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(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 shareholder;

(10) Benevolent life insurance associations of a purely local character, farmers' or other mutual hail, cyclone, casualty, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 per centum or more of the income consists of amounts collected from members for the sole purpose of meeting losses and 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; 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;

(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; and

(13) Federal land banks, national farm-loan_associations, and Federal intermediate credit banks, as provided in the Federal Farm Loan Act, as amended.

(Section 231-1924 Act)

In order to establish its exemption, and thus be relieved of the duty of filing returns of income and paying the tax, it is necessary that every organization claiming exemption, file an affidavit with the Collector of the district in which it is located, showing the character of the organization, the purpose for which it was organized, the sources of its income and its disposition, whether or not any of its income is credited to Surplus or may inure to the benefit of any private stockholder or individual, and in general all facts relating to its operations which affect its right to exemption. To such affidavit should be attached a copy of the charter or articles of incorporation and by-laws of the organization. Upon receipt of the affidavit and other papers by the Collector, he will inform the organization whether or not it is exempt. If, however, the Collector is in doubt as to the taxable status of the organization, he will refer the affidavit and accompanying papers to the Commissioner for decision.

When an organization has established its right to exemption, it need not thereafter make a return of income 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 exempt corporations, 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 based.

Time and Place for Filing Returns. (a) Returns of corporations shall be made at the same time as is provided in subdivision (a) of section 227, except that in the case of foreign corporations not having any office or place

of business in the United States returns shall be made at the same time as provided in section 227 in the case of a nonresident alien individual.

(b) Returns shall be made to the collector of the district in which is located the principal place of business or principal office or agency of the corporation, or, if it has no principal place of business or principal office or agency in the United States, then to the collector at Baltimore, Maryland. (Section 241-1924 Act)

Corporation income tax returns must be made and filed on or before the fifteenth day of the third month following the close of the taxable year. In the case of foreign corporations not having any office or place of business in the United States, however, returns shall be made on or before the fifteenth day of the sixth month following the close of the fiscal year, or, if the return is made on the basis of the calendar year, then, on or before June 15. A corporation going into liquidation during any taxable year may, upon the completion of such liquidation, prepare a return covering its income for the fractional part of the year during which it was engaged in business and may immediately file such return with the Collector. A corporation having an office or agency in the United States must make its return to the Collector of the district in which is located its principal office or agency. Other corporations must make their returns to the Collector at Baltimore.

Penalties. The penalty for failure to file a return on time or for filing a false or fraudulent return is the same for corporations as for individuals. This was discussed in Unit One. Briefly, the penalty for failure to file a return on time is an additional assessment of 25% of the total amount of the tax. The penalty for making a false or fraudulent return is a fine of not more than $10,000.00 or not exceeding one year of imprisonment, or both, in the discretion of the court and in addition an assessment of 50% of the total tax evaded.

Balance Sheets and Working Papers. Balance sheets as of the beginning and end of the taxable period must be filed with the return. These Balance Sheets should be prepared from the books of account and should agree therewith. If for any reason there are differences in any of the items, these differences should be reconciled or accounted for. A schedule is attached to the return for use in the preparation of the Balance Sheets.

Corporations engaged in an interstate and intrastate trade or business and reporting to the Interstate Commerce Commission and to any national, state, municipal, or other public officer, may submit in lieu of this schedule copies of their Balance Sheets prescribed by said Commission or State and municipal authorities, as at the beginning and end of the taxable period. If for any reason the Balance Sheet at the beginning of the current taxable period does not agree in every respect with the Balance Sheet which was submitted as at the end of the previous taxable

period, the difference should be fully explained in the space provided under the schedule. Every corporation should reserve, available for inspection by a revenue officer, working papers showing the balance in each account on the corporation's books which were used in preparing the return.

Information at Source. Every corporation making payments of salaries, wages, interest, rent, commissions, or other fixed or determinable income of a $1,000.00 or more during the calendar year, to any individual or partnership, is required to make a true and accurate return to the Commissioner of Internal Revenue, showing the amount of such payments and the name and address of the recipient. Special forms for reporting this information will be furnished by any Collector of Internal Revenue. This information will serve as a check upon the returns of the individuals who receive the income. Thus, if a corporation reported that it had paid a salary of $2,750.00 to one of its employees and such employee failed to file a return, it would be readily detected. Furthermore, if the employee filed a return but understated his income from the corporation, this would be detected when comparing his return with the information reported by the corporation.

Gross Income. The gross income of corporations is practically the same as the gross income of individuals with the exception that mutual marine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. It includes the total operating income and in addition to this, all gains, profits, and income derived from all other sources, such as rentals, royalties, interest, dividends from stock in other corporations and profits resulting from the sale of capital assets. For convenience in discussion, the gross income of corporations may be classified as follows:

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Income from Operations. If the corporation is engaged in a trading or manufacturing business, sales should be shown less any allowances, trade discounts or abatements. If the production, purchase or sale of merchandise is an incomeproducing factor in the trade or business, it is necessary to determine the gain or loss by the inventory method. A special form may be secured from the Collector of Internal Revenue for stating the inventory. This is known as a Certificate of Inventory. It should be filed with the return. The inventory

should be taken at cost or market price, whichever is the lower. This refers, of course, only to the inventory of stock-in-trade. In the case of securities and similar properties, the cost price must be taken, except in the case of a dealer in securities, where the market price may be used. The inventory may be either a physical inventory or it may be a book inventory, if the latter method is in current use by the firm in question. Purchases should be shown net; that is, less any returns, allowances or trade discounts, but freight and drayage in may be added to the invoice cost.

The cost of goods sold should be subtracted from net sales to determine the gross operating profit for the period. The following schedule will serve as a model to illustrate the proper procedure in computing the cost of goods sold.

(a) Inventory at beginning of year. $ x,xxx.xx
(b) Merchandise bought for sale...

(c) Cost of manufacturing or
otherwise producing goods..


Less inventory at end of year.




X,XXX.XX $x,xxx.xx

Income from Interest. All interest received or accrued should be reported, except:

I. Interest on obligations of a state or political subdivision thereof.

2. Interest on obligations of the United States issued prior to September 1, 1917, and the interest on the obligations of the United States issued since September 1, 1917, to the extent provided for in the acts authorizing their issue.

3. Interest on securities issued under the Foreign Loan Act of 1916.

Under the 1924 Act, interest on Liberty Bonds is subject only to the surtax assessed on incomes of individuals. Since a corporation does not pay a surtax, the interest received from Liberty Bonds is exempt from taxation and need not, therefore, be included in gross income.

Income upon bonds should include only the interest earned from the date of purchase. Where bonds are purchased between interest dates, the amount paid for accrued interest should be deducted from interest received. When bonds are purchased at a premium or discount, the amount of the premium or discount should be amortized over the life of the bonds and only a portion of the addition or deduction derived therefrom should be considered during the current period. In the case of interest received on securities held in a sinking fund, this must be reported as income of the corporation.

Income from Rentals and Royalties. All receipts for rent, whether in cash or its equivalent, must be reported as part of the gross income. If a tenant makes improvements or repairs on the land, which it is the duty of the landlord to make, in lieu of rent, the cost of these must be considered as an addition to the rent received. Where permanent improvements are made which revert to the owner at the termination of the lease, their value, less the accrued depreciation, must be regarded as income. All amounts received as royalties from patents, copyrights, or similar privileges must be reported as income, but a reasonable allowance for depreciation thereon may be deducted. In the case of mines, which are operated on the royalty basis, a reasonable allowance for depletion, as explained later, may be made.

Profit from Sale of Capital Assets. The profit derived from the sale of capital assets such as real estate, stocks, bonds, etc., should be computed in the same manner in preparing returns for corporations as would apply in the case of individuals. This was explained in detail in Unit Two; hence it will not be necessary to further discuss the subject here. A brief review of the procedure should be sufficient. A schedule is provided in the return for convenience of the taxpayer in computing the gain or loss derived from the sale of capital assets. This schedule calls for the following information:

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The net profit or loss to be reported is the difference between the cost, if acquired since February 28, 1913, or fair market value if acquired previous to March 1, 1913 plus subsequent improvements, less depreciation since date of acquisition, or since March 1, 1913, and the amount received. In determining the amount received, the actual consideration or price should be used if the property is sold or the fair market value of the property received should be used if the property is exchanged for other property. Expenses in connection with the sale, such as commissions paid agents, may be deducted. Expenses incident to the purchase of property may be included in the cost provided such expenses have never been deducted from income. Ordinary repairs, insurance or taxes should not be considered. Subsequent improvements include expenditures for additions, improvements and repairs made to restore the property or prolong its useful life.

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