the sworn copy of the report need be kept. But whatever information such a report may contain, a sworn copy of it must be made and kept. Such daily records, including such sworn copies of reports, must be kept on file at the place of business, or at some other convenient location, for a period of two years, in such a manner as to be readily accessible on request tojnternal-revenue officers. Copyright 1922, by The Corporation Trust Company. WAR TAX 1361 SERVICE 3-2-22. Reg. 43, Rev. — Part L — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6826 Art. 41. Returns and payments. — Every individual, corporation, part- nership, or association required under the provisions of Article 13 of these regulations to pay any tax on excess charges shall make up each month from the daily record, required by Art. 40, a return in duplicate on Form 729A, in accordance with the instructions printed on the back of that form. Every other individual, corporation, partnership, or association required by the provisions of the Act to collect any tax on admissions (see Art. 35) or to pay any tax on charges in excess of established price (see Art. 36) shall make up each month from the daily record, required by Art. 39 or 40, as the case may be, a return in duplicate on Form 729 (revised), in accordance with the instructions printed on the back of that form. In addition thereto, pro- prietors of places who sell admission tickets to or through brokers must make up for each month from the daily record a return in duplicate on Form 729B in accordance with the instructions printed on that form. These returns must be made under oath, and must be verified before an officer duly authorized to administer oaths, either by the laws of the United States or by the laws of the State or Territory where such officer resides. Persons in the military or naval service of the United States may verify their returns before any official authorized to administer oaths for the purpose of those services. Such return or returns, together with the amount of the tax, must be in the hands of the collector of internal revenue who issued the certificate of registry for the place or business for which such return and payment is being made, on or before the last day of the month following that for which it is made. 1 (For penalties see Art. 46.) A copy of the proper form (or forms) will, as far as possible, be mailed each month to every person that filed a return during the preceding month, but should any person who is liable to tax fail to receive a blank return he should take the necessary steps to secure a form and make return within the time prescribed by law, as a failure to receive such copy from the collector will not, of course, excuse a failure to return and pay the tax, or relieve the taxpayer from the penalties for delinquency. 6827 Art. 42. Leases of places. — Whenever a theater, hall, park, ball- room, or other place is leased 2 for any occasion, there is imposed on the lessee, by the provisions of the Act, the duty of collecting any taxes due on admissions to such place on that occasion. However, for the convenience of the parties and the safeguarding of the revenue, the lessor will be permitted, if properly registered in accordance with Art. 37, to assume the responsi- bility for the collection of the tax in such cases. If the lessor assumes such responsibility his tickets shall be used 3 and the daily record required by Art. 39 shall be kept as a part of the daily records of the lessor in the same manner and form as if there had been no lease of the place on that occasion; with the exception, however, that the name of the lessee must also appear on the daily record and that he must also certify to the correctness of such record. If the lessor, however, does not assume responsibility for the collection of the tax, the lessee, precisely like any other person collecting taxable admis- sions, must comply in all respects with these regulations, more particularly 1 "To the collector of the district in which the principal off;ce or place of business is located," in Section 502 of the Act, means (1) if there is a definitely located place to which admission is charged, to the collector of the district in which such place of business is located; or (2) if the business is not definitely located but traveling or itinerant, to the collector of the district in which is located the principal effee of such business or, if it has no offce, the residence of its proprietor. 'Where a person, society, or organization acquires the right to dispose of all the admissions to any place for one or more occasions the transaction amounts to a lease of such place within the meaning of this article. •If the lessee issues general admission tickets these tickets must not entitle to admission but be merely ex- changeable for tickets of the lessor entitling to admission. Copyright 1922, by The Corporation Trust Company. WAR TAX 1362 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. with Art. 35, 36, 39, 40 and 41. Every lessee or person who rents any theater, hall, park, ballroom, or other place for a term or period not exceed- ing 10 days, and who assumes responsibility for collecting and making return on Form 729 of taxable admission charges, shall furnish immediately after each performance or occasion for which admission charges are collected, to the collector of the district in which such theater, hall, ballroom, or other place is located, a sworn statement on Form 827 showing the number of persons admitted, the amount paid for admission by each, the amount of tax collected, and the permanent address of the person responsible for making return on Form 729. It shall be the duty of every lessor or person who rents out any theater, hall, park, ballroom, or other place to furnish to the person leasing or renting the same a sufficient number of copies of Form 827 at the time of such lease or rental. Moreover, in such case the lessor, before or at the time of making the lease, must notify the collector of internal revenue of the district in which the place is located on Form 754 (Revised) that such lease is being made. The lessor of any such place, whenever he makes a lease, shall furnish the lessee with a copy of Form 755 (Revised), in order that the lessee mav promptlv claim any exemption to which he mav be entitled. (See Art. 29.) CHAPTER EIGHT Credits and Refunds Law ^8018, 118023, ^8057 6828 Art. 43. Credit for overpayment. — Any individual, corporation, partnership, or association that has paid to the collector of internal revenue, as a tax under section 800 of the Act, any amount in excess of the amount of the tax actually imposed by that section for the month covered by that payment, is authorized under section 1304 of the Act to claim credit for such overpayment against the amount of the tax imposed by section 800 which is due upon any other monthly return thereafter made in the same behalf on Form 729 (Revised) or on Form 729A (Revised). 6829 In case a credit is claimed a statement shall be attached to the return setting forth fully the facts regarding the alleged overpayment or overcollection. In the case*of the overcollection of a tax no credit for the amount overcollected shall be allowed until the individual, corporation, partnership, or association making the overcollection submits a sworn state- ment that the tax in each case so overcollected has been returned to the person making the overpayment. 6830 It should be noted that the right to claim a credit exists only in the case of "overpayment or overcollection." These words are confined in general to cases where as the result of some clerical or mechanical error, an excess amount has been collected or paid. 6831 Art. 44. Refund of erroneous or illegal collections. — In all cases where tax has been collected and such collections are alleged to be illegal or erroneous it will be necessary for the person so paying the tax to file claim for refund on Treasury Department Form 46. Section 1304 of the Act does not authorize the individuals, corporations, partnerships, or associa- tions receiving such tax to make refund nor to adjust the claim; the only ad- justment authorized under this section of the Act being limited to cases of overpayment or overcollection of tax. WAR TAX 1363 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. 6832 Art. 45. Refund of overcollection. — Every individual, corporation, partnership, or association that has collected from any person, as a tax under section 800 of the Act, any amount in excess of the amount of the tax imposed by that section actually due from such person, shall upon proper application promptly refund such amount to the person entitled thereto, even though such amount has already been paid over to the collector of in- ternal revenue and no corresponding credit (see Art. 43) has yet been secured. As the tax on admissions is based on the payment not the admission, no refund of any part of such a tax is authorized merely because the person paying for admission does not actually make use of his right to admission. Where, however, an amount paid for admission is refunded it will be treated, as far as the liability to the tax is concerned, as not having been paid, and the amount of any tax collected at the time of the payment should itself be re- funded to the taxpayer by the person refunding the payment, at the same time the payment is refunded As the tax on the permanent use or a lease for the use of a box or seat is based on the right to use (see Art. 6), it is entirely imma- terial whether the box or seat is ever used or not, and, therefore, no refund can ever be granted on the ground that there was no actual use of the box or seat. CHAPTER NINE Penalties Law H5509, 1f6508, H8014-17, H8073-74 6833 Analysis of above provision of Revenue Act of 1921. Act or default penalized Penalty., applicable Section of Revenue Act of 1921 Sale of "admission ticket or card on" the "face or back" of "which the name of the vendor" ("if sold other than at the ticket office of the theater, opera, or other place of amusement") and the "price (exclusive of the tax to be paid by the person paying for admission) at which" the "ticket or card is sold" is not "conspicuously and indelibly printed, stamped, or L written"; or sale of an admission ticket or card "at a price in excess of X the price so printed, stamped, or P written thereon." Fine of not more than $100 800 (d). [Continued on page 1365.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1364 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. Analysis of above Provision of Revenue Act of 1921 — Continued. Act or default penalized Penalty" applicable Section of Revenue Act of 1921 'Failure to make and file" return "within the time prescribed" (when return not filed later and reasonable cause shown for failure to file in time). Willfully making "false or fraudulent return." Failure to pay tax when due , Failure by any "person" 1 to "pay, collect, or truly account for and pay over any such tax, make any such return, or supply any such information at the time or times required by law or regulation." Willful refusal by any "person" 1 to "pay, collect, or truly account for and pay over any such tax, make such return or supply such informa- tion at the time or times required by law or regulation," or willful attempt "in any manner to evade such tax." Willful refusal by any "person" 1 to "pay, collect, or truly account for and pay over any such tax." Embezzlement States. of money of United 25 per cent addition to tax (to be collected as part of tax, or if tax already collected then in same manner as tax). 50 per cent addition to tax (to be collected as above). 5 per cent addition to tax and 1 per cent interest for each full month from time tax due. Penalty of not more than $1,000 Fine of not more than $10,000. . or Imprisonment for not more than one year, or both. 100 per cent addition to tax 5 . . . Fine of not more than $5,000. . , or Imprisonment for not more than 5 years. Section 3176 U. S. Re- vised Stat- utes, as re- enacted by section 1311. Do. 502 or 903. 1302 (a). 1302 (b). 1302 (c). Section 47 U. S. Crim inal Code. 1 "Person" includes "an officer or employee of a corporation or a member or employee of a partnership, who- as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs." (Section 1302 (d).) 2 "No penalty shall be assessed under this subdivision for any offense for which a penalty may be assessed under authority of section 3176 of the Revised Statutes, as amended." (Section 1302 (c).) 6834 Art. 46. Penalties. — The scope of the penalties applicable to the Tax on Admissions is so broad that reference will be made only to their most common applications. Every individual, corporation, partner- ship, or association, on which there rests a duty to file a monthly return on Form 729 (Revised), that fails to file such return, and to pay over the tax due thereon, during the month which follows that for which such return should be made, is subject to certain penalties. A mere failure to file the return within that following month causes to accrue the 25 per cent penalty imposed by section 3176 of the Revised Statutes, as amended. If the failure be willful the penalty is 50 per cent instead of 25 per cent. A mere failure to pay to the collector during the month which follows that for which such return should be made, all taxes due under that return, causes to accrue, under section 502 of the Revenue Act of 1921, a penalty of 5 per cent, and of interest at 1 per Copyright 1922, by The Corporation Trust Company. WAR TAX 1365 SERVICE 3-2-22. Reg. 43, Rev. — Part I. — Admissions. TAX ON ADMISSIONS AND DUES REGULATIONS. cent per month for each full month of delay. Every person who fails to pay at the proper time the amount of the taxes due is also subject, under section 1302 of the Revenue Act of 1921, to a penalty of not more than $1,000. If this failure amounts to a willful refusal to pay, or an attempt to evade the tax, he is guilty of a misdemeanor and subject to a fine of not more than $10,000, or imprisonment for not more than one year, or both, and he is, moreover, liable to a penalty of 100 per cent of the amount of the tax. These penalties apply as well to an officer or employee of a place, or attraction, or ticket-selling business, who fails to perform a duty with regard to the Tax on Admissions, as to a person who fails or refuses to pay his tax. A willful conversion to one's own use of any tax collected under this act constitutes embezzlement, which is punishable by fine of not more than $5,000 or im- prisonment for not more than five years, or both. 6835 Example. — A certain theater which sells about $1,000 worth of taxable admission tickets each month, regularly collects the taxes due on such admissions, but the treasurer carelessly fails to file a return and pay over the taxes for April, May, and June, 1922, until September 2, 1922. The taxes collected in April are $1 10, in May $100, and in June $120. In this case the penalties are as follows: April: Taxes collected $110.00 25 per cent penalty $27.50 5 per cent penalty 5.50 3 months' interest at 1 per cent 4.29 $37.29 May: ' Taxes collected 100.00 25 per cent penalty 25.00 5 per cent penalty 5.00 2 months' interest at 1 per cent 2.60 32.60 Forward 69.89 Brought forward 69.89 June: Taxes collected $120.00 25 per cent penalty $30.00 5 per cent penalty 6.00 1 month's interest at 1 per cent 1.56 $37.56 Total penalties 107.45 In addition the theater treasurer is liable to a penalty of not more than $1 ,000. AUTHORITY FOR REGULATIONS 6836 Art. 47. Promulgation of regulations. — In pursuance of this provision fl[8009] of the Act the foregoing regulations are hereby made and promulgated and all rulings inconsistent with them are hereby revoked. D. H. BLAIR, Commissioner of Internal Revenue. Approved February 16, 1922 [Released for publication February 28, 1922.] A. \V. MELLON. Secretary of the Treasury Copyright 1922, by The Corporation Trust Company. WAR TAX 1366 SERVICE 9-25-22. TAX ON ADMISSIONS AND DUES REGULATIONS. (T. D. 3394.) 6837 Article 37, Regulations 43. Part I, (Revised, 1922), amended.*— 6817 Article 37, Regulations 43, Part I, (Revised 1922) is hereby changed* to read as follows: 6838 "Art. 37. Application for and certificate of registry. — Every individual, corporation, partnership, or association (1) required by the provisions of the Act to collect any tax on admissions (see Art. 35) or (2) being the owner or lessee of any place which is ordinarily or at times leased to other persons who impose charges for admissions to it (see Art. 42), or (3) required to pay any tax on charges in excess of established price (see Art. 36), shall annually, on or before the first day of July, (and if not on that date en- gaged in business, then within ten days after engaging in business and annually thereafter on or before the first day of July) make an application for registry, by filling out Form 752 (Revised), with all information there called for and duly executing it under oath. In cases falling within the first of the above classes (except such as are considered in Art. 38) such an appli- cation must be filed in the office of the collector of internal revenue of each district in which is located a place to which admissions are charged on account of which a duty to collect admissions taxes is imposed on the person making such application. In cases falling within class (2) the application must be filed in the office of the collector of internal revenue of each district in which such a place is owned or leased. In cases falling within class (3) the applica- tion must be filed in the office of the collector of internal revenue of the district in which is located the principal place of business of the person making the application, or in which is located his residence, if he has no fixed place of business. The collector, if satisfied that all the statements made in the application for registry arc correct, will issue a certificate of registry on Form 753 (Revised) to the person who made such application. This certificate must be kept conspicuously posted in the principal place of business of such person, or be carried about with him, if he has no fixed place of business. 6839 Example. — A certain hotel has a number of rooms which it rents from 6818 time to time for dances and other parties. This hotel falls within class (2) of Art. 37 and must annually make application for registry." (T. D. 3394, signed by Commissioner D. H. Blair, and dated September 21, 1922.) *[Note: The only change made in Article 37 by the foregoing T. D. 3394 is the addition of the matter in parenthesis following the word "July." — ■ The Corporation Trust Company.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1367 SERVICE 3 c. 83 9-25-22. ADMISSIONS AND DUES TAX.— RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Admissions and Dues Tax Law Provisions of the Revenue Act of 1921. (The Law appears at paragraphs 6500 to 6512.) Giving Treasury Decision Number or other Designation, Date of Issue, and General Subject Content. T. D. Subject Paragraph Law Provisions 6500 Reg. 43 ) Dues Regulations (revision of January 11, 1922) under the Revenue Pt. 2 ) Act of 1921. (Fully indexed on the blue index, following) 6513 3282 Revenue Act of 1918. — Amendment to Art. 12, Reg. 43, Part II (February 11, 1922) 6583 3285 Arts. 9, 10, 11, and 12, Reg. 43, Pt. II amended (February 11, 1922) 6584 Reg. 43 ) Admissions Regulations (revision of February 15, 1922). (Fully Pt. 1 \ indexed on the blue sheets following) 6589 The matters listed above are indexed. The matters listed below are not indexed. 3394 Art. 37, Reg. 43, Pt. % amended (September 21, 1922) 6837 Insert this page immediately before the blue Dues Tax Index. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Admissions and Dues Taxes Supplementary Page 1. ( I 3-2-22. INDEX TO ADMISSIONS REGULATIONS. INDEX TO REGULATIONS 43, REVISED PART 1, ADMISSIONS. [Government index with references changed from " Articles" to "Paragraphs. Additional charges for rental or service as charge for admission. .6608 Tax, charges in excess of established price. .6688-6710 Time, charge for, as charge for admission. .6602 "Admission" denned. .6601 "Admissions to agricultural fairs," definition. .6768 Affidavits, claim of exemption. .6777 Daily records, etc., of taxes collected. . 6823-6825 Returns. .6826 "Agricultural fairs," definition. .6768 Exemptions. .6766-6776 Organizations other than, exemption. .6723-6765 Airplane, amounts paid for rides, not admissions. .6598 "All the proceeds" defined. .6715 American Legion, exemption. .6754 "Amount paid for admission" defined. .6601-6656 Amusement park as "place" to which admissions are taxable. .6594 Animal exhibition, exemptions. .6769 Application for registry by persons collecting tax, etc. .6817 Athletic purposes, exemptions where proceeds are to be expended for. .6735 Authority for regulations. . 6836 Auxiliary units, American Legion exemption. .6754 Bands, exemptions. .6756 Baseball park. .6656, 6658-6660, Basis of exemptions. .6720, 6766 Basis of tax. .6589 Box-office sales in excess of established price. . 6688, 6694 Brokers' sales in excess of established price. .6688, 6698 Cabaret. . 6669 Leases of boxes or seats. .6657 Roof gardens. . 6669 Bathing beaches. .6625 Bible classes, exemptions. .6732 Bills, roof gardens and cabarets. .6798 Box-office sales in excess of established price, basis and rate of tax. .6688, 6694 Box, opera, lease of, defined. . 6662 Boy Scouts, exempt as educational organization. .6747 Brokers' sales in excess of established price, basis and rate of tax. . 6688, 6698 Bump-the-bumps as "place' to which admissions are taxable. .6594 Cabarets, basis of tax. .6669 Bills and coupon receipts. .6798 Computation of tax. . 6669 Rate of tax. . 6669 Cards of admissions established price to be printed on. . 6789 Issuing, prerequisites. . 6788 Marking. . 6784, 6788 Name of place to be printed on. . 6792 Name of seller to be printed on. . 6790 Necessity for. . 6784 Printing. . 6788, 6805 Serial numbers. .6792 Taking up and preservation. . 6797 Cave as "place" to which admissions are taxable. .6594 Certificate of registry, persons collecting tax, etc. .6817 Charitable organizations, exemption. .6723, 6749 Children, exemption of society for prevention of cruelty to. . 6724 Churches, exemptions. . 6729 Circuses, application for registry. .6819 Separate charge for admission and seats. .6591 City improvement societies, exemption. . 6726, 6760 Claims, credit for overpayment. . 6828 Exemptions. .6777 Refund of overpayment. . 6832 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Index Page 1. — Admissions. 3-2-22. INDEX TO ADMISSIONS REGULATIONS The references are to paragraph numbers. Club membership, amount paid for, as "amount paid for admission". .6649 Collection, Taxes on Admissions. .6810 Colleges, exemption. .6735 Community-center moving-picture theaters, exemption. .6726, 6763 Computation of tax. . 6589 Cabarets. . 6669 Leases of boxes or seats. . 6657 Roof gradens. . 6669 Contributions as "amount paid for admission". . 6653 Cooperative parties, "amount paid for admission". .6638 Cooperative moving-picture theaters, exemption. . 6726, 6763 Coupon receipts, roof gardens and cabarets. . 6798 Credits, overpayments. .6828 Cruelty to children or animals exemption of society for prevention of. . 6724 Daily records, taxes on admissions. .6823 Taxes on charges in excess of established price. . 6825 Dance hall or pavilion as "place" to which admissions are taxable. .6594, 6596 Dancing schools. .6627-6630 Definitions: "Admissions". .6601 "Admissions to agricultural fairs". . 6766 "Agricultural fairs". .6768 "All the proceeds". .6715 "Amount paid for admission". . 6608 "Entertainment". .6680 "Established price of an admission". .6690 "In need". .6758 "Lease". . 6662 "Persons in military or naval forces". .6757 "Place". .6593 "To any place". .6593 Devices, mechanical, to record admissions. .6806 Dip-the-dips as "place" to which admissions are taxable. . 6594 Discharged soldiers and sailors, exemptions. . 6826 Dog shows, exemptions. .6774 Educational organizations, exemption. . 6723, 6735 "Entertainment," definition. .6680 Established price of admission, computation of tax at. . 6589 Definition. .6690 Increase. . 6690 Printing on tickets. .6788 Season tickets or subscriptions defined. .6692 Excess of established price, box office sales in. .6694 Brokers' sales in. .6698 Exemptions as to charges in. .6713 Persons liable for tax on charges in. .6688, 6698 Records as to taxes on charges in. .6825 Registry by persons required to pay tax on charges in. .6817 Return and payment of tax on charge in. .6815 Scope of tax where charge is in. . 6689 Exemptions, admissions tax. .6711 Affidavit claiming. .6777 Agricultural fairs. .6766, 2768 Animal exhibition. . 6769 Bands. .6756 Basis. .6720, 6766 Bible classes. . 6732 Boy Scouts. . 6747 Certificate of. . 6777 Character of organization claiming. .6723 Charges in excess of established price tax on. .6713 Charitable organizations. .6723, 6749 College fraternity. .6742 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Index Page 2. — Admissions. 3-2-22. INDEX TO ADMISSIONS REGULATIONS. The references are to paragraph numbers. Exemptions, admissions tax — Continued. Cooperative or community-center moving-picture theaters. .6726, 6763 Dog shows. . 6774 Educational organizations. .6723, 6735 Fairs. .6766, 6768 Organizations other than agricultural fairs. .6711-6765 Farm-produce exhibition. . 6769 Flower exhibition. .6769 Food exhibition. . 6769 Fraternal organizations. .6750 Garden-produce exhibition. . 6769 Girl Scouts. . 6747 FTorse shows. .6772, 6773 Horticultural exhibition. .6769 Live-stock exhibition. . 6769 Men's club of church. .6731 Municipal corporations. .6765 Municipal improvement societies. . 6726, 6760 Music-festival association. .6739 National Guard Organizations. .6757 Orchestral organizations. .6755 Persons formerly in military or naval service who are in need. .6758 Police relief association. .6753 Political subdivisions of State. . 6765 Poultry exhibition. .6769 Prepared or preserved food exhibition. .6770 Private schools. .6738 Religious organizations. .6723, 6729 Sailors. . 6757 Society for prevention of cruelty to children or animals. .6724 Soldiers. . 6757 States. .6765 Symphony orchestra organizations. .6755 United States. . 6765 War-stricken people abroad, entertainment for benefit of. . 6752 Zoological park association. . 6740 Ex-service men and women who are in need, exemption. .6758 Fairs, exemptions. .6766-6776 Organizations other than agricultural fairs, exemptions. . 6723-6765 Farm produce exhibition, exemptions. . 6769 Ferris wheel as "place" to which admissions are taxable. .6594 Filing application for registry by persons collecting tax, etc. .6817 Fishing piers. . 6626 Floating theater as "place" to which admissions are taxable. .6594 Flower exhibition, exemptions. .6769 Food, public performance in connection with service of. . 6669 Food exhibition, exemptions. . 6769 Forms on which records of admissions are to be kept. . 6823 Fraternal organizations, exemption. . 6750 Fraternity, college, exemption. .6742 Garden produce exhibition, exemptions. . 6766-6776 Girl Scouts, exempt as educational organization. . 6747 Grandstand as "place" to which admissions are taxable. .6594 "Green" fees. . 6623 Hat-checking fees. .6628, 6635 Hilarity hall as "place" to which admissions are taxable . . 6594 Horse shows, exemption. .6772-6773 Horticultural exhibition, exemptions. .6769 Imposition of tax. .6589 Improvement societies, municipal, exemption. .6726, 6760 Increase of established price once adopted. . 6690 "In need" defined. . 6758 Instrumental music, exclusion from "other similar entertainment". .6680 Issuing tickets or cards of admission, prerequisites. .6788 Copyright 1922, bg, The .Corporation Trust Company. WAR TAX SERVICE Tndex Page 3.-— Admission; . 3-2-22. INDEX TO ADMISSIONS REGULATIONS . The references are to paragraph numbers. "Lease," definition. . 6662 Leases of boxes or seats, basis of tax. .6657 Computation of tax. . 6657 Rate of tax. .6657 Leases of places, collection of tax. .6827 Registry. .6817 Legion, American, exemption. .6754 Women's auxiliary units of. .6754 Live-stock exhibitions, exemptions. .6766, 6768 Lodges, exemption. . 6750 Marking tickets. .6784, 6788 Mechanical device to register admissions. . 6806 Medicated baths, admissions to. .6636 Membership club, amount paid for, as "amount paid for admission". .664 0 Men's club of church, exemption. .6731 Merry-go-round as "place" to which admissions are taxable. .6594 Method of securing exemption. .6777 Military service, exemptions as to persons in. .6757 As to persons formerly in, who are in need. .6758 Missions and missionary societies, exemptions. . 6729 Monthly returns. .6826 Moving-picture theaters, cooperative or community-center exemption. . 67 ?6 f-7( Municipal corporations, exemption. .6765 Municipal improvement societies, exemption. . 6726, 6760 Music, instrumental, exclusion from "other similar entertainment". . 6680 Musical-festival association, exemption. . 6739 Musical education, exemption of organization devoted to. .6735 Name of place, printing on tickets or cards of admission. .6792 Seller, printing on tickets or cards of admission. .6790 National Guard organizations, not exempt. .6757 Naval service, exemptions as to persons in. .6757 As to persons formerly in who are in need. .6758 Nonpayment of tax, penalty. .6834 Notice, leases of places. .6827 Preservation of tickets taken up. . 6797 Printing, etc., of tickets or cards of admission. .6805 Reduction of established price. .6691 Numbering roof-garden and cabaret bills and receipts. .6798 Tickets or cards of admission. . 6792 Nurses in military or naval service, exemptions. . 6757 Observation tower as "place" to which admissions are taxable. . 6594 "Old Mill" as a '/place". .6599 Orchestral organizations, exemption. .6755 Organizations exempt. .6711-6776 Outdoor amusement park as "place" to which admissions are taxable. .6594 Overcollection, refund. . 6832 Overpayment, credit. .6828 Refund. .6831^ Payment of admission tax: Duty to make. .6810 Penalty for delinquency. . 6834 Penalties. .6834 "Persons in military or naval forces" defined. .6757 Personal services, charge for, as charge for admission. .6608 Physical education, exemption of organization devoted to. . 6735 "Place," definition. . 6593 Operation of organization as affecting exemption from tax. .6727 Police relief association, exemption. .6753 Political subdivision of State, exemption. .6765 Pony rides. . 6632 Posting certificate of registry. .6817 Signs stating established price, tax due, and sum total. .6807 Poultry exhibition, exemptions. .6769 Copyright 1922, by The Corporation T rust Company. WAR TAX SERVICE Indcx'Pagc 4.-*-Ad missions. 3-2-22. INDEX TO ADMISSIONS REGULATIONS. The rejerences are to paragraph numbers. Prepared or preserved food exhibition, exemptions. .6770 Prevention of cruelty to children or animals, exemption of society for. . 6724 Price, printing on tickets or cards of admissions. .6789 Printing tickets. . 6784-6805 Private schools, exemption. .6738 Promulgation of regulations. . 6836 Purchase of property, amount paid as "amount paid for admission". .6610 Railway car or train as "place" to which admissions are taxable. .6595 Rate of tax. .6589 Box-office sales in excess of established price. .6694 Brokers' sales in excess of established price. . 6698 Cabaret. .6669 Leases of boxes or seats. .6657 Roof gardens. . 6669 Receipts, roof gardens and cabarets. . 6798 Records, taxes on admissions. . 6823 Taxes on charges in excess of established price. . 6825 Form on which to be kept. . 6824 Mechanical devices to record admissions. . 6806 Refreshments, cabaret performances. . 6669 Public performance in connection with service of. . 6680 Refunds of admissions, reduction of established price. .6691 Overcollections. . 6832 Tax erroneously or illegally collected. .6831 Registers, mechanical, to record admissions. .6806 Registry, persons collecting tax, etc. .6817, 6819 Religious organizations, exemption. . 6723, 6729 Rental, charge for, as charge for admission. .6608 Report of taxes collected. . 6823 Resale of tickets. .6698 Reserved seats, charge for use of, as charge for admission. .6601 Returns, penalty for delinquency. .6834 Taxes on admissions. .6810 Charges in excess of established price. .6815 Revenue act of 1921: Authority for regulations in. .6836 Charges in excess of established price. .6688-6710 Collection, return, and payment of tax. .6810-6827 Credits and refunds. .6828-6832 Exemptions. .6711-6783 Leases of boxes or seats. .6657, 6662 Penalties. . 6834 Roof gardens, cabarets, or similar entertainments. . 6669, 6680 Tickets and signs. . 3784-6809 Roller coaster as "place" to which admissions are taxable. .6594 Rolling chairs. . 6606 Roof gardens, basis of tax. .6669 Bills and coupon receipts. .6798 Computation of tax. . 6669 Rate of tax. . 6669 Rowboats. .6631 Sailors, exemption. .6757 "Persons in military or naval forces" defined. .6757 Sale price, printing on tickets or cards of admission. .6789 Salvation Army, exemption of entertainment for benefit of. .6718 Scenic railway as "place" to which admissions are taxable. . 6594 Schools, exemption. . 6735 Scope of Taxes on Charges in Excess of Established Price. . 6689 Season tickets, "established price of" defined. .6692 Seats, charge for use of, as charge for admission. .6601 Lease of, defined. . 6662 Serial numbers, printing on tickets or cards of admission. . 6792 Roof garden and cabaret bills and receipts. . 6798 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Index Page 5.-rAdmisskm5. 3-2-22. INDEX TO ADMISSIONS REGULATIONS. The references are to paragraph numbers. Services, charge for, as charge for admission. .6608 Several admissions paid for at once, computation of tax. . 6590 "Shoot-the-chutcs" as a "place". .6599 Sight-seeing automobile as "place" to which admissions are taxable. . 659.S Signs stating established price, tax due, and sum total. .6807 Skating rinks. .6617 Social settlement entertainments. .6745 Societies for municipal improvement, exemption. .6726, 6760 Societies maintaining cooperative moving-picture theaters, exemption. .6726, 6763 Society for prevention of cruelty to children or animals, exemption. .6724 Soldiers, exemption. .6757 "Persons in military or naval forces" defined. .6757 Specd-o-plane as "place" to which admissions are taxable. . 6594 Sport as element of purpose of organization, effect as to exemptions from tax. . 67.3 S States, exemption. .6765 Steamboat as "place" to which admissions are taxable. .6595 Street car as "place" to which admissions are taxable. .6595 Subscription as "lease". .6666, 6667, 6668 Computation of tax. .6657 Swimming pools. .6625 Swinging beach chairs. .6605 Symphony orchestra organizations, exemptions. .6755 Tables, charge for use of, as charge for admission. .6601 Tennis tournament as "place" to which admissions are taxable. .6597 Theaters, cooperative or community-center, exemption. . 6726, 6763 Theological seminaries, exemption. .6729 Thrift stamps, purchase as prerequisite to admission. .6647 Tickets, established price to be printed on. . 6789 Issuing, prerequisites. .6788 Marking. . 6784, 6788 Mechanical device or register may be used in lieu of. .6806 Name of place to be printed on. .6792 Seller to be printed on. . 6790 Necessity for. . 6784 Printing. .6788-6805 Serial numbers. .6792 Taking up and preservation. . 6797 "To any place" defined. . 6593 Toboggan slide as "place" to which admissions are taxable. .6594 Town improvement societies, exemption. .6726, 6760 Traveling shows, application for registry. . 6S 1 9 Turkish baths. .6633 United States, exemptions. .6765 Units, women's auxiliary of American Legion, exemption. . 6754 Universities, exemptions. .6735 Vaudeville in connection with service of food. .6680 Village improvement societies, exemption. . 6726, 6760 Voluntary contributions as "amount paid for admission". . 6653 War-stricken people abroad, exemption of entertainment for beneiit of. . 675 2 Whip as "place" to which admissions are taxable. .6594 Window, rental of. .6601 Words and phrases. See Definitions, ante. Women's auxiliary units of American Legion, exemption. . 6754 Young Men's Christian Association, exemption as educational organization. . 6744 Exemption as religious organization. . 6734 Young Men's Hebrew Association exemption as educational organization. . 674 1 Exemption as religious organization. .6734 Zoological park association, exemption. . 6740 Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Index Page 6. — Admissions, 1-2S-22. INDEX TO DUES REGULATIONS. INDEX TO REGULATIONS 43, REVISED— PART 2, DOTS. [Government index with references changed from "pages" U) "pawgrpphs "Active resident annual member" defined. .6534 Admissions, tax on (see Part 1 of Regulations.) Assessments by club .6535 Associations of athletic clubs. . 6524 .)»..,'../' Athletic clubs (see also "Clubs and organizations"). .6524 Authority for making regulations. .6582 , Automobile Dealers Association. . 6523 Basis of tax. See "Tax on dues." Boating clubs (see also "Clubs and organizations"). .6524 Boxing clubs (see also "Clubs and organizations"). .6524 Business organizations (see also "Clubs and organizations"). . 652,0 Canoe clubs (see also "Clubs and organizations"). .6524 Chambers of commerce (see also "Clubs and organizations"). ,6520 Chapters, fraternity. .6529 Character of club, determination of. .6519 Claim for refund. See "Refund." Claim that club is not within scope of tax. .6519 Clubs and organizations: "Active resident annual member" defined. .6534 Assessments by club. .6535 Associations of athletic clubs. . 6524 Athletic clubs. .6524 Basis of tax. See "Tax on dues." Boating clubs. .6524 Boxing clubs. . 6524 Business organizations. .6520 Canoe clubs. . 6524 Chambers of commerce. . 6520 Chapters, fraternity. .6529 Character, determination of. .6519 Claim that club is not within scope of tax. .6519 Collection of tax from member. .6569 College fraternities. .6529 Commercial clubs. .6520 Credit to club for overpayment. .6575 Curling club. . 6544 Dues or membership fees. See "Dues or membership fees." Duty to — Collect, return, and pay over tax. .6569, 6572 Keep records, .6572 Report member refusing to pay tax. .6579 Exempt organizations. .6527 Fines imposed by club not taxable. .6536 Fishing clubs. . 6524 Foreign clubs. .6533 Fraternal organizations. .6520, 6527 Golf clubs. .6524 "Green" fees. .6536, 6543 Hunting clubs. .6524 Included within scope of tax. .6518 Intercollegiate athletic associations. . 6525 Labor unions. .6530 Life memberships. See "Life memberships." Lodges. .6527 Musical clubs. .6520 Officer subject to penalties. . 6579 "Operating under the lodge system" defined. .6527 Paying tax to collector. . 6569, 6572 Payments within time scope of Revenue Act of 1921. .6513. Penalties to which subject. .6578 WAR TAX SERVICE Index Page 1. — Dues. INDEX TO DUES REGULATIONS, Ctub« and organizations' -Concluded. Presumption as to character of club. .6519 Records to be kept. .6572 Refund- By club for overcollection. .6519, 6577 To club for overpayment. .6519, 6576 Religious organizations. . 6520 Return, monthly. .6569, 6572 Revenue Act of 1921 — Basis of tax under. See "Tax on dues.'* Clubs within scope of. .6518 Payments within time scope of. .6513 Text of. .6509 ■Revenue Act of 19 In- payments taxable under. . 6514 Scope of tax, clubs within. .6518 Singing societies. .6520 Social clubs. .6520 Social settlements. .6522 Sporting clubs. .6524 Tax. See "Tax on dues." Tennis clubs. . 6524 Trade organizations. .6520 Treasurer subject to penalties. .6579 Within scope of tax. .6513 Young Men's Christian Associations. .6521, 6526 Young Men's Hebrew Associations. .6521, 6526 Collection of tax by club: Duty to collect. .6569 Penalties for failure to collect. .6578 College fraternities. .6529 Commercial clubs (see also "Clubs and organizations"). .6520 Credit to club for overpayment. .6575 Curling club. . 6544 Decisions, Treasury, inconsistent with regulations, revoked. . 6582 Definitions: "Active resident annual member". .6534 "Athletic or sporting club". . 6524 "Initiation fees". .6552 "Operating under the lodge system. .6527 "Social club". ,6520 Delegate organizations. .6524 Determination of character of club. .6519 Dues or membership fees: "Active resident annual member" defined. .6534 Assessments by club. .6535 Extraordinary dues. .6534 foreign club, paid to. . 6533 Include, what they. .6534 Payments within time scope of Revenue Act of 1921. .6513 Penalties for failure to pay dues promptly. .6534 Penalties imposed by Revenue Act of 1921. .6578 Rate of tax. .6515, 6534 Records to be kept by club. . 6572 When tax due. .6569 Duty of: Club to collect, return, and pay over tax. . 6569 Club to keep records. .6572 Club officer to report member refusing to pay tax. .657^ Club — enforced by penalties. .6579 Member to pay tax. .6569 Member — enforced by penalties. .6579 Effective date of Act. .6513 Exempt organizations. .6527 WAR TAX SERVICE Index Page 2. — Dues. 1-23-22. INDEX TO DUES REGULATIONS. l ine imposed by club. .6536 Fishing club {see also "Clubs and organizations"). .6524 Foreign clubs. . 6533 Form 46 (revised) used for claim for refund. .6519, 6576 Form 729 (revised) used for monthly return. .6572 Fraternal organizations {see also "Clubs and organizations"). .6520, 6527 Fraternities, college. .6529 Golf clubs {see also "Clubs and organizations"). .6524 "Green" fees. .6536, 6543 Hunting clubs {see also "Clubs and organizations"). .6524 Initiation fees: "Active resident annual member" defined. .6534 Foreign club, paid to. .6533 Include, what they. .6552 Payments within time scope of Revenue Act of 1921. .6513 Penalties imposed by Revenue Act of 1921. .6579 Rate of tax. .6515, 6552 Records to be kept by club. .6572 When tax due. . 6569 Intercollegiate athletic associations. .6525 Labor unions. .6530 Life memberships: Foreign club. . 6533 Payments within time scope of Revenue Act of 1921. .6513 Penalties imposed by Revenue Act of 1921. .6579 Rate of tax. . 6561 Records to be kept by club. .6572 When tax due. . 6569 "Lodge system, operating under the," defined. .6527 Lodges. .6527 Member: Duty to pay tax to club. . 6569 Penalties for failure to pay tax. .6579 Refund by club of overcollection. .6519, 6577 Refusal to pay tax to be reported. .6579 Military service, free membership granted account of, not taxable. .6549 Musical clubs {see also "Clubs and organizations"). .6520 Oath, return for over $10 to be under. .6572 Officer of club subject to penalties. .6579 "Operating under the lodge system" defined. .6527 Organizations. See "Clubs and organizations." Overcollection by club, refund to member of. .6519, 6577 Overpayment bv club: Credit for. '.6575 Refund of. .6576 Payment of tax. See "Tax on dues." Payments within time scope of Revenue Act of 1921 .6513 Dues or membership fees. .6534 Initiation fees. .6552 Life membership fees. .6561 Penalties for failure to pay dues promptly. .6534 Penalties imposed by Revenue Act of 1921. .6578 Presumption of character of club. .6519 Rate of tax. See "Dues or membership fees," "Initiation fees," and "Life memberships." Records to be kept by club. . 6572 Records by collectors of internal revenue. .6519 Refund: By club of overcollection. .6519, 6577 To club of overpayment. .6519, 6576 Regulations 43, Part 2: Authority for making. .6582 Promulgation of. . 6582 Religious organizations. .6520 Return of tax. See "Tax on dues." WAR TAX SERVICE Index Page 3. — Dues. INDEX TO DUES REGULATIONS. Revenue Act of 1921: Authority for regulations in. . 6582 Basis of tax under. See "Tax on dues." Clubs within scope of tax under .6518 Collection, return, and payment of tax under .6569, 6572 Credits and refund under. .6575-6577 Effective date of Act. .6513 Payments within time scope of. .6513 Penalties imposed by .6578 Revenue Act of 1918: Payments taxable under. .6514 Rulings, Treasury, inconsistent with regulations, revoked. . 6582 Singing societies {see also "Clubs and organizations") .6520 Social clubs {see also "Clubs and organizations"). .6520 Social settlements {see also "Clubs and organizations"). .6522 Sporting clubs {see also "Clubs and organizations") . 6524 Subscriptions taxable. .6547 Stock, payments for, taxable. .6555 Tax on Admissions. See Part 1 of Regulations 43. Tax on dues: Basis of tax. . 6515 Dues or membership fees. . 6534 Initiation fees. .6552 Life memberships. .6561 Clubs within scope of tax {see also "Clubs and organizations"). .6518 Collection of tax from member. . 6569 Credit to club for overpayment. .6575 Foreign club, payments of dues or fees to .6533 Payment of tax — Club to collector of internal revenue. .6569, 6572 Member to club. . 6569 Penalties for failure. .6578 When due .6569 Payments within time scope of Revenue Act of 1921. .6513 Penalties. .6578 Kate of tax. See "Tax on dues: Basis of tax." Refund- By club of overcollection. . 6519, 6577 To club of overpayment. .6519, 6576 Return of tax — Duty to make return . 6569 Monthly return . 6572 Penalty for failure to make return. .6579 Taxability of pavmcnts as to time. See "Payments within time scope of Revenue Act of 1921." Tennis clubs {see also "Clubs and organizations"). .6524 Time: Penalties for failure to act on time. . 6579 Returns due when. .6569, 6572 Tax payments due when. .6569, 6572 Taxability of payments as to time. See "Pavmcnts within time score of Revenue Act of 1921." Trade organizations {see also "Clubs and organizations"). .6520 Treasurer of club subject to penalties. .6579 Treasury Decisions inconsistent with regulations, revoked. . 6582 Unions, labor .6530 Witnesses instead of oath where return for less than $10. .6572 Young Men's Christian Associations. .6521, 6526 Young Men's Hebrew Associations. .6521, 6526 WAR TAX SERVICE Index Page 4. — Dues. > ) ) c a c 1-2-22. (2) 8-2-22. SPECIAL TAXES ON OCCUPATIONS. Differences between Reg. 59 (1918 Act) and Reg. 59 (1921 Act). The general subject content of Regulations 59, relating to the 1921 Act, promulgated July 20, 1922, released for publication August 2, 1922, and reproduced beginning on page 1513, is the same as of Regulations 59, relat- ing to the 1918 Act, but the Article numbers differ throughout, beginning with Article 5 of the present regulations, because of the omission of the two Articles of the 1918 regulations referring to credit (under the 1918 Act) for taxes paid under the 1916 Act — no such credit arising under the 1921 Act which, as to taxes on occupations and boats, became effective at the begin- ning of the regular taxable year, i.e., on July 1, 1922. Otherwise, and aside from one or two inconsequential verbal changes, and the necessary changes in dates, differences between the old and new regulations are as follows: 1f7546. Brokers; banks. — The "or" in the last line was "and." 1(7554 and 1(7580c (exempt). Brokers; auctioneers. — Expanded to re- flect the rule stated in 1(7557. (See also 1(7556.) 1(7556. Brokers; tobacco warehousemen. — This is new. 1(7584. Pawnbrokers.— "among others" instead of "persons." 1(7593a. Theaters, etc. — This is new. 1(7596. Theaters, etc.- — -The sentence beginning "A person failing to pay" is new. 1(7614. Bowling alleys. — The last sentence is new. 1(7617. Riding academies. — The last two sentences are new (the last reflecting the change in the law). 1(7618. Passenger automobiles for hire. — The next to the last sentence- is new. Otherwise clarifying rearrangement of matter, merely, without apparent change in substance. 1(7619. Passenger automobiles for hire.— The sentence beginning "Pay- ment of such additional special tax" is new. (Over.) Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Special Taxes on Occupations Fore-Page. 1-2-22. (2) 8-2-22. SPECIAL TAXES ON OCCUPATIONS. Differences between Reg. 59 (1918 Act) and Reg. 59 (1921 Act). — Concluded. 1J7624 and 1f7625. Boats taxable and not subject to tax.— (c) and (d) of H7624 and (c) of ^[7625 are new. Rest of matter rearranged, but no sub- stantial change other than that necessary to reflect the change in the law. (See H7625 at (d) and at (g).) 1f7627. Boats; rate and computation of tax. — Reflects change in law, merely (over 32 feet and motor boats placed within general classification). 1[7628. Boats. — Last sentence is new. 1(7630. Boats.— The words "the boat is over 32 feet in length and" following "If," at the beginning, are new. Differences of interest to collec- tors only, are reflected in changes made in the second and third sentences from the end. 1J7632. Boats; return and payment of tax. — Return may now be made to a deputy collector. The second and last sentences are new. The state- ment that if the tax is not more than $10 the return need not be under oath does not appear. 117633. Boats; return and payment of tax. — The last two sentences are new. 1[7634. Boats. — The last sentence is new. If 764 1 . Returns. — Corrected to state that returns may be made to "the collector" as well as to a deputy collector. 1|7659. Claims for refund of special taxes. — All of Article 64 is new, here THE CORPORATION TKI ST COMftfcNY, Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Special Taxes on Occupations Fore-Page. 1-2-22. (2) 8-2-22. SPECIAL TAXES. 1921 ACT. BEING TITLE X OF THE REVENUE ACT OF 1921. In effect July 1, 1922. TITLE X.— SPECIAL TAXES. [SPECIAL EXCISE TAX ON CORPORATIONS.] 7500 Sec. 1000. — [For this law provision and the regulations thereunder see special section "Capital Stock Tax on Corporations" at 1f3000.] MISCELLANEOUS OCCUPATIONAL TAXES. CALENDAR. Returns; During July each year, or during the month of commencing business, or at the time of the original purchase of a new boat by a user, for the fiscal year ending June 30, next following. Tax; During July each year, or during the month of commencing business*! or at the time of buying a new boat. The tax should be paid at the same time the return is filed. However, the 5% penalty does not accrue and the 1% interest .does not begin to run until after ten days' notice and demand. The specific penalty applies if the tax is not paid on or before July 31 or during the month of commencing business. In the case of commencing business, or in the case of the purchase of a new boat by a user in any month other than July, the amount of tax to be paid is the same proportion of the amount provided by law for a full year as the number of months to the succeeding June 30, including the month of com- mencing business or of the purchase of the new boat, bears to twelve months. 7501 Sec. 1001. That on and after July 1, 1922, there shall be levied, collected, and paid annually the following special taxes — [Brokers.] 7502 (1) Brokers shall pay $50. Every person whose business it is to negotiate purchases or sales of stocks, bonds, exchange, bullion, coined money, bank notes, promissory notes, other securities, produce or merchandise, for others, shall be regarded as a broker. If a broker is a member of a stock exchange, or if he is a member of any produce exchange, board of trade, or similar organization, where produce or merchandise is sold, he shall pay an additional amount as follows: If the average value, during the preceding year ending June 30, of a seat or membership in such exchange or organization was $2,000 or more but not more than $5,000, $100; if such value was more than $5,000, $150. [Pawn Brokers.] 7503 (2) Pawn brokers shall pay $100. Every person whose business or occupation it is to take or receive, by way of pledge, pawn, or ex- change, any goods, wares, or merchandise, or any kind of personal property Copyright 1922, by The Corporation Trust Company, WAR TAX 1501 SERVICE 1-2-22. (2) 8-2-22. SPECIAL TAXES ON OCCUPATIONS LAW. — 1921 ACT. whatever, as security for the repayment of money loaned thereon, shall be regarded as a pawnbroker. [Ship Brokers.] 7504 (3) Ship brokers shall pay $50. Every person whose business it is as a broker to negotiate freights and other business for the owners of vessels or for the shippers or consignors or consignees of freight carried by vessels, shall be regarded as a ship broker. [Custom House Brokers.] 7505 (4) Custom house brokers shall pay $50. Every person whose occupa- tion it is, as the agent of others, to arrange entries and other custom house papers, or transact business at any port of entry relating to the im- portation or exportation of goods, wares, or merchandise, shall be regarded as a custom house^broker. [Theaters, Museums, and Concert Halls.] 7506 (5) Proprietors of theaters, museums, and concert halls, where a charge for admission is made, having a seating capacity of not more than two hundred and fifty, shall pay $50; having a seating capacity of more than two hundred and fifty and not exceeding five hundred, shall pay $100; having a seating capacity exceeding five hundred and not exceeding eight hundred, shall pay $150; having a seating capacity of more than eight hundred, shall pay $200. Every edifice used for the purpose of dramatic or operatic or other representations, plays, or performances, for admission to which entrance money is received, not including halls or armories rented or used occasionally for concerts or theatrical representations, and not in- cluding edifices owned by religious, educational or charitable institutions, societies or organizations where all the proceeds from admissions inure ex- clusively to the benefit of such institutions, societies or organizations or ex- clusively to the benefit of persons in the military or naval forces of the United States, shall be regarded as a theater: Provided, That in cities, towns, or villages of five thousand inhabitants or less the amount of such payment shall be one-half of that above stated: Provided further, That whenever any such edifice is under lease at the time the tax is due, the tax shall be paid by the lessee, unless otherwise stipulated between the parties to the lease. [Circuses.] 7507 (6) The proprietor or proprietors of circuses shall pay $100. Every building, space, tent, or area, where feats of horsemanship or acro- batic sports or theatrical performances not otherwise provided for in this section are exhibited shall be regarded as a circus: Provided, That no special tax paid in one State, Territory, or the District of Columbia, shall exempt exhibitions from the tax in another State, Territory, or the District of Colum- bia, and but one special tax shall be imposed for exhibitions within any one State, Territory, or District. Copyright 1922, by The Corporation Trust Company. WAR TAX 1502 SERVICE 1 2 22 (2) 8-2-22 SPECIAL TAXES ON OCCUPATIONS LAW. — 1921 ACT [Other Public Exhibitions or Shows.] 7503 (7) Proprietors or agents of all other public exhibitions or shows for money not enumerated in this section shall pay $15: Provided, That a special tax paid in one State, Territory, or the District of Columbia shall not exempt exhibitions from the tax in another State, * Territory, or ^ the District of Columbia, and but one special tax shall be required for exhibitions within any one State, Territory, or the District of Columbia: Provided further. That this paragraph shall not apply to Chautauquas, lecture lyceums, agricultural or industrial fairs, or exhibitions held under the auspices of religious or charitable associations: Provided further. That an aggregation of entertainments, known as a street fair, shall not pay a larger tax than $100 in any State, Territory, or in the District of Columbia. [Bowling Alleys and Billiard Rooms.] 7509 (8) Proprietors of bowling alleys and billiard rooms shall pay $10 for each alley or table. Every building or place where bowls are thrown or where games of billiards or pool are played, except in private homes, shall be regarded as a bowling alley or a billiard room, respectively. [Shooting Galleries.] 7510 (9) Proprietors of shooting galleries shall pay $20. Every building, space, tent, or area, where a charge is made for the discharge of firearms at any form of target shall be regarded as a shooting gallery. [Riding Academies.] 751 1 (10) Proprietors of riding academies shall pay $100. Every building, space, tent, or area, where a charge is made for instruction in horse- manship or for facilities for the practice of horsemanship shall be regarded as a riding academy: Provided, That this tax shall not be collected from asso- ciations composed exclusively of members of units of the Federalized National Guard or the Organized Reserve and whose receipts are used exclusively for the benefit of such units. [Passenger Automobiles for Hire.] 7512 (11) Persons carrying on the business of operating or renting pas- senger automobiles for hire shall pay $10 for each such automobile having a seating capacity of more than two and not more than seven, and $20 for each such automobile having a seating capacity of more than seven. [Brewers, Distillers, Liquor Dealers, etc.] 7513 (12) Every person carrying on the business of a bfewer, distiller, wholesale liquor dealer, retail liquor dealer, wholesale dealer in malt liquor, retail dealer in malt liquor, or manufacturer of stills, as defined in section 3244 as amended and section 3247 of the Revised Statutes, in any State, Territory, or District of the United States contrary to the laws of such State, Territory, or District, or in any place therein in which carrying on such business is prohibited by local or municipal law, shall pay, in addition to all other taxes, special or otherwise, imposed by existing law or by this Act, $1,000. Copyright 1922, by The Corporation Trust Company. WAR TAX 1503 SERVICE 1-2-22. [(2) 8-2-22. ^SPECIAL TAXES ON OCCUPATIONS LAW. — 1921 ACT. 7514 The payment of the tax imposed by this subdivision shall not be held to exempt any person from any penalty or punishment provided for by the laws of any State, Territory, or District for carrying on such business in such State, Territory, or District, or in any manner to authorize the commencement or continuance of such business contrary to the laws of such State, Territory, or district, or in places prohibited by locai or municipal law. [Taxes herein specified are in Lieu of the Similar Taxes Imposed by Section 1001 of the Revenue Act of 1918.] 7515 The taxes imposed by this section" shall, in the case of persons upon whom a corresponding tax is imposed by section 1001 of the Revenue Act of 1918, be in lieu of such tax. Special Tobacco Manufacturers' Tax. 751 6 Sec. 1002. That on and after July 1, 1922, there shall be levied, col- lected, and paid annually, in lieu of the taxes imposed by section 1002 of the Revenue Act of 1918, the following special taxes, the amount of such taxes to be computed on the basis of the sales for the preceding year ending June 30 — 75 1 7 Manufacturers of tobacco whose annual sales do not exceed fifty thousand pounds shall each pay $6; 75 1 8 Manufacturers of tobacco whose annual sales exceeded fifty thousand and do not exceed one hundred thousand pounds shall each pay $12; 7519 Manufacturers of tobacco whose annual sales exceed one] hundred thousand and do not exceed two hundred thousand pounds shall each pay $24; 7520 Manufacturers of tobacco whose annual sales exceed two hundred thousand pounds shall each pay $24, and at the rate of 16 cents per thousand pounds, or fraction thereof, in respect to the excess over two hundred thousand pounds; 7521 Manufacturers of cigars whose annual sales do not exceed fifty thousand cigars shall each pay $4; 7522 Manufacturers of cigars whose annual sales exceed fifty thousand and do not exceed one hundred thousand cigars shall each pay $6; 7523 Manufacturers of cigars whose annual sales exceed one hundred thousand and do not exceed two hundred thousand cigars shall each pay $12; 7524 Manufacturers of cigars whose annual sales exceed two, hundred thousand and do not exceed four hundred thousand cigars shall each pay $24; 7525 Manufacturers of cigars whose annual sales exceed four hundred thousand cigars shall each pay $24, and at the rate of 10 cents per Copyright 1922, by The Corporation Trust Company. WAR TAX 1504 SERVICE 1-2-22. (2) 3-22-22. (3) 5-19-22. (4) 8-2-22. SPECIAL TAXES OPT OCClTPATIONS LAW. — 1921 ACT. thousand cigars, or fraction thereof, in respect to the excess over four hundred thousand cigars; 7526 Manufacturers of cigarettes, including small cigars weighing not more than three pounds per thousand, shall each pay at the rate of 6 cents for every ten thousand cigarettes, or fraction thereof. 7527 In arriving at the amount of special tax to be paid under this section, and in the levy and collection of such tax, each person engaged in the manufacture of more than one of the classes of articles specified in this section shall be considered and deemed a manufacturer of each class separately. 7527a In computing under this section the amount of annual sales no account shall be taken of tobacco, cigars, or cigarettes, sold for export and in due course so exported. Special Tax on Use of Boats. 7528 Sec. 1003. That on and after July 1, 1922, and thereafter on July I in each year, and also at the time of the original purchase of a new boat by a user, if on any other date than July 1, there shall be levied, assessed, collected, and paid, in lieu of the tax imposed by section 1003 of the Revenue Act of 1918, upon the use of yachts, pleasure boats, power boats, sailing boats, and motor boats with fixed engines, of over five net tons and over thirty-two feet in length, not used exclusively for trade, fishing, or national defense, or not built according to plans and specifications approved by the Navy Depart- ment, a special excise tax to be based on each yacht or boat, at rates as follows: Yachts, pleasure boats, power boats, motor boats with fixed engines, and sailing boats, of over five net tons, length over thirty-two feet and not over fifty feet, $1 for each foot; length over fifty feet, and not over one hundred feet, $2 for each foot; length over one hundred feet, $4 for each foot. 7529 In determining the length of such yachts, pleasure boats, power boats, motor boats with fixed engines, and sailing boats, the measure- ment of over-all length shall govern. 7530 In the case of a tax imposed at the time of the original purchase of a new boat on any other date than July 1, the amount to be paid shall be the same number of twelfths of the amount of the tax as the number of calendar months (including the month of sale) remaining prior to the following July 1. 7531-3This section shall not apply to vessels or boats used without profit by any benevolent, charitable, or religious organizations, exclusively for furnishing aid, comfort, or relief to seamen. Penalty for Nonpayment of Special Taxes. 7534 Sec. 1004. That any person who carries on any business or occupa- tion for which a special tax is imposed by sections 1000, 1001 or 1002, without having paid the special tax therein provided, shall, besides being liable for the payment of such special tax, be subject to a penalty of not more than $1,000 or to imprisonment for not more than one year, or both. 7535-6 [General Administrative Law Provisions.] [Read at "Miscellaneous Matters" at back of the book.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1505 SERVICE In blank. WAR TAX 1506 SERVICE 8-7-22. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1921 ACT. w .o § a < ta O C3 s3« M t- o O 10 Ida" « CS ~* CO O o p 5 .5 C3 o o R-2 o W H c 3 8 ■11 O - c 03 i-h a * 2 « S o w a> G © s te o WAR TAX 1507 SERVICE i-7-22. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1921 ACT. 888 SS S8S 8838 S SSS8S 2 Sfe'g* S3 S38' "Jisrf " '^tiSS i Ul I a X < J J jS3 8888 o 83888 8 8 cicdod rH 'JO * t-i 30 'riWN * ' r-i CN CN " * Hi Mil? . O C p to c/j -t- ++++ *os 03 to to .S'3'3 If§Se is sa H to is g"3 OSS Rf,-*f oocaoo t> 5^ J? o p. > >■ > 5>p 3 P 888888888888888888888888888 88 O o o es >d © o c>C? eo ©' ooodco'dddNON © o dorio o o LOOOiCMOflOg ^ ^ g rr ^ iO O iM ^ — < l5 C» CN <5 iO 'O »0 O 111 Hi si" fly .5 «* a ill l fi l £3 Is? 2 cl 3-3 £s .Sfi fa o o h o *1 0 d .a a Id a Pa 1 | a a w o 3 I o IS bo9« |>> g >,! Iff' 53 i" to 3 -a 1 1 S ^ 0)<3 B- 5 111 |3Ib§ ■sea ^1 « 5 > •si S ^ sis; iii J •2 2 5?? .a , J o d 0 lis .3 'o ft 5 o a H S o O ^ la § WAR TAX 1508 SERVICE 8-7-22. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1921 'ACT. I 1 w o tl t-" o ,M ort. Bro ! >» ta- !S < ^— - lc cc i on!) , Pawi IS i tact 1 SI €«■ €<9- *> j ! i i i 3 Draft: M.O.: Cash: Check: o 03 o o * H 8 H WAR TAX 1509 SERVICE 8 7 22 ' SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1921 ACT. •66- C» CO CO- 09 8 8 CO CO 1 o a, d ° 0) § o 112 ©is til % o « ill IS* a. 3 ~2 53 1 go i I ° q Sq o •S3 1 t° © p| * *q S © r "3 J .2 eg "S o o « 111 W W in "1 © ft £-3 3^ fa* bo OS S °=3ll q q ©^ q III 13 18 £o©o° t>> © o .§5.3 zero CM © ** c S ■ © ! © 1 1-4 O .q 5 ~> © i- ^* n - "rw© Its llslfc d-^q ° ® q t-3 © 5 . © .d a q 05- X3 O :©-S as aS-s^alpa-a O rj O C3 si- 9 - £ ©3 co a>+s -J c3 ©^ ~ ea © u flo©23 a© ^ a q WAR TAX 1510 SERVICE 8-7-22 ' SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1921 ACT. 2 O CC u. is 1 §, to , CO -J UJ < a o O UJ O C < CC . .s h 5 5 £ •=> m m a ° O Q> a « to h .22 ~ 5 73 4) 6 -1 o a w 22 g a 1 . o - R > >. o 4> O. * 2 .9 X! o a 3 -a i i o 8f *5 fl O IS 3 3 H N CO 2 • 3 £ <3 A 2 J3 a CM) o hi DO) §■ < o 2 I II § 8 S 2 w ?5 w 111 0 Z f CD io: hi- es o « C. "o CP to 11 o >> ° a 03 0) fl a cp ^ 00 03 •!-( £•§ P cp el CP rt >.s *.§ CP ^ rfl a> 5 59 / — - CD 8)8 ^ fl o g . C3 g > ' CO . r-< 5 g fl CQ O 73 CD CZ3 X! > % £ ° s ~82 5? no CD 73 fl £J 2.9 CP i— < CP c« la |.s cp^3 Q 73 fl If CP ? H - CP X "S a op at WAR TAX 1511 service] 8-7-22. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1921 ACT. INSTRUCTIONS PLEASURE BOATS 1. What Is Taxed. — Subject to exemptions noted hereunder, a special tax is imposed upon the use of yachts, pleasure boats, power boats ; motor boats with fixed engines, and sailing boats, of over five net tons, length over 32 feet, at the following rates: (a) Over five net tons, length over 32 feet and not over 50 feet $1.00 each foot 6) Over five net tons, length over 50 feet and not over 100 feet $2.00 each foot c) Over five net tons, length over 100 feet._ _ _ $4.00 each foot 2. Exemptions.— Tho law exempts from tax— (c) Boats used exclusively for trade. ("Trade" is held to. be any serious activity which consti- tutes the means of livelihood of the owner, lessee, or charterer.) (5) Boats used exclusively for fishing. (This refers to commercial fishing and not fishing for pleasure.) c) Boats used exclusively for national defense. d) Boats built according to plans and specifications approved by the Navy Department. e) Boats used without profit by benevolent, charitable, or religious organizations exclusively for furnishing aid, comfort, or relief to seamen. 3. Persons Liable foe Return and Payment of Tax. — Tho owner, lessee, or charterer of every boat described in par. 1 is required to file return, irrespective of whether its use is exempt from tho tax under par. 2, and, unless the boat is exempt, is also required to pay the tax (see also par. '4(d) below. No return is required on boats fallin? below the tonnage and footage specifications mentioned in par. 1. 4. How. to Estimate Net Tonnage.— To estimate roughly the net tonnage of a vessel the following rules" may be used: <' (a) By the word "ton" is meant 100 cubic feet of space. (b) Multiply the extreme length of the vessel by the extreme breadth and that product by the depth from the underside of the deck to the frame in the hold taken amidships. The result obtained should be multiplied by six-tenths. To this result should be added the cubical contents of any closed-in structure above the upper deck. The sum should be divided by 100, which will give tho approximate gross tonnage of the boat. (c) From this gross tonnage may be deducted all spaces used exclusively in connection with the navigation of the boat or for the exclusive use of the crew, such as a reasonable amount for machinery space, space for officers and crew but not for passengers (who include all persona not actual members of the crew), storage of sails, navigation instruments, boatswain'3 stores, etc. The result will be the approximate net tonnage of the boat. (d) If the net tonnage estimated is more than four net tons, and the length over 32feet, application should be made to the nearest customs officer for official measurement. If an official meas- urement is not completed before tho date on which a return is required, a return should be rendered; and if the estimate of net tonnage, made as above directed, is over five net tons, the tax should be paid. If the official measurement should later snow that no tax was due, a claim should be made for the refund of the tax. 5. How to Ascertain the Over-All Length.— Over-all length is defined as the extreme length of the structure, i. e., from the forward side of the stem outside the planking orplating to the aftermost side of the stern planking or plating, whether above or below the water line. The measurement should be to the outside of any planking or plating extending above the deck, constituting bulwarks, and to the outside of any forecastle deck, quarter deck, or poop deck ex tending beyond the main deck. The length should be taken in a straight line, excluding any sheer there may be to the deck. 6. How to Compote Tax.— In the case of a boat over five net tons, multiply the rate of the class in •which the boat is included by the number representing the length over all in full feet. For example, a boat 49.5 feet in length is taxable at the rate of $1 for each foot, or $49; a boat 50.5 feet in lengthis in the same class and taxable at $1 per foot, or $50. AUTOMOBILES 7. Persons Liable for Return and Patmenp of Tax.— Persons carrying on the business of oper- ating or renting passenger automobiles for hire are required to file return and pay special tax on each automobile as follows: Annual Monthly rate. rate. Seating capacity over 2 but not over 7— — $10 $0. 83* Seating capacity more than 7 - $20 $1.66} GENERAL 8. When Return and Payment op Tax Must Be Made.— These taxes become due on the first day of July in each year, or on commencing the business on which a tax is imposed or placing a boat in use. In the former case the tax shall be reckoned for one year and in the latter case it shall be reckoned Eroportionately from the first day of the month in which the liability to special tax commenced to the rst day of July following. Returns with proper amount of tax due must be filed with tho collector not later than.the last day oi the month in whieo specie! tax liability commenced. A separate return must be filed for each automobile operated or rented for hire, and for each boat whether or not exempt from tax. Where exemption is claimed in the case of a boat, the return should be filed and the notation "exemption claimed" made across the face of the form. If exemption is allowed, the collector willissue an exemption certificate. 9. If tax liability, as shown bv the return, is more than $10, applicant must appear in person before an officer qualified to administer oaths and swear to the correctness of the information given on the appli- cation. Ii the tax is $10 or less, return may be signed or acknowledged before two witnesses, who will affix their signatures. Follow instructions carefully and file promptly in order to avoid penalties imposed for delinquency in filing return and paying tax, or making false or fraudulent return. 2 OOVKHMMENT HUNTDTO 05T1CS WAR TAX 1512 SERVICE 8-2-22. Reg. 59—1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. REGULATIONS 59. [Approved July 20, 1922.] [Compiled with certain supplementary matters, as cited.] Relating to the SPECIAL TAXES UPON BUSINESSES AND OCCUPATIONS and upon THE [USE OF BOATS under SECTIONS 1001 (SUBDIVISIONS (1) TO (11) INCLUSIVE) AND 1003 OF THE REVENUE ACT OF 1921 CONTENTS. Paragraph Article 1. Scope of regulations 7537 Section 1001. Special taxes upon businesses and occupations 7501 Article 2. Effective date 7538 3. Use of terms 7539 4. Basis of tax 7543 Section 1001 (1). Brokers 7502 Article 5. Persons liable 7544 6. Persons not liable 7559 7. Secondary tax 7581 8. Branch offices 7582 Section 1001 (2). Pawnbrokers 7503 Article 9. Delivery , 7583 10. Persons liable 7584 11. Persons not liable 7587 Section 1001 (3). Ship brokers 7504 Article 12. Persons liable 7588 Section 1001 (4). Customhouse brokers 7505 Article 13. Persons liable 7589 Section 1001 (5). Theaters, museums, and concert halb 7506 Article 14. Persons liable 7590 15. "Charge for admission" 7591 16. Theater defined. 7592 17. Exemptions 7593 18. Theaters open for part of year only 7594 19. Seating capacity 7595 20. Transfer of stamp 7597 21. Population 7598 Section 1001 (6). Circuses t 7507 Article 22. Persons liable 7599 23. Payment in different States 7600 Section 1001 (7). Other public exhibitions or shows 7508 Article 24. Other public exhibitions or shows for money: Taxable exhibitions 7601 25. Exhibitions not taxable 7612 26. Aggregation of entertainments 7613 Section 1001 (8). Bowling alleys , 7509 Article 27. Scope of tax 7614 28. Transfer of special tax stamp 7615 Section 1001 (9). Shooting galleries 7510 Article 29. Persons liable 7616 Section 1001 (10). Riding academies 7511 Article 30. Liability to tax. 761 7 Copyright 1922, by The Corporation Trwt Company. WAR TAX 1513 SERVICE 8-2-22. Reg. 59.-1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. Paragraph Section 1001 (11). Passenger automobiles 7512 Article 31. Basis of tax 7618 32. Special tax stamp 7619 Section 1003. Special taxes upon the use of boats 7528 Article 33. Effective date 7620 34. Taxable period 7621 35. Basis of tax 7622 36. Persons liable 7623 37. Boats taxable 7624 38. Boats not subject to tax 7625 39. Purchase or use of second-hand boats 7626 40. Rate and computation of tax 7627 41. Tonnage ! 7629 42. Over-all length 7631 43. Return and payment of tax. 7632 44. Stamp or card certificates _ 7634 Provisions of law and regulations pertaining to special taxes Article 45. Special taxes 7635 46. Business to be registered 7636 47. Partnerships 7637 48. Payment of one special tax not to cover several places of business 7638 49. More than one pursuit carried on in the same place of business.. . . 7639 50. When special tax becomes due 7640 51. Returns 7641 52. Stamps for special taxes 7644 53. Special tax stamps "at large" 7646 54. Special tax stamp to be posted in place of business 7647 55. List of special taxpayers 7648 56. Death or removal after paying tax 7650 57. Transfer of place of business 7652 58. Change in membership of firm 7653 59. Change from partnership to corporation 7654 60. Who may carry on business without new stamp ' * 7655 61. Changes to be registered 7656 General Administrative Provisions 8000 Article 62. Aid to collection of tax, 7657 Section 1317. Penalties 8071 Article 63. Penalties . 7658 64. Claims for refund of special taxes 7659 Section 1309. Authority for regulations 8009 Article 65. Promulgation of regulations 7662 f 537 Art. 1. Scops of regulations. — These regulations relate to the 7501 special taxes upon businesses and occupations, imposed by sub- divisions (1) to (11), inclusive, of section 1001, and upon the use of boats, imposed by section 1003, of the Revenue Act of 1921. SPECIAL TAXES UPON BUSINESSES AND OCCUPATIONS. 7538 Art. 2. Effective date. — The effective date of the special tax on oc- cupations'enumerated in section 1001 of the act is July 1, 1922. 7539. Art. 3. Use of terms. — In these regulations — for convenience unless obviously inapplicable — 7540 The term "person" shall include partnerships, corporations, and associations as well as individuals; 7541 The term "secondary tax" shall mean the tax imposed on brokers by reason of their ownership of a membership or seat, valued at $2,000 or more, in a stock or produce exchange, board of trade, or similar organization; 7642 The term "fiscal year" shall mean the period from July 1 of each calendar year to June 30, inclusive of the following calendar year. Copyright 1922, by The Corporation Trust Company. WAR TAX 1514 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. 7643 Art. 4. Basis of tax. — The tax is upon the engaging in or carrying on of a business or occupation. If a person does not engage in or carry on any of the businesses or occupations specified in section 1001 during the taxable period, no special tax liability is incurred. If, however, he does carry on a business upon which a tax is imposed during any portion of the taxable year, he is liable to tax from the first of the month during which he begins business to the end of the taxable period. (See sec. 3237, R. S., a? amended by sec. 53, act of Oct. 1, 1890 [26 Stat., 567].) BROKERS. 7544 Art. 5. Brokers; Persons liable. — Only those persons who have a 7502 business of their own as distinguished from that of their employer or employers are liable to special tax as brokers. Any person who holds himself out as a broker and is engaged in the business of negotiating purchases or sales of any of the articles enumerated is liable to tax. It is not necessary that the brokerage business shall be the sole business of a person in order that liability to tax shall attach. Any person who, in connection with his pro- fession or occupation, makes it a regular part of his business to negotiate purchases or sales for others of articles enumerated is liable to tax. Mere casual or incidental negotiation of purchases or sales for others of articles enumerated does not constitute a business for the purpose of the tax. The following among others are subject to special tax as brokers: 7646 (a) A bucket-shop proprietor giving memoranda of transactions to customers. By a "bucket -shop" is meant a place, other than a board of trade or exchange, where the parties who agree to buy and sell stocks do not ordinarily contemplate the receiving or delivering of any certificates therefor by the buyer or seller either at the time or in the future; 7546 (b) A bank which sells checks drawn by any person or concern in which it has no property interest, if such transactions are engaged in with such frequency or in such a way as to constitute a business; 7547 (c) An agent occupying an independent status and not that of an employee who negotiates the sale of foreign money orders for a steam- ship company; the fact that he maintains a place where the money orders are issued is evidence of an independent status; 7548 (d) A person who, under an agreement previously made with dealers, engages in the business of issuing orders upon those dealers for certain articles or commodities to parties who desire to purchase such articles or commodities; 7549 (e) One who holds himself out as dealing in exchange and in the regular course of business accepts orders and takes them to a bank for execution by the latter, receiving substantial remuneration -for his services; 7550 (f) An express company engaged in the business ot buying or selling foreign money orders or bills of exchange for others; 7551 (g) A real estate or business broker who lists and negotiates pur- chases or sales of produce or merchandise independently of pur- chases or sales of real estate or businesses, or holds himself out as being en- gaged in the business of negotiating, for others, purchases or sales of produce or merchandise; 7552 (h) A commission merchant receiving produce or merchandise on consignment to sell for the account of the consignors; Copyright 1922, by The Corporation Trust Company. WAR TAX 1515 SERVICE 8-2-22. Reg. 59—1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. 7553 (i) A dealer in securities of a given kind for the account of an under- writer or other broker; 7554 (j) An auctioneer who maintains auction rooms or other place of business to which produce or merchandise is sent to be sold for the account of the consignor; 7555 (k) A factor who advances money to farmers on crops which are to be placed with him to be sold on commission. 7556 (1) A tobacco warehouseman whose business it is to arrange that tobacco growers shall bring their produce to the warehouse to be sold at auction and that tobacco buyers shall attend such auction sales and bid for the tobacco. 7567 Auctioneers as brokers. — Reference is made to an inquiry received in this office in regard to the applicability of tax under section 1001, paragraph (1), of the Revenue Act of 1918, on brokers. You are advised that this office confirms its previous ruling as follows: "Auctioneers making sales on a farm ar premises of the owner of goods are not subject to the broker's tax for the reason that they are only agents of their employers. An auctioneer, however, who has auction rooms, or other places of business, to which persons send goods or merchandise to be sold, is held to be carrying on a brokerage business and is amenable to the special tax under sec- tion 1001 of the Revenue Act of 1918." [Applies to 1921 Act as well. See 1f7580c] [ 7558 A distinction is made between an auctioneer who has a place of busi- ness of his own and occupies an independent status, and an agent of another negotiating the sale of goods at another's place of business. (Letter to The Corporation Trust Company, signed by Deputy Commissioner James M. Baker, and dated July 28, 19200 7559 Art. 6. Persons not liable. — The following persons are not subject to special tax as brokers where the business mentioned herein is the only business conducted by such persons. If, however, coupled with a business mentioned in this article any such person engages in any of the occupations mentioned in Article 5, or other brokerage transactions, to such an extent as to constitute a business, such person must pay the tax, although at the same time he engages in other occupations, not in themselves such as to subject such person to liability for special tax as a broker: 7560 (a) Any persons who only occasionally or incidentally engages in brokerage transactions; 7561 (b) A person loaning money for himself or for others, on commission; 7562 (c) A bank which does not engage in the negotiating of purchases or sales of stocks or bonds as a business, but merely negotiates the purchase and sale thereof for depositors and other patrons without remuneration and for their accommodation only; 7563 (d) A bank which sells its own drafts upon the foreign correspondent 7567 of another institution, if it has at the time of the drawing of such drafts 1 credit with such correspondent, or if the drafts are drawn on credit which it is the intent to obtain. Such a bank acts as a principal and not as a broker. A bank which sells drafts or orders drawn by others, if the drafts or orders are sold by the bank as its own property, whether or not it paid cash for them or obtained them under a credit arrangement, likewise acts as a principal and not as a broker; Copyright 1922, by The Corporation Trust Company. WAR TAX 1516 SERVICE 8-2-22. Reg. 59.-1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. 7564 (e) A bank which effects a financial arrangement to carry out the terms of a sale where the purchaser and seller of merchandise have previously agreed upon the kind and quantity of the merchandise to be sold and upon the terms of the sale; 7565 (f) A person selling securities which he has purchased prior to the sale thereof and which he sells for his own account; 7566 (g) A person dealing in oil leases only; 7567 (h) A person holding a seat in a stock exchange but transacting no business for others; 7568 (i) A person negotiating purchases and sales of real estate; 7569 (j) A person who receives and negotiates the transmission of money abroad where there are neither purchases nor sales of any money orders, drafts, bills of exchange, or any other instruments constituting exchange; 7570 (k) A person negotiating loans and requiring the borrowers to pay a commission to the person securing the loan, drawing papers, or examining titles; 7571 (1) A railway agent who exchanges foreign money for American money and vice versa, merely in the transaction of the frieght and passenger business of his company; 7572 (m) A loan and mortgage company which loans its own funds upon notes or bonds secured by mortgage or trust deed of real estate and which subsequently sells such notes or bonds so taken, on its own account and for its own profit or loss; 7573 (n) A person employed by a coal company, as agent to negotiate sales of coal for the company on a commission basis; 7574 (o) A traveling or other salesman who has no business of his own but is an employee of the firm or firms which he represents; 7575 (p) A person who buys or sells Liberty bonds or other securities for himself, purchasing them with his own money, title to the securi- ties actually passing to or being in such person; 7576 (q) A person engaged in the business of placing loans secured by notes and mortgages upon real estate, acting only as agent and re- ceiving a commission for his services; 7577 (r) An agent of a mill or factory who is in fact a part of the sales department of such mill or factory, and performs such services as selling the goods, determining what fabrics or products the mill or factory can best make, designing fabrics, indorsing notes of the mill or factory, and otherwise financing the mill or factory, or providing expert advice to it. 7578 (s) A person having territorial rights for the sale of articles placed in his possession, when sold in his own name; 7579 (t) A corporation selling its own stock through its own employees who are acting under its exclusive supervision and control; 7580 (u) A person engaged in the business of buying and selling tickets; 7580a (v) Live stock brokers and live stock commission merchants. 7580b (w) A person negotiating purchases or sales of businesses; 7580C (x) An auctioneer who makes sales of produce or merchandise on the farm or premises of the owner. 7681 Art. 7. Secondary tax. — A broker who owns seats in different ex- changes is liable to the secondary tax upon the value of a seat (valued at $2,000 or more) in each exchange. A broker who owns a number of Copyright 1922, by The Corporation Trust Company. WAR TAX 1517 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. scats in the same exchange is liable to the secondary tax upon only the value of a single seat. A partnership or corporation doing a brokerage business is liable to both the primary and secondary tax to the same extent as an individual. It is immaterial that the seat in the exchange through which the partnership transacts business is held in the name of an individual. Where two or more members of a partnership doing a brokerage business own seats in the same exchange and all the business transacted by such partners is for the partnership, the partnership is liable to the secondary tax upon the value of only a single seat in the exchange. Where all the trading done by the members of a firm or partnership is for the firm or part- nership but one payment of special tax is required. If, however, at any time purchases or sales of securities are made for others upon a commission basis by any member of the firm or partnership for his own account and not for the account of the firm or partnership special tax liability is incurred by the individual; secondary tax liability is also incurred provided the individual owns a membership or seat (valued at $2,000 or more) in a stock or produce exchange, board of trade, or similar organization. For example, A, B, and C. members of a partnership, each own a membership in the same exchange; but one special tax and one secondary tax are due so long as all the trading is done for the partnership; but if any one of the members accepts ^dividual commissions then such member is individually liable to special tax and second- ary tax in addition to the tax imposed on the partnership. Where the pos- session of a share of stock is a prerequisite to membership in a stock exchange a lessee of a share of stock in such exchange actually carrying on a brokerage business is liable to the secondary tax and not the lessor of the share. The secondary tax on a membership in a stock or produce exchange should be paid in the district where special tax as a broker is paid; for example, a broker in Boston is a member of the New York Stock Exchange and subject to secondary tax by reason of such membership. Such secondary tax should be paid to the collector of the district in which Boston is located and not to the collector of the district in which the New York Stock Exchange is located, unless such broker maintains a branch office in New York and pays special tax therefor. 7582 Art. 8. Branch offices. — Inasmuch as the payment of one special tax cannot cover the doing of business by a broker in branch offices, a broker who maintains such branch offices is required to pay a special tax in respect of the main office and of each branch office where a brokerage business is conducted. The special tax is not required in the case of a branch office similar to the smaller offices frequently located in hotels, where the duties of the clerks employed are restricted to the taking of orders and their transmission to the main office without transacting any other business. The special tax must be paid, however, with respect to branch offices or brokers that are equipped to do and who actually do a brokerage business. A branch office, organized for the transaction of business, which receives orders, disburses funds and renders statements to its customers, must pay the special tax provided. The distinction to be drawn is whether a brokerage business is transacted at the branch office. It is considered that business is so transacted unless the activities of the branch house are restricted to the receipt of orders and money for transmission to the parent house and to the disbursement of such funds only as are received from the parent house with specific, detailed instructions as to their disposition. Copyright 1922, by The Corporation Trust Company. WAR TAX 1518 SERVICE 8-2-22. Reg. 59—1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. PAWNBROKERS. 7683 Art. 9. Pawnbrokers: Delivery. — Delivery of personal property a; 7503 security for the repayment of money loaned thereon is necessary tc incur liability to special tax as a pawnbroker. By agreement of th< parties the pledge may be deposited in the hands of a third person insteac of being delivered to the pawnbroker. 7584 Art. 10. Persons liable. — The following, among others, are liable to tax as pawnbrokers: 7685 (a) A person using no tickets in his business, but making a pretense of buying articles which are brought to him which he holds under a verbal agreement that the articles can be bought back again by the persoi selling them upon the payment of a specified bonus; 7686 (b) A concern though called a bank which has practically no de- posits and almost its entire business is the loaning of money on auto- mobiles secured by warehouse receipts. 7587 Art. 11. Persons not liable. — A person is not required to pay t special tax as a pawnbroker for occasional or incidental acts whicb can not be regarded as constituting his business or occupation. Bank? doing a bona fide banking business are not required to pay tax as pawn- brokers in cases where they accept diamonds or jewelry or other persona! property as collateral security for the making or extension of loans if such loans are made on the same conditions and at the same rate of interest at other loans, provided such loans comprise the smaller portion of the loar business of the bank. Bankers who are able to show that they did not invite or cater to persons desiring to borrow money on articles of personal property, but merely made such loans upon request of and to oblige persons doing other business with them or who have taken such property as security only to save themselves from loss in connection with loans previously made are not liable to the special tax. The special tax on pawnbrokers is not required to be paid for making loans on chattel mortgages or in any case where chattels or personal property are not taken or received by way of pledge, pawn, oi exchange. SHIP BROKERS. 7588 Art. 12. Ship brokers: Persons liable. — Persons engaged in the 7504 business of negotiating freights and business of a similar kind and character for the owners of vessels or for th shippers or consignors or consignees of freight carried by vessels are subject to tax as ship brokers. Liability to tax is not incurred unless the work performed is of the same general character as the negotiation of freights. Persons acting as agenti for ship owners in finding charterers for their ships or as agents for charterer! in finding ships available for charter are ship brokers. A person whose busi- ness it is to furnish sailors on a commission basis or for a flat rate for each sailor furnished is not a ship broker. An express company which undertakes for a lump sum to deliver freight at some foreign port and makes arrangement with various railroad and steamship lines on its own account and not as the agent of the shippers for the transportation of such freight i* not a ship broker. A person who as an agent of the consignee attends to the propei Copyright 1922, by The Corporation Trust Company. WAR TAX 1519 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. forwarding of goods consigned to domestic or foreign ports, sees that proper inspection is made and manifests issued is not a ship broker, but a customhouse broker. A person performing both the duties of a ship broker and a custom- bouse broker is subject to the special tax of both a ship broker and a custom- house broker. CUSTOMHOUSE BROKERS. F589 Art. 13. Customhouse brokers: Persons liable. — A person or firm 7505 holding himself or itself out to the public as engaged in the occupa- tion of customhouse broker either by maintaining an office or sending out literature or advertising matter is required to pay special tax as a custom- house broker. If the business of such a person is transacted by employees at offices at different ports, a separate and distinct special tax must be paid for each office. A special tax stamp taken out by a person in his own name as a customhouse broker is sufficient to cover the business done by him in bis own name at the place of business stated therein whether such business is done by him on his own account or as an agent for other persons. Persons whose occupation it is as agents of others to enter and clear vessels in the customhouse are not relieved from special tax as customhouse brokers on the ground that they have paid special tax as ship brokers. A railroad or other corporation operated by the United States and acting as the agent of others to arrange entries and other customhouse papers acts in a govern- mental capacity and is not liable to tax. THEATERS, MUSEUMS, AND CONCERT HALLS. 7690 Art. 14. Theaters, museums, and concert halls: Persons liable.— .7506 The tax is upon the business of operating a theater, museum, or con- cert hall where a charge for admission is made. A person owning a theater which is not used at any time during the taxable year is not liable to tax. A "proprietor" of a theater, museum, or concert hall is the owner of such a building, or the lessee or tenant if the building is leased or rented. The owner is liable for the special tax unless the building is under lease at the time the tax is due, in which case the tax shall be paid by the lessee unless otherwise stipulated between the parties to the lease. (See art. 20.) The tax is upon each theater operated by the proprietor. If the same proprietor has theaters in different internal-revenue districts, the tax due upon each theater must be paid in the district in which such theater is located. 7591 Art. 15. "Charge for admission," — By a "charge or admission" is meant a charge for the right or privilege to enter or remain in a theater, museum, or concert hall for a limited time. No liability to tax is incurred by a proprietor on account of the giving of moving picture exhibi- tions or concerts where no admission fee is charged and only collections arc taken up, persons in the audience contributing if they see fit. 7692 Art. 16. Theater defined. — Only an "edifice" (a building or struc- ture of a permanent character) used for the purpose of dramatic or operatic or other representations, plays, or performances for admission to which entrance money is received is to be regarded as a theater. A railroad car or a boat fitted up is a theater and traveling about from place to place is to be regarded as an edifice. An open-air theater with a permanent roof Copyright 1922, by The Corporation Trurt Company. WAR TAX 1520 SERVICE 8-2-22. Reg. 59.-1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. over the audience or the stage is an edifice, but an airdome or tent is not. Where the proprietor of a theater operates a theater at one location and an airdome at another location he is subject to tax under this subdivision with respect to the operation of the theater and under subdivision (7) upon the operation of the airdome. Where an airdome is operated in connection with a theater, the same ticket admitting a patron to either the theater or airdome, a special tax stamp under this subdivision is required for the theatre and one under subdivision (7) for the airdome. 7593 Art. 17. Exemptions. — (a). Halls or armories rented occasionally for the purpose of dramatic or operatic or other representations, plays, or performances for admission to which a charge is made are exempt from tax. Liability to tax is not determined by the average number of times per month that such hall or armory may be rented for dramatic representa- tions, but upon the primary usage of the hall or armory for such representa- tions. The proprietor of an exhibition or show for money renting the hall or armory is liable to tax under subdivision (7). 7593a (b) Edifices owned by religious, educational or charitable institutions, societies or organizations where the proceeds from admissions inure exclusively to the benefit of such institutions, societies, or organizations or exclusively to the benefit of persons in the military or naval forces of the United States, are exempt from tax. To qualify for exemption the institution, society or organization must be the owner of the edifice; and (1) it must have a definite organization, with officers, directors, or trustees, and the usual essential features (incorporation not being essential) of an association of its class; (2) it must have a purpose which, as put into practice, is religious, educational, or charitable; and (3) its funds must be used exclusively in furtherance of such purpose, none of them being paid or otherwise being distributed to any of its members except as charity or as reasonable com- pensation for services actually rendered. 7594 Art. 18. Theaters open for part of year only. — Where theaters are entirely closed to performances during the months of July and August and open in the month of September the special tax is to be reckoned from the first day of September to the last day of June following at the specified annual rate — that is, for 10 months. Where a theater is closed before the end of a fiscal year, the stamp issued has no redeemable value. 7595 Art. 19. Seating capacity. — Where seats consist of boards or benches, seating capacity should be ascertained by allowing space for each spectator of the same width as the inside measurement of the average or standard theater chair. Where, after payment of special tax at a certain rate, the seating capacity of a theater is increased beyond that which the tax previously paid is sufficient to cover, an additional amount must be paid as special tax equal to the difference between the amount of tax due upon the enlarged theater and the value of the old special tax stamp, computed from the first day of the month in which the seating capacity of the theater was increased to June 30 following. For example: Special tax due and paid July 1, 1922 $50.00 Seating capacity increased Oct. 10, 1922 (new rate) 100.00 Difference $50 00 Copyright 1922, by The Corporation Trust Company. WAR TAX 1521 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. 7596 Since nine months are remaining in the fiscal year from the date of October 1, the additional tax due is nine-twelfths of $50, or $37.50, which amount must be paid to the collector and evidenced by receipt on Form 1. This receipt must be posted with the special tax stamp in the place of business of the holder until the close of the fiscal year, when a new special tax stamp for the succeeding fiscal year must be procured. A person failing to pay special tax covering increased seating capacity within the month during which liability begins, incurs liability to the penalty imposed by Section 1004 of the Revenue Act of 1921. Where a special tax stamp "at large" is issued to a proprietor of a traveling theater having a seating capacity of more than 250 and not exceeding 500 the stamp is good for any theater having a seating capacity of not exceeding 500. No new liability is created when the proprietor gives a performance in a theater with a seating capacity of less than 250. If, however, he gives a performance in a theater having a seating capacity of more than 500, liability at the increased rate of tax is incurred. 7597 Art. 20. Transfer of stamp. — A special tax stamp taken out by the proprietor of a theater who transfers his interest to another person can not be transferred and made to answer for such other person in con- ducting the theater. A special tax stamp is personal to the one to whom issued. Upon request to the collector he may have the stamp transferred from one place of business to another. Thus, if a proprietor of a theater closes it during the summer season he may have his stamp transferred to a summer theater, provided the seating capacity of such theater is not greater than that of his other theater; if the seating capacity of the summer theater is greater than that of his other theater, the proprietor will be required to pay an additional tax, measured by the difference in seating capacity. The proprietor of a summer theater who operates another theater during the winter season may likewise have his special tax stamp transferred from his summer theater to his other theater. 7598 Art. 21. Population. — In determining population of cities, towns, or villages latest United States census figures are to be used, unless a State census has been taken more recently, in which case the State census figures shall be used. However, in case of a sudden and considerable increase or decrease in population since the last United States or State census, the collector of the district in which the particular city, town, or village is located shall determine the population from the best evidence available, which may be common knowledge, and the tax shall be paid accordingly. CIRCUSES. 7699 Art. 22. Circuses: Persons liable. — Exhibitions or feats of horse- 7507 manship which occur on race tracks are subject to a special tax of $100; but mere tests of speed of horses in racing or jumping contests are not regarded as feats of horsemanship within the meaning of the statute. The "theatrical performances" contemplated by this subdivision are only those which are given in connection with a circus. A show under canvas exhibit- ing among other things acrobatic and athletic exercises, but no feats of horsemanship, and having no menagerie, is not subject to special tax as a circus if these exercises arc few and simple, but is taxable under subdivision Copyright 1Q22. by The Corporation Trust Company. WAR TAX 1522 SERVICE 8-2-22. Reg. 59—1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. (7). A small wagon show having no "circus feats," but only trapeze per- forming, wire walking, trained ponies, singing, and dancing, is not to be regarded as a circus, but is taxable under subdivision (7). A "round-up" and like contests in which the contestants are from the locality, sponsored and financed by citizens of the community, are not circuses even though feats of horsemanship are shown and no tax liability as a circus is incurred. A Wild West show is taxable as a circus. Side shows at circuses are liable to tax under subdivision (7). 7600 Art. 23. Payment in different States. — Where a circus is exhibiting in any State in the month of July the special tax of $100 is required to be paid for the year beginning July 1. If in the following month the cir- cus goes into another State the special tax at the rate of $100 for the year is to be reckoned from the first day of August to the last day of June fol- lowing, and a separate special tax stamp must be taken out for that State, and for every other State, Territory, or District in which performances are given. If a circus, after leaving a State in which special tax has been paid, returns before the close of the fiscal year, no further special tax is due. OTHER PUBLIC EXHIBITIONS OR SHOWS. 7601 Art. 24. Other public exhibitions or shows for money: Taxable ex- 7508 hibitions. — Proprietors or agents of all public exhibitions or shows for money not enumerated in the two previous subdivisions are liable to tax under this subdivision. The proprietors of the following exhibitions or shows are liable to tax under this subdivision: 7602 (a) An airdrome or summer theater which has no roof over the auditorium or stage; 7603 (b) A theatrical troupe traveling around the country and giving performances in halls or auditoriums for which special taxes have not been paid by the owners or lessees thereof; 7604 (c) An open-air picture exhibition for admission to which a charge is made; 7605 (d) „An exhibition or show given on fair grounds but not under the management of the fair association; 7606 (e) A side show at a carnival or circus to which an admission fee is charged; 7607 (/) A dancing pavilion upon a pier where a charge is made for the privilege of going upon the pier as spectators; 7608 (g) A public dance hall, if a charge is made to persons who attend as spectators; 7609 (h) An illustrated lecture to which an admission fee is charged; 7610 (i) Baseball games by professionals or semiprofessionals to which an admission fee is charged; 7611 (/) Concert gardens where no admission fee is charged but where drinks are sold and stage and other entertainments are given. 7612 Art. 25. Exhibitions not taxable. — Subdivision (7) specifically pro- vides "that this paragraph shall not apply to Chautauquas, lecture lyceums, agricultural or industrial fairs, or exhibitions held under the au- spices of religious or charitable associations." Illustrated lectures or other exhibitions given by bona fide lecture lyceums or Chautauquas in a tent or other place during the usual Chautauqua or lecture lyceum season are exempt from tax. Exhibitions or shows given by an agricultural or industrial fair Copyright 1922, by The Corporation Trust Company. WAR TAX 1523 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. association in connection with the conduct of a fair are likewise exempt from tax. It is immaterial whether a'separate charge is made for admission to such exhibitions or shows. Where, however, an exhibition or show, for ad- mission to which a charge is made, is conducted on the fair grounds, but is not given by the fair association, the proprietor of such exhibition or show is liable to special tax. Special tax is not required to be paid by proprietors of restaurants or cafes employing^orchestras during the meal hours for the entertainment of patrons. Amateur theatrical exhibitions either in private houses or in licensed public halls to which an admission fee is charged to cover expenses incurred in giving the exhibition, and not for the pecuniary profit of the performers or the manager, are not such performances as are subject to special tax. Owners or agents of theatrical troupes giving per- formances only in halls or auditoriums for which special taxes have been paid by the owner or lessee thereof are not subject to tax. Persons conduct- ing stands and raffling devices at beaches, summer resorts, and similar places, at which no charge is made for admission but only a charge for taking a chance, are not subject to the tax. This is also true of merry-go-rounds, shoot-the-chutes, and similar amusement devices. 7613 Art. 26. Aggregation of entertainments. — An aggregation of enter- tainments known as a street fair is not subject to a larger tax than $100 in any State, Territory, or the District of Columbia. When seven or more separate entertainments are under the same management and are con- ducted in connection with a street fair, the total amount of tax payable shall not exceed $100. These aggregations usually include such exhibitions or shows as "pit shows," "rides," "dare-devil entertainments," imitation Wild West shows, or trained animals. A special tax stamp has been pro- vided for such aggregations. BOWLING ALLEYS. 7614 Art. 27. Bowling alleys: Scope of tax. — In every building or place 7509 where bowls are thrown each division or track is a separate alley, for which a special tax must be paid. Proprietors of bowling alleys and billiard and pool tables in clubs, Y. M. C. A. buildings, hotels, fraternity houses, lodge rooms, State armories, fire houses, and similar places are sub- ject to special tax unless the bowling alley or billiard and pool tables are supported out of funds contributed by a State or a subdivision of a State. The Italian game of "Boccie" is taxable under this subdivision. Bagatelle and tivoli tables and Japanese rolling ball games are not subject to tax. No liability is incurred where tables or alleys are not actually used, in which case pins and bowls should be removed from the alleys and cushions from tables. The person for the time being in possession or control of a billiard table or bowling alley is prima facie the proprietor of the alley or table and liable to the special tax even if the property and ultimate control of the table and place where it is located are in some one else. A "private home" is held to be an individual or family residence. The mere fact that no charge is made for use of the tables or alleys, or that they are not operated for profit, does not relieve the proprietor from payment of the special tax. 7616 Art. 28.~3 Transfer of special tax stamp. — When a person who has taken out a special tax stamp for a bowling alley closes the alley and thereafter opens another the stamp may be transferred to the latter. Copyright 1922, by The Corporation Trust Company. WAR TAX 1524 SERVICE 8-2-22. Reg. 59.— 1922 Edition SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. SHOOTING GALLERIES. 7616 Art. 29. Shooting galleries: Persons liable. — Every person who is 7510 in possession and control of any building, space, tent, or area where a charge is made for the discharge of firearms at any form of target is liable to tax. A club which charges annual dues and in addition makes a charge to cover operating expenses of a shooting range is liable to tax. The tax attaches in the case of a gun club where the membership dues specifically cover participation in shoots or tournaments. wmrfoBm Bid lb V alfoasH vifcinoVi nl .vrifidBii IbJo* M §rtfi3vob ?3niffo*m RIDING ACADEMIES. 7617 Art. 30. Riding academies: Liability to tax. — Only a proprietor of 7511 a riding academy who maintains a building, space, tent, or area where a charge is made for instruction in horsemanship or for facili- ties for the practice of horsemanship is liable to tax. Persons who are en- gaged merely in letting saddle horses are not liable to tax. A highway or other place, the use of which is open to the public generally, that is not re- stricted by concession or otherwise to a person giving instruction in horse- manship, is not a "building, space, tent, or area" within the meaning of this section and subdivision of law. Associations composed exclusively of mem- bers of units of the Federalized National Guard or the Organized Reserve and whose receipts are used exclusively for the benefit of such units, are exempt from tax. PASSENGER AUTOMOBILES. 7618 Art. 31. Passenger automobiles: Basis of tax. — The tax is upon 7512 the business of operating or renting passenger automobiles for hire, and is based upon the number of cars operated or rented and the seating capacity of each car. It is upon the total number of cars operated and not upon the average number operated. Liability is not incurred through the occasional carrying of a passenger in an automobile for hire provided the owner or operator does not hold himself out to the public as engaged in the business of carrying passengers. A person, however, who habitually carries passengers for hire whenever the opportunity presents or the capacity of his car permits is liable to tax. In computing seating capacity the driver's seat is to be included. The tax should be paid for automobiles used for carrying passengers, based upon the seating capacity of the whole car, unless a portion of it is set off and is of such design that it can not readily be used for passengers. HThe tax attaches to a person operating a hotel bus for the carriage of passengers between railroad stations and hotels, pro- vided a separate charge is made for the service. Motor trucks used for car- rying passengers for hire are liable to tax, and unless evidence is furnished which conclusively shows that such trucks can not accommodate more than seven persons the owners are liable to the special tax of $20 for each. Persons operating or renting passenger automobiles for hire during a strike of street- railway employees are liable to the tax. A company operating automobile stages or motor busses on fixed schedule over established routes in cities or between cities and carrying passengers at a fixed charge is subject to tax even though it operates under rules and regulations of a state railroad com- mission or similar body. ^Automobile ambulances and automobile hearses are not considered passenger automobiles within the purview of this sub- division, Copyright. 1922, by The Corporation Trust Company. WAR TAX 1525 SERVICE 8-2-22. Reg. 59.-1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. 7619 Art 32. Special tax stamp. — The special-tax stamp or stamps issued must cover the total tax liability of the taxpayer at the time the stamp or stamps are taken out. He must secure a stamp for each car operated. A taxpayer does not incur an increased liability to tax by reasoc of replacing a car with a new car unless the new car is of a seating capacity subject to a higher rate of tax than the car replaced. For example: A person engaged in the business of operating passenger automobiles foi hire owns 40 machines, each of them carrying more than two but not more than seven passengers. He takes out a special-tax stamp on each of the 4C machines covering his total liability. In February he sells 7 of his machine? and purchases new ones of the same seating capacity or of a seating capacity of not more than seven. In such case no additional special-tax liability U incurred. If, however, in February he should replace 7 of his old machine* with the same number of new machines each carrying more than seven passengers, an additional amount must be paid as special tax equal to the difference between the amount of tax due upon the operation of the ne* machines and the value of the old special-tax stamps paid upon the operatior of the replaced machines, computed from the first day of the month in whict additional liability was incurred and ending with the following June 30, Thus, since five months are remaining in the fiscal year from the date oi February 1, the additional tax due is five-twelfth of $70, or $29.17. Pay- ment of such additional special tax will be evidenced by a receipt on Form 1, which must be kept posted with the special tax stamp until the close of the fiscal year. A person failing to pay special tax covering increased seating capacity within the month during which liability begins incurs liability to the penalty imposed by section 1004 of the Revenue Act of 1921. IjThc purchaser of a passenger automobile for the operation of which special tax has been paid by the previous owner does not acquire the right to operate the automobile under the special-tax stamp which was issued to the previous owner. The special-tax stamp or stamps issued must be conspicuously posted in the place of business of the person operating or renting passengej automobiles. IfAutomobiles in respect of which special tax has been paid may- be operated at any place in the United States without the payment of addi tional tax so long as the owner remains the same. When a special-tax 8tam? is issued, the engine number of the car covered by the stamp shall be regit tered with the collector issuing the stamp, who, in addition to the stamp- will issue a receipt card for each car which will bear the number correspond^ to that on the engine of the car for which issued, and this receipt shall b< carried by the operator at all times. The operation of a car without i receipt card or with a receipt card bearing a different engine number than that on the engine of the car operated shall be prima facie evidence of evasion 01 tax. Any replacement of a car must be likewise registered with the collectoi and a new receipt card will be issued in lieu of the card originally issued for the car which the new car replaces. %lt is not considered necessary nor is it desirable to put the license-tag number on the receipt card issued with the stamp, owing to the fact that the stamp shows payment of tax for a fiscal year, while auto license tags usually cover a calendar year. The engine num- ber on the card will be sufficient. This will obviate the necessity of obtaining a new card when the tag is changed. However, it will be necessary to obtain a new card in all cases where, for any reason, a different car is replacing an old one. (As amended by T. D. 3184, June 24, 1921.) Copyright 1922, by The Corporation Trust Company. WAR TAX J526 SERVICE 8-2-22. Reg. 59.-1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. SPECIAL TAXES UPON THE USE OF BOATS. 7820 Art. 33. Effective date. — The effective date of the tax on boats is 7528 July 1, 1922. This tax is in lieu of a similar tax imposed by section 1003 of the Revenue Act of 1918. 7821 Art. 34, Taxable period. — The first taxable period is from July 1, 1922, or from the date of the original purchase of a new boat by a user, to June 30, 1923, inclusive. Succeeding taxable periods cover the fis- cal year beginning July 1 and ending June 30 of the succeeding year. 7622 Art, 35. Basis of tax. — The tax is based on use and not on mere possession or ownership. Liability to tax begins from the first day of the month in which the boat is used. Thus, if the first use of a boat is on April 27, 1923, the liability to tax begins on April 1, 1923. A boat which is not used at all during a fiscal year is not subject to tax for that period not- withstanding the fact that it might have been liable to tax in the preceding fiscal year. A boat which is not placed in use during the first part of the fiscal year is not liable to the tax for the period during which it was not in use, except to the extent of becoming liable from the first of the month during which it was placed in use. Once liability has been incurred at some time during a fiscal year the tax must be paid from the first of the month during which the boat was first placed in use until the close of the fiscal year, and no refund will be made notwithstanding the fact that during some lubsequent period of such fiscal year the boat may not be in use. 7623 Art. 36. Persons liable.— The owner, lessee, or charterer of a boat is liable for the tax. 7 824 Art. 37. Boats taxable. — Subject to the exemptions provided for in Article 38, the tax is imposed upon the use of yachts, pleasure boats, powerboats, motor boats with fixed engines, and sailing boats of over 5 net tons, length over 32 feet. The use of the following boats, among others, is subject to tax: (a) Boats of foreign register used in the United States; (b) Boats owned by nonresident aliens navigating United States waters; (c) Boats built according to plans and specifications approved by the Navy Department but subsequently converted or remodeled according to plans not approved by the Navy Department; (d) Boats built without prior approval of the plans and specifications by the Navy Department. 7 625 Art. 38. Boats not subject to tax. — (a) Boats used exclusively for trade are specifically exempt from tax. (Any boat 'which is used exclusively in connection with any serious activity which constitutes a per- son's business, occupation, profession, or means of livelihood is exempt from tax. Casual employment at irregular intervals for the convenience of the owner or his family, not exceeding such casual employment as is usual for boats maintained or employed in trade, will not cause the tax to attach to a boat which is entirely devoted to trade except for such limited casual use.) (b) Boats used exclusively for fishing are specifically exempt from tax. (The term "fishing" as used in the statute has reference to commercial fishing and not fishing for pleasure.) Copyright 1922, by The Corporation Trust Company. WAR TAX 1527 SERVICE 8-2-22. Reg. 59 —1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. (c) Boats built according to plans and specifications approved by the Navy Department are specifically exempt from tax. (In order to be exempt the plans and specifications must receive approval by the Navy Department prior to the building of the boat.) (d) Vessels or boats used without profit by an)' benevolent, charitable or rcligious organizations exclusively for furnishing aid, comfort, or relief to seamen arc specifically exempt from tax. (e) Boats owned by nonresident aliens and operated only occasionally in American waters are not subject to tax. (f) A houseboat without means of propulsion is not subject to tax. (g) Boats of over 5 net tons but less than 32 feet in length, and boats of over 32 feet in length but less than 5 net tons, do not fall within the purview of the act and are not subject to tax. (h) A boat used by a physician in calling upon patients is exempt from tax. (i) A boat used by a farmer to take produce to market, farming con- stituting the means of livelihood of the owner of the boat, is exempt from tax. (j) A boat used by an owner in the course of his employment to tend channel lights on a barge canal is exempt from tax. (k) A boat regularly in service in the carriage of the public is exempt from tax. (1) A boat used by a marine-engine manufacturer in transporting sales- men on their business trips or in taking out prospective customers purely for demonstrating purposes is exempt from tax. (m) A boat used in towing disabled boats and furnishing repair service to customers is exempt from tax. 7626 Art. 39. Purchase or use of secondhand boats. — If a person pur- chases a secondhand boat on which special tax has already been paid, he is not liable to special tax upon the use of the boat during the balance of the fiscal year. The tax is on the use of the boat and the special tax stamp passes with it. The adjustment of the tax between the vendor and the ven- dee is a matter of individual contract in which the Government has no con- cern. If a person leases or charters a boat upon which the tax has been paid, the lessee or charterer is exempt from tax on the use of the boat dur- ing the remainder of the fiscal year. 7627 Art. 40. Rate and computation of tax. — The boats enumerated in the act are divided into three classes with respect to length, and a separate rate of tax is provided for each class, as follows: (a) Over 5 net tons, length over 32 feet and not over 50 feet, $1 for each foot. (b) Over 5 net tons, length over 50 feet but not over 100 feet, $2 for each foot. (c) Over 5 net tons, length over 100 feet, $4 for each foot. 7628 To compute the amount of tax in any given instance multiply the rate of the class in which the boat is included by the number repre- senting the length over all in full feet. For example: A boat 49.5 feet in length would be included in class (a) and would be taxed at the rate of $1 for each foot, or $49; a boat 50.5 feet in length would also be included in class (a) and would be taxed at the rate of $1 for each foot, or $50. A boat must be at least 33 feet in length in order to be taxable. Copyright 1922, by The Corporation Trust Company. WAR TAX 1528 SERVICE 8-2-22. Reg. 59.— 1922i£dition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. 7629 Art. 41. Tonnage. — To estimate the net tonnage of a vessel, the fol- lowing rules may be used: (a) By the word "ton" is meant 100 cubic feet of space. (b) Multiply the extreme length of the vessel by the extreme breadth and that product by the depth from the underside of the deck to the frame in the hold taken amidship3. The result should be multiplied by six-tenths. To this result should be added the cubical contents of any closed-in structure above the upper deck. The sum should be divided by 100, which will give the approximate gross tonnage of the boat. A closed-in superstructure is any space inclosed with wood or glass, whether stationary or removable, but does not include awnings or canvas shelters. (c) From this gross tonnage may be deducted all spaces used exclusively in connection with the navigation of the boat or for machinery space, space for officers and crew but not for passengers (who include all persons not actual members of the crew), storage of sails, navigation instruments, boatswain's stores, etc. The result will be the approximate net tonnage of the boat. (d) For the purpose of determining the tonnage of open boats the space within the boat level with the outer rails will be considered, and no deductions for machinery or crew will be made. 7 630 If the boat is over 32 feet in length and the net tonnage thus esti- mated is more than 4 net tons, application should be made to the nearest customs officer for official admeasurement. If an official admeasurement is not completed before the date on which a return is required, a return should be rendered; and if the estimate of net ton- nage, made as above directed, is over 5 net tons, the tax should be paid. If an official admeasurement is being made or has been requested but not completed on the date set for filing return, the taxpayer should file his return on the date set by the law and regulations, accompanied by a remittance in an amount which he has determined is due. The collector will, upon receipt of such return and remittance, deposit the remittance as an advance collec- tion in his stamp account, but will not order an improvised stamp for the taxpayer until the official admeasurement has been completed. If the tax due as shown by such official admeasurement is greater than that already paid by the taxpayer such taxpayer should be called upon for an additional amount sufficient to cover his total liability. When this additional amount is received the collector will then order an improvised stamp of the proper denomination. If the amount of tax is found to be the same as or less than the amount remitted by the taxpayer the collector will order an improvised stamp of the proper denomination, take credit in his stamp account for any excess remittance, and transfer the balance to account 9e. The collector will then place the item covering the excess payment on his Schedule of Refunds, Form 7777a. By this method the taxpayer will not be burdened with the necessity of purchasing a new special tax stamp in the proper amount and returning the original stamp for redemption, but will receive a stamp in the proper denomination in the first instance. 7631 Art. 42. Over-all length. — Over-all length is defined as the extreme length of the structure — i. e., from the forward side of the stem out- Bide the planking or plating to the aftermost side of the stern planking or plating, whether above or below the water line. The measurement should be to the outside of any planking or plating extending above the deck, con- stituting bulwarks, and to the outside of any forecastle deck, quarter deck, or poop deck extending beyond the main deck. The length should be taken in a straight line, excluding any sheer there may be to the deck. Copyright 1922, by The Corporation Trust Company. WAR TAX 1529 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. 7632 Art. 43. Return and payment of tax. — Every person liable to special tax must, during the month in which his liability begins, file with the collector or a deputy collector of the district in which he is located s(Wprn return on Form 732 (Revised) which shall show the amount of tax due. This return shall also be filed by persons claiming exemption from tax on boats falling within the purview of the Act. Instructions for filling out Form 732 (Revised) will be found on the back of the form. The return due for the fiscal year ending June 30, 1923, must be filed during the month of July, 1922, provided the boat is used during the month of July, 1922. If the boat is placed in use during a month subsequent to July, return must be filed during such month. 7 633 If exemption is claimed the return must be executed in full and "exemption claimed" noted across the face of the return. Failure to file Form 732 in the case of a tax-exempt boat renders a person liable to a penalty of not more than $1,000 (sec. 1302 (a) of the act). Return is not required with respect to boats of not over 5 net tons and not over 32 feet in length. 7 634 Art. 44. Stamp or card certificates. — When tax is paid a special tax stamp indicating payment and a card certificate showing the name or other description of the boat will be issued. If exemption is allowed, an exemption card (Form 725) will be issued. The card certificate or exemption card issued must be kept on board whenever the boat is in use, and must be shown on demand to any officer or agent of the interna! revenue or naviga- tion service. No exemption certificate is required for a boat falling below the tonnage and footage specifications mentioned in the Act. PROVISIONS OF LAW AND REGULATIONS PERTAINING TO SPECIAL TAXES. 7635 Art. 45. Special taxes. — The taxes imposed by sections 1001 and 7501 1003 of the Revenue Act of 1921 are "special taxes," and taxpayers are subject, under these sections, to ail applicable provision* of the internal-revenue laws now in force and effect. 7636 Art. 46= Business to be registered. — Every person engaged in any trade or business on which a special tax is imposed by law shall register with the collector of the district his name or style, place of rest dence, trade or business, and the place where such trade or business is to be carried on. In case of a firm or company, the names of the several persons constituting the same, and their places of residence, shall be so registered, i Sec. 3233. R. S.) 7637 Art. 47. Partnerships. — Any number of persons doing business in copartnership at any one place shall be required to pay but one special tax. (Sec. 3234, R. S.) 7638 Art. 48. Payment of one special tax not to cover several places of business. — The payment of the special tax imposed does not exempt a person carrying on a trade or business in any other place than that stated in the collector's register from the payment of an additional special tax on the doing of such business; but a special tax is not required for the storage of goods, wares, or merchandise in other places than the place of business, nor for the sale by manufacturers or producers of their own goods, wares, and merchandise at the place of production or manufacture, and at their Copyright 1922, by The Corporation Trust Company. WAR TAX 1530 SERVICE 8-2-22. Reg- 59.-1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. principal office or place of business, provided no goods, wares, or merchandise shall be kept except as samples at said office or place of business. (See sec. 3235, R. S.) 7639 Art. 49. More than one pursuit carried on in the same place of business. — Whenever more than one of the pursuits or occupations subject to special taxes are carried on in the same place by the same person at the same time, the tax shall be paid for each according to the rates sever- ally prescribed. (See sec. 3236, R. S.) 7640 Art. 50. When special tax becomes due. — All special taxes shall be- come due on the 1st day of July in each year, or on commencing any trade or business on which such tax is imposed. In the former case the tax shall be reckoned for one year; and in the latter case it shall be reckoned proportionately from the 1st day of the month in which the liability to a special tax commenced to the 1st day of July following. (See sec. 3237, R. S., as amended by sec. 53, act of Oct. 1, 1890; 26 Stat., 567.) An applicant for a special-tax stamp for a fractional part of a year must calculate from the 1st day of the month in which he commences business and must pay until the end of the fiscal year. A special tax payer, even though he makes a sworn return within the calendar month of his liability, is liable to criminal prosecution if he fails to pay the tax within that month or to post the stamp in his place of business, although he is not liable to the additional tax im- posed by section 3176, Revised Statutes, as amended. 7641 Art. 51. Returns. — It shall be the duty of special tax payers to render their returns to the collector or a deputy collector at such times within the calendar month in which the special tax liability commenced as shall enable him to receive such returns, duly signed and verified, not later than the last day of the month, except in cases of sickness or absence, as pro- vided for in section 3176 of the Revised Statutes as amended. (See sec. 3237, R. S., as amended by sec. 53, act of Oct. 1, 1890; 26 Stat., 567.) For failure to make a sworn return within the time prescribed by law, without a reasonable cause for delinquency, the Commissioner of Internal Revenue is required to add to the special tax 25 per cent, of its amount. In case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue is required to add to the special tax 50 per cent, of its amount. (See art. 64.) 7642 Return and tax due during July, generally. — [Comment: The following letter may be of interest, to be read in connection with the "calendar" on page 1501.] Reference is made to your letter of the 6th inst. in which you refer to Form 11 and inquire by what authority this form calls for the filing of the return betore July 1st of each yeaf. You state you have been unable to find anything in the Revised Statutes or in the Revenue Act of 1918 that warrants the statement printed in bold face type at the bottom of the return form. 7643 In reply you are advised that there is no requirement of law that the return must be filed on or before July 1st. The statement printed on the form, and referred to by you, is to be eliminated. Section 53 of the Act of October 1, 1890 (26 Stat., 567) amends Section 3237, Revised Statutes, and distinctly provides that special taxpayers shall render their returns at such times within the calendar month in which the special tax liability commenced as shall enable the collector to receive such returns Copyright 1922, by The Corporation Trust Company. WAR TAX 1531 SERVICE 8-2-22. Reg. 69.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. duly signed and verified not later than the last day of the month. (Letter to The Corporation Trust Company, signed by Deputy Commissioner James M. Baker, and dated December 27, 1919.) 7644 Art. 52. Stamps for special taxes. — All special taxes imposed by law shall be paid by stamps denoting the tax, and the Commissioner of Internal Revenue is required to procure appropriate stamps for the payment of such taxes; and the provisions of sections 3312 and 3446, Revised Statutes, and all other provisions of law relating to the preparation and issue of stamps for distilled spirits, fermented liquors, tobacco, and cigars shall, so far as applicable, extend to and include stamps for special taxes; and the Commis- sioner of Internal Revenue shall have authority to make all needful regula- tions relative thereto. (See sec. 3238, R. S.) 7 ©45 A special tax stamp issued is not a license, but merely a receipt for the tax. It puts the United States under no obligation whatever to the holder beyond assuring him against prosecution under the special tax laws. The firm name is the only name that is necessary in a special tax stamp issued to a partnership. Collectors or their deputies are forbidden to issue receipts for moneys received for taxes which are payable by stamps. 7646 Art. 53. Special tax stamps "at large." — Any special tax payer ex- cept those liable to tax under subdivisions (6) and (7) of section 1001, whose business is such as to require him to travel from place to place in different States of the United States, such as proprietors of traveling thea- ters, proprietors of shooting galleries traveling with circuses, etc., may pro- cure a special tax stamp "at large" covering, with the payment of but one special tax, the activities of such special tax payer throughout the United States. Collectors of internal revenue are instructed to issue such special tax stamps "at large" upon receipt of application and remittance covering the amount of tax due. 7647 Art. 54. Special tax stamp to be posted in place of business. — Every person engaged in any business, vocation, or employment who is thereby made liable to a special tax shall place and keep conspicuously in his establishment or place of business all stamps denoting the payment of said special tax; and any person who shall, through negligence, fail to so place and keep said stamps, shall be liable to a penalty equal to the special tax for which his business renders him liable, and the costs of prosecution; but in no case shall said penalty be less than $10. And where the failure to comply with the foregoing provision of law shall be through willful neglect or refusal, then the penalty shall be double the amount above prescribed: Provided, That nothing in this section shall in any »vay affect the liability of any person for exercising or carrying on any trade, business, or profession, or doing any act for the exercising, carrying on, or doing of which a special tax is imposed by law, without the payment thereof. (See sec. 3239, R. S.) 7848 Art. 55. List of special taxpayers. — Each collector of internal reve- nue shall, under regulations of the Commissioner of Internal Reve- nue, place and keep conspicuously in his office, for public inspection, an alphabetical list of the names of all persons who shall have paid special taxes within his district, and shall state thereon the time, place, and business for which each such special tax has been paid; and upon application of any prosecuting officer of any State, county, or municipality he shall furnish a Copyright 1922, by The Corporation Trust Company. WAR TAX 1532 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. certified copy thereof, as of a public record, for which a fee of one dollar for each one hundred words or fraction thereof in the copy or copies so requested may be chnrged. (Sec. 3240, R. S., as amended by the act of June 21, 1906; 34 Stat., 337.) 7649 Records in the collectors' offices relating to special tax payers are based on returns made by these persons under compulsion of law for the sole purpose of raising revenue for the United States. Collectors are not permitted to send out these records or copies thereof for use against the special tax payers in cases not arising under the laws of the United States. This restriction does not apply to copies of record 10, which the collector is required by the act of June 21, 1906, to furnish to prosecuting officers upon payment of the prescribed fee. 7650 Art. 56. Death or removal after paying tax— When any person who has paid the special tax for any trade or business dies, his wife or child, or executors or administrators or other legal representatives, may occupy the house or premises, and in like manner carry on, for the residue of the term for which the tax is paid, the same trade or business as the de- ceased before carried on, in the same house, and upon the same premises, without the payment of any additional tax. And when any person removes from the house or premises for which any trade or business was taxed to any other place, he may carry on the trade or business specified in the collec- tor's register at the place to which he removes, without the payment of any additional tax: Provided, That all cases of death, change, or removal, as aforesaid, with the name of the successor to any person deceased, or of the person making such change or removal, shall be registered with the collector, under regulations to be prescribed by the Commissioner of .nternal Reve- nue. (Sec. 3241, R. S.) 7651 Under the law and rulings of this office an executor, receiver, or referee in bankruptcy may continue the business under the stamp is- sued to the deceased or bankrupt taxpayer at the place and for the period for which the tax was paid. An assignee may continue business under his assignor's special tax stamp without incurring special tax liability. 7652 Art. 57. Transfer of place of business. — Whenever the special tax payer desires to remove his business to a place other than that speci- fied in his original return and stated in his special tax stamp he shall, during the calendar month in which such transfer is made, register such fact by filing under oath an additional return on the prescribed form, properly modi- fied, setting forth the time and place where he intends to engage in the busi- ness described; and if such taxpayer is a firm or corporation, the names and residences of all the members or principal officers thereof shall again be re- corded. He shall also forward the special tax stamp to the collector in order that proper notation of the transfer may be made thereon, after which it will be returned to the owner. Should the transfer be made to a location in an- other collection district, the stamp will be forwarded to the collector who issued it, who will make proper notation on his record 10 and make notation on the stamp as to transfer. This collector will then forward the stamp to the colled or of the district to which the taxpayer will transfer, who will make out a proper record 10 card and sign the stamp under the signature of the transferring collector, and forward the stamp to the taxpayer. Unless such transfer notice is filed within the time specified a new special tax liabil- Copyright 1922, by The Corporation Trust Company. WAR TAX 1533 SERVICE P-2r22, Reg. 59.— 1922 Edition. SPECIAL TAXES OJNf OCCUPATIONS REGULATIONS. — 1922. ity will be incurred and a new special tax stamp will be required for the car- rying on of the busines3. 7653 Art. 58. Change in membership of firm.-- When one or more mem- bers of a firm or partnership withdraw the business may be contin- ued by the remaining partner or partners under the same special tax stamp, but where new partners are taken into a firm the new firm can not carry on business under the special tax stamp of the old firm. It must make return and pay its own special tax reckoned from the first day of the month in which it began business, even though the name of the new firm be the same as that of the old. 7854 Art. 59. Change from partnership to corporation. — Where a partner* ship paying special tax incorporates a special tax stamp must be taken out in the name of the corporation. 7655 Art. 60. Who may carry on business without new stamp. — A cor- poration may, upon application to the collector, change its name vrithout creating new special tax liability, provided its charter permits such & change. A copy of the charter must be filed with the application and the stamp forwarded to the collector for proper notation. Additional special tax stamp is not required by reason of an increase of capital stock of a cor- poration if State laws creating the corporation provide for such changes without the formation of a new corporation. Additional tax stamp is not required of an unincorporated club by reason of changes of membership where such changes do not result in a dissolution and formation of a new club. 7©5© Art. 61. Changes to be registered. — Whenever such a person as is permitted under article 60 to carry on the business of one who has paid the required special tax succeeds to such business he shall register with the collector under oath the name of the original taxpayer and the names of such successors and their residences together with all the data required. Any person succeeding to and carrying on the business for which special tax is required to be paid on removing to and carrying on such business at a place other than that for which the special tax was paid without registering such change on removal will be regarded as carrying on the business in vio lation of law, and will be liable to a fine of not less than $10 nor more than $500, in addition to his liability for the tax. (See sec. 3242, R. S.) General Administrative Provisions. 7 ©57 Art. 62. Aid to collection of tax. — In collecting the special taxes the 8000 Commissioner has the benefit of all existing internal-revenue laws. In aid of the enforcement of the statute the Commissioner may re quire any person to keep specified records, to render returns and statements as directed, to submit himself and his books to examination, and to comply with such regulations as may be prescribed. PENALTIES. Sec. 1311. (Sec. 3176 Rev. Stats.) H8071. Sec. 1004. H 7534. Sec. 1302. 1F8014. Sec. 3184, R. S. Where it is net otherwise provided, the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Commissioner of In- Copyright 1922, by The Corporation Trust Company. WAR TAX 1534 SERVICE 8-2-22. Reg. 59.— 1922 Edition. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. ternal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of tuch taxes and demanding payment thereof. If such person does not pay the taxes within ten days after the service or the sending by mail of such notice, it shall be the duty of the collector or his deputy to collect the said taxes with a penalty of five per centum additional upon the amount of taxes, and interest at the rate of one per centum a month. 7668 Art. 63. Penalties. — Any person who fails to file a return of tax due 8071 within the time prescribed by law or regulations made pursuant to law is liable to an additional amount equal to 25 per cent, of the total tax due except when it is shown that the failure to file the return within the prescribed time was due to a reasonable cause and not to willful neglect. If a false or fraudulent return is filed the taxpayer is liable to an additional amount equal to 50 per cent, of the total tax. A person who fails to pay or truly to account for any tax or to make any return prescribed by law is in addition to the increased tax as set forth above liable to a penalty of not more than $1,000. If he willfully refuses to pay or account for any tax or make any return required by law, or willfully attempts in any manner to evade the tax he is guilty of a misdemeanor and in addition to the increased taxes provided for he is liable to a fine of $10,000, or imprisonment for not more than one year, or both, together with the costs of prosecution. Where a false or fraudulent return is filed it is considered prima facie evidence of a willful attempt to evade tax and the penalties provided by law for such of- fense will be invoked. Under section 3184, Revised Statutes, a taxpayer who does not pay a special tax assessed within 10 days from the date of the mailing by the collector of a notice and demand for payment is liable to a 5 per cent, penalty and interest at the rate of 1 per centum per month. 7659 Art. 64. Claims for refund of special taxes. — (a) In all cases where special tax has been collected and such collection is alleged to be illegal or erroneous, it will be necessary for the person so paying the tax tc file claim for refund on Treasury Department Form 843, obtainable at the office of the collector. The completed claim should be filed with the collector and should be accompanied by the special-tax stamp, or receipt, representing payment of the amount claimed. 7660 (b) No claim for the redemption of or allowance for special-tax stamps shall be allowed unless presented within two years after the purchase of said stamps from the Government. The authority for such redemption or allowance is the act of May 12, 1900 (31 Stat. 177), as amended by the act of June 30, 1902 (32 Stat. 506) [see U8024 herein]. 7661 (c) Where taxes are paid pursuant to an assessment and not by the issuance of stamps, claims for the refund of amounts so paid are governed by sections 3220 to 3228 R. S., as amended, and must be presented within four years next after payment of such taxes, as provided in section 1316 of the Revenue Act of 1921. AUTHORITY FOR REGULATIONS. [Sec. 1309, ^8009.] 7662 Art. 65. Promulgation of regulations. — In pursuance of the statute 8009 the foregoing regulations are hereby made and promulgated, and all rulings inconsistent herewith are hereby revoked. D. H. BLAIR, Commissioner of Internal Revenue. Approved: July 20, 1922. | [Released for publication Aug. 2, 1922.] A. W. MELLON, Secretary of the Treasury. Copyright 1922, by The Corporation Trust Company. WAR TAX 1535 SERVICE 3-22-22. (2) 5-19-22. (3) 8-2-22. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. (T. D. 3309.)* 7 663 Theatre special tax — Determination of population. — Article 22 of Regulations 59 (Revised January, 1921) is amended to read as follows: 7664 Art. 22. Population. — In determining population of cities, towns or villages latest United States census figures are to be used, unless a State census has been taken more recently, in which case the State census figures shall be used. However, in the case of a sudden and considerable increase or decrease in population since the last United States or State cencus, the collector of the district in which the particular city, town or village is located shall determine the population from the best evidence available, which may be by common knowledge, and the tax shall be paid accordingly. (T. D. 3309, signed by Commissioner D. H. Blair, and dated March 20, 1922.) (T. D. 3331.)* 7665 Brokers: Persons Table and not liable to tax. — Article 6(g) of Regu- lat'ons 59 (Revised January, 1921) is hereby amended to read as follows: A real estate or business broker who lists and negotiates purchases or sales of produce or merchandise independently of purchases or sales of real estate or businesses, or holds himself out as being engaged in "he business of negotiating for others purchases or sales of produce or mer- chandise. 7 666 Article 7 of Regulations 59 (Revised January, 1921) is hereby amended by adding a new paragraph (w) as follows; A person negotiating purchases or sales of business. (T. D. 3331, signed by Commissioner D. H. Blair, and dated May 13, 1922.) *T. D. 3309 and T. Di 3331, above, amend Regulations 59, relating to the 1918 Act. The amendments have been embodied in Regulations 59, lelating to the 1921 Act, pro- mulgated July 20, 1922. — The Corporation Trust Company, Copyright JQ22, by The Corporation Trust Company. WAR TAX 1536 SERVICE 10-30-22. (2) 11-29-22. SPECIAL TAXES ON OCCUPATIONS REGULATIONS. — 1922. (Decision.) Revenue Act of 1918. (October 21, 1922.) Tobacco Warehousemen as Brokers. United States Circuit Court of Appeals Fourth Circuit. Cothran & Connally, Plaintiffs in Error, versus The United States of America, Defendant in Error. In Error to the District Court of the United States for the Western District of Virginia, at Lynchburg. 7 667 Woods, Circuit Judge: A^statement of the case will demonstrate 7556 the correctness of the judgment of the District Court. 7668 The petitioners, Cothran & Connally, tobacco warehousemen, brought this proceeding under paragraph 20, sec. 24 of Judicial Code to recover $52.05, tax and penalty collected from them under the following section of the Act of February 24, 1919, (40 Stat. 1126): "Sec. 1001. That on and after January 1, 1919, there shall be levied, collected and paid annually the following special taxes: (1) Brokers shall pay fifty dollars. Every person whose business it is to negotiate purchases or sales of stocks, bonds, exchange, bullion, coined money, bank notes, prom- issory notes, other securities, produce or merchandise, for others, shall be regarded as a broker." 7669 The petitioners conduct a tobacco warehouse in the town of Brook- neal, Virginia. Producers sold their tobacco through the warehouse. The tobacco was placed in piles on the warehouse floor, ticketed with the owner's name, lot number and weight. Periodically sales were conducted by the auctioneer of the proprietors of the warehouse. The owners of the tobacco usually attended the sale. If the highest bid was not satisfactory to the owner he had the privilege of refusing it. If accepted the warehouse- men paid the owner the amount of price offered, less 3% commission. The warehousemen afterwards invoiced the tobacco in their own name and at their own risk to the buyer, who paid the price to them. There was no direct contractural relation between the buyer and the owner of the tobacco. 7 670 It is too plain for discussion that tobacco is produce, and that the petitioners were engaged in negotiating the sale of it as brokers, under the controlling definition of the statute. 7 671 In earlier statutes, enacted at different times from 1864 to 1914, a tax was levied on brokers negotiating the sale of goods, wares, pro- duce or merchandise, and on commission merchants receiving into possession for sale, goods, wares or merchandise. In these same statutes dealers in tobacco were distinguished and a special and different tax levied on them. This special tax on dealers in tobacco was repealed in the statute of 1916. (39 Stat. 790.) The argument of petitioners' counsel is that this course of past legislation imposing the special tax on dealers in tobacco indicated an intention to maintain a distinction between tobacco and other produce and merchandise in future legislation, however broad in terms; and that, Copyright 1922, by The Corporation Trust Company. WAR TAX 1537 SERVICE 10-30-22. (2) 11-29-22. SPECIAL TAXES ON OCCUPATIONS REGULATIONS.— 1922. too, although such future tax legislation repealed the special tax on dealers in tobacco. 7 672 We think the true view is that by the Acts of 1916 and 1919 the Congress expressed as clearly as possible the intention to abolish the distinction in tax legislation between dealings in tobacco and other produce and merchandise by omitting the tax on dealers in tobacco as such; and by the Act of 1919 to put tobacco in the same class with other produce and merchandise by exacting a tax on brokers, that is all persons who nego- tiate the sale of any produce or merchandise, including tobacco. 7 67 3 We can see no ground whatever for holding that the Congress meant to make persons who negotiated the sale of tobacco a privileged class, exempt from the tax imposed on those who negotiated the sale of wheat, corn or other produce. Affirmed. (T. D. 3413.) 7 674 [This Treasury Decision, dated November 24, 1922, reproduces the 7667 Cothran & Connally opinoin above, beginning at 1J7667. — The Cor- poration Trust Company.] ( opyri&Ut 1942, by 1 /»* C'vrpotation Trust Lompauy WAR TAX 1538 SERVICE J^l*!! 2 * ^^^^^^-M^^^^^fej^g OF CONTENTS, Rulings, Regulations, Opinions and Decisions under the Occupations Tax Law Provisions. living Treasury decision . Number or other Designation,, . General Subject Content; Date of Issue, arid Paragraph References. T: t>. Subject Paragraph Law provisions : ; ; ; ; .'. ; '. " '. i ; ', '. . 7500 Meg. 59 Regulation^ Under 1921 jaw (issue of July 20, 1922) relating to the : special taxes on businesses and occupations and on the use of boats. .(See exhaustive Table 7537 of Contents beginning on page 15 13.) ........... ..- 7537 5309 Art. 22, Reg. 59 (1918 &qt)j amended;— theater ; ., . , special tax: population (March 20, 1922) . .. 7663 S33T Arts. 6(g) and 7, Reg. 59, (1918 Act), amended,^ Brokers: Persons liable and not liable to tax - , , (Nfay 13, I9;22). ..j.... 7665 Decision 1 tothran & Conn ally. vs. JJ . , S. 0 4th Circuit Cour-t of.A'ppeals, — Tobacco warehousemen as brokers jOict. :2I, 1 922), ;;., 4 , ........ . . . . ........ 7667 3443 TV D. desjgnationTor-tlve; Cothran & (ponnally de- cision above/ (Nov.' 24, 1922) .'.'. .'. . ..'.'.'. 7674 > iteeti^his^'^in^e^ately before "the yeuow guide card" "Miscellaneous " Matter^. Copyright mi. by The Corporation Trust Company i 9 I ( 0 1-2-22. MISCELLANEOUS MATTERS HAVING A GENERAL APPLICATION BEING IN THE MAIN MISCELLANEOUS SECTIONS OF TITLE XIII AND TITLE XIV OF THE REVENUE ACT OF 1921. General Administrative, Special, and Stamp Tax Provisions of Law Extended to Apply to Revenue Act of 1921. 8000 (Law.) Sec. 1300 [of the Revenue Act of 1921]. That all adminis- trative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person liable to any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe. Statements May be Required of any Person. i3YJ*qx£} on JbHT .[I£QI \o JdA sunsvsJI oih \o] (?0fcl (.wbJ) 8008 8001 (Law.) Sec. 1307 [of the Revenue Act of 1921]. That whenever in the judgment of the Commissioner necessary he may require any person, by notice served upon him, to make a return or such statements as he deems sufficient to show whether or not such person is liable to tax. Examination of Books and Witnesses. 8002 (Law.) Sec. 1308 [of the Revenue Act of 1921]. That the Com- missioner, for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been made, is hereby authorized, by any revenue agent or inspector designated by him for that purpose, to examine any books, papers, records, or memoranda bearing upon the matters required to be included in the return, and may require the attendance of the person rendering the return or of any officer or employee of such person, or the attendance of any other person having knowledge in the premises, and may take his testimony with reference to the matter required by law to be included in such return, with power to administer oaths to such person or persons. Jurisdiction of Courts. 8003 (Law.) Sec. 1310 [of the Revenue Act of 1921]. (a) That if any person is summoned under this Act to appear, to testify, or to produce books, papers or other data, the district court of the United States for the district in which such person resides shall have jurisdiction by appro- priate process to compel such attendance, testimony, or production of books, papers, or other data. S004 (b)^The district courts of the United States at the instance of the United States are hereby invested with such jurisdiction to make and issue, both in actions at law and suits in equity, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders Copyright 1922, by The Corporation Trust Company. WAR TAX . 1601 SERVICE 1-2-22. Ml SCELLANEOI iS LAW PROVISIONS AND REGULATIONS. and process, and to render such judgments and decrees, granting in proper cases both legal and equitable relief together, as may be necessary or appro- priate for the enforcement of the provisions of this Act. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such provisions. SC05 (c) Paragraph Twentieth of section 24 of the Judicial Code is amended by adding at the end thereof the following new paragraph: "Concurrent with the Court of Claims, of any suit or proceeding, com- menced after the passage of the Revenue Act of 1921, for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected, under the internal-revenue laws, even if the claim exceeds $10,000, if the collector of internal-revenue by whom such tax, penalty, or sum was collected is dead at the time such suit or proceeding is commenced." Unnecessary Examinations. 800@ (Law.) Sec. 1309 [of the Revenue Act of 1921]. That no taxpayer shall be subjected to unnecessary examinations or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Com- missioner, after investigation, notifies the taxpayer in writing that an ad- ditional inspection is necessary. .39329iijiW^ DfiB gjfooS io noil£nimBx3 Final Determinations and Assessments. 8007 (Law.) Sec. 1312 [of the Revenue Act of 1921]. That if after a determination and assessment in any case the taxpayer has without protest paid in whole any tax or penalty, or accepted any abatement, credit, or refund based on such determination and assessment, and an agreement is made in writing between the taxpayer and the Commissioner, with the approval of the Secretary, that such determination and assessment shall be final and conclusive, then (except upon a showing of fraud or malfeasance or misrepresentation of fact materially affecting the determination or assess- ment thus made) (1) the case shall not be reopened or the determination and assessment modified by any officer, employee, or agent of the United States, and (2) no suit, action, or proceeding to annul, modify, or set aside such determination or assessment shall be entertained by any court of the United StateS * [IS#1 tO SoA 3UfI3/y^ sdt ) Administrative Review. 8008 (Law.) Sec. 1313 [of the Revenue Act of 1921]. That in the absence of fraud or mistake in mathematical calculation, the findings of facts in and the decision of the Commissioner upon (or in case the Secretary is authorized to approve the same, then after such approval) the merits of any claim presented under or authorized by the internal-revenue laws shall not be subject to review by any other administrative officer, employee, or agent of the United States. Copyright 1922, by The Corporation Trust Company. WAR TAX 1602 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. Rules and Regulations to be Made by the Commissioner. 8009 (Law.) Sec. 1303 [of the Revenue Act of 1921]. That the Com- missioner, with the approval of the Secretary, is hereby authorized to make all needful rules and regulations for the enforcement of the pro- visions of this Act. Swearing to Certain Returns May be Waived. 8010 The Commissioner, with such approval may by regulation provide that any return required by Titles* V, VI, VII, VIII, IX, or X to be under oath may, if the amount of the tax covered thereby is not in excess of $10, be signed or acknowledged before two witnesses instead of under oath. *Titie V. Facilities. Title VI. Beverages. Title VII. Tobacco. Title VIII. Admissions and Dues. Title IX. Excise Taxes. Title X. Special Taxes. Retroactive Regulations. 8011 (Law.) Sec. 1314 [of the Revenue Act of 1921]. That in case a regulation or Treasury decision relating to the internal-revenue laws made by the Commissioner or the Secretary, or by the Commissioner with the approval of the Secretary, is reversed by a subsequent regulation or Treasury decision, and such reversal is not immediately occasioned or required by a decision of a court of competent jurisdiction, such subsequent regulation or Treasury decision may, in the discretion of the Commissioner, with the approval of the Secretary, be applied without retroactive effect. Method of Collecting Tax. tO f D9DJiV3 XfiJ'SIU' IO jflUOfttfi 3X1} TO /JlBfWq B 0J -Slid Jill 30 Wfil vd bobivoiq- 8012 (Law.) Sec. 1301 [of the Revenue Act of 1921]. That whether or not the method of collecting any tax imposed by Titles *V, VI, VII, VIII, IX, or X of this Act is specifically provided therein, any such tax may, under regulations prescribed by the Commissioner with the approval of the Secretary, be collected by stamp, coupon, serial-numbered ticket, or such other reasonable device or method as may be necessary or helpful in securing a complete and prompt collection of the tax. All administrative and penalty provisions of Title XI [Stamp Taxes], in so far as applicable, shall apply to the collection of any tax which the Commissioner determines or prescribes shall be collected in such manner. "Title V. Facilities. Title VI. Beverages. Title VII. Tobacco. Title VIII. Admissions and Dues. Title IX. Excise Taxes. Title X. Special Taxes. Copyright 1922, by The Corporation Trust Company. WAR TAX 1603 SERVICE 1-2-22. MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. Assessments. 8013 (Law.) Sec. 1322 [of the Revenue Act of 1921]. That all internal revenue taxes, except as provided in section 250 [Income and Excess- Profits Taxes] of this Act, shall, notwithstanding the provisions of section 3182 of the Revised Statutes or any other provision of law, be assessed within four years after such taxes became due, but in the case of fraud with intent to evade tax or willful attempt in any manner to defeat or evade tax, such tax may be assessed at any time. sbivoiq jnofjjslugsi ycF YJ>rn IjsvoiqqB douz rfjiw .i^noiggifrixnoO 3rIT Of 08 Penalty for Failure to Pay, Collect, Account for or Pay over any Tax, or for Failure to Make a Return. 8014 (Law.) Sec. 1302 [of the Revenue Act of 1921]. (a) That any person required under Titles *V, VI, VII, VIII, IX, X, or XII, to pay, or to collect, account for and pay over any tax, or required by law or regulations made under authority thereof to make a return or supply any information for the purposes of the computation, assessment, or collection of any such tax, who fails to pay, collect, or truly account for and pay over any such tax, make any such return or supply any such information at the time or times required by law or regulations shall in addition to other penalties provided by law be subject to a penalty of not more than $1,000. 801 5 (b) Any person who willfully refuses to pay, collect, or truly account for and pay over any such tax, make such return or supply such information at the time or times required by law or regulation, or who willfully attempts in any manner to evade such tax, shall be guilty of a mis- demeanor and in addition to other penalties provided by law shall be fined not more than $10,000 or imprisoned for not more than one year, or both, together with the costs of prosecution. 801 6 (c) Any person who willfully refuses to pay, collect, or truly account for and pay over any such tax shall in addition to other penalties provided by law be liable to a penalty of the amount of the tax evaded, or not paid, collected, or accounted for and paid over, to be assessed and col- lected in the same manner as taxes are assessed and collected: Provided, however, That no penalty shall be assessed under this subdivision for any offense for which a penalty may be assessed under authority of section 3176 [^[8071] of the Revised Statutes, as amended, or for any offense for which a penalty has been recovered under section 3256 [Distilled Spirits] of the Revised Statutes. 8017 (d) The term "person" as used in this section includes an officer or employee of a corporation or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs. ♦Title V. Facilities. Title VI. Beverages. Title VII. Tobacco. Title VIII. Admissions and Dues. Title IX. Excise Taxes. Title X. Special Taxes. Title XII. Child Labor. Copyright 1922, by The Corporation Trust Company. WAR TAX 1604 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. Overpayments and Overcollections of Taxes. 8013 (Law.) Sec. 1304 [of the Revenue Act of 1921]. That in the case of any overpayment or overcollection of any tax imposed by section 602 [Cereal beverages, etc.] or by Title V [Facilities], Title VIII [Admissions and Dues], or Title IX [Excise or sales taxes], the person making such over- payment or overcollection may take credit therefor against taxes due upon any monthly return, and shall make refund of any excessive amount collected by him upon proper application by the person entitled thereto. Fractional Parts of a Cent in Payment of Tax. 8019 (Law.) Sec. 1306 [of the Revenue Act of 1921]. That in the pay- ment of any tax under this Act not payable by stamp a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent. Payment of Taxes by Check or United States Securities. 8020 (Law.) Sec. 1325 [of the Revenue Act of 1921]. That collectors may receive, at par with an adjustment for accrued interest, notes or certificates of indebtedness issued by the United States and uncertified checks in payment of income, war-profits and excess-profits taxes and any other taxes payable other than by stamp, during such time and under such regulations as the Commissioner, with the approval of the Secretary, shall prescribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered. Articles Exported. 8021 (Law.) Sec. 1305 [of the Revenue Act of 1921]. That under such rules and regulations as the Commissioner with the approval of the Secretary may prescribe, the taxes imposed under the provisions of Titles VI, VII or IX shall not apply in respect to articles sold or leased for export and in due course so exported. Under such rules and regulations the amount of any internal-revenue tax erroneously or illegally collected in respect to exported articles may be refunded to the exporter of the article, instead of to the manufacturer, if the manufacturer waives any claim for the amount so to be refunded. Claims for Refund and Abatement of Taxes. 8022 (Law.) Sec. 1315 [of the Revenue Act of 1921]. That section 3220 of the Revised Statutes, as amended, is reenacted* without change. as follows: Section 3220 of the Revised Statutes. 8023 "Sec. 3220. The Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, is author- ized to remit, refund, and pay back all taxes erroneously or illegally as- sessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive in amount, or in any man- Copyright 1922, by The Corporation Trust Company. WAR TAX 1605 SERVICE MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. ner wrongfully collected; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered against him in any court, for any internal revenue taxes collected by him, with the cost and expenses of suit; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of anything done in the due performance of his official duty, and shall make report to Con- gress at the beginning of each regular session of Congress of all transac- tions under this section. " 8024 Allowance for and redemption of Internal Revenue Stamps. — Form 46. — The Act entitled "An Act authorizing the Commissioner of Internal Revenue to redeem or make allowance for internal revenue stamps," approved IVlay 12, 1900, (as amended by the act of June 30, 1902 [32 stat., 506]) provides: That the Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, may, upon receipt of satisfactory evidence of the facts, make allowance for or redeem such of the stamps, issued under authority of law, to denote the payment of any internal-revenue tax, as may have been spoiled, destroyed, or rendered useless or unfit for the purpose intended, or for which the owner may have no use, or which through mis- take may have been improperly or unnecessarily used, or where the rates or duties represented thereby have been excessive in amount, paid in error, or in any manner wrongfully collected. Such allowance or redemption may be made, either by giving other stamps in lieu of the stamps so allowed for or redeemed, or by refunding the amount or value to the owner thereof deducting therefrom, in case of repayment, the percentage, if any, allowed to the purchaser thereof; but no allowance or redemption shall be made in any case until the stamps so spoiled or rendered useless shall have been re- turned to the Commissioner of Internal Revenue, or until satisfactory proof has been made showing the reason why the same cannot be returned; or, if so required by the said Commissioner, when the person presenting the same can not satisfactorily trace the history of said stamps from their issuance to the presentation of his claim as aforesaid. * * * 8025 Provided further J That no claim for the redemption of or allowance for stamps shall be allowed unless presented within two years after he purchase of said stamps from the government. * * * 8026 Sec. 2. That the finding of facts in and the decision of the Com- missioner of Internal Revenue upon the merits of any claim presented under or authorized by this Act shall, in the absence of fraud or mistake in mathematical calculation, be final and not subject to revision by any account- ng officer. 8027 Sec. 3. That all laws and parts of laws in conflict with any of the provisions of this Act are hereby repealed. 8028 Redemption of stamps not affixed to documents or articles. — Claims for the allowance for or redemption of unused stamps must be made on Form 46, and the facts relied upon in support of the claim should be clearly Copyright 1922, by The Corporation Trust Company. WAR TAX 1606 SERVICE 1-2-22. MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. set forth under oath. The claim should be made by the bona fide owner of the stamps presented for allowance or redemption or an agent or representa- tive of such owner. [For copy of Form 46, see page 1609. J 8029 The claim should be supported by the certificate of the deputy collector who personally investigated the statements made by the claimant, setting forth, after careful inquiry, his belief as to the statements therein made, and by the certificate of the collector from whom the stamps were purchased, setting forth the date of purchase, by whom pur- chased, kind of stamps, denomination, number and amount, and his certi- ficate that the facts set forth in the affidavit of the claimant have been carefully investigated under his direction, and his opinion as to the truth or falsity of said statements, together with such recommendation as to the allowance or disallowance of said claim as in his opinion seems just and proper. 803© All claims shall be forwarded to the Commissioner of Internal Revenue for examination, and he may, when he deems it necessary to complete the evidence of the facts set forth in any claim, require additional state- ments, certificates, or affidavits from the claimant, collector, or any other person, and may cause such investigation to be made and such instructions complied with as in his opinion are necessary to a proper adjustment of the claim. \o injjoni£ fnslsvhipa ri£ aworl?, rtairlw sDfwbr/s lo noiaa^oq ni g'r lanoiaeira 8031 Redemption of stamps affixed to documents or articles.— In cases v/here documentary or proprietary stamps have been affixed to instruments or articles not requiring them, and canceled, or where, by error, stamps of greater value than that required by law have been used, claims for the amounts paid in error or in excess should be made on Form 46, accom- panied by the stamps, and, where practicable, by the instruments to which the stamps have been erroneously attached, or certified copies thereof. [For copy of Form 46, see page 1609.] These instructions as to the use of Form 46 will also apply to cases where an instrument is duly stamped and is accidentally injured or found to be defective, and a substitute is prepared and duly stamped, or where the instrument is not used. (Extract from Regula- tions No. 14, Revised, published January 25, 1916.) 8032 Forms 46 and 47 on which to present Claims for refund and abate- ment of taxes. — [For copy of Form 46, see page 1609 and for copy of Form 47, see page 1611.] Claims for the refunding of assessed taxes and penalties must be made out upon Form 46. In this case, as in that of claims for abatement upon Form 47, the burden of proof rests upon the claimant. All the facts relied upon in support of the claim should be clearly set forth under oath. The claim should be still further supported by an affidavit of the deputy collector of the proper division, and by the certificate of the collector. (Extract from Regulation No. 14, Revised, published Tanuarv 25, 1916.) 8033 Claims for abatement abatement of taxes penalties erroneously or illegally assessed or which are abatable under remedial acts, etc., must be made out upon Form 47, and must be sustained by the affidavits of the parties against whom the taxes are assessed, or of other parties cog- nizant of the facts, and must be accompanied by affidavits of the deputy collectors of the divisions in which the claims arise. (Extract from Regulation No. 14, Revised, published January 25, 1916.) Copyright 1922, by The Corporation Trust Company. WAR TAX 1607 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. 8034 Claim for abatement stays 5% penalty until claim is rejected. — "When an assessment is made for a tax or penalty and demand made for payment, if a claim for abatement (Form 47) is filed within ten days after such demand, and accepted by the collector, the time ceases to run against the claimant as to five per cent, penalty until the claim is rejected. Upon receipt of the notice of rejection of the claim, the collector should immediately notify the party assessed and demand the payment of the tax; if the tax is not then paid within ten days after mailing of the notice to the claimant by the collector of the rejection of the claim, the five per cent, penalty accrues. Interest at one per cent, per month continues to run and should be collected with the tax at the time of payment for the full number of calendar months which intervene between the date of the expiration of the first ten days' notice and the date of the payment of the tax, notwithstanding the fact that a claim for abatement has been filed." (Paragraph from Regulation No. 14, dated January 25, 1916.) 8035 Abatement of assessments as erroneous or illegal when an equiva- lent amount of tax is properly due. — The validity of an assessment depends upon the law and actual facts existing. Therefore, an assessment made upon an erroneous theory or by mistake may not be remitted or abated because so made if, at the time its validity is passed upon, the Com- missioner is in possession of evidence which shows an equivalent amount of tax is properly due in connection with the income, transaction or matter upon which the assessment is predicated. (T. D. 3251, signed by Commis- sioner D. H. Blair, and dated November 25, 1921.) Interest on Refunds and Judgments. 8036 (Law.) Sec. 1324 [of the Revenue Act of 1921]. (a) That upon the allowance of a claim for the refund of or credit for internal revenue taxes paid, interest shall be allowed and paid upon the total amount of such refund or credit at the rate of one-half of 1 per centum per month to the date of such allowance, as follows: (1) if such amount was paid under a specific protest setting forth in detail the basis of and reasons for such protest, from the time when such tax was paid, or (2) if such amount was not paid under protest but pursuant to an additional assessment, from the time such additional assessment was paid, or (3) if no protest was made and the tax was not paid pursuant to an additional assessment, from six months after the date of filing of such claim for refund or credit. The term "ad- ditional assessment" as used in this section means a further assessment for a^tax of the same character previously paid in part. 8037 (b) Section 177 of the Judicial Code is amended to read as follows: "Sec. 177. No interest shall be allowed on any claim up to the time of the rendition of judgment by the Court of Claims, unless upon a contract expressly stipulating for the payment of interest, except that interest may be allowed in any judgment of any court rendered after the passage of the Revenue Act of 1921 against the United States for any internal-revenue tax erroneously or illegally assessed or collected, or for any penalty collected with- out authority or any sum which was excessive or in any manner^wrongfully collected, under the internal-revenue laws." Copyright 1922, by Tht Corporation Trust Compony. WAR TAX 1608 SERVICE 2-10-22. MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. TREASURY DEPARITiEtfT iNTFRNAl RFVEWL SFEV1CK Form 3«S-J»n , 193 Coicrtrollcr Ocacr:il V. S. January IS, 1952 IMfORT.VNT File Uith Collector of Internal Revenue inhere nssessmcrd veos made. Not acceptable unless completely filled in. CLAIM FOR ] ABATEMENT OF TAX ASSESSED J CREDIT AGAINST OUTSTANDING ASSESSMENTS j REFUND OF TAXES ILLEGALLY COLLECTED J REFUND OF AMOUNTS PAID FOR STAMPS USED IN ERROR OR EXCESS *T COtT-FCTOTVS NOTATION ^:au cy ... Courdy cf AJ3i:tu!f»t,vii Unit DlsbM Account number TYPE OR PRINT axpayer or purciii (Residence— give St veil as ci!y or town and State.) (Easiness address., This deponent, bc;T)<» duly sworn' according to law, deposes ?nd saya that this statement is made on behalf of the taxpayer named, and it the facts given beiovT with reference to aiid statement are true and complete: pehioo — ; YEAR 1. Business ir. which engaged 2. Character of assessment or tax. 3. 4. (Sty!" fir or upon ' he tax vrzs assessed or the stamps affixed.) •flxjouiii. ui aascA*meui or hi Reduction of T?.n Liabiiit> requested "'Income and Prof t3 Tax) $ Amount to be abated fi. Amount to be refunded (or such greater amount as is legally refundable) 7. Dates of payment (see Collector'.! receipts or indorsements oi canceled checks) (If statement covers income tax liability, items 8-11, inclusive, must be an 8. District in which return (if any) was filed S. District in which unpaid asses-'n-ent appears 10. Amount of overpayment claimed as credit 11. Unpaid aFsesrmcnt against which credit is asked; period from Deponent verily believes that this application should be allowed for the following r (At tarn additions] sheets U necessary.; Sworn to and subscribed before me this « day Signed: oi ii. , 19 i lo m.ia r.ffidaTit may be toji lo before s deputy Collector of Interna] Sevccae u K«v«nu« Agent without charge.) t2-H7pt , [Page 1 of Form 843.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1609 SERVICE 2-10-22. MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. CERTIFICATES I certify that an examination of the records o." the Bureau of Internal Revenue shows the following facts as tr the assessment and payment of the tax: NAKE or TAXPAYER. Character of csossmcnt and period covered. List. Year. Month. Page. Line. Amount. Date paid. Dlstri-t In ? wh.cb paid $ : • <■ ■ | Collector of Internal Revenue. Assessment Clerk, Commission^' s Office. I certify that the records of my office show the following facts as to the purchase of stamps: TO WHOM SOLD OE ISSUED Kind. Number Denomination Date of sale or issue. Amount. If special tax stamp, state: Serial numbT rcriod commencing - $ 1 District... Schedule Number Allowed or Rejected Number. Claimant Address District. (Nature of Uje.) Examined und submitted for action . uwm cxar inel oy— Claim approved by— C.V/n//>li>uion. Amount claimed--. $. Amount allowed... $. Amount rejected... %. COMMITTEE ON CLAIMS [Page 2 of Form 843-1 Copyright 1922, by The Corporation Trust Company. WAR TAX 1610 SERVICE 2-10-22. MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. This page and page 1612 formerly carried Form 47. Old Form 46. — Claim for refund, Old Form 47. — Claim for abatement, Old Form 47A.- Claim for credit, have been superseded by Form 843 For which see pages 1609-1610. WAR TAX 1611 SERVICE MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. This page is blank. WAR TAX 1612 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. Suits to Restrain Assessment or Collection of Taxes. Section 3224 of the Revised Statutes 8038 "No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." Decision. (February 21, 1916.) Supreme Court of the United States. John F. Dodge and Horace E. Dodge, Appellants vs. W. H. Osborn, Commissioner of Internal Revenue. (240 U. S. 118.) Mr. Chief Justice White delivered the opinion of the Court. 8039 The appellants filed their bill in the Supreme Court of the District of Columbia against the Commissioner of Internal Revenue to en- join the assessment and collection of the taxes imposed by the Income Tax section of the Tariff Act of October 3, 1913 (38 Stat. 166, 181), and especially the surtaxes therein provided for on the ground that the statute was void for repugnancy to the Constitution of the United States. The case is here on appeal from the judgment of the court below affirming the action of the trial court in sustaining a motion to dismiss the complaint for want of juris- diction because the complainants had an adequate remedy at law and because of the provision of section 3224 Revised Statute that "No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." 8040 We at once put our of view a contention that section 3224 is not applicable to taxes imposed by the Income Tax Law since we are clearly of the opinion that it is within the contemplation of paragraph L of the act which provides: 8041 "That all administrative, special and general provisions of law, including the laws in relation to the assessment, remission, collection, and refund of internal-revenue taxes not heretofore specifically repealed and not inconsistent with the provisions of this section, are hereby extended and made applicable to all the provisions of this section and to the tax herein imposed." And for the same reason we do not further notice a contention as to the inapplicability of sections 3220 [1J8021], 3226 [H8048] and 3227 [H8049], to which effect was given by the court below requiring an appeal to the Commissioner of Internal Revenue after payment of a tax claimed to have been erroneously and illegally assessed and collected and upon his refusal to return the sum paid giving a right to sue for its recovery. 8042 The question for decision therefore is whether the sections of the Revised Statutes referred to are controlling as to the case in hand. The plain purpose and scope of the sections are thus stated in Snyder v. Marks, 109 U. S. 189, 193-194, a suit brought to enjoin the collection of a revenue tax on tobacco: "The inhibition of Section 3224 applies to all assessments of taxes, made under color of their offices, by internal revenue officers charged with general jurisdiction of the subject of assessing taxes against tobacco manufacturers. Copyright 1922, by The Corporation Trust Company. WAR TAX 1613 SERVICE -2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. The remedy of a suit to recover back the tax after it is paid is provided by statute, and a suit to restrain its collection is forbidden. The remedy so given is exclusive, and no other remedy can be substituted for it. Cheatham v. United States, 92 U. S. 85, 88, and again in State Railroad Tax Cases, 92 U. S. 575, 613, it was said by this court, that the system prescribed by the United States in regard to both customs duties and internal revenue taxes, of stringent measures, not judicial, to collect them, with appeals to specified tribunals, and suits to recover back moneys illegally exacted was a system of corrective justice intended to be complete, and enacted under the right belonging to the government to prescribe the conditions on which it would subject itself to the judgment of the courts in the collection of its revenues. In the exercise of that right, it declares, by section 3224, that its officers shall not be enjoined from collecting the tax claimed to have been unjustly assessed, when those officers, in the course of general jurisdiction over the subject matter in question, have made the assignment (assessment) and claim that it is valid." And this doctrine has been repeatedly applied until it is no longer open to question that a suit may not be brought to enjoin the assessment or col- lection of a tax because of the alleged unconstitutionality of the statute imposing it. Shelton v. Piatt, 139 U. S. 591; Pittsburgh, etc., Ry. v. Board of Public Works, 172 U. S. 32; Pacific Whaling Company v. United States, 187 U. S. 447, 451,452. 8043 But it is contended that this doctrine has no application to a case where wholly independent of any claim of the constitutionalty of the tax sought to be enjoined, additional equities sufficient to sustain jurisdiction are alleged, and this, it is asserted, being such a case, falls within the exception to the general rule. But conceding for argument's sake only the legal premise upon which the contention rests, we think the conclusion that this case falls within such exception is wholly without merit, since after an examination of the complaint we are of the opinion that no ground for equitable jurisdiction is alleged. It is true the complaint contains aver- ments that unless the taxes are enjoined many suits by other persons will be brought for the recovery of the taxes paid by them, and also that by reason of section 3187 Rev. Stat, making the tax a lien on plaintiffs' property the assessment of the taxes would constitute a cloud on plaintiffs' title. But these allegations are wholly inadequate under the hypothesis which we have assumed solely for the sake of the argument, to sustain jurisdiction, since it is apparent on their face they allege no ground for equitable relief independent of the mere complaint that the tax is illegal and unconstitutional and should not be enforced — allegations which if recognized as a basis for equitable jurisdiction would take every case where a tax assailed because of its uncon- stitutionality out of the provisions of the statute and thus render it nugatory, while it is obvious that the statute plainly forbids the enjoining of a tax unless by some extraordinary and entirely exceptional circumstance its provisions are not applicable. 8044 There is a contention that the provisions requiring the appeal to the Commissioner of Internal Revenue after payment of the taxes and giving a right to sue in case of his refusal to refund are wanting in due process and therefore there is jurisdiction. But we think it suffices to state that contention to demonstrate its entire want of merit. AFFIRMED. [240 U. S. 118] Copyright 1922, by The Corporation Trust Company. WAR TAX 1614 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. Decision. (January 31, 1917.) Suit to Enjoin Collection of Penalties. District Court, N. D. Illinois, E. D. Kohlhamer vs. Smietanka, Collector. (239 Fed. 408.) iU2 11)6 8045 While Section 3224 R. S. [1(8038] which prohibits suits to enjoin the collection of internal revenue taxes, does not specifically include "penalties" as such, yet where penalties are authorized by statute to be added to the tax and collected as a part of the tax, the court will hold that the penalty is a part of the tax, the assessment and collection of which are governed by Section 3224. (239 Fed. 408.) Fraudulent Returns. 8046 (Law.) Sec. 1323 [of the Revenue Act of 1921]. That section 3225 of the Revised Statutes of the United States, as amended, is re- enacted without change as follows: c .-. . .anobnaaaot^ LsniinhO no nohaJiraiJ Section 3225 of the Revised Statutes. 8047 "Sec. 3225. When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fradulent, or contained any understatement or undervaluation, such assessment shall not be remitted, nor shall taxes collected under such assessment be refunded, or paid back, or recovered by any suit, unless it is proved that such list, statement, or return was not willfully false or fradulent and did not contain any willful understatement ©^undervaluation." Limitations Upon Suits and Prosecutions. 8048 (Law.) Sec. 1318 [of the Revenue Act of 1921]. That section 3226 of the Revised Statutes is amended to read as follows: Section 3226 of the Revised Statutes. 8049 "Sec. 3226. No suit or proceeding shall be maintained in any court for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof. No such suit or proceeding shall be begun before the expiration of six months from the date of filing such claim unless the Commissioner renders a decision thereon within that time, nor after the expiration of five years from the date of the payment of such tax, penalty, or sum." Copyright 1922, by The Corporation Trust Company. WAR TAX 1615 SERVICE 1-2-22. MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. 8050 This section shall not affect any suit or proceeding instituted prior to the passage of this Act, but shall apply to all suits and proceedings instituted after the passage of this Act, whether or not barred by prior Acts of Congress. Section 3227 of the Revised Statutes Repealed. 8051 (Law.) Sec. 1319 [of the Revenue Act of 1921]. That section 3227 of the Revised Statutes is hereby repealed but such repeal shall not affect any suit or proceeding instituted prior to the passage of this Act. Five-Year Limitation on Suits. 8052 (Law.) Sec. 1320 [of the Revenue Act of 1921]. That no suit or proceeding for the collection of any internal revenue tax shall be begun after the expiration of five years from the time such tax was due, except in the case of fraud with intent to evade tax, or willful attempt in any manner to defeat or evade tax. This section shall not apply to suits or pro- ceedings for the collection of taxes under section 250 [Income and Excess- Profits Taxes] of this Act, nor to suits or proceedings begun at the time of the passage of this Act. Limitation on Criminal Prosecutions. 8053 (Law.) Sec. 1321 [of the Revenue Act of 1921]. (a) That the Act entitled "An Act to limit the time within which prosecutions may be instituted against persons charged with violating internal-revenue laws," approved July 5, 1884, is amended to read as follows: 8054 "That no person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal-revenue laws of the United States unless the indictment is found or the information instituted within three years next after the commission of the offense: Provided, That the time during which the person committing the offense is absent from the district wherein the same is committed shall not be taken as any part of the time limited by law for the commencement of such proceedings: Provided further, That the provisions of this Act shall not apply to offenses committed prior to its passage: Provided further, That where a complaint shall be instituted before a commissioner of the United States within the period above limited, the time shall be extended until the discharge of the grand jury at its next session within the district: And provided further, That this Act shall not apply to offenses committed by officers of the United States." 8055 (b) Any prosecution or proceeding under an indictment found or information instituted prior to the passage of this Act shall not be affected in any manner by this amendment, but such prosecution or pro- ceeding shall be subject to the limitations imposed by law prior to the passage of this Act. Limitation on Claims for Refund or Credit. 8056 (Law.) Sec. 1316 [of the Revenue Act of 1921]. That^section 3228 of the Revised Statutes is amended to read as follows : Copyright 1922, by The Corporation Trust Company. WAR TAX 1616 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. Section 3228 of the Revised Statutes. 8057 "Sec. 3228. All claims for the refunding or crediting of any internal revenue 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 four years next after payment of such tax, penalty, or sum." 8058 This section, except as modified by section 252 [Income and Excess- Profits Taxes], shall apply retroactively to claims for refund under the Revenue Act of 1916, the Revenue Act of 1917, and the Revenue Act of 1918. Compromises. Section 3229 of the Revised Statutes. 8059 "The Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, may compromise any civil or criminal case arising under the internal-revenue laws instead of commenc- ing suit thereon; and, with the advice and consent of the said Secretary and the recommendation 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 Commis- sioner the opinion of the Solicitor of Internal Revenue, or of the officer acting as such, with his 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." Amendments to Revised Statutes. 8060 (Law.) Sec. 1311 [of the Revenue Act of 1921]. That sections 3164, 3165, 3167, 3172, 3173, and 3176 of the Revised Statutes, as amended, are reenacted, without change, as follows: Duty of Collector to Report Violations of Law to District Attorney. Section 3164 of the Revised Statutes. 8061 "Sec. 3164. It shall be the duty of every collector of internal revenue having knowledge of any willful violation of any law of the United States relating to the revenue, within thirty days after coming into possession of such knowledge, to file with the district attorney of the district in which any fine, penalty, or forfeiture may be incurred, a statement of all the facts and circumstances of the case within his knowledge, together with the names of the witnesses, setting forth the provisions of law believed to be so violated on which reliance may be had for condemnation or conviction." Revenue Officers Who May Administer Oaths. Section 3165 of the Revised Statutes. 8062 "Sec. 3165. Every collector, deputy collector, internal-revenue agent, and internal-revenue officer assigned to duty under an internal-revenue agent, is authorized to administer oaths and to take Copyright 1922, by The Corporation Trust Company. WAR TAX 1617 SERVICE 1-2-22 1 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. 2-2-1 evidence touching any part of the administration of the internal-revenue laws with which he is charged, or where such oaths and evidence are author- ized by law or regulation authorized by law to be taken." Disclosure of Information in Returns. 8063 "Sec. 3167. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or to make known in any manner whatever not provided by law to any person the operations, style of work, or apparatus of any manufacturer or producer visited by him in the discharge of his official duties, or the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any income return, or to permit any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law; and it shall be unlawful for any person to print or publish in any manner whatever not pro- vided by law any income return, or any part thereof or source of income, profits, losses, or expenditures appearing in any income return; and any offense against the foregoing provision shall be a misdemeanor and be pun- ished by a fine not exceeding $1,000 or by imprisonment not exceeding one year, or both, at the discretion of the court; and if the offender be an officer or employee of the United States he shall be dismissed from office or dis- charged from employment. wrfio 3xL) )o to ^unsvsil {fcrnojnl Jto ioibiloS sdJ lo noinjqo adl ignore Canvass of Districts for Objects of Taxation. Section 3172 of the Revised Statutes. 8064 "Sec. 3172. Every collector shall, from time to time, cause his deputies to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal revenue tax, and all persons owning or having the care and management of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects. Annual and Other Returns. Section 3173 of the Revised Statutes. 8065 "Sec. 3173. It shall be the duty of any person, partnership, firm, association, or corporation, made liable to any duty, special tax, or other tax imposed by law, when not otherwise provided for, (1) in case of a special tax, on or before the thirty-first day of July in each year, and (2) in other cases before the day on which the taxes accrue, to make a list or return, verified by oath, to the collector or a deputy collector of the district where located, of the articles or objects, including 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, with the ap- proval of the Secretary of the Treasury, for which such person, partnership, firm, a ssociation, or corporation is liable: 8066 "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, ai tides or objects liable to pay any duty Copyright 1922, by The Corporation Trust Comp—y. WAR TAX 1618 SERVICE 1_2 " 22 * MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. 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 as 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 by the person so owning, possessing, or having the care and management as aforesaid, may be received as the list of such person: 8067 "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 a 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 in the nearest post office, a note or memorandum addressed to such person, requir- ing 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. 8068 "And if any person, on being notified or required as aforesaid, shall refuse or neglect to render such list or return within the time re- quired 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 theme it required, or delivers any return which, in the opinion of the collector, is erroneous, false, or fraudulent, or contains any undervaluation or under- statement, or refuses to allow any regularly authorized Government officer to examine the books of such person, firm, or corporation, it shall be lawful for the collector to summon such person, or any other person having posses- sion, 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 any time and place named in the sum- mons, and to give testimony or answer interrogatories, under oath, respect- ing any objects or income liable to tax or the returns thereof. 8069 "The collector may summon any person residing or found within the State or Territory in which his district lies; and when the person intended to be summoned does not reside and can not be found within such State or Territory, he may enter any collection district where such person may be found and there make the examination herein authorized. And to this end he may there exercise all the authority which he might lawfully exercise in the district for which he was commissioned: 8070 "Provided, That 'person,' as used in this section, shall be construed to include any corporation, joint-stock company or association, orjinsurance company when such construction is necessary to carry out its provisions." Proceedings When No Return or a False Return is Made. Section 3176 of the Revised Statutes. 8071 "Sec. 3176. If any person, corporation, company, or associa- tion fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, willfully or Copyright 1922, by The Corporation Trust Company. WAR TAX 1619 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such informa- tion as he can obtain through testimony or otherwise. In any such case the Commissioner may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes. 8072 "If the failure to file a return or list is due to sickness or absence, the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper. 8073 "The Commissioner of Internal Revenue shall determine and assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. In case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to the tax 50 per centum of its amount. 8074 "The amount so added to any tax shall be collected at the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax." Deposit of United States Bonds or Notes in Lieu of Surety. 8075 (Law.) Sec. 1329 [of the Revenue Act of 1921]. That wherever by the laws of the United States or regulations made pursuant thereto, any person is required to furnish any recognizance, stipulation, bond, guar- anty, or undertaking, hereinafter called "penal bond," with surety or sureties, such person may, in lieu of such surety or sureties, deposit as security with the official having authority to approve such penal bond, United States Liberty bonds or other bonds or notes of the United States in a sum equal at their par value to the amount of such penal bond required to be furnished, together with an agreement authorizing such official to collect or sell such bonds or notes so deposited in case of any default in the performance of any of the conditions or stipulations of such penal bond. The acceptance of such United States bonds or notes in lieu of surety or sureties required by law shall have the same force and effect as individual or corporate sureties, or certified checks, bank drafts, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds or notes deposited here- under and such other United States bonds or notes as may be substituted therefor from time to time as such security, may be deposited with the Treasurer of the United States, a Federal reserve bank, or other depositary duly designated for that purpose by the Secretary, which shall issue receipt therefor, describing such bonds or notes so deposited. As soon as security for the perfomance of such penal bond is no longer necessary, such bonds or notes so deposited, shall be returned to the depositor: Provided, That in case Copyright 1922, by The Corporation Trust Company. WAR TAX 1620 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. a person or persons supplying a contractor with labor or material as provided by the Act of Congress, approved February 24, 1905 (33 Stat. 811), entitled "An Act to amend an Act approved August thirteenth, eighteen hundred and ninety-four, entitled 'An Act for the protection of persons furnishing materials and labor for the construction of public works/ " shall file with the obligee, at any time after a default in the performance of any contract subject to said Acts, the application and affidavit therein provided, the obligee shall not de- liver to the obligor the deposited bonds or notes nor any surplus proceeds thereof until the expiration of the time limited by said Acts for the institution of suit by such person or persons, and, in case suit shall be instituted within such time, shall hold said bonds or notes or proceeds subject to the order of the court having jurisdiction thereof: Provided further , That nothing herein contained shall affect or impair the priority of the claim of the United States against the bonds or notes deposited or any right or remedy granted by said Acts or by this section to the United States for default upon any obligation of said penal bond: Provided further, That all laws inconsistent with this section are hereby so modified as to conform to the provisions hereof: And provided further, That nothing contained herein shall affect the authority of courts over the security, where such bonds are^taken as security in judicial proceedings, or the authority of any administrative officer of the United States to receive United States bonds for security in cases authorized by existing laws. The Secretary may prescribe rules and regulations necessary and proper for carrying this section into effect. Prior Acts and Parts of Acts Repealed. 8076 (Law.) Sec. 1400 [of the Revenue Act of 1921]. (a) That the following parts of the Revenue Act of 1918 are repealed, to take effect (except as otherwise provided in this Act) on January 1, 1922, sub- ject to the limitations provided in subdivision (b) : Title II (called "Income Tax") as of January J, 1921; Title III (called "War-Profits and Excess-Profits Tax") as of January 1, 1921; Title IV (called "Estate Tax") on the passage of this Act; Title V (called "Tax on Transportation and other Facilities, and on Insurance"); Sections 628, 629, and 630 of Title VI (being the taxes on soft drinks, ice cream, and similar articles); Title VII (called "Tax on Cigars, Tobacco and Manufactures Thereof"); Title VIII (called "Tax on Admissions and Dues"); Title IX (called "Excise Taxes"); Title X (called "Special Taxes"); Title XI (called "Stamp Taxes"); Title XII (called "Tax on Employment of Child Labor") as of J? , y 1921; and Copyright 1922, by The Corporation Trust Company. WAR TAX 1621 SERVICE 1-2-22. MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. Sections 1314, 1315, 1316, 1317, 1319, and 1320 of Title III (being certain administrative provisions) on the passage of this Act. Extent to which Prior Acts or Parts of Acts Remain in Force. 807 7 (b) The parts of the Revenue Act of 1918 which are repealed by this Act shall (unless otherwise specifically provided in this Act) remain in force for the assessment and collection of all taxes which have accrued under the Revenue Act of 1918 at the time such parts cease to be in effect, and for the imposition and collection of all penalties or forfeitures which have accrued or may accrue in relation to any such taxes. In the case of any tax imposed by any part of the Revenue Act of 1918 repealed by this Act, if there is a tax imposed by this Act in lieu thereof, the provision im- posing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act. The unexpended balance of any appropriation heretofore made and now available for the administra- tion of any such part of the Revenue Act of 1918 shall be available for the administration of this Act or the corresponding provision thereof. Short Titles. Yd b^shodJuE rii ft'nvo^?. io\ ?hnod sst&tS fiblinU sviso&i 01 asifuS Revenue Act of 1916. 8078 (Law.) Sec. 1403 [of the Revenue Act of 1918]. That the Revenue Act of 1916 is hereby amended by adding at the end thereof a section to read as follows: 8079 "Sec. 903. That this Act may be cited as the 'Revenue Act of 1916/ " Revenue Act of 1917. 8080 (Law.) Sec. 1404 [of the Revenue Act of 1918]. That the Revenue Act of 1917 is hereby amended by adding at the end thereof a section to read as follows: 8081 "Sec. 1303. That this Act may be cited as the 'Revenue Act of 1917.' " Revenue Act of 1918. 8082 (Law.) Sec. 1405 [of the Revenue Act of 1918]. That this Act may be cited as the "Revenue Act of 1918." Revenue Act of 1921. 8083 (Law.) Sec. 1 [of the Revenue Act of 1921]. That this Act may be cited as the "Revenue Act of 1921." General Definitions. 8084 (Law.) Sec. 2 [of the Revenue Act of 1921]. That when used in this Act — 8085 (1) The term "person" includes partnerships and corporations, as well as individuals; Copyright 1922, by The Corporation T rust Company. WAR TAX 1622 SERVICE 1-2-22 MISCELLANEOUS LAW PROVISIONS AND REGULATIONS. 8086 (2) The term "corporation" includes associations, joint-stock com- panies, and insurance companies; 8087 (3) The term "domestic" when applied to a corporation or partner- ship means created or organized in the United States; 8088 (4) The term "foreign" when applied to a corporation or partnership means created or organized outside the United States; 8089 (5) The term "United States" when used in a geographical sense includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia; 8090 (6) The term "Secretary" means the Secretary of the Treasury; 8091 (7) The term "Commissioner" means the Commissioner of Internal Revenue; 8092 (8) The term "collector" means collector of internal revenue; 8093 (9) The term "taxpayer" includes any person, trust or estate subject to a tax imposed by this Act. 8094 (10) The term "military or naval forces of the United States" includes the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female, but this shall not be deemed to exclude other units otherwise included within such terms; and 8095 (11) The term "government contract" means (a) a contract made with the United States, or with any department, bureau, officer, commission, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a con- tractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States. The term "government contract or contracts made between April 6, 1917, and Novem- ber 11, 1918, both dates inclusive" when applied to a contract of the kind referred to in clause (a) of this subdivision, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or may become enforceable by reason of subsequent validation in pursuance of law. Saving Clause in Event of Unconstitutionality. 8096 (Law.) Sec. 1403 [of the Revenue Act of 1921]. That if any pro- vision of this Act, or the application thereof to any person or cir- cumstances, is held invalid, the remainder of the Act, and the application of such provision to other persons or circumstances, shall not be affected thereby. General Effective Date of Act. 8097 (Law.) Sec. 1404 [of the Revenue Act of 1921]. That except as otherwise provided, this Act shall take effect upon its*passage. Approved by the President, November 23, 1921, at 3:55 P. M. Copyright 1922, by The Corporation Trust Company, WAR TAX 1623 SERVICE 03 reos seo8 eeos *eos » I i FORMS, FINDER, ETC. TABLE OF CONTENTS. Page Forms.— Table of "War Tax" Forms 1703 Cases.— Table of Court Cases 1705 1918 Revenue Act Sections. — Table of sections reproduced in this Service with paragraph references 1707 1921 Revenue Act by Sections. — Giving reference to the War Tax Service paragraphs at which the sections are reproduced 1708 Laws. — Table of laws reproduced in this Service 1710 Regulations. — Table of "Regulations" reproduced in this Service 1710 Revised Statutes Sections. — Giving reference to the sections of the Revised Statutes of the United States reported herein 1710 Collectors of Internal Revenue. — Table of Internal Revenue Collection Districts, including names and addresses of Collectors and location of branch offices 1711 Copyright 1922, by The Corporation Trust Company. WAR TAX 1701 SERVICE FORMS, FINDER, ETC. TABLE OF CONTENTS. Page- Forms. — Table of "War Tax" Forms 170." Cases.— Table of Court Cases 1 70- 1918 Revenue Act Sections.— Table of sections reproduced in t hi? Service with paragraph references .. .. '.* 8 ?PIW?W*.PVWWW 1707 1921 Revenue Act by Sections.- — Giving reference to the War Tax Service paragra? A ■< at which the sections are reproduced 170* Laws. — Table of laws reproduced in this Service • 17lf> Regulations. — Table of "Regulations"' reproduced in this Service JT; L . . -.^Aoilslifg^ft) Revised Statutes Sections.— (jiving reference to the sections of the Revised Statutes of the United States reported herein tf iwrl. t>?no/p.i. 39*A*& v: i 1710 Collectors of Internal Revenue. — Table of Internal Revenue Collection District?, including names and addresses of Collectors and location of branch offices 171 i Copyright 1922, by The Corporation Trust Company. WAR TAX 1702 SERVICE FORMS, FINDER, ETC. FORMS. MISCELLANEOUS. No. Designation Page 843 Claim for refund: Claim for abatement: Claim for credit 1609 WAR-PROFITS AND EXCESS-PROFITS TAX. 1120 Corporation income and profits tax return 425 1120S Government contracts profits tax return Insert to face page 425 1122 Information return of subsidiary or affiliated corporation 424 ESTATE TAX. 704 Executor's 60-day notice (resident estates). — 1918 Act 27 704 Executor's 2-month notice (resident estates). — 1921 Act 223 705 Executor's 60-day notice (non-resident estates) — 1918 and 1921 Acts. ... 29 706 Return of Gross Estate — 1918 and 1921 Acts 11 714 Transfer agents' notice: Non-resident decedents — 1918 and 1921 Acts. ... 218 Old Form 714 (page 31) superseded by above. 760 Affidavit of Ownership of Bonds 88 787 Insurance companies' 60-day notice: Resident decedent — Not reproduced. See f20l. [Not in use under 1921 Act.] 788 Insurance companies' 60-day notice: Non-resident decedent — Not repro- duced. See 1[207. [Not in use under 1921 Act.] 791 Application for release of estate tax lien — Not reproduced. See ^278 (1918 Act) and H753 (1921 Act). 792 Certificate releasing estate lien — Not reproduced. See ^"277^(1918 Act) and 1[752 (1921 Act). 793 Claim for military exemption from estate tax. — Not reproduced. See ^[55 (1918 Act) and «[[597 (1921 Act). STAMP TAXES. A Clearing-house and ex-clearing-house transactions 719 B Sales of products or commodities 726 741 Statement for registration — Not reproduced. See ^[3704. 743 Order for stamps: stock certificates — Not reproduced. See ^3736. 744 Order for stamps: sale of products — Not reproduced. See ^[3736. EXCISE TAXES. 728 Return of manufacturer's excise taxes 907 728A Return of miscellaneous excise taxes 909 TELEGRAPH AND TELEPHONE 727 Return of tax on telegraph and telephone messages 1103 ADMISSIONS AND DUES. 729 Return of tax on admissions and dues 1305 729A Tax return on brokers' sales — Not reproduced. See ^[6826. 752 Application for registry — Not reproduced. See ^[6817. 753 Certificate of registry — Not reproduced. See ^[6817. 754 Notification by lessor where lessee is responsible for collection of the tax — Not reproduced. See ^6827. 755 Affidavit claiming exemption: admissions. Not reproduced. See ^[6777. 755 A Notification by Collector of allowance or disallowance of claim for exemption. Not reproduced. See ^6779. SPECIAL TAXES. 11 Special-tax return 1507 1 1 A Brokers' special tax return 1509 725 Receipt form for tax on pleasure boats — Not reproduced. See ^[7634. 732 Return for special tax on pleasure boats and automobiles 1511 CAPITAL vSTOCK TAX. 707 Annual return of domestic corporations 603 708 Annual return of foreign corporations 607 Copyright 1922, by The Corporation Trust Company. war'tax 1703 SERVICE FORMS, FINDER, ETC. [In blank.] WAR TAX 1764 SERVICE FORMS, FINDER, ETC. TABLE OF CASES. The references are to page numbers. W Page Baker & Co.. Malley vs. (C. C. of A., First Circuit, May 16, 1922) 946 l£iit i more Talking Board Co., Inc. vs. Miles- (280 Fed. 658). . . 9 15, 952 Buckeye Cotton Oil Co. vs. U. S. (T. D. 3377) 1 1 18 Ca'rtiet Holland Lumber Co. vs. Dovle (269 Fed. 647). .Dec. 1920 Cum. Bull. p. 337. Reversed, C. C. of A., Sixth Circuit (277 Fed. 150) 417 Casey vs. Howard (C. C. of A., First Circuit, June 6, 1922). 631 Central Union Trust Co. vs. Edwards (U. S. D. C, May 25, 1922) 640 "N Cole et al. vs. Ralph (252 U. S. 286) ! . . 749 Congdon vs. Lvnch (T. D. 3324) 153 Cothran and Connally vs. U. S. (4th C. C. of A., Oct. 21, 1922) 1537 Crocker vs. Malley (C. C. of A., First Circuit, June 6, 1922) 631 D. L. & W. R. R. Co.: W. U. Telegraph Co. vs. (T. D. 3369) 1117 DeLaski & Thropp Circular Woven Tire Co. vs. Iredell (268 Fed. 377) 386 Dodge vs. Osborn (240 U. S. 118) 1613 Dovle: Cartier Holland Lumber Co. vs. (269 Fed. 647) . . Dec. 1920 Cum. Bull. p. 337. ' Reversed, C. C. of A., Sixth Circuit (277 Fed. 150) 417 Doyle: Shwab vs. (U. S. Supreme Court, May 1, 1922) 113 ft Duffy: Marconi Wireless Telegraph Company of America vs. (273 Fed. 197) 763 Edwards: Central Union Trust Co. vs. (U. S. D. C, May 25, 1922) 640 Edwards: Lincoln Chemical Co. vs. (272 Fed. 142) 389 Edwards: Martin vs. (T. D. 3334) 462 Edwards: Slocum et al., executors (Sage Estate) vs .(U. S. D. C, June 20, 1922). . . . 220 I'M wards: Title Guarantee and Trust Co. (Teets) vs. (T. D. 3319) 142 Eisner: New York Trust Co. vs. (41 Sup. Ct. 506) 117 Fidelity Trust Co. vs. Lederer (276 Fed. 51) 766 Field: U. S. vs. (255 U. S. 257) 120 Gaston: Nichols vs. (U. S. C. C. of A., First Circuit, March 21, 1922) 136 Greiner vs. Lewellyn (U. S. Supreme Court, April 10, 1922) , 142 Hecht vs. Malley (C. C. of A., First Circuit, June 6, 1922) 631 Howard vs. Casey (C. C. of A., First Circuit, June 6, 1922) 631 Z- Howard vs. Malley (C. C. of A., First Circuit, June 6, 1922) 631 W Iredell: DeLaski & Thropp Circular Woven Tire Co. vs. (268 Fed. 377) 386 Knox (estate of Kissam) vs. McElligott (U. S. Supreme Court, May 1, 1922) 152 Kohlhamer vs. Smietanka (239 Fed. 408) 163 5 La Belle Iron Works vs. U. S. (41 Sup. Ct. 528) 379 Lederer: Fidelity Trust Co. vs. (276 Fed. 51). 766 Levy vs. Wardell (U. S. Supreme Court, May 1, 1922) 150 Lewellyn: Greiner vs. (U. S. Supreme Court, April 10, 1922) 142 Lincoln Chemical Co. vs. Edwards (272 Fed. 142) 389 Lynch: Congdon vs. (T. D. 3324) 153 Malley vs. Baker & Co. (281 Fed. 41) 946 Malley vs. Crocker (C. C. of A., First Circuit, June 6, 1922) 631 Malley vs. Hecht (C. C. of A., First Circuit, June 6, 1922) 63 i Malley vs. Howard (C. C. of A., First Circuit, June 6, 1922) 631 / Marconi Wireless Telegraph Company of Am. vs. Duffy 273 (Fed. 197) 763 Martin vs. Edwards (T. D. 3334) 462 McElligott: Knox (estate of Kissam) vs. (U. S. Supreme Court, May 1, 1922) 152 Miles: Baltimore Talking Board Co., Inc., vs. (280 Fed'. 658) 945, 952 New York Trust Co. vs. Eisner (41 Sup. Ct. 506) 1 17 Nichols vs. Gaston (281 Fed. 61) • 136 Osborn : Dodge vs. (240 U. S. 118) 1613 Polk vs. Page (276 Fed. 128. Also U. S. D. C, December 21, 1921) 106, 135 1st C. C. of A. (281 Fed. 74) ! 155 f Proctor & Gamble Co. vs. U. S. (T. D. 3377) 11 18 Ralph: Cole et al. vs. (252 U. S. 286) 749 Shwab vs. Doyle (U. S. Supreme Court, May 1, 1922) 143 Slocum et al., executors vs. Edwards (Sage Estate) (U. S. D. C, June 20, 1922) 220 Smietanka: Kohlhamer vs. (239 Fed. 408) , 1615 Smietanka vs. Ullman (275 Fed. 814) 79 Title Guarantee and Trust Co. (Teets) vs. Edwards (T. D. 3319) 142 Ullman: Smietanka vs. (275 Fed. 814) 79 Union Trust Company (Lachman) vs. Wardell (U. S. Supreme Court, May 1, 1922) 147 4 U. S.: Buckeye Cotton Oil Co. vs. (T. D. 3377).. 1118 U. S.: Cothran and Connally vs. (4th C. C. of A., Oct. 21, 1922) 1537 FORMS, FINDER, ETC. TABLE OF CASES.— Concluded. The references are to page numbers. Page tL S. vs. Field (255 U. S. 257) ; 120 U. S.: UBelle Iron Works vs. (41 Sup. Ct. 528) 37« U. S.: Proctor & Gamble Co. vs. (T. D. 3377) 1118 U. S.: Washington Water Power Co. vs. (56 Ct. Clms. — Opinion No. 34092) 627 W. U. Telegraph Co. vs. D. L. & W. R. R. Co. (T. D. 3369) 1117 Wardell: Levy vs. (U. S. Supreme Court, xMay 1, 1922) 150 Wardel! : Union Trust Co. (Lachman) vs. (U. S. Supreme Court, May 1, 1922) 147 Washington Water Power Co. vs. U. S. (56 Ct. Clms. — Opinion No. 34092) 627 WAR TAX 1 706 SS KVIC Z l-i-22. (2) 6-22-22. (3) 8-3-22. FORMS, FINDER, ETC. 1918 REVENUE ACT SECTIONS. Reproduced in this Service. Title II.— Income Tax. Sec. 200 (in part) H501, 502, 504 Sec. 231 11667 201 505 236 (a), (in part) 726 213 (b), (4), (in part) 726 240 587 Sec. 300 301 302 303 304 305 306 to 309. — No such. 310 311 312 313 to 319. — No such. 320 321 to 324. — No such. Title III— Excess-Profits Tax. ^500 Sec. 325.... 510 326.... 523 327.... 524 525 528 529 530 541 543 H548 555 565 328 570 329. — No such. 330 575 331 579 332 to 334.— No such. 335 580 336 585 337 586 338 to 399— No such. Title IV. Sec. 400 Hi 401 4 402 7 403 14 404 27 405 29 Estate Tax. Sec. 406 H30 407 31 408 33 409 35 410 37 411 to 499.— No such. Title XIV.— General Provisions. Sec. 1403 1f8078 Sec. 1405 f8082 1404. 8080 Copyright 1922, by The Corporation Trust Company. WAR TAX 1707 SERVICE 1-2-22. (2) 6-22-22. (3) 8-3-22. FORMS, FINDER, ETC. 1921 REVENUE ACT BY SECTIONS. Title I. — General Definitions. Sec. 1 H8083 2 8084 3 to 199. — No such. Title II.— Income Tax. (Not included herein except as shown below.) Sec. 200 (in part) ^1002, 1004 Sec. 231 ^1059 201 1005 236 (a), (in part) 726 213 (b), (4), (in part) 726 240 1074 229 1082 262 1083 Title III.— Excess-Profits Tax. Sec. 300 fllOOO Sec. 326 1) 1035 301 1011 327 1044 08£ 302 1019 328 1049 303 1020 329 to 330.— No such. 304 1021 331 1053 305 1024 332 to 334.— No such. 306 to 311— No such. 335 1054 312 1025 336 1056 313 to 319.— No such. 337 1057 320 1027 338 1058 321 to 324— No such. 339 to 399.— No such. 325 1028 Title IV.— Estate Tax. Sec. 400 U416 Sec. 407 ^451 401 421 408 454 402 424 409 456 403 431 410 458 404 446 411 460 405 448 412 to 499.— No such. 406 449 Title V. — Telegraph and Telephone Messages. Sec. 500 H5500 Sec. 502 115506 501 5505 503 to 599 —No such. Title VI. — Beverages. Sec. 600 to 603. — Not included herein. Sec. 604 to 700 —No such. Title VII— Cigars, Tobacco, etc. Sec. 700 to 704. — Not included herein. Sec. 705 to 799. — No such. Title VIII. — Admissions and Dues. Sec. 800 116500 Sec. 802 ^6512 801 6509 803 to S99.— No such. Copyright 1922. by The Corporation Trust Company. WAR TAX 1708 SERVICE 6 19 22 (2) 6-22-22. FORMS, FINDER, ETC. 1921 REVENUE ACT BY SECTIONS. — Concluded. Title IX.— Excise Taxes. *ec 900 H4500 Sec. 904 114521 901 4517 905 4528 902 4518 906 4531 903 4519 907 to 999.— No such. Title X.— Special Taxes. Sec, 1000 113000 Sec. 1004 H7693 1001 7661 1005 to 1007. — Narcotic Act (not 1002 7676 included herein). 1003 7689 1008 to 1099— No such. Title XL— Stamp Taxes. Sec. 1100 H3500 Sec. 1105 %35\4 1101 3501 1106 3516 1102 3502 1107 3517 1103 3507 Schedule A 3520 1104 3513 1108 to 1199— No such. Title XII.— Child Labor.* Sec. 1200 to 1207. — Not included herein Sec. 1208 to 1299.— No such. *Title XII.— -Tax on child labor, declared unconstitutional, U. S. Supreme Court (Bailey vs. The Drcxel Furniture Company, May 15, 1922). Title XIIL — Administrative. Sec. 1300 . f8000 Sec. 1317.— Not included herein. 1301 8012 1318 H8048 1302 8014 1319 8051 1303 8009 1320 8052 1304 4539, 8018 1321 8053 1305 4538, 8021 1322 8013 1306 8019 1323 8046 1307 8001 1324 8036 1308 8002 1325 8020 1309 8006 1326 4537 1310 8003 1327 — Not included herein. 1311 8060 1328, 1089 1312 8007 1329 8075 1313 8008 1330.— Not included herein. 1314 8011 1331 1079 1315 ] . . 8022 1332 1093 1316 8056 1333 to 1399.— No 'such. Title XIV.— General Provisions Sec. 1400 1l463, 1099, 8076 See. 1403 1[80£6 1401. — Not included herein. 1 104....- 8097 1402. — Not included herein. 1404 is the last section Copyright 1922, by The Corporation Trust Company, WAR TAX 1709 SERVICE 5-19-22. (6) 6-22-22. FORMS, FINDER, ETC. LAV/S Revenue Act of 1918 See p. 1707 Revenue Act of 1921 See p. 1708 Act of May 12, 1900 as amended by Act of June 30, 1902 ^[8024 Liberty and Victory Loan Act — Exemption provisions H727 Section 4 W76, 733 Second Liberty Bond Act (Sec. 14) as amended by Third Liberty Bond Act U"236 REVISED STATUTES SECTIONS Sec. 3164 ^8061 Sec. 3220 ^8023 Sec. 3165 H8062 Sec. 3224 ^8038 Sec. 3167 f8063 Sec. 3225 ^[8047 Sec. 3 1 72 1[8064 Sec. 3226 ^8049 Sec. 3173 1j8065 Sec. 3227 f 805 1 Sec. 3176... 118071 Sec. 3228. <[8057 Sec. 3184 , 117658 Sec. 3229 ^8059 REGULATIONS The articles of each of the "Regulations" listed below are -printed in numerical order where the regulations appear in the Service and the "Article" number is printed in boldface type in each case. Usually the articles are tabulated in a table of contents beginning on the page indicated below: Regulations Beginning Number Subject Covered on page 37 Estate Tax 33 40 Stamp Taxes: Sales and transfers of stock, and sales of products for future delivery 709 43 — Part I Tax on Admissions 1321 43— Part II Tax on Dues 1307 45— Part II B Excess Profits Tax: 1918 Act (For 1921 Act see Reg. 62 below.) . 316 47 Excise Taxes — Sales by manufacturer 910 48 Works of Art and Jewelry Taxes 934 55 Stamp Taxes — Documents , # 737 57 Tax on Telephone, Telegraph, Radio, and Cable Facilities 1103 59 Special Taxes upon Businesses and Occupations and upon the use of Boats 1513 62— Part II B Excess" Profits Tax: 1921 Act (For 1918 Act see Reg. 45 above.) 431 64 Capital Stock Tax 609 Copyright 1922, by The Corporation Trust Company. WAR TAX 1710 SERVICE 5 19 22 (2) 6-22-22. (3) 8-7-22. FORMS, FINDER, ETC. 1921 REVENUE ACT BY SECTIONS. — Concluded. Title IX —Excise Taxes. Sec. 900 ^[4500 Sec. 904 ^4521 901 4517 905 4528 902 4518 906 4531 903 4519 907 to 999.— No such. Title X.— Special Taxes. Sec. 1000 13000 Sec. 1004 ^7534 10C i ..... , 7501 1005 to 1007.— Narcotic Act (nor 1002 , 7516 included herein). 1003 7528 1008 to 1099— No such. Title XL— Stamp Taxes. Sec. 1100... ^3500 Sec. 1105 Salina. KENTUCKY (Comprising the State of Kentucky), Collector: Robert H Lucas, Louisville. Div. Hdqrs. at: Ashland, Paducah,* Owensboro,* Lexington,* Cov- ington.* Stamp Offices at: Danville, Frankfort. LOUISIANA (Comprising the State of Louisiana), Collector: Joseph H. Hynson, Jr. (Acting}, New Orleans. Div. Hdqrs. at: Shreveport, Baton Rouge. MAINE (Comprising the State of Maine), Collector: Frank J. Ham, Augusta. Div. Hdqrs. at: Portland, Bangor. MARYLAND (Comprising the State of Maryland and the District of Columbia), Collector: Galen L. Ta-t, Baltimore. Div. Hdqrs. at: Washington, D. C.,* Hagerttowa, Salisbury. "Stamp* sold. Copyright 1922, by lhr Corporation TtiM Company WAR TAX J 712 SERVICE 2-10-22. FORMS, FINDER, ETC. MASSACHUSETTS (Comprising the State of Massachusetts), Collector: Malcolm E. Nichols, Boston. Div. Hdqrs. at: Springfield, Worcester, Fall River, Lawrence. MICHIGAN First District. — Comprising that part of the State of Michigan included in the following counties: Alcona, Alpena, Arenac, Bay, Branch, Calhoun, Cheboygan, Clare,' Clinton, Crawford, Genesee, Gladwin, Gratiot, Hillsdale, Huron, Ingham, Iosco, Isabella, Jackaon Lapeer, Lenawee, Livingston, Macomb, Midland, Monroe, Montmorency, Oakland, Ogemaw, Oscoda, Otsego, Presque Isle, Roscommon, Saginaw, Sanilac Shiawassee, St. Clair, Tuscola, Washtenaw and Wayne. Collector: Fred L. Wood worth, Detroit. Div. Hdqrs. at: Bay City,* Jackson, Flint. Stamp Office at: Saginaw. Fourth District. — Comprising that part of the State of Michigan included in the following counties: Alger, Allegan, Antrim, Baraga, Barry, Benzie, Berrien, Cass, Charlevoix, Chippewa, Delta, Dickinson, Eaton, Emmet, Gogebic, Grand Traverse, Houghton, Ionia, Iron, Kalamazoo, Kalkaska, Kent, Keweenaw, Lake, Leelanau, Luce, Mackinac, Manistee, Marquette, Mason, Mecosta, Menominee, Missaukee, Montcalm, Muskegon, Newaygo, Oceana, Ontonagon, Osceola, Ottawa, St. Joseph, Schoolcraft, Van Bur-en. Wexford. Collector: Emanuel J. Doyle, Grand Rapids. Div. Hdqrs. at: Kalamazoo, Marquette. MINNESOTA (Comprising the State of Minnesota), Collector: Levi M. Willcuts, St. Paul. Div. Hdqrs. at: Minneapolis,* Duluth,* Winona, Mankato, St. Cloud. MISSISSIPPI (Comprising the State of Mississippi), Collector: George L. Donald, Jackson. Div. Hdqrs. at: Meridan, Greenwood. MISSOURI First District. — Comprising that part of the State of Missouri Included in the following counties: Adair, Audrain, Bollinger, Boone, Butler, Callaway, Cape Girardeau, Carter, Clark, Crawford, Dent, Dunklin, Franklin, Gasconade, Howard, Iron, Jefferson, Knox, Lewis, Lincoln, Linn, Macon, Madison, Maries, Marion, Mississippi, Montgomery, Monroe, New Madrid, Oregon, Osage, Pemiscot, Perry. Phelps, Pike, Pulaski, Ralls, Randolph, Reynolds, Ripley, St. Charles, St. Francois, Ste. Genevieve, St. Louis, Schuyler, Scot- land, Scott, Shannon, Shelby, Stoddard, Warren, Washington, and Wayne. Collector: John S. Leahy, St. Louis. Div. Hdqrs. at: Hannibal, Cape Girardeau. Sixth District. — Comprising that part of the State of Missouri Included In the following counties: Andrew, Atchison, Benton, Barry, Barton, Bates, Buchanan, Caldwell, Camden, Carroll, Cass, Cedar, Charlton, Christian, Clay, Clinton, Cole, Cooper, Dade, Dallas, Daviess, Dekalb, Douglas, Gentry, Greene, Grundy, Harrison, Henry, Hickory, Holt, Howell, Jackson, Jasper, Johnson, Laclede, Lafayette, Lawrence, Livingston, McDonald, Mercer, Miller, Moniteau, Morgan, Newton, Nodaway, Ozark, Pettis, Platte.Polk, Putnam, Ray, St. Clair, Saline, Stone, Sullivan, Taney, Texas, Vernon, Webster, Worth, Wright. Collector: Geo. F. Crutchley, Kansas City. Div. Hdqrs. at: St. Joseph,* Springfield. Stamp Office at: Joplin. MONTANA (Comprising the State of Montana), Collector: Charles A. Rasmusson, Helena. Div. Hdqrs. at: Butte,* Great Falls, Billings, NEBRASKA (Comprising the State of Nebraska), Collector: Arthur B. Allen, Omaha. Div. Hdqrs. at: Lincoln, Grand Island. NEVADA (Comprising the State of Nevada), Collector: Louis A. Spellicr, Reno. NEW HAMPSHIRE (Comprising the State of New Hampshire), Collector: John H. Field, Portsmouth. Stamp Office at: Manchester. •Stamps sold. Copyright 1922, by The Corporation Trust Company. WAR TAX 1713 SERVICE 2-10-22. FORMS, FINDER, ETC. NEW JERSEY Flmt District. — Comprising that part of the State oi New Jers-y Included in the following counties: Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Monmouth, Ocean, and Salem. Collector: Edward L. Sturgess, Camden. Div. Hdqrs. at: Trenton. Fifth District. — Comprising that part of the State of New Jersey included In the following counties: Bergen, Essex, Hudson, Hunterdon, Middlesex, Morris, Passaic, Somerset, Sussex, Union, Warren. Collector: Frank C. Ferguson, Newark. Div. Hdqrs. at: jersey City,* Paterson,* Elizabeth, Morristown. Stamp Office at: New Brunswick. NEW MEXICO (Comprising the State of New Mexico), Collector: Benigno C Hernandez, Albuquerque NEW YORK Fl st District. — Comprising that part of the State of New York included in the following counties: Kings, Nassau, Queens, Richmond and Suffolk, Collector: John T. Rafferty Brooklyn. Div. Hdqrs. at: Patchogue. Second District. — Comprising the County of New York, N. Y., and those three certain islands situated in the East River known as Randalls Island, Wards Island and Blackwells Island. Collector: Frank K. Bowers, New York. Div. Hdqrs. at: 4 Union Square, 1416 Broadway, 1819 Broadway.* 310 Lenox Ave.* Stamp Office at: San Juan, P. R. Foorteesth District. — Comprising that part of the State of New York included in the following counties: Albany, Bronx (formerly the 23rd and 24th wards of New York City), Clinton, Columbia, Dutchess, Essex, Fulton, Greene, Hamilton, Montgomery, Orange, Putnam, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, Sullivan, Ulster, Warren. Washington, and Westchester. Collector: Cyrus Durey, Albany. Div. Hdqrs. at: Schenectady, Troy, Newburgh, Bronx,* 1932 Arthur Ave., N. Y. City, Poughkeepsie. Stamp Office at: PeekskilL Twenty-first District.— Comprising that part of New York included in the following counties: Broome, Cayuga, Chenango, Cortland, Delaware, Franklin, Herkimer, Jefferson, Lewis, Madison, Oneida, Onondaga, Oswego, Otsego, St. Lawrence, Schuyler, Seneca, Tioga, Tompkins, and Wayne.) Collector: Jesse W. Clarke, Syracuse. Div, Hdqrs. at: Utica,* Binghamton,* Watertown. Twenty-eighth District. — Comprising that part of New York included in the following counties: Allegany, Cattaraugus, Chautauqua, Chemung, Erie, Genesee, Livingston, Monroe, Niagara, Ontario, Orleans, Steuben, Wyoming, and Yates. Collector: Bert P. Gage, Buffalo Div. Hdqrs. at: Rochester,* Elmira,* Jamestown. NORTH CAROLINA (Comprising the State of North Carolina), Collector: Gilliam Grissom, Raleigh. Div. Hdqrs. at: Washington, Wilmington, Charlotte, Asheville, Winston-Salem.* Stamp Offices at: Durham, Reidsville, Statesville, Greensboro NORTH DAKOTA (Comprising the State of North Dakota), Collector: Gunder Olson, Fargo! Div, Hdqrs. at: Grand Forks. •Stamps sold, Copyriglit 1922, by The Corporation Trust Company. WAR TAX 1714 SERVICE t-10-22. FORMS, FINDER, ETC. OHIO First District. — Comprising that part of the State of Ohio included in the following counties: Brown, Butler, Clarke, Clermont, Clinton, Payette, Greene, Hamilton, Highland, Miami, Montgomery, Preble, and Warren. Collector: Charles M. Dean, Cincinnati. Div. Hdqrs. at: Dayton.* Stamp Offices at: Middletown, Hamilton. Tenth District. — Comprising that part of the State of Ohio included in the following counties: Allen, Auglaize, Champaign, Crawford, Darke, Defiance, Erie, Fulton, Hancock, Hardin, Henry, Huron, Logan, Lucas, Mercer, Ottawa, Paulding, Putnam, Sandusky, Seneca, Shelby, Van Wert, Williams, Wood, and Wyandot. Collector: Charles H. Nauts, Toledo. Eleventh District. — Comprising that part of the State of Ohio Included in the following counties: Adams, Athens, Coshocton, Delaware, Fairfield, Franklin, Gallia, Guernsey, Hocking, Jackson, Knox, Lawrence, Licking, Madison, Marion, Meigs, Morgan, Morrow, Muskingum, Noble, Perry, Pickaway, Pike, Ross, Scioto, Union, Vinton, and Washington. Collector: Newton M. Miller, Columbus. Div. Hdqrs. at: Portsmouth, Zanesville. Eighteenth District. — Comprising that part of the State of Ohio included in the following counties: Ashland, Ashtabula, Belmont, Carroll, Columbiana, Cuyahoga, Geauga, Harrison, Holmes, Jefferson, Lake, Lorain, Mahoning, Medina, Monroe, Portage, Rich- land, Stark, Summit, Trumbull, Tuscarawas, and Wayne. Collector: Carl F. Routzahn, Cleveland. Div. Hdqrs. at: Akron, Canton, Youngstown, Stcubenville. OKLAHOMA (Comprising the State of Oklahoma), Collector: Acel C. Alexander, Oklahoma. Div. Hdqrs. at: Tulsa, Muskogee, McAlester, Enid. OREGON (Comprising the State of Oregon), Collector: Clyde G. Huntley, Portland. Div. Hdqrs. at: Eugene, Pendleton. PENNSYLVANIA First District. — Comprising that part of the State of Pennsylvania included in the following counties: Adams, Bedford, Berks, Blair, Bucks, Chester, Cumberland, Dauphin, Dela- ware, Franklin, Fulton, Huntingdon, Juniata, Lancaster, Lebanon, Lehigh, Mifflin, Montgomery, Perry, Philadelphia, Schuylkill, Snyder, and York. Collector: Blakely D. McCaughn, Philadelphia. Div. Hdqrs. at: Philadelphia (2), Allentown,* Altoona, Chester, Harrisburg,* Lancaster,* Norristown, Pottsville,* Reading,* York.* Twelfth District. — Comprising that part of the State of Pennsylvania included in the following counties: Bradford, Carbon, Center, Clinton, Columbia, Lackawanna, Luzerne, Lycoming, Monroe, Montour, Northampton, Northumberland, Pike, Potter, Sullivan, Susquehanna, Tioga, Union, Wayne, Wyoming. Collector: David W. Phillips, Scranton. Div. Hdqrs. at: Wilkesbarre,* Easton,* Shamokin. Twenty-third District. — Comprising that part of the State of Pennsylvania included in the following counties: Allegheny, Armstrong, Beaver, Butler, Cambria, Cameron, Clarion, Clearfield, Crawford, Elk, Erie, Fayette, Forest, Green, Indiana, Jefferson, Lawrence, McKean, Mercer, Venango, Warren, Washington, and Westmoreland. Collector: Daniel B. Heiner, Pittsburgh. Div. Hdqrs. at: Erie,* Uniontown,* New Castle, Du Bois, Johnstown. RHODE ISLAND (Comprising the State of Rhode Island), Collector: Frank A. Page, Providence SOUTH CAROLINA (Comprising the State of South Carolina), Collector: Wm. R. Bradley (Acting), Columbia. SOUTH DAKOTA (Comprising the State of South Dakota), Collector: Leslie Jensen, Aberdeen. Div. Hdqrs. at: Sioux Falls. TENNESSEE (Comprising the State of Tennessee), Collector: Louis P. Brewer, Nashville, Div. Hdqrs. at: Memphis,* Chattanooga,* Knoiville.* *Stamps sold. Copyright 1922, by The Corporation Trust Company. WAR TAX 1715 SERVICE 2-10-22. FORMS, FINDER, ETC. TEXAS First District. — Comprising that part of the State of Texas included in the. following counties: Aransas, Atascosa, Austin, Bandera, Bastrop, Bee, Bell, Bexar, Blanco, Bosque, Brazoria, Brazos, Brewster, Brooks, Burleson, Burnet, Caldwell, Calhoun, Cameron, Chambers, Colorado, Comal, Coryell, Culberson, Dewitt, Dimmit, Dunn, Duval, Edwards, El Paso, Falls, Fayette, Fort Bend, Freestone, Frio, Galveston, Gillespie, Goliad, Gonzales, Grimes, Guadalupe, Hamilton, Hardin, Harris, Hays, Hidalgo, Hill, Hudspeth, Jackson, Jasper, Jeff Davis, Jefferson, Jim Hogg, Jim Wells, Karnes, Kendall, Kerr, Kimble, Kinney, Kleberg, Lampasas, La Salle, Lavaca, Lee, Leon, Liberty, Limestone, Live Oak, Llano, McCulloch, McLennan, McMullen, Madison, Mason, Matagorda, Maverick, Medina, Milam, Montgomery, Newton, Nueces, Orange, Pecos, Polk, Presidio, Real, Reeves, Refugio, Robertson, San Jacinto, San Patricio, San Saba, Somervell, Starr, Terrell, Travis, Trinity, Tyler, Uvalde, Val Verde, Victoria, Walker, Waller, Washington, Webb, Wharton, Willacy, Williamson, Wilson, Zapata, Zavalla. Collector: James W. Bass, Austin. Div. Hdqrs. at: San Antonio,* Houston,* El Paso, Waco.* Second District. — Comprising that part of the State of Texas included in the following counties: Anderson, Andrews, Angelina, Archer, Armstrong, Bailey, Baylor, Borden, Bowie, Briscoe, Brown, Callahan, Camp, Carson, Cass, Castro, Cherokee, Childress, Clay, Cochran, Coke, Coleman, Collin, Collingsworth, Comanche, Concho, Cooke, Cottle, Crane, Crockett, Crosby, Dallam, Dallas, Dawson, Deaf Smith, Delta, Denton, Dickens, Donley, Eastland, Ector, Ellis, Erath, Fannin, Fisher, Floyd, Foard, Franklin, Gaines, Garza, Glasscock, Gray, Grayson, Gregg, Hale, Hall, Hansford, Hardeman, Harrison, Hartley, Haskell, Hemphill, Henderson, Hockley, Hood, Hopkins, Houston, Howard, Hunt, Hutchinson, Irion, Jack, Johnson, Jones, Kaufman, Kent, King, Knox, Lamar, Lamb, Lipscomb, Loving, Lubbock, Lynn, Marion, Martin, Menard, Midland, Mills, Mitchell, Montague, Moore, Morris, Motley, Nacogdoches, Navarro, Nolan, Ochiltree, Oldham, Palo Pinto, Panola, Parker, Parmer, Potter, Rains, Randall, Reagan, Red River, Roberts, Rockwall, Runnels, Rusk, Sabine, San Augustine, Schleicher, Scurry, Shackelford, Shelby, Sherman, Smith, Stephens, Sterling, Stonewall, Sutton, Swisher, Tarrant, Taylor, Terry, Throckmorton, Titus, Tom Green, Upshur, Upton, Van Zandt, Ward, Wheeler, Wichita, Wilbarger, Winkler, Wise, Wood, Yoakum and Young. Collector: George C. Hopkins, Dallas. Div. Hdqrs. at: Wichita Falls, Fort Worth, Abilene, Tyler. UTAH (Comprising the State of Utah), Collector: James H. Anderson, Salt Lake City. Stamp Office at: Ogden, VERMONT (Comprising the State of Vermont), Collector: Robert W. McCuen, Burlington. VIRGINIA (Comprising the State of Virginia), Collector: John C. Noel, Richmond. Div Hdqrs. at: Norfolk,* Lynchburg,* Roanoke,* Alexandria.* Stamp Offices at: Petersburg, Martinsville, Danville. WASHINGTON (Comprising the State of Washington and the Territory of Alaska), Collector: Burns Poe, Tacoma. Div. Hdqrs. at: Seattle,* Spokane. WEST VIRGINIA ^Comprising the State of West Virginia), Collector: Albert B White, Parkersburg. Div. Hdqrs. at: Wheeling,* Charleston, Huntington,* Clark«burg. Stamp Offices at: Fairmont. WISCONSIN (Comprising the State of Wisconsin), Collector: Alonzo H. Wilkinson, Milwaukee. Div. Hdqrs. at: Madison,* Green Bay, Oshkosh, Superior, La Crosse, Racine. WYOMING (Comprising the State of Wyoming), Collector: Marshall S. Reynolds, Cheyenne. 'Stamps sold. Copyright 1922, by The Corporation Trust Company. WAR TAX 1716 SERVICE 8-3-22. Sec. 326. Art. 333.-7. of lOx dollars for the payment of these notes, and it should have reduced its surplus accord- ingly. It might be, as between the stockholders and creditors of the corporations, that the stockholders would be held estopped from denying that they still owe these notes to the corporation, but that is extremely doubtful, and could be determined only upon the hap- pening of that contingency. However that may be, such an estoppel would not set up these notes as valid and legal obligations, but would only estop the stockholders from claiming that they had already been paid. It is suggested, therefore, that the surplus account of the corporation be reduced each year by the amount which it paid as a dividend in satisfaction of these notes as they fell due. This conclusion necessarily reduced the corporation's invested capital by 40a; dollars prior to the year 1917, and requires an adjustment on account of the IQx dollar note paid on June 1, 1917. In view of the foregoing quoted opinion, with which the Committee is i i accord, it is recommended that the surplus account of the corporation be reduced each year by the amount which was paid as a dividend in satisfaction of these notes as they fell due, and that the corporation's invested capital be reduced by 40x dollars prior to the year 1917 and a further adjustment of invested capital be made as of June 1, 1917, on account of the note paid through the medium of a special dividend on that date. Accordingly, it is recommended that the action of the Income Tax Unit be sustained and the taxpayer's appeal be denied. 3 V 1 \ I ('22)-31-444: I. T. 1409. Revenue Acf of 1918. Section 8632 of the Ohio General Code, which provides that at the time of making a subscription 10 per cent on each share subscribed for shall be paid, and which provides that the residue shall be paid in such installments at the times and places and to such persons as the directors require, has been construed by the Ohio courts as merely marking the time when the first installment shall be payable upon a stock subscription and as providing the mode for determining the time at which the residue shall become payable. (Chamberlain v. Railroad, 15 Ohio State, 249.) Stock issued without the payment of the first 10 per cent at the time of making the subscription is not invalid. (Smith v. Railroad, 15 Oh^> State, 336, and Henry v. Railroad, 13 Ohio Reports, 187.) A note given for such 10 per cent is enforceable (Latham v. Insurance Co., 1 Bull., 127.) In view of the above interpretation, it is held that, under the provisions of section 8632 of the Ohio General Code, promissory notes of subscribers may legally be received in respect of the entire amount of stock subscribed. Consequently, it follows that all the notes received by the M Company upon stock subscriptions may be included in the company's invested capital to the extent of their fair market value at the time paid in under the pro- visions of article 833 of Regulations 45, provided they were received in abso- lute payment and not as conditional payment only. \ \ Supplementary Bulletin Rulings. 12-21-22. Perpetual Check List Supplementary Rulings Reprinted from the Internal Revenue Bulletins. The Supplementary Rulings are printed on the pages immediately preceding. The Foreword to the Supplementary Rulings should be read. Key. — The word "none," in the column headed "Last Ruling," signifies in each case that there are no special rulings bearing on the particular Article of Regulations 45 (1918 Act) or of Regulations 62 (1921 Act). The numeral, in each case, shows how many serially numbered special r ulings bearing on the particular Article have been reproduced, and indicates the last serial number of the group. These serial numbers appear in bold face type at the end of the special rulings themselves, within the Supplement. Caution. — To the extent of the imposition of the excess-profits tax for 1921, the 1918 and 1921 laws are identical, except that domestic corporations entitled to the benefits of Section 262 of the 1921 Act (If 1083) are grouped with foreign corporations for the purposes of the 1921 excess-profits tax. To much the same extent, with like qualifications, the provisions of Regula- tions 62 (1921 Act) are essentially identical (there are frequent verbal changes) to the provisions of Regulations 45 (1918 Act). The numbering of the Articles of Regulations 62 (1921 Act)/ is the same as that of the respec- tive corresponding Articles of Regulations 45 (1918 Act), except as noted below. It follows then, that, except as noted below, for the purposes of the Supplementary Bulletin Rulings, the Article reference number is the same under either Act. Reg. 62 (1921 Act) Reg. 45. (1918 Act) No corresponding Article. ..J. to Article 712 Article 712 is the same as, therefore refer to, Article 713 " 713 " " " " " " " " 714 n j\4 " " " << « « « « T\§ i* a a a tt tt it n tt No corresponding Article. .to Article 717 Article 716 is the same as, therefore refer to, Article 719 tt a a it tt | tt it a a 713 a yjg tt tt tt ttj u tt tt tt No corresponding Article?. 1 , ... to Article 869 Article 869 is the same as, therefore refer to, Article 870 tt gjQ tt tt tt a a a tt a gyj Otherwise Art. of Reg. 62 is same as, therefore refer to, same numbered Art. of Reg. 45 ( The list is always up-to-date,) i Law Article Last Section Number Ruling k Section Number Ruling y / . mi 712 1 * 300 701 None 301 711 1 / 712 None / iNone v / 714 11 V, 715 .21! * 716. None / Law Article Last 302 732 1 733 None /, 303 741 2 713 Nbne 4 \ " 742 None ✓ 743 None ✓ 1 304 751 ....None ✓ 752 None ✓ 717 None*> " 753.... None / 718 .None< 305 761 None ' 310 771 1 y / ' 7 719 .....1 / 720 None f 311 781 3 302 ........ 731. ..A 7 i ** 782 ....None Law Section 311. .. . 312 320 h 325 326 it Article Number ..783.., 784... Last Ruling 1 / . .None / 785 None / .791 .801 802 .811 812, 813. 814 815. 816 817. 818. 831. 832. 833. 834. 835. 836. 837. 838. 839. 840. 841. 842 . 843. 844. 843. .3 .1 .1 .2 .3 9 None 9 1 1 3 41 None ,4 1 3 16 5 10 4 10 5 ✓ y \ % y i 845 A (See 845) 846....... .4 / i t I None * | 1 i S47 ...None 7 / 848.. None ^ 849 None *] 850 .....2 / 851 6 l\ 853 1 / I Law Section 326.... «( it it it a a u a a a it it a it it a a 327 328 u u a 330, CI 331 335 a a it 336 ti 337, « 338, Article Last Number Ruling^ • 855 4 ::;::::::::i ✓ 856.. None^ 857, 858 859, 860, 861. 862, 863. 864. 865. 866. 867. 868. 869. 5 10 1 None / None 3 None None None None None None ^ 1 870 None^ / y y P / v 871, .901 911, 912 913. 914. 931. 932. 933. 934. 941. 951, 952. 953. .1 .30 .2 .3 .1 .2 .4 .1 .7 .None .17 .Non? J / i y None ^ 954 None / 955 None ✓ 961 None / 962 971 None / 2 I 972. None 981. None Every Article of Regulations 45 (1918 Act) and of Regulations 62 (1921 Act) bearing specifically on the war-profits and excess-profits tax is listed in the foregoing table. The first Article is 701. Missing Article numbers such as 702 to 710 have not yet been used. The last weekly Bulletin from which rulings have been reproduced hereinbefore and as listed above is . AW VOLUME I (1922), No. 51 Later Bulletins, since issued (if any ), contain no rulings bearing on the 1918 or 1921 excess-profits tax laws. Insert this page to face blue page 401. 1-2-22. (2) 6-12-22. STAMP TAX REGULATIONS. — 1922. are^called for because some railroad or other transportation company is in need of rolling stock or other equipment and is without funds or credit with which to supply itself, and there is a legal or other difficulty in the way of a direct pledge of the property. They are issued under a number of different plans. The one with which we are concerned is known as the Philadelphia plan. Those willing to share in the venture are invited to place their contribu- tions in the hands of an acceptable trustee. The rolling stock, or other property is then purchased in the name of this trustee as owner. The trustee then enters into a form of bailment or conditional sale agreement with the carrier, the periodical and final payments upon which are sufficient to pay the interest on the investment and the principal at maturity. The contributors in the meantime hold the certificates or acknowledgment of the trustee of their respective shares in the venture. 4013 It will thu^ be seen that in strictness the only obligation in the nature of a debt or promise to pay money is the obligation and agree- ment of the carrier to pay the agreed price for the hire and use of the property or the rentals as they are commonly termed. The trustee is a mere purse, and only in a secondary sense can be said to owe anything to any one other than faithfulness to its trust obligations, and is not a debtor even in this secondary sense unless and until and as the moneys which belong to the contributors come into its hands. The certificate is not within the literal verbiage [sic] of the Act of Congress not being "a certificate of indebtedness issued by any person" nor "an instrument issued by any corporation." If the taxing hand has been laid only upon these specific forms of what are generally known as securities, it must be withdrawn from the "trust certi- ficates" now under view. This would mean th£t they are the exceptions among this general class of securities and are exen/pt because of the very effort made in the framing of the law to include all forr/is of securities of this general character has, in verbal nicety, excluded them, ^he Act of Congress, however, includes more than the two kindi of securities/mentioned above, because we think it includes everything "Mnown generally as corporate securities." That these trust certificates are st known would not be denied. The denial would be of the correctness of tliis construction of the Act of Congress. There are two obstacles to be surmounted before reading this construction. One is that the rule of the nearest Antecedent makes the quoted phrase relate to and serve as a definition of thi described kinds of "instruments issued by corporations," and the other ischajf the finding of a meaning to tax all instruments "commonly known aslcofporate securities" involves presence of a grammatical error in the Act elf,; Congress. Neither of these obstacles are however insurmountable, if thisjjfwas the meaning of Congress, and we so find. Nor do we see any conflict 'between a ruling* that these certificates are taxable and the doctrine of the leases to which we have been referred that there is no such thing as a doi/Dtlul tax. U. S. vs. Isham, 84 U. S., 496. 4014 The question now presented is admittedly a close one, but this does not necessarily make for the taxpayer. The true doctrine is that neither the Executive nor tfie Judicial Departments nor both can levy a tax. This can only be done $y Congress. When, however, Congress has acted and the tax questioned is found to have been levied, the mere fact that in the light of the particular case in which the question is raised the meaning of Congress might have been more clearly expressed, does not justify refusal to give that meaning effect. The real truth back of the whole discussion is that if these certificates are not taxable, it is because of the accidental circumstance of a wholly nominal separation of the security held Copyright 1922, by The Corporation Trust Company. WAR TAX 767 SERVICE 1-2-22. (2) 6-12-22. STAMP TAX REGULATIONS.— 1922. by the taxpayer from the obligation of debt entered into by the carrier corporation. The real security is the promise not of one corporation but of two to pay to the certificate holders the sums due them. The real trans- action is the request of the carrier company made to the certificate holders to advance the money required for equipment, in consideration of which the carrier agrees to pay back the sum advanced, with interest. This it is true was not the form of the promise, but such it was in substance because it was a promise to pay a sum which was the exact (and not accidental but prefixed) equivalent of the advances, with interest. It is, however, and none the less true, that if for any reason Congress has not included these certificates, no tax can be imposed. The impression to this effect made by the argument at bar has been removed by what seems to us to be the sufficiently expressed will of Congress to tax them. 4015 We have disposed of the case as if on trial hearing with all the facts which enter into the discussion established, understanding such to be the wish of all parties, it being conceded that all these facts are in the record. Rule for judgment discharged Copyright 1922, by The Corporation Trust Company. WAR TAX 768 SERVICE 12-6-22. Perpetual Check List Supplementary Rulings Reprinted from the Internal Revenue Bulletins. The Supplementary Rulings are printed on the pages immediately preceding, The Foreword to the Supplementary Rulings should be read. Key. — The word "none," in the column headed "Last Ruling," signifies in each case that there are no special rulings bearing on the particular Article of Regulations 45 (1918 Act) or of Regulations 62 (1921 Act), The numeral, in each case, shows how many serially numbered special rulings bearing on the particular Article have been reproduced, and indicates the last serial number of the group. These serial numbers appear in bold face type at the end of the special rulings themselves, within the Supplement. Caution. — To the extent of the imposition of the excess-profits tax for 1921, the 1918 and 1921 laws are identical, eicept that domestic corporations entitled to the benefits of Section 262 of th|b 1921 Act (If 1083) are grouped with foreign corporations for the purpose^ of the 1921 excess-profits tax. To much the same extent, with like qualifications, the provisions of Regula- tions 62 (1921 Act) are Essentially identical (there are frequent verbal changes) to the provisions of Regulations 45 (1918 Act). The numbering of the Articles of Regulations 62 (1921 Act) is the same as that of the respec- tive corresponding Articles i>f Regulations 45 (1918 Act), except as noted below. It follows then, thati except/as noted below, for the purposes of the Supplementary Bulletin Rulipgs, tjre Article reference number is the same under either Act. Reg. 62 (1921 Ait)/ Reg. 45, (1918 Act) No corresponding Arti/le . .to Article 712 Article 712 is the same as, therefore refer to, Article 713 n 723 " " < jjr << << a a a 714 « J\4 " " f\ " << << a a << yj^ u a ftt\ a tt a a a J]fi No corresponding Article to Article 717 Article 716 is the/sami as, therefore refer to, Article 719 a" 718 " / " 1 " " " " " 720 No correspondmg Artidle to Article 869 Article 869 is Jthe sameks, therefore refer to, Article 870 870 "/ " l" ii ii " " 871 otherwise Art. of Reg. 62 is sam^ as, therefole refer to, same numbered Art. of Reg. 45 (The list isxdways up-to-date?) Law Section 300.... 301 ... . 302 Article I Number ..701../, . .711 . 712..., 713... 714.... 715... 716..., 717... 718.... 719.... 720.... ..731... Law Section 302.... 304 Article Number ..732... 733... ..741... 742... 743... ..751... 752... 753... ..761 . ..771... ..781... 782... Last Ruling . .1 . . None ..2 . .None . . None . . None . . None . . None . . None ..1 ..3 , .None (Over) Law Article Last Section Number Ruling •211 i tt 784 None tt 312 791 o 320 801 ' f TL'SV. n 802 1 325 81 ! 2 « 81? 3 tt 81 * 9 tt 814 None a Q it 816 1 tt 817 None it 818 .3 326 831 41 <« 832 . None «< 833 .4 it 834 1 tt 835 % u 836 . . 15 tt 837 5 tt 838 . . .10 tt 839 4 tt 840 . .10 a 841 .5 a 842 None tt 843 2 tt 844 t €i 845 8 U 845 A fS'-e 845) tt 846 4 tt None tt 848 None tt 849 . . . .None it 850 2 it 851 6 it 852 1 it 853 1 Law Article Last Section Number Ruling 326 ... 854 . 2 tt 855 , 1 tt 856 None tt 857.. 5 a 858. 10 u 859 1 it 860 . . . . None tt 861 .. . None a 862. . 3 n 863 None • fit i tA uru 1 1 864 None tt 865 None per cent of tax. Failure to pay on time, 5 per cent cf tax and 1 per cent interest a month. Severe penalties for iaiiure t.> file returns or for false < : fraudulent returns. o 2 — nss G . r. o. [Reverse of Form 727.] Copyright 1922, by The Corporation Trust Company. WAR TAX 1 103 SERVICE 2-28-22. Reg. 57, Rev., 1922. TELEGRAPH AND TELEPHONE REGULATIONS. — 1921 ACT. REGULATIONS 57, REVISED. — 1921 ACT. [Promulgated February 15, 1922.] [Released for publication February 28, 1922.] RELATING TO THE TAX ON TELEGRAPH, TELEPHONE, RADIO, AND CABLE FACILITIES UNDER THE ^ REVENUE ACT OF 1921. TABLE OF CONTENTS. PART I. TRANSMISSION OF DISPATCHES, MESSAGES, AND CONVERSATIONS. IMPOSITION OF TAX. Paragraph Article 1. Imposition of tax — Transmission 5510 2. Imposition of tax — Carrier 5512 ORIGIN OF MESSAGE DETERMINES TAXABILITY. 3. Origin within United States 5514 4. Reversed or collect messages 5517 5. Effective date of law 5518 BASIS, RATE AND COMPUTATION OF TAX. 6. Basis for computation' — Amount of charge 5519 7. Franks 5523 8. Overtime telephone messages 5524 9. Messages transmitted under contract 5525 EXEMPTIONS. 10. Business of transmitting carrier 5526 11. Charges of 14 cents or less 5527 12. Services rendered to the United States, or to any State or Territory, or to the District of Columbia 5528 13. Political subdivisions of State or Territory 5529 14. Government agencies 5530 15. Evidence of right to governmental exemption 5531 16. Foreign diplomats 5535 17. Evidence of right to exemption of foreign diplomats * 5538 PART II. LEASED WIRE AND TALKING CIRCUIT SPECIAL SERVICE. IMPOSITION OF TAX. 18. Imposition of the tax' — Meaning of leased wire and talking circuit special service 5539 19. Private branch exchange service 5544 20. Tie lines 5545 21. Private lines and extension lines 5546 22. Intercommunication and interior systems 5547 23. Long-distance terminals 5548 BASIS, RATE AND COMPUTATION OF TAX. 24. Basis for computation of tax 5549 25. Computation of tax — Effective date 26. Computation of tax — Service performed between a point within and a point without the United States 5553 Copyright 1922, by The Corporation Trust Company WAR TAX 1104 SERVICE 10-30-22. SALES (EXCISE) TAXES. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Sales and Excise Taxes Law Provisions. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph Law Provisions 4500 Reg. 47 Manufacturer's and producer's excise taxes (revision of January 6, 1922). (Indexed on the blue sheets following.) .. . 4540 Reg. 48 Works of art and jewelry taxes regulations (revision of January 1 2, 1922). (See exhaustive Table of Contents on page 934.) 4700 3307 Art. 4, Reg. 47, amended.— Cash discounts (March 20, 1922) 4758 3312 Court decision, 1918 Act. Ouija boards held to be taxable (April 5, 1922) J 4766, 4795 Decision Malley vs. Walter Baker & Co., Ltd., 1918 Act. Sweet chocolate as candy (May 16, 1922) 4768 3344 Treasury Decision designation for Malley vs. Walter Baker & Co., Ltd., case (H4768). (June 10, 1922) 4793 3358 Art. 4, R£g. 47, restored to original form.— T. D. 3307 (H4758] revoked. — Cash discounts and expenses (June 22, 1922) 4794 \ Correcting typographical errors in T. 1). 3312 above... 4795 Irserl this page immediately before the blue "Sales Taxes" index. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Sales (Excise) Taxes Supplementary Page 1. 11-22-22. Perpetual Check List Supplementary Rulings Reprinted from the Internal Revenue Bulletins. The Supplementary Rulings are printed on the pages immediately preceding. The Foreword to the Supplementary Rulings should be read. Key. — The word "none," in the column headed "Last Ruling," signifies in each case that there are no special rulings bearing on the particular Article of Regulations 45 (1918 Act) or of Regulations 62 (1921 Act). The numeral, in each case, shows how many serially numbered special rulings bearing on the particular Article have been reproduced, and indicates the last serial number of the group. These serial numbers appear in bold face type at the end of the special rulings themselves, within the Supplement. Caution. — To the extent of the imposition of the excess-profits tax for 1921, the 1918 and 1921 laws are \dentical, except that domestic corporations entitled to the benefits of Section! 262 of the 1921 Act HJ1083) are grouped with foreign corporations for the^ purposes of the 1921 excess-profits tax. To much the same extent, with lijce qualifications, the provisions of Regula- tions 62 (1921 Act) are essentially identical (there are frequent verbal changes) to the provisions of Regulations 45 (1918 Act). The numbering of the Articles of Regulations 62 (Jl921 Act) is the same as that of the respec- tive corresponding Articles of Regulations 45 (1918 Act), except as noted below. It follows then, that, except as noted below, for the purposes of the Supplementary Bulletin\Rulings,| the Article reference number is the same under either Act. Reg. 62 (1921 Act) Reg. 45, (1918 Act) No corresponding Article to Article 712 Article 712 is the same as, therefore refer to, Article 713 a 713" 4< '* £< u 715 « 715 u ** I ** u ** 716 No corresponding Article to Article 717 Article 716 is the samfb as, therefore refer to, Article 719 " 717 " " "^ i " " " " " 718 " 718 " " I" " " " " 720 No corresponding Aiiicff to Article 869 Article 869 is the same as, therefore refer to, Article 870 " 870 " " ^ it ' " " *' 871 Otherwise Art. of Reg. 62 is same as, therefore refer to, same numbered Art. of Reg. 45 ( The list is always up-to-date.) Law Section 300. . . . 301.... J " u ti « " ti tt Article Number ..701.... ..711.... 712.... 713.... 714.... 715.... 716... 717.... 718.... 719.... 720.... ..731.... Last Ruling . . None .1 i . None . . None . .11 1.2 . .None . .None . . None . .1 . .None ..1 Law Section -302. .. . A" 303.... « 304.... 305 310 311 Article Number ..732... 733... ..741... 742... 743... ..751... 752... 753... ..761 . ..771... ..781... Last Ruling 1 None 2 None None None None None None 1 3 , None (Over) Law Section 311.... 312.... 320.... « 325. « « v « 326, « « « « « ? «< ^«« S u i/tt tt ... Article Number ..783... 784... 785 ..791.... ...801.... 802.... ..811.... 812.... 813 814 815 816 817 818 ...831 832 833 834 835 836 837 838 839 840 841 842 843 844 845 Last Ruling 1 None None 3 .1 .1 .2 .3 .9 .None .9 .1 .None .3 .40 .None .4 .1 .3 .15 .5 .10 .4 .9 .5 .None .2 .1 .8 845 A (See 845) 846 4 847 None 848. None 849 None 850 2 851 6 852 1 853 1 Law Section 326.... a « « a it it « tt (( tt tt a a it tt 327. 328. it a tt 330. a tt tt 331. 335, tt tt tt 336. « 337. tt 338. Article Last Number Ruling ..854 2 y y 855 1 856 None^ 858:::::::::::io^ 859. 860. 861. 862 1 .None None 3 : 863 None^ 864 865 866 867 868 869 870 871 .901 .911 912 913 914 .931 932 933 934 .941 .951 952 None None None None .None 1 J None 1 - 30 2 ? 3 9 1 % 2 4 1 ' 7 ' j None ■ 17 ^ None' 1 s 953 None- 954 None ' 955 None " 961 None " 962 None * 971 2 972 None 981 None Every Article of Regulations 45 (1918 Act) and of Regulations 62 (1921 Act) bearing specifically on the war-profits and excess-profits tax is listed in the foregoing table. The first Article is 701. Missing Article numbers such as 702 to 710 have not yet beon used. The last weekly Bulletin from which rulings have been reproduced hereinbefore and as luted above is VOLUME I (1922), No. 47. Later Bulletins , since issued (if any), contain no rulings bearing on the 1918 or 1921 excess-profits tax laws. Insert this page to face blue page 401. 4-14-22. Sec. 326. Art. 840. -11. I ('22)-15-219: I. T. 1278. Revenue Act of 1921. Inquiry is made as to whether the cost of rotogravure supplements comes within the purview of A. R. M. 141 [Ruling No. 8, above], which permits taxpayers engaged in the publication of newspapers to include in their in- vested capital, for tax purposes, moneys expended /out of earned surplus or current earnings for the sole purpose of building up/ the circulation structure. It is stated that newspaper publishers employ /rotogravure supplements largely as a circulation stimulant. / The question to be determined in cases affected by the ruling above referred to is whether the amounts claimed as an addition to invested capital can be identified as having been expended out of earned surplus or current earnings for the sole purpose of building up the circulation structure. It is believed that rotogravure supplements constitute a part of the news service furnished by newspapers to their subscribers and are not of such a nature that the expense thereof can be said to be incurred solely for the purpose of building up the circulation structure. It, therefore, follows that the moneys expended therefor may not be added to invested capital. 9 Supplemcntarp Bulletin Rulings. Sec. 326. Art. 831.-25. I ('22)-33-459: I. T. 1420. Revenue Acts of 1917, 1918, and 1921. In 1885 certain persons organized a corporation and a certificate of incorporation was issued to them. In 1911, in pursuance of the advice of an attorney, the company was reorganized in order to cure defects in its original organization, and the powers of the corporation were broadened, its capital increased, and its existence made perpetual. In 1914 the name of the corporation was changed ana thereupon all of the assets standing in the then name of the corporation were transferred by a deed having a covenant of warranty to the corporation designated by its new corporate name. Held, that the copy of the jbriginal charter of the corporation and of the renewed charter, and the othe/ evidence submitted by the taxpayer, disclose that the amendmen of its cr/arter and the subsequent change in its name did not create a new corporation, nor cause any change in its existing cor- porate organization. The iiwested capital of the corporation, accordingly, must be computed in the s£me manner as though the invested capital of the corporation originally formed in 1885 was being determined. The values of the assets on hand at the/beginning of 1917 and later years must be deter~ mined by their values at tire time of their original acquisition, as limited and defined by the Revenue Acts applicable to the taxable years involved, and their values at the date of the amendment of the corporation's charter or at the date of its change of name can not be considered for such purpose. Supplementary Bulletin Rulings. 0* t 6-1-22. (2) 6-26-22. (3) 10-30-22. EXCISE TAXES REGULATION; made, it is difficult to see how candy can be taxed at all; for, as already stated, candy is in its main characteristics sugar compounds intended for luxury, taste-gratifying, consumption. When somewhat less than half of a toothsome sweet is chocolate — also a common ingredient of candy compounds — the resultant is not transmuted into food within the fair meaning of this tax statute, if the compound is sold and consumed as confectionery or candy. 4731 The eighteenth assignment of error brings before us the refusal of the court below to submit to the jury the question of what proportion of the sweet chocolate in question was used for cooking or domestic purposes. This assignment must be sustained. The burden of proof is on the plaintiff to show that the taxes collected was illegal or the assessments excessive. Anderson v. Farmers' Loan & Trust^Co., 241 Fed. 322; New York Life Ins. Co. v. Jnderson\263 Fed. 527, 530; Germantown Trust Co. v. Lederer, 2631 Fed. 672; Bailey v. R. ]L Co., 22 Wall. 604, 63* ; Black Fed. Cases, sec. 547; Shafer v. Craft\Collector, 144 Fed. 90 r , 909; South. Pacific \\Lowe, Collector, 328 Fed. 847, 849; Cohen v. Lowe, Collector, 234 Fed. 47ft, 476. 4792 The plaintiff is not entitled to recover more than the amount that it can show it fiaid as a tax on such portions of the product in question as were not sold and used as candy wmihin the meaning of the Department's regulation. \ / The judgment of the "District Court lis reversed and the case is remanded to that court for further proceedings not {inconsistent with this opinion; and the plaintiff in error recovers sis in this iourt. (T. b. 3344.) 4793 [This Treasury Decision consists of a reprint of the opinion in Malley 4768 vs. Walter Baker & Coktpany, Limited, which is reproduced in full, above, beginning at 1f47^| — The Corporation Trust Company.] nf. D. 3358.) 47S4 Discounts and Expense*. — Revocation of T. D. 3307. — Treasury 4553 Decision 3307 [1f4758] isj herebV revoked as of date July 1, 1922, 4758 and Article 4 of Regulations 47\revised Deeember, 1921 [^4553]) is restored to read as it stpod priorVto the promulgation of the above mentioned Treasury Decision. ffT. D. 333§, signed by Commissioner D. H. Blair, and dated June 22, 1922. Copyright 1922, by The Corporation Trust Company. WAR TAX 951 SERVICE 1 0-30-22. EXCISE TAXES REGULATIONS. PP. D. 3401.) 47 95 Revenue Act of 1918. — Decision of Court. — Ouija boards held to be 4766 taxable as games. — [This Treasury Decision (Oct. 18, 1922) reprints the decision of the 4th Circuit Court of Appeals in the case of Balti- morelTalking! Board Co. (Inc.) vs. Miles, Collector, (280 Fed. 658), as reported in T. D. 3312 [^|4766] "for the purpose of correcting typographical errors in T. D. 3312/' merely, adding, incidentally, that "Certiorari was denied in U. S. Supreme Court, 6-5-22, 42 Sup. Ct. 590." — The Corporation Trust Company.] Copyright 19ZI, by I he Corpot 02 11.530 no Article Number ..701 711 712 713 714 715 716 717 718 719 720 731 Last Ruling . . None .1 . . None ; .None .11 ..2 . .None . .None . .None .1 . .None .1 Law Section " ' <403 .... ifii 305 £410 Article Number 732 741 742. 743. 751 752, 753. 761 771. ^311 781 " 782, Last Ruling . .1 . .None . .2 , .None , . None . . None . .None .None .None .1 .3 .None (Ow) Article Last Number Ruling . .. .:783.. 1 " 784 None " 785.... None ¥ 312 791 3 320.... 801 1 802 1 325 811 2 " 812 3 813 9 814 None 815 9 816 1 817 None 818 3 1/326. 831 40 tm 832 None //• 833 4 /l - tt\ jfi* [ * n0 ** ^' * Later Bulletins, since issued {if any) y contain no rulings bearing on the 1918 or 1921 excess-profits tax laws. Insert this page to face blue page 401. 4-6-22. Sec. 327. Art. 001.— 41. ] not be computed upon the basis of or in direct relation to cost, but in either case it satisfies the term "plus." This interpretation appears to be in accord with the common under- standing of the term "cost-plus basis" by the governmental departments charged with war contracting, as appears from the recommendations of the Interdepartmental Cost Conference held on July 31, 1917. (See full reprint of such recommendations in Nicholson & Rohrbach on Cost Accounting, p. 488, et seq.^ Accordingly, this office holds that the "cost-plus basis" of contracting within the meaning of the statute applies to those cases wherein the contractor is to be reimbursed the actual cost of operations and is to be paid in addition (or "plus") an assured profit, determined by any of the methods above men- tioned, whereby the burden of the cost of production is put upon the Government. As appears above, the method of compensation agreed upon by the parties to the contract here considered consisted of a reimbursement to the contractor of its total actual cost of operations and the payment in addition thereto of a fixed profit of a definite sum for each and every pound of product delivered and accepted, with a provision for the payment of an additional profit of 50 per cent of a so-called saving in case the contractor produced the product at an actual cost of production in an amount less than the estimated cost of production as determined under the contract. Income derived upon this basis or method of compensation is "income derived on a cost-plus basis." In view of the foregoing opinion of the Solicitor, in which the Committee I concurs, it is recommended that the action of the Income Tax Unit in rejecting the corporation's application for assessment of the profits tax for 1919 under the provisions of sections 327 and 328 of the Revenue Act of 1918 be affirmed, and accordingly that the appeal of the taxpayer be denied, inasmuch as 50 per cent or more of the gross income of the corporation for the taxable year consists of gains, profits, commissions, or other income derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. 1 J 29 Supplementary Bulletin Rulings. ,irioiq i to iZOJ 2 baa 7-27-22. FORMS, FINDER, ETC. TABLE OF CASES. The references are to page numbers. Page Baker & Co.: Matley vs. (C. C. of A., First Circuit, May 16, 1022) 946 Baltimore Talking Board Co., Inc. vs. Miles (T. D. 3312) 945 Buckeye Cotton Oil Co. vs. U. S. (T. D. 3377) 1118 Cartier Holland Lumber Co. vs. Doyle (269 Fed. 647). .Dec. 1920 Cum. Bull. p. 337. Reversed, C. C. oft A., Sixth Circuit (277 Fed. 150) 417 Casey vs. Howard (C. fc. of A., First Circuit, June 6, 1922) 631 Central Union Trust Cb. vs. Edwards (U. S. D. C, May 25, 1922) 640 Cole et al. vs. Ralph (252 U. S. 286) 749 Congdon vs. Lynch (TAD. 3324) 153 Crocker vs. Malley (C. C. of A., First Circuit, June 6, 1922) 631 D. L. & W. R. R. Co.: \W- U. Telegraph Co. vs. (T. D. 3369) 1117 DeLaski & Thropp Circular Woven Tire Co. vs. Iredell (268 Fed. 377) 386 Dodge vs. Osborn (240 U. S. 118) 1613 Doyle: Cartier Holland Lumber Co. vs. (269 Fed. 647) . . Dec. 1920 Cum. Bull. p. 337. Reversed, C. C. of A.ASixth Circuit (277 Fed. 150) 417 Doyle: Shwab vs. (U. S, Supreme Court, May 1, 1922) 143 Duffy: Marconi Wireless Telegraph Company of America vs. (273 Fed. 197) 763 Edwards: Central Union Trus\ Co. vs. (U. S. D. C, May 25, 1922) 640 Edwards: Lincoln Chemical C\ vs. (272 Fed. 142) ' 389 Edwards: Martin vs. (T. D. 3334) 462 Edwards: Slocum et al., executory (Sage Estate) vs .(U. S. D. C, June 20, 1922). .. . 220 Edwards: Title Guarantee and Trust Co. (Teets) vs. (T. D. 3319) 142 Eisner: New York Trust Co. vs. (41 Sup. Ct. 506) 117 Fidelitv Trust Co. vs. Lederer (276\Fed. 51) 766 Field: U S. vs. (255 U. S. 257).... \ 120 Gaston: Nichols vs. (U. S. C. C. of R., First Circuit, March 21, 1922) 136 Greiner vs. Lewellyn (U. S. Supreme\Court, April 10, 1922) 142 Hecht vs. Malley (C. C. of A., First Circuit, June 6, 1922) 631 Howard vs. Casey (C. C. of A., First VCircuit, June 6, 1922) 631 Howard vs. Malley (C. C. of A., Firstt Circuit, June 6, 1922) 631 Iredell: DeLaski & Thropp Circular Woven Tire Co. vs. (268 Fed. 377) 386 Knox (estate of Kissam) vs. McElligoit (U. S. Supreme Court, May 1, 1922) 152 Kohlhamer vs. Smietanka (239 Fed. 4(|8) 1615 La Belle Iron Works vs. U. S. (41 SupiCt. 528) 379 Lederer: Fidelity Trust Co. vs. (276 F$d. 51) 766 Levy vs. Wardell (U. S. Supreme Court May 1, 1922) 150 Lewellyn: Greiner vs. (U. S. Supreme (fourt, April 10, 1922) 142 Lincoln Chemical Co. vs. Edwards (272|Fed. 142) 389 Lynch: Congdon vs. (T. D. 3324) I 153 Malley vs. Baker & Co. (C. C. of A., FiVst Circuit, Mav 16, 1922) 946 Malley vs. Crocker (C. C. of A., First Circuit, June 6, 1922) 631 Malley vs. Hecht (C. C. of A., First Cir<|uit, June 6, 1922) 631 Malley vs. Howard (C. C. of A., First Grdjuit, June 6, 1922) 631 Marconi Wireless Telegraph Company on Am. vs. Duffy 273 (Fed. 197) 763 Martin vs. Edwards (T. D. 3334) I 462 McElligott: Knox (estate of Kissam) vs.|(U. S. Supreme Court, May 1, 1922) 152 Miles: Baltimore Talking Board Co., Inclvs. (T. D. 3312) 945 New York Trust Co. vs. Eisner (41 Sup. ft. 506) 117 Nichols vs. Gaston (U. S. C. C. of A., FirSt Circuit, March 21, 1922) 136 Osborn: Dodge vs. (240 U. S. 118) | 1613 Polk vs. Page (276 Fed. 128. Also U. S. I). C, December 21, 1921) 106 135 C. C. of A. (May 16, 1922) ] ' 155 Proctor & Gamble Co. vs. U. S. (T. D. 3317) 1118 Ralph: Cole et al. vs. (252 U. S. 286) 1 749 Shwab vs. Doyle (U. S. Supreme Court, May 1, 1922) 143 Slocum et al., executors vs. Edwards (Sage Estate) (U. S. D. C, June 20, 1922) 220 Smietanka: Kohlhamer vs. (239 Fed. 408). 1 1615 Smietanka vs. Ullman (275 Fed. 814) \ 79 Title Guarantee and Trust Co. (Teets) vs. wards (T. D. 3319) 142 Ullman: Smietanka vs. (275 Fed. 814) \. 79 Union Trust Company (Lachman) vs. Wardell (U. S. Supreme Court, May 1, 1922) 147 U. S.: Buckeye Cotton Oil Co. vs. (T. D. 3377) 1118 U. S. vs. Field (255 U. S. 257) 120 U. S.: LaBelle Iron Works vs. (41 Sup. Ct. 528) 379 WAR TAX .1705 SERVICE FORMS, FINDER, ETC. TABLE OF CASES.- Concluded. The references are to page" numbers. Page U. S.: Proctor & Gamble Co. vs. (T. D. 3377) 1 1 18 U. S.: Washington Water Power Co. vs. (56 Ct. Clms. — Opinion No. 34092) 627 W. U. Telegraph Co. vs. D. L. & W. R. R. Co. (T. D. 3369) 1117 Wardell: Levy vs. (U. S. Supreme Court, May 1, 1922) 150 Wardell: Union Trust Co. (Lachman) vs. (U. S. Supreme Court, May t, 1922) 147 Washington Water Power Co. vs. U. S. (56 Ct. Clms. — Opinion No. 34092) 627 WAR TAX 1706 SERVICE 8-2-22. OCCUPATIONS TAXES. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Occupations Tax Law Provisions. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph References. T. D. Subject Paragraph 1921 Law Provisions A 7500 Reg. 59 Regulations under 1921 law (issue of July/io, 1922) relating to the special taxes on businesses and occupations and on the use of boats./' (See exhaustive Table of Contents beginning on/page 1513.) 7537 3309 Art. 22, Reg. 59 (1918 /Act), amended.— Theater special tax: population (March 20, 1922) 7663 3331 Arts. 6(g) and 7, Reg/59 (1918 Act), amended.— Brokers: Persons Uable and not liable to tax (May 13, 1922)../. 7665 Insert this page immediately before the yellow guide card * 'Miscellaneous Matters.'! Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Occupations Taxes Supplementary Page 1. 6-26-22. SALES (EXCISE) TAXES.— RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the Sales and Excise Taxes Law Provisions. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph Law Provisions J. 4500 Reg. 47 Manufacturer's and producer's excise taxes (revision of January 6, 1922). (Indexed on the blue sheets following). .. . 4540 Reg. 48 Works of art and jewelry taxes regulations (revision of January 12, 1922). (pee exhaustive Table of Contents on page 934.)../ 4700 3307 Art. 4, Reg. 47, amende^.— Cash discounts (March 20. 1922) 4758 3312 Court dec/sion, 1918 Act. Ouija boards held to be taxable (April 5, 1922) 4766 Decision Malley vjt. Walter Baker & Co., Ltd., 1918 Act. Sweet cho/olate as candy (May 16, 1922) 4768 V Treasury Decision designation for Malley vs. Walter B^ker & Co., Ltd., case (1f4768). (June 10, 1922) 4793 Art. 4,\Reg. 47, Restored to original form.— T. D. 3307 ffl4758] revoked. — Cash discounts and expenses (June 22, 1922) 4794 Insert this page immediately before the blue "Sales Taxes" index Copyright 1922, by The Corporation trust Company. WAR TAX SERVICE Sales (Excise) Taxes Supplementary Page 1. ■ 6-1-22. (2) 6-26-22. EXCISE TAXES REGULATIONS. made, it is difficult to see how candy can be taxed at all; for, as already stated, candy is in its main characteristics sugar compounds intended for luxury, taste-gratifying, consumption. When somewhat less than half of a toothsome sweet is chocolate — also a common ingredient of candy compounds — the resultant is not transmuted into food within the fair meaning of this tax statute, if the compound is sold and consumed as confectionery or candy. 4791 The eighteenth assignment of error brings before us the refusal of the court below to submit to the jury the question of what proportion of the sweet chocolate in question was used for cooking or domestic purposes. This assignment must be sustaine/i. The burden of proof is on the plaintiff to show th^t the taxes collected V-as illegal or the assessments excessive. Anderson v. Farmers' Loan & Trust Co., 241 Fed. 322; New York Life Ins. Co. v. Anderson, 263 Fed. 527, 530; Germantown Trust Co. v. Ltderer, 263 Fed. 672; Bailey v. R. R. Co., 22 Wall. 604, 638; Black Fed. Cases, sec. 547; Shafer v. Craft, Collector, 144 Fed. 907, 909; South. Pacific v. Lowe /Collector, 238 Fed. 847, 849; §phen v. Lowe, Collector, 234 Fed. 474, 476. 4792,^ The plaintiff is not entitled to recover more than the amount that it \ can show it pain as a tax on such portions of the product in question as wereX not sold and ldsed as candy within the meaning of the Department's regulation. The judgment of /the District Court is reversed and the case is remanded to that court for further proceedings not inconsistent with this opinion; and the plaintiff ii% error recovers costs in this court. (T. D. 3344.) 47 93 [This Treasury Decision consists of a reprint of the opinion in Malley 4768 vs. Walter Baker & Company, Limited, which is reproduced in full, above,*- beginning at ^[4768. — The Corporation Trust Company.] — (T. D. 3358.) 47S4 Discounts and Expenses. — Revocation of T. D. 3307. — Treasury 4553 Decision 3307 ff4758] is hereby revoked as of date July 1, 1922, 4758 and Article 4 of Regulations 47 (revised December, 1921 [^[4553] is restored to read as it stood prior to the promulgation of the above mentioned Treasury Decision. (T. D. 3358, signed by Commissioner D. H. Blair, rnd dated June 22, 1922.) r. Copyright 1922, by The Corporation Trust Company. WAR TAX 951 SERVICE i i 2-1-22. EXCISE TAXES REGULATIONS. z E 3 Section 902— I— Siulptot, ficlnlir.it. statuary, art tmtdalra, J |,j Section 905— fti Jtwtlry. reof or Imitation, pttclam jjW jgjMj MISCELLANEOUS EXCISE TAXES (Title IX, Sections 902 and 90 5,01 the Reve nue Ac t 0119-31) CHARACTER OF TAX. AMOUNT Cf TAX J / juwoi (or o^rir) £Arf tit^nplng It 4 but rthtm t] lit amount of tax Jut on lata a! tkt cioee-mcnltar.oJ % ml.'tlu fat tnt month of , IMU~, end Hat tit amount loiucUifot txopaymtnl It aSLaUt o E o Total tax collcclcj .. I ocu pay men! for month of . Total amount of tax, alto. 2S% /Vo. an -tu. be roprrUd on Fan: 726-i, P.e\i'V. (a) Admissions ^ (•5) L«srs, ttc.of beset aia? scab \c) Roof itriem,t*Smli, arJ slaiier tnialalnmali (i) Excess oTtr tzU'-lishi ' prjr.es — Bct*f!ee salts / sHeaf (or ejfrr.*' O-.s'. the. fwefetni is a trot it''rm of tbi arrxttr-.t a/ tax ccllisttj cn adntiiifas and dues for the menthof , 192 , and thai Hp MMMt tt\*» lW /»> osvfsa'jmfil is aZoaa'U iy leu. J (>*) 5u« J {/) IrJSleUaifca. Jj (<) I;/. ^M<-icn. 07 duly ftntKrrind UMcK g Al'cm Ins raj .$<>*.« Tc'ol iix collected.. ntrv<«f orr^u-,1 of lex due.. PvkMj 2*$ /W.'y 5/r Interest Total amotmi dve.. i h ends c&saftejfsjec icy of.. I Uek) (T.U.. ii lecjiiaiico tiicBid b? neat to ttf- Catlrrior of Intel sal r joci ct^lct aid Bit to lh(- CotaaiMiorer of latere! I Washington, D. C. ifwo [natraettona, par, e, on revet™ If yon have notMo? to rep: r>, -sr.t notation to thit ii for* and retmm io tke CoH«c:«r n' Inu.'Kal Kevocjc. >•.«•*.....•;:•••• t . » not to ttport u.x < n thi • torn. Taxe? • !«« from such brotars mturf be rerwrtsd o.; Form 72»-A, Revised. j£ (*) Adn-.tssioni [jj (') Leasts, etc, of boxes and teats — C {<) Roof larderj; cabarets, and similitr entertainments (d) £r ;-h n<> ni'nr i ■ ■ !>in, r;o'v*v«r, must be made tor exeraption on Form 7f\ 4. "WHO MUST SLAKE KETTTR5T, CGMJSCt, AND I? A"? TAX. — Any pcrcou or organization receiving payment for admissions or dues or being a club ami having taxable life members •.vuA collect the tax from the poreon poying admission, dues or fees, except in 1 (6) and 1 (c) above, vsQcuveridor must pay tax on the «>Nre*s charge. 6/^60 MPTTTATION OF TAX.— fast on admissions i? irnncsed on each payment, or upon each single admission. Tn the case of admissions by K-ason ticket or subscription, the tax applies to the wnOffit para fox each reason ticket or subscription. 6. EETTJRNS AND PAxMENl OF TAX. — Return with remittance covering taxes -collected in any month must be in tho hands of the Collector of Internal Revenue (or iris authorized representative) of tho district in which the principal ofnoe or place of business of tho person mating the return is located on or before tho last day or tho succe«iin2 month. Separate re'nrn of tax on admissions must be made for each place operated. Returns must be signed and sworn to before on officer authorized to adnvniptsr oaths, but if tho tax is less than $10 the return may bo signed or acknowledged before two subscribing witnesses. 7. CREDITS.— In case oi overpayment ot tax due to an error in calculation, credit may be taken therefor upon any subsequent monthly return. Credit may also be taken as outlined in the iegukt:6n3. A complete and detailed record of such overpayment must be kept by the person taking credit therefor. In caso credit is taken on this return for an ove.paj rne.it made on a previous return, fui information must be attached shown;: ttia reasons therefor and designating the kind of tax, and ihe month for which tho previous return was fi'ed and the date of payment. _ ■ 8. RECORDS.— Every person or organization rcqjnjrad to make a return must keep such records zs rill saw ail payments, admits k.ns, or mem- bers upon which tax is reamred to be collected, in order that rctvrrhs may be essilv verified by revenue of.icera. * . 9/ ADMISSION HX05ETS.— The price of tho.ticket sL>aP be conspicucualy 8'id indelibly printed, stamped, or written on the fs.ee or back of that part of the ticket which is to be taken up by the management of the thea ter, opera, or other place of amusement, together with the muse of the vendor, if sold other than at the ticket office of tho theater, opera, cr other place ci amueement. Penalty of not more than 5100 for violation of the clause. ■■■ • • • •■ ■ - . . 10. PENA^iTDaa.— Failure to/<« "on time, 25 per cent of tax. Failure to pay on U:uc, 5 per cent of tax and 1 per ce.it interest a month." Severe penalties for faihure io £lc returns cr for fai?o or fraudulent, returns. ■ e.*.o. [Reverse of^Form 729. j ( fpyrighi 1922, by 7 he Corporation /ritJi Lompony. WAR TAX 1306 SERVICE 2-1-22. EXCISE TAXES REGULATIONS. MANUFACTURER'S EXCISE TAXES CHARACTER OP TAX Camera, andlenaca Pl.otocrafik!c film, arid puUs 6) Candg 7) Ftrearna. Mh, etc £Xr$ knlfj. dour", otc 1) Cl tor holder a, de ) Automatic tending machine! I}) Uecrla.-ie. 13) Hanlln4itma1Sj.dc. J 4) Yacht., mote, ioaU. d Total amount tllox due «%>J% AMOUNT OF TAX Mr (or tfirm) Uo/tfi/arcpfei b a (rue rdarn of the eh, lam. 5Mrrrkm/niK>/M» /or t»« mwilA o/„ .-.*•«»•/ „/M , end thoLlh, omxnl iedudcJIo, . ItilmlYoT (Wiiaessj (Sob paragraph 4 onbecir.) VTlti"e~)~or (Witness) Name No. ani Strut City ar.i State Betum with remittance ehonld be seat to tke Collector of Internal Revenue (or your district and not to the Commissioner of Internal Revenue, at Washington, D. C. (Sri Instructions, par. 4, on revera* "hta* to report, nuke notation to that i Collector of Internal Bevenna. MANUFACTURER'S EXCISE TAXES CHARACTER OP TAX CHARACTER OF TAX AMOUNT OF TAX SECTION 900: (0 Automobile truck,, fit . i*) Camera end I ernes 5) Phobtrephte film, and filala .6) Candy (7) Firearm,, Mb. dc ... 9) Dt,k knitter, doner,, dc [10) C(/.r AoWer.. dc _ 70 Automatic vending machine, axlghlne machine, (12, LlKrla.de (13) HmUnt iarmmli.de.. (.14) YacLii. male coah. eU. OT VoUk,. jolt cam. dc. . Total amount of lea due . a ttaii% PtnaH,S% Total amount due . I tutor (.at affirm) lUtth-Jorejclnt I, a true return of tie a uahle iu law. intern to and, uloathed kef art rm IhU m .end that tke amount deducted Jo, , (SeVpara^phVon back) (Title) ot (Witness) Name No. ani Street ,Clty ani Stale Eetoxxi with remittance should be sent to the Collector of Internal Revenue for your district and not to the Commissioner of Internal Bovenne, at Washington, D. C. (8ee Instructions, par. 4, on reverse t, mafce notation to that [Obverse of Form 728.J Copyright 1922, by The Corporation Trust Compmny. WAR TAX 907 SERVICE 2-1-22. EXCISE TAXES REGULATIONS. INSTRUCTIONS (For foil Instruction, seo Regulations No. 47, Rirtaed) - _ - . I. TAX. — Section 900 of the Revenue Act of 1921 provides: "That from and after January' 1, 1922, there shall ho levied, aasceeed, collected, and id upon the following articles sold or leased by the manufacturer, producer, or importer, a tax equivalent to the following percentages of the pric* which so sold or leased : "(1) Automobile trucks and automobile wagons (including tires, inner tube3, parts, and accessories therefor, sold on or in Rale. connection therewith- or with the sale thereof) r ■ 3 per cent. "(2) Other automobiles and motor cycles (including tires, inner tubes, parts, 1 and accessories therefor, sold on or in con- nection therewith or with the sale thereof), except tractors 5 per cent. "(3) Tires, inner tubes, parts, or accessories for any of the articlea enumerated in subdivision ( I) or (2), sold to any person other than a manufacturer or producer of any of tho articles enumerated in subdivision (1) or (2) 5 per cent. "(4) Cameras, weighing not more than 100 pounds, and lenses for such cameras , 10 per cent. "(6) Photographic films and plates (other tian moving-picturo films) „ „ ... 5 per cent. "(6) Candy _ a 3 per cent. "(7) Firearms, shells, and cartridges, except those sold for the use of tho United States, any State, Territory, or possession of the United States, any political subdivision thereof, or the District of Columbia ■ 10 per cent. "<$) Hunting and bowie knives _ — , .. 10 per cent. "(9) Dirk knives, daggers, sword canes, stilettos, and brass or metallic knuckles 1 100 per cent. "(10) ttgar or cigarette holders and pipes, compc-ed wholly or in part of meerschaum or amber, humidors, and smoking stands 10 percent. "(11) Automatic slot-device vending machines. _ 5 per cent. Automatic slot-device weighing machines. _ 10 per cent. (If the manufacturer, producer, or importer of any such machine operates it for profit, he shall pav a tax in respect to each tucb. machine put into operation equivalent to 5 per centum of its fair market value in the case of a vend- ing machine, and 10 per centum of ita fair market value in the case of a weighing machine.) "(12) Liveries and hvery boots and hats _ 10 per cent. "(13) Hunting and shooting garments and riding habits , 10 per cent. "(14) Yachts and motor boats not designed for trade, fishing, or national defense; and pleasure boats and pleasure canoes if sold for more than 5100 10 per cent." 2. Section 904 of the Revenue Act of 1921 provides: "That from ted after January 1, 1922, there shall be levied, assessed, collected, and paid, in lieu of the taxes imposed by section 904 of the Revenue Act of 1918, upon the following articles sold or leased by the manufacturer, producer, or importer, • tax equivalent to 5 per centum of so much of the price for which so sold or leased as is in excess of the price hereinafter sperified as to each euch article: "(1) Carpets and rugs, including fibre, on the amount in excesB of $4.50 per square yard in the case oi carpets and $6.00 per square yard in the case of rugs; "(2) Trunks, on the amount in excess of $35 each; "(3) Valises, traveling bags, suit cases, hat boxes used by travelers, and fitted toilet cases, on the amount in excess of $25 each; •''(4) Purses, pocketbooks, shopping and hand bags, on the amount in excess of $5 each ; "(5) Portable lighting fixtures, including lamps of all kinds and lamp shades, on the amount in excess of $10 each; "(6) Fans, on the amount in excess of $1 each." 3. COMPUTATION OF TAX.— The tax under sections 900 and 904 is based on the sale price of the goods sold and should be computed on earh transaction. 4. RETURNS AND PAYMENT OP TAX. — Return with remittance covering taxes due in anv month must be in the hands of the Collector of Internal Revenue (or his authorized representative) of the -district in which the principal office or place of business of the person making thn ret irn is located on or before the last day of the succeeding month. Returns must be signed and 6worn to before an officer authorized to administer oaths, but if the tax is less than $10 the return may be signed or acknowledged before two subscribing witnesses. 5. CREDITS. — In case of any overpayment of tax due to an error in calculation, credit may be taken therefor against taxes due upon any sub- sequent monthly return. Credit may also be taken as outlined in the regulations. A complete and detailed record of such overpayment must be kept by the person taking credit therefor. In case credit is taken on this return for an overpayment made on a previous return, full information must be attached showing the reasons therefor and designating the kind of tax, the month for which the previous return was filed, and the date of payment. In the case of illegal or erroneous payment, such as exports, nontaxable articles, etc., claim for refund on Form 46 must be filed. 6. RECORDS. — Every manufacturer, producer, onimporter required to make. returns must keep such records as will clearly show earh ta\.il>lp transaction, in order that returns may be easily verified By revenue officers. 7. PEN AX TIES. —Failure lof.lt on time, 25 per cent of tax. Failure to pay on time, 5 percent of tax and 1 per cent interest a month penalties for failure to file returns or for false or fraudulent returns. [Reverse of Form 728.] Copyright 1922, by The Corporation Trust Company. WAR TAX 908 SERVICE 8-2-22. ADMISSIONS AND DUES TAX.— RUNNING TABLE OF CONTENTS. Giving T. D. Reg. 43 Pt. 2 3282 3285 Reg. 43 Pt. 1 Rulings, Regulations, Opinions and Decisions under the Admissions and Dues Tax Law Provisions of the Revenue Act of 1921. (The Law appears at paragraphs 6500 to 6512.) Treasury Decision Number or other Designation, Date of Issue, and General Subject Content. Subject Paragraph Law Provisions 6500 ) Dues Regulations (revision of January 11, 1922) under the Revenue ) Act of 1921. (Fully/Indexed on the blue index, following) / 6513 Revenue Act of 1918.— /Amendment to Art. 12, Reg. 43, Part II (February 11, 1922) 6583 Arts. 9, 10, 11, and 12, Reg. 43, Pt. M amended (February 11, 1922) 6584 I Admissions Regulations (revision hi February 15, 1922). (Fully ) indexed on the bliile sheets following) 6589 Insert this page immediate e blue Dues Tax Index. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Admissions and Dues Taxes Supplementary Page I. 8-17-22. ESTATE TAX.— RUNNING TABLE OF CONTENTS.— Continued. Rulings, Regulations, Opinions and Decisions under the Estate Tax Laws. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph 3319 Title Guarantee and Trust Co. (Teets) vs. Edwards. U. S. District Court Decision. Bequest or devise in lieu of dower (April 5, 1922) 495 Decision Greiner vs. Lewellyn, U. S. Supreme Court. Value of State and municipal bonds to be included in value of gross estate (April 10, 1922) 497 Decisions (1) Shwab vs. Doyle 499 (2) Union Trust Co. vs. Wardell 518 (3) Levy vs. Wardell 537 (4) Knox vs. McElligott 551 (1), (2), (3), and (4). The text of the 1916 Act is not to be construed as applying to transfers in contemplation of death, etc., completed before the passage of the Act. (U. S. Supreme Court, May 1, 1922.) / 3324 Congdon vs. Lynch. /XL S. District Court decision, 1916 Act. The ,4916 Act is retroactive, apply- ing to trusts created prior to the passage of the Act to take effect in possession or enjoyment at or after the trustor's death. (T. D. dated May 8, 19i2.) / 562 3325 Reprint of -Nichols Ars. Gaston opinion (^467, herein) . . 567 3326 Reprint of Greiner/vs. Lewellyn opinion (1[497, herein) . 568 Decision Page vs. Polk, reversing Polk vs. Page, ^[3 15 q. v. above (C. C. ofU.,Ast Circuit, May 16, 1922) . . . . 569 3338 Reprint of Union/ Trust Company vs. Wardell opinion (1F518 heretr/) 577 3339 Reprint of Shwalb vs. Doyle opinion (1[499 herein). . . . 578 3348 Reprint of Page*' vs. Polk opinion (1f569 herein) 578a Reg. 63 Regulations 63^ — -1921 Act. Complete regulations re- lating to ijne Revenue Act of 1921, fully indexed beginning/ on page 207, and with complete table of contents beginning on page 158 579 Reg. 37 Regulations 37— 1918 Act. Amended 776 Decision Slocum et all, executofes (Sage estate) vs. Edwards. — Deductible amounts of charitable bequests out of residual estate out 6f which State succession and Federal estate taxes a\e paid (June 20, 1922) 778 3383 Department Circular 225 extended and made applicable to receipt of Treasury^ Notes for Estate Taxes (August 9, 1922) A 787 Insert this page immediately before the yellow guide card 4 'Excess Profits Tax." Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Estate Tax Supplementary Page 3. ESTATE TAX REGULATIONS, ETC. — 1922. (T. D. 3383) 7 87 Receipt of Liberty Bonds, Victory Notes, and Treasury Notes for 231 Estate or Inheritance Taxes. — The appended [*f 788] department 236 circular, issued under date of June 30, 1922, with reference to receipt 265 of Treasury notes of the United States in payment of Federal estate and inheritance taxes, is published for the information of internal- revenue officers and others concerned. This circular supplements Depart- ment Circular No. 225, dated January 31, 1921 (T. D. 3144) [1(265]. (T. D. 3383, signed by Commissioner D. H. Blair, and dated August 9, 1922.) 7 88 1. The provisions of Department Circular No. 225, dated January 31, 1921, prescribing regulations governing the receipt of Liberty bonds and Victory notes for Federal estate or inheritance taxes are hereby extended and made applicable to Treasury notes of the United States now or hereafter issued under authority of Section 18 of the Second Liberty Bond Act, as amended and supplemented, bearing interest at a higher rate than 4 per centum per annum, and any such Treasury notes shall accordingly be receivable by the United States at par/and accrued interest in payment of any estate or inheritance taxes imposed/by the United States, under or by virtue of any present or future law, upon/ the same terms and conditions as provided in said Department Circular Jno. 225, dated January 31, 1921, with respect to the acceptance of Liberw bonds and Victory notes bearing interest at a higher rate than 4 per centum per annum. 789 2. The issues of Treasury not4ot reproduced. See ^3736. EXCISE TAXES. 728 Return of manufacturer's excise taxes. \ 907 728A Return of miscellaneous excisp taxes 1 909 TELEGRAPH AND TELEPHONE 727 Return of tax on telegratdf and telephone! message? 1103 AMISSIONS AN4 DUES- 729 Return of tax on admissions and dues. ... \ . . 130-5 729A Tax return on bro kefs' sales — Not reproduced. See ^682^. 752 Application for registry — Not reproduced. See 116817. 753 Certificate of redCtry — Not reproduced. See 1168 1 7. 754 Notification by/fessor where lessee is responsible for collection of the tax- — Not reproduced. See ^6827, 755 Affidavit claiming exemption: admissions. Not reproduced. See ^67 7 7. 755A Notification by Collector of allowance or disallowance of claim for exemption. Not reproduced. S<^e U6779, SPECIAL^ TAXES. 1 1 Special-tax return 1507 11 A Brokers' special tax return.. .. , !50o 725 Receipt form for tax on pleasure boats—Not reproduced. See fl7636, 732 Return for special tax on pleasure boats and automobile?.. 1511 CAPITAL STOCK TAX. 707 Annual return of domestic corporations 603 708 Annual return of foreign corporations 607 Copy tight 1922, by The Corporation (rust Company. WAJtTAX .170 3 SERVICE FORMS, FINDER, ETC. [In blank.] WA*. TAX 1704 lEJb H B 6-2-22. Sec. 325. Art. 813. -13. case such interest payments are to be treated as if received by the subscribers and immediately reinvested by applying them to the purchase price of the new stock. 8 Supplementary Bulletin Rulings. 1-2-22. (2) 8-4-22. (3) 8-10-22. ESTATE TAXES 1918 Law Provisions.— In effect after 6:55 P. M., Frb. 24, 1919 Page 3 ♦Regulations No. 37 (1918 Act) etc Page 33 Index Blue pages following page 124 Forms: 704 Executor's 60-day notice (resident estates) Page 27 705 Executor's 60-day notice (nonresident estates).. ..... .Page 29 706 Return of gross estate Page 11 714 Transfer agents' 60-day notice: Non-resident decedents. Page 31 Superseded by Form 714 reproduced on page 218. 760 Affidavit of Ownership of Bonds.^ Page 88 787 Insurance companies' 60-day notice: Resident decedent See ^201. [Not in use under 1921 Act.] 788 Insurance companies' 60-day notice: Non-resident decedent. See ^[207. [Not in use under 1921 Act.] 791 Application for release of estate tax lien — Not repro- duced. See 1f278. 792 Certificate releasing estate tax lien — Not reproduced. u See H277. 793 Claim for military exemption from estate tax. — Not reproduced — See ^[55. ♦Important Caution Notice. — See amendments to Regulations 37 (1918 Act) noted at 11776. These are reflected in the revised table of contents beginning on page 33. 1921 Law Provisions.— In effect after3:55 P. M., Nov. 23, 1921 Page 125 Regulations No. 63 (1921 Act) Page 158 Index to Regulations No. 63 Page 207 Forms: 704 Executor's 2-month notice (resident estates) Page 223 705 Executor's 2-month notice (nonresident estates) Page 000 706 Return of gross estate Page 000 714 Transfer agent's notice: Estate of nonresident Page 218 760 Affidavit of ownership of bonds or notes Page 88 791 Application for release of estate tax lien. — Not repro- duced. See H753. 792 Certificate releasing estate tax lien. — Not reproduced See 1752. 793 Claim for exemption on account of military service/ — Not reproduced. See ^597. Copyright 1922, by The Corporation Trust Comp*my. WAR TAX SERVICE Estate Tax Fore-Page 9-1-22. Perpetual Check List Supplementary Rulings Reprinted from the Internal Revenue Bulletins. The Supplementary Rulings are printed on the pages immediately preceding. The Foreword to the Supplementary Rulings should be read. Key. — The word "none," in the column headed "Last Ruling," signifies in each case that there are no special rulings bearing on the particular Article of Regulations 45 (1918 Act) or of Regulations 62 (1921 Act). The numeral, in each case, shows how many serially numbered special rulings bearing on the particular Article have been reproduced, and indicates the last serial number of the group. -These serial numbers appear in bold face type at the end of the special rulings themselves, within the Supplement. Caution. — To the extent of the imposition of the excess-profits tax for 1921, the 1918 and 1921 laws are identical, except tl^at domestic corporations entitled to the benefits of Section 262 of the 1921 Act fl[1083) are grouped with foreign corporations for the purposes of the 1921 excess-profits tax. To much the same extent, with like qualifications, the provisions of Regula- tions 62 (1921 Act) are essentially idejhtical (there are frequent verbal changes) to the provisions of Regulations 45 (1918 Act). The numbering of the Articles of Regulations 62 (1921 Act) is the same as that of the respec- tive corresponding Articles of Regulations 45 (1918 Act), except as noted below. It follows then, that, except as noted below, for the purposes of the Supplementary Bulletin Rulings, the Article reference number is the same under either Act. Reg. 62 (19^21 Act) Reg, 45, (1918 Act) No corresponding Article. | to Article 712 Article 712 is the same as, /therefore refer to, Article 713 a 713 " (i ' " " ' " ** " " 714 « 714 " " f< * (i " " " 715 it 7jcj a a it tt n a tt tt Jia No corresponding Articl^. to Article 717 Article 716 is the same gs, therefore refer to, Article 719 a 717 " " " " " '* " ** 718 n 713 " " " i" " " " " 720 No corresponding Article to Article 869 Article 869 is the samer as, therefore refer to, Article 870 a gyQ tt a tt * a tt V a tt tt gyj Otherwise Art. of Reg. 62 is same as, therefore refer to, same numbered Art. of Reg. 45 ( The list is always up-to-date,) Law Article Last Section Number Ruling 300 701 None 301 711 ...1 712 None 713 None 714 11 715 2 716 None 717 None 718 None 719 1 720 None 302 731... 1 Law Article Last Section Number Ruling 302 732 None 733 None 303 741 2 " 742 None " 743 None 304 751... None 752 None 753 None 305 761 None 310 771 1 311 781 3 " 782 None (Oyer) Law Article Last Section Number Ruling 311 783 1 " 784 None " 785 None 312 791 3 320 801 1 802 1 325 811 2 " 812 3 813 8 814 None 815 9 816 1 " 817 None 818 ( 3 326 831.... ■ 40 832 None 833 4 834 1 " 835 3 " 836 15 " 837 5 " 838 9 839 4 " 840 9 841 5 842 None 843 2 844 1 845 8 845A (See 845) 846 4 847 None 848 None " 849 None 850 2 851 6 852 1 853 1 Law Article Last 1 > l-lil JLkJCI n li n o X. v U i 1 1 1 £ 326 854 2 tt 855 1 n 856 tt 857 5 tt 858 10 ft 859 1 tt 860 None tt 861 None tt 862 tt 863 None tt 864 None tt 865 None tt 866 None tt 867 None tt 868 None tt 869 1 tt 870 None tt 871 1 327 .,..901 29 328 . . . .911 2 tt 912 3 tt 913 1 it 914 2 330 . . . .931 4 tt 932 1 a 933 7 ct 934 331 . . . .941 17 335 . . . .951 None tt 952 1 tt 953 None ■ it 954 tt 955 None 336 . . . .961 tt 962 None 337 . . . .971 2 tt 972 338 ....981 Every Article of Regulations 45 (1918 Act) and of Regulations 62 (1921 Act) bearing specifically on the war-profits and excess-profits tax is listed in the foregoing table. The first Article is 701, Missing Article numbers such as 702 to 710 have not yet been used. The last weekly Bulletin from which rulings have been reproduced hereinbefore and as listed above is VOLUME I (1922), No. 35. Later Bulletins, since issued {if any)> contain no rulings bearing on the 1918 or 1921 excess-profits tax laws. Insert this page to face blue page 401. 6-26-22. Sec. 326. Art. 838.— 15. books at the beginning of the taxable year at an amount in excess of their actual value at that time and quoted with approval the following from article 839 of Regulations 45 (1920 edition): Adjustments in respect of depreciation or depletion in prior years will be made or permitted only upon the basis of affirmative evidence that as at the beginning of the taxable year the amount of depreciation or depletion written off in prior years was in- sufficient or excessive, as the case may be. And in an informal memorandum the Committee has expressed an opinion that: No reduction in earned surplus should be made in any case where, because of repairs, renewals and replacements, the property as a whole Remains unimpaired either in intrinsic value or efficiency. The principle last stated is peculiarly applicable to obsolescence. Ob- solescence, of which the case here presented is typical, is not like depre- ciation, a matter of decrease in earning power or in absolute efficiency, but only in relative efficiency. It has its origin in the fact that although the orig- inal efficiency be maintained, yet, owing to improvements in the art or changed economic conditions, a device or factor in production will eventually have to be discarded. The loss is a future loss, but for equitable reasons the statute permits it to be spread over the period for which it can be foreseen, and allows the portion assignable to the period subsequent to December 31, 1917, to be deducted pro rata over such period. In the instant case the vessels of the 5,000-ton class will to-day net x cents freight per mile, as when they, were/first constructed. Their intrinsic value is unimpaired, but, because the ne { wer and larger type will earn from six to eight times as much, it is evident that, when the number of larger vessels becomes sufficient to handle the Carrying trade of the Great Lakes, the smaller vessels will become economically^impossible of operation and will necessarily be discarded or junked. Under/tjie principle laid down in A. R. M. 106, as subsequently explained, therefore, there is neither justification nor reason in requiring the reduction of tl^e invested capital in the case of these bulk freighters prior to the time such deductions were actually taken in the com- putation of net income. / It is, therefore, recommended, upon reconsideration of A. R. R. 27, that obsolescence upon bulk-freight vessels upon the Great Lakes be accepted as established by the evidence now on file; that such obsolescence be computed in the case of the various types and sites of such vessels in accordance with the above recommendation; that Solicitor's Opinion 114 be adhered to; and that the owners of such bulk-freight vessels be not required to readjust their invested capital to allow for the obsolescence accrued up to and including December 31, 1917. 9 Supplementary Bulletin Rulings. S-17-22. Perpetual Checklist Supplementary Rulings Reprinted from the Internal Revenue Bulletins. The Supplementary Rulings are printed on the pages immediately preceding The Foreword to the Supplementary Rulings should be read. Key. — The word "none," in the column headed "Last Ruling/* signifies in each case that there are no special rulings bearing on the particular Article of Regulations 45 (1918 Act) or of Regulations 62 (1921 Act). The numeral, in each case, shows how many serially numbered special rulings bearing on the particular Article have been reproduced, and indicates the last serial number of the group. These serial numbers appear in bold face type at the end of the special rulings themselves, within the Supplement. Caution. — To the extent of the imposition of the excess-profits tax for 1921, the 1918 and 1921 laws are identical, except that domestic corporations entitled to the benefits of Section 262 of the 1921 Act C^j 1083) are grouped with foreign corporations for the purposes of the 1921 excess-profits tax. To much the same extent, with like qualifications, the provisions of Regula- tions 62 (1921 Act) are essentially identical (there are frequent verbal changes) to the provisions of Regulations 45 (1918 Act). The numbering of the Articles of Regulations 62 (1921 Act) is the same as that of the respec- tive corresponding Articles of Regulations 45 (1918 Act), except as noted below. It follows then, that, except as noted below, for the purposes of the Supplementary Bulletin Rulings, the Article reference number is the same under either Act. Reg. 62 (1921 Act) Reg. 45, (1918 Act) No corresponding Article to Article 712 snoH J a n o 54 3flO>i ^no r A Article 7I3js the same as, therefore refer to, Article 713 n 713 V* '* / u '* '* '* " \* 714 714 A "/ " " " " " • 715 715 "YJ " " * " * " " d gg 716 No corresponding Article to Article 717 Article 716 is tnfe same as, therefore refer to, Article 719 " ,718 " r V" " " " " " 720 No corresponding Article to Article 869 Article 869 is the sarne as, therefore refer to, Article 870 a 870 " f ** " \ " ii *'* (( " 871 Otherwise Art. of Reg. 62 is same as, therefore refer to, same numbered Art. of Reg. 45 3ffoVf (The list is always up-to-date.) Law Section i^300. . . . ^301.... is' a s it , a Article Number . .701... J . ..711 712 713..... . 714 715 716 717 718 719,... . . 720 Last Ruling . .None . .1 . . None . . None .11 . .2 . None . . None , . None .1 None ^302 731... 1 Law Section 302 ... . Article Number . .732 733 303 .. . n a 304. . . « 305 310 311 741 742 743 751 752 753 761 771 781 Last Ruling . . None . . None ^ . .2 es . None . None *" . . None - . . None - . . None . . None 1 ^ .3 " 782 None (Over) Law Section 311.... 312 320 M 325 326 Article Number . .783... 784... 785... ..791... . .801... 802... . .811... 812... 813... 814... 815... 816 Last Ruling . .1 . .None . .None . .3 . .1 .1 . .2 . .3 . .8 . . None i J/ 817 None^ 818 ,831 832 833 834 835 836 837 838 839 840. 841 3 * .40*' None J .4 3 V 15 .5 9 4 ^ 9 5 * 842 None*' 843 2 ^ 844 1 V 845 8 *s 845A (Sec 845) ^ 846 4 847 None £ 848 None < 849.... None ^ 850 2 851 6 852 1 * 853 1 ! Law Article Last Section Number Ruling 326 854 2 855 1 856 None^ 857 5 ^ 858 10 r 859 1 S 860.. None A" 861 None u 862 3 + 863 None 864 None , 865 None 866 None ^ 867 None ^ 868 None*- 869 1 / 870 None 871 1 327 901 29 328 911 2 A 912 3 913 1 X 914 2 *T 330 931 4 932 1 V 933 7 ' 934 None 331 941 17 ^ 335 951 None 952 1 ^ " 953 None 954 None 955 None 336 961 None 962 None 337 971 2 * 972 None 338 981 None : : > • ' i • " . . y, -:u>;g g« \d .S3.M TO . IT A Every Article of Regulations 45 (1918 Act) and of Regulations 62 (1921 Act) bearing specifically on the war-profits and excess-profits tax is listed in the foregoing table. The first Article is 701. Missing Article numbers such as 702 to 710 have not yet been used. The last weekly Bulletin from which rulings have been reproduced hereinbefore and as listed above is VOLUME I (1922), No. 33. Later Bulletins since issued (if any), contain no rulings bearing on the 1918 or 1921 excess-profits tax laws. Insert this page to face blue page 401. 1-81-22. Sec. 325. Art 815<~3. 40-21-1857: O. D. 1057. Inquiry if made whether 4 per cent bonds of the Government of the Philippine Islands are to be considered admissible or inadmissible assets in computing invested capital. Section 325 (a) of the Revenue Act of 1918 provides that: The term "inadmissible assets" means stocks, bonds and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income * * *. It is further provided in section 213(b) 4 of the Act that interest upon obligations issued by a possession of the United States is exempt from Federal income tax. The bonds referred to are not obligations of the United^States, but on the contrary are obligations of a possession of the United States. Accordingly, it is held, that 4 per cent bonds of the Government of the Philippine Islands are inadmissible assets within the meaning of section 325 (a) of the Revenue Act of 1918. / 42-21-1875: O. D. 1069. Since the income from Federal land ba£tk bonds is tax free and since such bonds are not obligations of the United States, they are inadmissible assets within the meaning of section 325(a) of the Revenue Act of 1918, and should be so treated in computing the invested capital of a corporation. 7 , / (See I ('22)-4-48: corporate stock. 8 Section 3 26\ Article 831. Ruling No. 32.) Foreign Supplementary Bulletin Rulings. 7-12-22. EXCESS PROFITS TAX. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the War-Profits and Excess-Profits Tax Laws. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph 1918 Law Provisions 500 Special Special Decision Di Decision 596 86: 865 869 875 Reg. 45, Pt. II-B Regulations under 1918 Act (revision of January 28, 1921) as amended and supplemented to December 20, 1921 Special Relief for 1919 under Sec. 328 not determined: compu- tation and payment of tax for 1920. (March 23, 1921.) i 3220 Amended returns required within 90 days when inflated values have been used in determining invested capital. (August 26, 1921.) Mim. 2848 Interpretation of the foregoing. (October 19, 1921.).. 3243 Extension of time for foregoing. (November 14, 1921.) A. R. M. 106 Surplus and undivided profits: Adjustments because of alleged failure to charge off depreciation. (Febru- ary 26, 1921.) 877 Explanation of the foregoing. (July 6, 1921.)... .: .. . 879 Supplementing the foregoing. (November 1, 1921.)... 885 La Belle Iron Works vs. U. S. U. S. Supreme Court decision, Act of 1917. Invested capital. (May 16, 1921.). 889 DeLaski & Thropp Circular Woven Tire Co. vs. Iredell, pistrict Court decision, Act of 1917. A corporation whose entire income is derived from royalties 'on patents in which it has no investment is entitled to assessment undeT Section 209 as being engaged? in a trade or business having no invested eapita\]or not more than a nominal capital. (November 9, 1920.) . Lincoln Chpnical Co. vs. Edwards. District Court decision, |9 17 Act. Additions to surplus account: Earned| surplus expended in developing and im- proving a sVcret process, or used to repay borrowed moneyjso expended. (T. D. 3183, June 24, 1921.) The matters listed above are fully ir.dexedNon the blue index following page 393. 913 926 For running table of contents of matters relating to the 1921 Act, and to all matters issued since the passage of that Act, see Excess-Profits Tax Supplementary Page 2, over. Copyright 1922, by 'The Corporation Trust Company. WAR TAX SERVICE Excess-Profits Tax Supplementary Page 1. 7-12-22. EXCESS PROFITS TAX. — RUNNING TABLE OF CONTENTS. Rulings, Regulations, Opinions and Decisions under the War-Profits and Excess-Profits Tax Laws. Giving Treasury Decision Number or other Designation, General Subject Content, Date of Issue, and Paragraph Reference. T. D. Subject Paragraph The regulations, rulings, etc., listed below, are those issued during 1922. 1921 Law Provisions 1000 I)«cision Cartier-Holland Lumber Co., vs. Doyle. U. S. Circuit Court of Appeals decision, 1917 Act. Borrowed capital in relation to the "no invested capital or not more than a nominal capital" provision of Sec. 209 of the 1917 Act. (December 15, 1921.) . 1101 Special Allocation of tax: partnership-s and corporations in con- solidated cases under 1917-1921 Acts (Jan. 16, 1922) 1126 Reg. 62, Pt. II-B Regulations under 1921 Act (1922 Edition). Promulgated Febru- ary 15, 1922. Released for publication March 1, 1922 1133 Special Consolidated returns for 1917 (A. R. R. 855) 1265 3328 Arts. 27 and 46, Reg. 41 (1917 Act) amended.— Divi- dends received from foreign corporations; stock holdings in foreign corporations (May 12, 1922) 1266 3334 Court decision, 1917 Act. — Invested capital: Selling agent: Taxability under Sec. 209 (May 25, 1922) 1270 Special Consolidated returns for 1917 (A. R. R. 942) 1272 3367 Art. 836, Regs. 45 and 62 amended. — Tangible property paid in; value in excess of par value of stock 1288 Insert this page immediately before the blue Excess-Profits Tax — 1921 Act — Index. Copyright 1922, by The Corporation Trust Company. WAR TAX SERVICE Excess-Profits Tax Supplementary Page 2. 6-30-22. ' (2) 7-12-22. WAR-PROFITSfAND EXCESS-PROFITS TAX REGULATIONS, ETC.— 1922. companies in acquiring and disposing of their stock and it seems equally- clear that the State statutes gave to them the right to such independence. The absence of any ulterior motive on the part of the stockholders has also been fully established. The Committee, therefore, is of the opinion that because of the disparity of stockholdings of the stockholders in these three corporations the Bureau would be unable to compel the corporations to pay a tax based upon a consolidated return of net income unless the corporations voluntarily paid such tax, and that, therefore, consolidated returns in this case should neither be required nor permitted. 1287 It is therefore recommended, in the appeal of the M Company, the O Company, and the P Company, that the ruling of the Income Tax Unit that these companies were affiliated and should file consolidated returns for the years 1917, 1918, and 1919, jbe reversed, and, accordingly, that the appeal be sustained. (1-26-373: A. R. R. 942.— Bulletin I ('22)-26.) (T./D. 3367.) 1288 Article 836, Regulations 45, (1920 edition) and Article 836, Reg- 757 ulations 62, amended. — Afticle 836, Regulations 45, (1920 edition) 1192 and Article 836, Regulations 62, are hereby amended to read as follows: \ / Article 836. Tangible prope^y paid in; value in excess of par value of stock. — The paid-in surplus allowM in any case is confined to the value def- initely known or accurately ascertainable at the time the property is paid in. Evidence offered to support a cliim for a paid-in surplus must be as of the date of the payment. It may consist among other things of (a) an appraisal of the property by disinterested authorities; (b) a certificate of the assessed value in the case of real estate or, (c) evidence of a market price in excess of the par value of the stock or shares. Opinion evidence, expert or otherwise, of the value of property as of a prior date will not be accepted. Retrospective appraisals submitted in support of a claim for a paid-in surplus will not be accepted in any case where other reasonably satisfactory evidence is available and in any case will be accepted only after rigid scrutiny and will be followed only to the extent to which their reasonableness is fully established. The property which was paid in is the basis of the appraisal, and the appraisal must reconcile the accounts so as to reflect accurately the actual value on the date as of which the appraisal is made and the depreciation sustained. Proper consideration must in all cases be given to depreciation and the expired and remaining serviceable life of the property must be shown. To be acceptable retrospective appraisal must show: (1) the history of the business and manner in which the information or data was acquired; (2) the manner in which the appraisals were constructed; (3) the inventory on the date of the appraisal in detail; (4) the date of acquisition of all items remaining in the inventory as of the date of appraisal; (5) the elimination from the inventory of all items acquired subsequent to the date as of which the appraisal is made and how this was effected (all items, the date of acquisition of which can not be definitely determined, should be listed separately and all the facts bearing upon the date of acquisition given); (6) the replacement cost at the date as of which the appraisal is made of each item accepted as on hand on that date determined upon competent data, with a statement of the method employed in arriving at such cost (estimate and general statements will not be accepted); (7) the rate and total amount of depreciation as shown by the books; (8) the Copyright 1922, by The Corporation Trust Company. WAR TAX 465 SERVICE 7-12-22. WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS, ETC. — 1922. 1 rate and total amount of depreciation taken upon each item included in the appraisal for the purposes of the appraisal (if other than normal rates of depreciation are used the reason therefor and the method of computing depreciation must be fully explained); (9) the actual cost when ascertainable of each item included in the appraisal; (10) the book value on the date as of which the appraisal is made of all the items included in the appraisal, and (11) a detailed statement of all plant facilities and additions, represented by capital expenditures previously written off, which were still in use on the date as of which the appraisal was made and all the depreciation actually sustained or accrued on such items. No claim will be allowed for paid-in surplus in any case in which the addition of value has been developed or ascertained subsequent to the date on which the property was paid in to the corporation, or in respect of property which the stockholders or their agents on or shortly before the date of such payment acquired at a bargain price, as for instance, at a receiver's sale. Generally, allowable claims under this article will arise out of transactions in which there has been no substantial change of beneficial interest in the property paid in to the corporation and in all cases the proof of value must be clear and explicit. (T. D. 3367, signed by C. P. Smith, Acting Commissioner of Internal Revenue, and dated July 10, 1922.) [Comment: All in amended Article 836, as printed above, relating to retrospective appraisals is new. Otherwise no change in effect except that the word "evidence" in (c) in the third sentence was formerly "proof." — The Corporation Trust Company.] Copyright 1922, by 'I tie Corporation Trust Company. WAR TAX 466 SERVICE 8-4-22. ESTATE TAX INDEX. — REGULATIONS 63: 1921 ACT. The references are to paragraph numbers. Reservation of annuity or income from property transferred. .647 Resident decedent: Definition. . 583 See also Section 403b and section 41 L .444, 460 Presumption. . 584 Specific exemption. .582, 700 Return: Beneficial interest, person holding, when to make return. . 722, 72') Commissioner or collector — Securing evidence. . 769, 770 When to make. . 725 Deductions. . 665 Delay in filing, none authorized. .721 See also Penalties. Executor to file. .722, 725, 729 Extension of time for filing. .721 False and fraudulent, penalty for. .757 Nonresident estates. .705-707, 729, 730 Not filed in good faith. .744, 757 Penalties, delinquency in filing. .725, 755, 758 For false or fraudulent return. .755, 757 Persons liable for return — Nonresident estates. . 729 Resident estates. .722 Privileged character of return. .732, 733 Tax shown by, payment of. . 736-744 Transfers presumed to be taxable. .643 Verification of. . 726, 736, 769, 770 When required — Nonresident estates. . 729 Resident estates. .721 Revenue agents in charge, list of offices of. .777 Revocation, reservation in connection with transfer — of power of. . 649 Revoked articles of Regulations No. 37. . 776 Rugs, oriental, valuation of. .625 Safe deposit companies, duty with respect to nonresident estates. .716 Sale of property as determining value at time of death. . 608, 609 Sale of property subject to power of appointment. . 656 Sale, when cost of, is an administration expense. .676 Scope of repeal of 1918 revenue act. .775 Securities of nonresident decedent: Person in possession of. .716 Transfer on order of foreign executor. .717 Settlement of estate: Losses during. . 682 Support of dependents during. .683 Shares of stock (see Stocks and bonds). .610 Shipwreck, losses from. .682 Silverware, valuation of. .621, 625 Situs of property. .604, 701 Special power of appointment. .657 Specific exemption. .582, 700 None in nonresident estates. .582, 703 Spouse surviving. .641, 653 State bonds, transfer of, taxable. .605 Statements, executor's duty to render. .773 Statuary, valuation of. .625 Statutes (see Table of Contents, for analysis of Revenue Act, 1921, page 15S). .57^, 588 Stock dividends, when included. . 606 See also Nonresident estates. .717 Stock of nonresident decedent, transfer of, after giving bond. .719 Stock owned by nonresident decedent, situs of. .701 Stocks and bonds, valuation of. .610 Copyright 1922, by The Corporation Trust Company. WAR TAX 215 SERVICE 8-4-22. ESTATE TAX INDEX.— REGULATIONS 63: 1921 ACT, The references are to paragraph numbers. Storms, losses from. .682 Suit, collection of tax by. .771 Superseded articles of Regulations No. 37. .776 Supplemental data to be filed with return. .724 Nonresident estates. .730 Support of dependents. .683 Surrogates' fees. .676 Surviving partner succeeding to interest of the decedent. .614 Surviving spouse. (See Dower; Curtesy; Support of dependents; Tenant-; by the entirety.) Survivorship, property passing by right of. .651, 653 Table of Contents (see page 158). Tables, annuity and remainder. .639, 640 Tax rates. .588, 590 Tax, estate: Additional. . 726 Collection'of. .747, 771 Computation of. .587-590 See also Nonresident estates. . 70S Executor shall pay the tax. .741 See also Nonresident estates. .711 Liability, manner of determining. .587 Liability of certain persons. See Personal liability. Lien for. .749, 752 Life insurance proceeds subject to lien for. . 750 Life insurance, to provide for payment of. .661 Nature of. . 581 Payment essential to deduction of previously taxed property. . > ; ' Payment of (for analysis see Payment of tax). Rates of. .588, 590 Refund of tax and penalties. . 760, 764, 765 Tax, Federal income. .680, 728 Tax-free securities, transfer of, taxable. . 605 Taxation, local, assessment for, not determinative of value. . 609 Taxes, rules determining deductibilty. . 678 Tenants in common, joint, or by the entirety. .651, 653 Tenants, life. .601, 629, 656 Termination of World War. . 596 Testimony, taking. . 769, 770 Theft, losses from. . 682 Time for payment of tax. . 736 Time, limitation of — for filing claim for abatement of additional tax. . 76 > Time of transfer. . 642-646 Title vested in decedent and one or more other persons. .651, 653 Tombstone. . 667 Trade-marks, valuation of. .617 Transfer agent, nonresident estate, when to give notice of. .717 Transfer of life insurance, when taxable. . 663 Transfer of net estate taxed, not the property. .581 Transfer of securities directed by foreign executor, agent's notice. .717 Transfers, by will or under intestate laws. .580 Transfers made by decedent in his lifetime: Additions to property transferred. . 650 Betterments to property transferred. . 650 Checks outstanding at date of death. .616 Consideration for. . 642-647 Date of transfer. . 642-647 Deductibility of value, included in gross estate. .691, 694 See also Nonresident estates. . 707 General. .580 In contemplation of death. . 643 Income of property transferred, payable to third person. .648 Insurance policy. .663 Intended to take effect in possession or enjoyment at or after death. . 646-6") 1 Copyright 1922, by The Corporation Trust Company. WAR TAX 216 SERVICE 37 Wall Street, New York oAffiliated with Wtyt Corporation 3Drti£ft Company SYSTEM Organized 1892 Jersey City, 15 Exchange Place Boeton, 53 State Street (Corporation Registration Co.) Chicago, 112 W. Adams Street Pittsburgh, Oliver Bldg. Washington, Colorado Bldg. Lea Angeles, Title Insurance Bldg. fconpoBATten 1 TRUST ff Company I AH9 AFflUATXO Philadelphia, Land Title Bldg. Portland, Me., 281 St. John Street St. Louis, Federal Reserve Bank Bldg. Wilmington, du Pont Bldg. (Corporation Trust Co. of America) Albany Agency, 158 State Street Services These are loose leaf binder Services containing, in addition to the respective Acts as amended and now in effect, all official matters, in force, issued since the passage of the respective original Acts, compiled, cross-referenced, and indexed, and kept up to date at all times by means of additional sequentially numbered printed pages sent to subscribers under first-class postage. Formal regulations, informal rulings, Supreme Court decisions, and lower court cases are embodied in the Tax Services. FEDERAL INCOME TAX SERVICE— Reports the Federal Income Tax Law and the official regulations, etc., bearing thereon. FEDERAL WAR TAX SERVICE— Reports the Excess Profits Tax Law and prac- tically all the other strictly Internal Revenue Tax Laws, except the Income Tax Law, due to the war, and the official regulations, etc., bearing thereon. (Does not cover the Tax Laws relating to beer, wine, spirits, soft drinks, tobacco, narcotics or child labor.) FEDERAL RESERVE ACT SERVICE— Reports the Federal Reserve Act and the official Regulations, etc., bearing thereon. FEDERAL TRADE COMMISSION SERVICE— Reports the Federal Trade Commission Act and the Federal Anti-Trust Act (the Clayton Actj and the official complaints, orders, rulings, etc., bearing thereon. NEW YORK INCOME TAX SERVICE— Reports the New York Personal and Corpora- tion Income Tax Laws and the official regulations, etc., bearing thereon. STOCK TRANSFER GUIDE AND SERVICE— Reports requirements for the issuance and transfer of registered securities, including inheritance tax requirements, court orders, etc. Departments CORPORATION DEPARTMENT— Assists attorneys in the organization of corporations and in the licensing of foreign corporations in every state and in the provinces of Canada, and subsequently furnishes annual statutory representation service, including office or agent required by statute. REPORT AND TAX DEPARTMENT —Notifies attorneys of the time to file corporation reports and attends to tax matters in every state and in the provinces of Canada. LEGISLATIVE DEPARTMENT— Reports on pending legislation; furnishes copies of bills and of new laws enacted by Congress. TRUST DEPARTMENT — Acts as trustee under deed of trust, custodian of securit ies, escrow depository and depository for reorganization committees. TRANSFER DEPARTMENT— Acts as registrar and transfer agent of stocks, bonds and notes. ' FEDERAL DEPARTMENT— Reports decisions of the United States Supreme Court, rulings of the Interstate Commerce Commission, Federal Trade Commission, Bureau of Internal Revenue and Federal Reserve Board. Furnishes agent at Washington for common carriers to accept service of orders, process, etc., of Interstate Commerce Commission, j