tax imposed by the act of October 3, 1917 (Brady et al. v. Anderson, 240 Fed., 665). A corporation so situated will make a return on revised form 1031, covering the period in 1917 during which it was in business prior to its dissoluton. If it shall have previously made a return coverng this period and shall have paid any excess profits tax under the act of March 3, 1917, it shall be entitled to credit for the amount of such tax so paid against any excess profits tax assessable against it under Title II of the act of October 3, 1917. (Reg. 33 Rev., Art. 61.)

[Page 135.]

Treasury Stock. 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. If, for the purpose of enabling a corporation to secure working capital, or for any other purpose, the stockholders donate or return to the corporation to be resold by it certain shares of stock of the company previously issued to them, 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 to the corporation. (Reg. 33 Rev., Arts. 98 and 99.)

[Page 136.]

Expenses Incurred in Sale of Capital Stock. Any and all expenses incidental to or connected with the F. I. Tax Supp.-2

selling of the capital stock (common or preferred) of a corporation for the purpose of raising capital to be by it invested in property or employed in the business for which the corporation is organized are not an "expense of operation and maintenance" within the meaning of this title, and such expense is not an allowable deduction from the gross income, for the reason that such an expense is incurred in a capital transaction; that is, the raising of capital to be invested or employed in the business.

Such expense, like the discount at which the shares of stock may be sold, has the effect only to reduce the available capital of the corporation and cannot be used to reduce the income from operations; that is to say, any expense incident to the bringing of capital into the company, whether it be a new or a going concern, cannot be recouped out of or charged against the operating income. It is a capital loss or expense properly chargeable against the proceeds of the sale of the stock and reduces the capital rather than the earnings of the company. (Reg. 33 Rev., Art. 145.)

[Page 142.]

Indebtedness Outstanding at the Close of the Year. From the amount of indebtedness to be reported as indebtedness oustanding at the close of the year must be eliminated all indebtedness incurred in the purchase of securities the income from which is not subject to the income tax. (Reg. 33 Rev., Art. 182.) Nor shall such amount include indebtedness which is not bearing interest.

[Page 143.]

Car Trust Certificates. Equipment or car trust certificates issued by or for railroad companies are a means

by which such companies secure cars or other equipment, or the money which with such equipment is purchased.

The equipment becomes at once an asset of the company and the trust certificates secured by such assets are obligations of the railroad companies, similar to corporate bonds, mortgages, and like obligations. The trustees in whose names legal title to the equipment stands, are not an association within the meaning of this title, and are therefore not a taxable entity, but they are, for the purpose of this title, a fiscal agent, paying off the obligations, both principal and interest, of the railroad companies with funds appropriated by such companies.

The railroad companies may include these trust certificates in the amount of their bonded or other indebtedness reported, under item 2 of the return Form 1031, and the interest paid thereon, with interest paid on other obligations will be deductible, the aggregate amount so deducted not to exceed the limit fixed by law. (Reg. 33 Rev., Art. 188.)

[Page 150.]

Lessee Corporations. A railroad company operating leased or purchased lines as an integral part of its line or system, and keeping no separate books of account as to such leased or purchased line, and the income from the operating of which cannot be segregated, shall include in its income all reecipts derived therefrom, and if bonded or other indebtedness of the leased or purchased line has been assumed by the operating company, it may deduct from its gross income the interest paid on such indebtedness, provided the interest so paid plus the interest paid on its own indebtedness is

not in excess of the limit fixed by the law. In this event the leased or purchased line so long as it has a corporate existence will make return of annual net income setting out that on its own account it has neither income nor expenses, and that both are taken up in the return of the operating company, naming it. (Reg. 33 Rev., Art. 125.)

[Page 151.]

Lessor Corporations. If the leased or purchased line keeps separate books of account, or the income from its operations is, or can be segregated, or if the lessee or operating company pays it a certain rental, or in lieu of rental pays a certain per cent of dividends on its stock, interest on its bonds, taxes, etc., it (the lessor) will return the same as its income and will be subject to tax accordingly, and the lessee or operating company will make its return as though it were in no way related to the leased line. (Reg. 33 Rev., Art. 125.)

[Page 151.]

Stock Trust Certificates. Stock trust certificates or leased line certificates, as the case may be, issued by the lessee for the purpose of securing or holding control of the stock of the lessor are held to be issued in lieu of the certificates of capital stock, and for the purpose of this tax will be treated as capital stock and the amounts received by the holders of these certificates are dividends to the holders, to be treated as rentals by both lessee and lessor and constitute an allowable deduction in the one case and an item of income in the other, accordingly as they are paid and received. (Reg. 33 Rev., Art. 104.)

[Page 153.]

Fiscal Year. For the purpose of the 4 per cent additional tax imposed by the act of October 3, 1917, it is provided that in the case of a corporation making its return on the basis of its own fiscal year (other than the calendar year) this tax, for a fiscal year ending during the calendar year 1917, shall be levied, only on that proportion of its net income (less dividends received) which the period from January 1, 1917, to the end of the fiscal year bears to the entire fiscal year.

If the last previous return was made for the period ended December 31, 1916, and a return is made for a fiscal period ended with the last day of some month in 1917, the tax will be computed on the entire net income so returned. (Reg. 33 Rev., Art. 82.)

CHAPTER 13

SPECIAL PROVISIONS APPLYING TO INSURANCE COMPANIES

[Page 166.]

Returns to Conform to State Reports. Returns of insurance companies must be rendered in conformity with reports made for the same period to the State insurance departments. As all insurance companies are required by law to render their reports to the various State insurance departments for the calendar year, their returns of annual net income for the purpose of the income tax should be made for the same period, unless their books are actually kept on a fiscal year basis.

Treasury Decision 2433, providing that returns may be made on a basis other than as above set forth, is not applicable to insurance companies. (Reg. 33 Rev., Art. 239.)