the inherent difficulty surrounding the proof of their valuation, especially where the good-will had been acquired many years previous.

A contract purchased with capital stock was held to be an intangible asset; but a leasehold, purchased also with stock, was looked upon as tangible property (O. D. 635). Developmental expenses incurred in connection with patents before January 1, 1909, may be added back now to invested capital if the corporation can prove these were proper capital expenditures; but such expenses subsequent to that date cannot now be capitalized (Art. 843). Where a new group of stockholders acquired the outstanding stock of a corporation by a cash purchase from the old stockholders, the amount in excess of the book value of the assets could not be regarded as good-will of the corporation (A. R. R. 413). Where bonds and stock are issued in exchange for a mixture of tangible and intangible assets, and no other means of apportionment exists, the stock will be regarded as the payment for intangibles (T. B. R. 49). A corporation in 1897 acquired tangible and intangible assets of approximately equal value, the par value of the stock issued for the total assets (which were current assets) being equal to the value of the tangible assets alone. Since (a) the original purchase price could have been split equally between tangibles and intangibles, (b) the maximum for intangibles in 1918 was 25% of the par value of the capital stock, and (c) the tangible assets acquired had long since been turned over or liquidated in the business, the corporation was allowed to add 25% of the par value of its capital stock to earned (not paid-in) surplus as the maximum allowance under the law (A. R. R. 307). Expenditures of a predecessor corporation relating to intangibles and charged off the books cannot be added now to invested capital (T. B. R. 19). A deduction of 1/17 of a patent account in a 1917 return was disallowed inasmuch as all the patents included thereunder, except one, had expired. The corporation had not in previous years deducted any allowance for patents, and had thus exercised its option of permanently capitalizing the intangible (A. R. M. 95). The value of a patent acquired in 1899 was reduced from the par value of the common and preferred stock given in exchange to the market price at which the stock was selling on the stock exchange. Under Section 207 of the Revenue Act of 1917 the limitation (20% in the case of good-will and other intangibles acquired for stock) did not apply to patents, and the entire amount, without reduction in this case, was permitted to be in

cluded in the invested capital for 1917 (A. R. R. 436). Where the 25% limitation is to be applied to no par value stock, the minimum capital necessary to commence business as required by the state law will govern (New York and Illinois, $5 per no par value share); in case no minimum requirements exist, the fair market value when issued (O. D. 348). A stock dividend from the value of patents put on the books several years after they were acquired by the corporation was excluded from invested capital (A. R. R. 9). Revaluation in 1917 of secret formulas acquired in 1909 on the theory of developed values and on the theory that they were tangible property was not permitted, the corporation having deducted developmental costs in its tax returns, and the committee holding that secret formulas were intangibles and subject to the 20% limitation under the 1917 act when acquired for stock (A. R. R. 29). Another corporation sought to be assessed under the provisions of Section 209 of the 1917 act but was not permitted the privilege of the relief section because of the existence of a secret process which had been developed through the investment of corporate funds and borrowed money and charged off prior to 1910 (Lincoln Chemical Company v. Edwards) (T. D. 3458). The fair value at the time of exchange and not cost of land given in exchange for intangible rights to future business was the basis for the valuation of the intangibles (A. R. M. 131). The amount of stock issued for intangible property, the subsequent revaluation of such property, or the earnings subsequent to the acquisition of intangible property, cannot be accepted as proof of the value of intangibles at date of acquisition (A. R. R. 2991).

Amended returns should be filed for all years when a corporation desires to set up amounts paid for intangibles which were charged off in prior years (O. D. 901). Improvements on a lease which had expired, the improvements going to the lessor, could not be included in the good-will account of the lessee upon renewal of the lease even though the lessee paid for the improvements out of capital (A. R. R. 384). Patents, and formulas not patented, but merely ideas, were considered the equivalent of patents when transferred by an inventor for stock. He later completed the patents and transferred the rights as contracted (A. R. R. 328). An amount paid by a corporation to take up notes made and delivered by principal stockholders as part of the purchase price of stock from retiring stockholders was not considered payment in cash or other tangible property for goodwill or other intangible property, and was not properly a part of invested capital, regardless of the fact that the retiring owners

had contracted not to enter into business again for a period of years (A. R. R. 250). Royalty contracts purchased with stock were considered intangible and subject to the limitation thereon (I. T. 1374).

XXI

INVESTED CAPITAL: CHANGES DURING YEAR— INADMISSIBLES

Changes in invested capital during year. Additions and deductions: Federal taxes, dividends, stock sold and retired. Inadmissible assets.

So far invested capital at the beginning of the taxable year has been discussed. The law further provides that the invested capital thus arrived at shall be "averaged" for the taxable year without, however, considering profits made during the year. This is accomplished by adding or subtracting the averaged credits to or reductions of the invested capital at the beginning of the year. For example, if stock amounting to $100,000 is sold for cash at par on July 1, 1921, the amount to be added to the invested capital at January 1, 1921, is the fraction thereof obtained by ascertaining the number of days between July 1 and December 31 (including July 1) and dividing by 365 (366 for 1920). In this case the fraction is 184/365, and $50,410.96 is to be added to the invested capital on January 1, 1921 (Art. 853-4).

(a) Additions. Contributions of capital or surplus are the sources of additions during the year to invested capital. Cash need not be received but the property must have a cash value which will be the value for purposes of computing invested capital. The illustration just cited indicates the method of averaging. The number of days between the date of the transaction and December 31 or the end of the fiscal year is always inclusive; that is, it always includes the date of the transaction as well as December 31. Hence the number of days from July 1 is 184 days; from May

17, 229 days; from December 13, 19 days; and so forth.

(b) Deductions. Federal income and profits taxes, cash dividends and the purchase or retirement of a corporation's own stock are the causes of decreases in the invested capital at the beginning of the year. They are averaged in the same way that additions are averaged, and in the schedule of changes in the return are shown in red. The various deductions are described below.

1. None of the previous year's Federal taxes are regarded as being paid from current earnings. Thus the 1920 taxes falling due on the various instalment dates in 1921 are averaged and deducted from the invested capital at January 1. Since the instalment dates do not vary, it is evident that the same percentage of the previous year's Federal taxes will be deducted in all cases. For 1919 taxes paid in 1920 (a leap year) the percentage is 42.144809%; for other years, 42.260274%. The fraction in the 1920 tax return was .4214 (A. R. R. 822) and in the 1921 return, .4226.

2. Cash dividends are divided into two groups: those paid prior to March 2 (1921 and other years not leap years; March 1, 1920) and those paid subsequently. Dividends paid in the first 60 days of the taxable year are looked upon as payments of a liability existing before the taxable year and the averaged amount thereof is deductible from invested capital (Sec. 201 (f)). Dividends paid after the first 60 days are regarded as being paid from current earnings if current earnings are sufficient. To determine their sufficiency, the pro rata portion of the net income (or the actual net income for the particular period in question if the books permit such calculation) as arrived at for