1, 1921, incorporated December 31, 1921. The taxable net income for 1921 was $300,000. Mr. Dodge, a citizen of the United States, was unmarried and had no dependents on December 31, 1921. The market value of his business on June 30, 1921 was $1,000,000. Mr. Dodge had no other source of income. He reports on the calendar-year basis.

QUESTION:

How shall Mr. Dodge make his return for 1921?

The taxpayer, having the option in this case of filing as an individual or as a corporation on the 1921 income, should make computations of the tax he would have to pay if he chooses to report as an individual, and of what he would be required to pay if he chooses to report as a corporation. The return showing the lower tax may be filed. In this case as an individual the computation would be:

As a corporation the computation of the tax would be:

Capital stock tax to be paid

995

Total tax due as a corporation

$113,255

The above computations show that the tax as a corporation is less than the tax as an individual. It must be borne in mind, however, if the return is made as a corporation, that Mr. Dodge would be subject, as an individual, to surtax on all dividends received from the corporation from earnings accumulated after December 31, 1920.

REFERENCE:

Sec. 229: "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 individual, 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 business, 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 of the Revenue Act of 1918 as if such taxpayer had been a corporation on and after January 1, 1921."

NOTE:

Sec. 1000 imposes the Federal Capital Stock tax.

PROBLEM 202

Illustrating Computation of Normal Tax on Corporations, 1921 and 1922

FACTS:

The Flower Cotton Company is a domestic corporation and reports on the calendar year basis. For 1921 the amount of its net income in excess of the credits provided in Section 236 is $50,000. For 1922 such excess is $60,000.

The normal tax is, therefore, $5,000 for the calendar year 1921, and $7,500 for the calendar year 1922.

REFERENCE:

Sec. 230: "That in lieu of the tax imposed by section 230 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every corporation a tax at the following rates:

(a) For the calendar year 1921, 10 per centum of the amount of the net income in excess of the credits provided in section 236; and (b) For each calendar year thereafter, 122 per centum of such excess amount."

PROBLEM 203

Illustrating Corporations Exempt From Taxation-Labor, Agricultural or Horticultural Organizations

FACTS:

The Holstein Register Association of New York was organized by men interested in the breeding of Holstein cattle, to register the pedigree of such animals, and by arousing the interest of

farmers in such cattle induce them to raise better stock by introducing Holstein cattle into their herds for breeding purposes. Its income consists of registration fees and dues of members and is expended entirely for the purpose for which the association was formed.

QUESTION:

Is the association exempt from taxation?

ANSWER:

Yes, because the organization is an agricultural organization formed for the purpose of benefiting the breeders of the Holstein cattle so registered and the profits were solely used for such purpose.

REFERENCE:

Sec. 231: "That the following organizations shall be exempt from taxation under this title (1) Labor, agricultural, or horticultural organizations;"

PROBLEM 204

Illustrating Corporations Exempt from Taxation Mutual Savings Banks Not Having a Capital Stock Represented by Shares

FACTS:

The New Idea Gas Light Mutual Savings Association was formed for the purpose of enabling the employees of the New Idea Gas Light Company, to save and borrow money. It was limited to the employees of the company, who elected a board of trustees to manage its affairs. Each member was allowed to subscribe to a certain number of shares, and could borrow to a certain amount. The profits, if any, were to be returned to the members in proportion to the number of shares held by each.

QUESTION:

Is the association exempt from the Federal income and profits tax for 1921?

ANSWER:

Yes. It has been held that the shares of stock sold by the association are merely the means to assist the members in accumulating their savings and that they do not constitute capital stock within the accepted business meaning of that term.

The dividends paid thereon are in reality interest on deposits.

REFERENCES:

Sec. 231: "That the following organizations shall be exempt from taxation under this title... (2) Mutual savings banks not having a capital stock represented by shares;"

Bul. 43-20-1265; O. D. 703: "An association of the employees of the N Company was formed for the purpose of enabling its members to save and borrow money. The members, who are limited to the employees of the N Company, elect annually a board of trustees to manage their affairs. Each member may subscribe to from 1 to 25 shares of stock, which is represented by certificates of deposit. At the end of the year the money paid in, together with the earnings thereon, is returnable to the members in proportion to the amount each has paid in, but each member has the option of allowing the money to remain on deposit where it accumulates further earnings. Any member may borrow from the association on his promissory note, at rates of interest ranging from 5 to 12 per cent, but in no greater amount than the amount remaining to his credit, plus a sum equal to one month's salary, unless the same is secured by satisfactory collateral. Held, that the shares of stock sold by the association are merely the means to assist the members in accumulating their savings and that they do not constitute capital stock within the accepted business meaning of that term. The dividends paid thereon are in reality interest on deposits (see 28 Op. A. G. 189; 31 id. 176); and the association is exempt under section 231 (2) of the Revenue Act of 1918 as a mutual savings bank not having a capital stock represented by shares."

PROBLEM 205

Illustrating Corporations Exempt from Taxation-Fraternal Beneficiary Societies, Orders or Associations

FACTS:

The Sunshine Mutual Aid Society was organized by members of a certain fraternal organization operating under the lodge system for the purpose of providing insurance exclusively to the members of the fraternal organization, for the benefit of their