41

plus. 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.1 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) 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.42

Art. 64. Reconstruction of surplus and undivided profits accounts. 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.

Where a taxpayer claims additions to the capital account, the books of account will be presumed to show the. true facts and the burden of proof will rest upon the taxpayer. Such additions will be accepted only to the extent and under the conditions stated below:

(1) Amounts which have been expended in the past for the acquisition of plant, equipment, tools, patterns,

41 This ruling is supported by the language of the statute (Sec. 207a) which permits the inclusion of "the actual cash value of tangible property paid in at the time of such

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42 The three methods outlined are not exclusive. Other evidence may be submitted to show the value at the time of acquisition.

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 currrent expense, may (less proper reduction for depreciation or obsolescence) be added to the surplus account in computing invested capital when such assets are still owned and in active use by the taxpayer 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. Assets of this kind not in current use shall not be valued at more than their nominal or scrap value.

(2) Amounts expended in the past for good will, trademarks, 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.43

43 Amounts expended prior to March 1, 1913, in, for instance, litigation to protect patents are proper additions to the cost of the patents, but whether or not advertising expense is a proper addition to the investment in good will, trade marks, etc., depends upon the circumstances in each particular case.

(3) Amounts under (1) and (2) above, expended on or after March 1, 1913, will, in the case of a corporation, be limited strictly to items which have not been deducted in computing taxable income upon its income tax return. Whenever a corporation has claimed and the department has allowed a deduction in respect to its income tax, the item upon which the deduction is based shall not be restored to the surplus account nor included in the invested capital.

(4) The taxpayer shall in his return to the Commissioner of Internal Revenue make a statement of the proposed additions, 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.

(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.

Art. 65. Invested capital of insurance companies.(a) The invested capital of a 'mutual insurance company will be deemed to consist of the sum of (1) any surplus or contingent reserves maintained for the general use of the business, plus (2) any legal reserves the net additions to which are included in the net income subject to the tax-subject to the restrictive provisions of Art. 44 requiring the exclusion of tax-free assets other than obligations of the United States.

(b) The invested capital of a stock insurance company will be deemed to consist of its capital stock, paid in or earned surplus and undivided profits (subject to the same restrictive provision of Art. 44), computed in accordance with the provisions of Art. 53.

INVESTED CAPITALINDIVIDUALS

Art. 66. Items included in invested capital.-Subject to the limitations stated in these regulations, the invested capital of an individual is measured by the total of three items:

(1) Actual cash paid into the trade or business.

(2) Tangible property paid into the trade or business. (3) Patents and copyrights, and good will, trademarks, trade-brands, franchises, and other intangible property.44a

Art. 67. Valuation of tangible property.-Subject to the requirements of Art. 42 as to allowance for depletion, depreciation and obsolescence, valuation of tangible property will be as follows:

In the case of tangible property purchased with cash the valuation will be based upon the cost (estimated if not known) in cash at the time purchased.

In the case of tangible property paid in as such prior to January 1, 1914, the valuation will be based upon its actual cash value as of that date. Adequate evidence of such value must be furnished by the taxpayer.45

In the case of tangible property paid in on or after January 1, 1914, the valuation will be based upon its actual cash value at the time of payment.

It will be presumed that the tangible assets employed in the trade or business have been acquired with cash which has been either paid in directly or derived from earnings of the trade or business; but the taxpayer will

44 See Arts. 42 to 52 inclusive.

44a See Art. 68.

45 See Art. 63.

be entitled to show that such assets were paid in as tangible property.

Art. 68. Valuation of intangible property.-Patents and copyrights, and good will, trade-marks, trade-brands, franchise, and other similar intangible assets may be included in invested capital at a value not to exceed the actual cash paid therefor or the actual cash value at the time of payment of the tangible property paid therefor, but only if bona fide payment was made therefor specifically as such in cash or tangible property.46

Art. 69. Profits earned during taxable year may be included. The restriction in respect of undivided profits earned during the taxable year which is imposed upon corporations and partnerships does not apply to individuals, and therefore, unless otherwise shown, the profits of the taxable year remaining in the trade or business will be deemed to have arisen ratably throughout the year, and the capital at the beginning of the year may be increased by the total amount of such profits. remaining in the trade or business averaged monthly over the year.47

Art. 70. Rule for computing invested capital.— Where an individual keeps books of account his invested

46 Amounts spent in litigation to protect patents, copyrights or trade marks and amounts spent in advertising to establish trade names, etc., it seems, can be held to be additional investments of capital if not charged to expense and proof can be produced to show the disbursements to have been made specifically for such purposes. "Other similar intangible assets" would include licenses, rights to manufacture under letters patent, etc. 47 The individual may, if he keeps books, show that the greater part of the year's earnings accrued in the earlier months of the year, in which case the deduction will be greater than if the earnings are considered to have arisen ratably. See Art. 43 for manner of determining monthly average.