during the taxable year for which the return is made, which have been distributed or ordered to be distributed, respectively, to its stockholders or members during such year."

PROBLEM 227

Illustrating Consolidated Returns-Class A, or Parent-andChild, Relationship

FACTS:

M. Company, a domestic corporation, owns all the outstanding capital stock of domestic corporation X. The latter corporation in turn owns all the outstanding capital stock of domestic corporation Y. These conditions prevailed during the entire taxable year ended in 1921.

QUESTION:

Are the returns of the three corporations to be consolidated in 1921?

ANSWER:

Yes; this is a so-called Class A, or parent-and-child, consolidation, one corporation owning the entire outstanding capital stock of another. It will be noted that the ownership of "substantially all the stock" is referred to in the Revenue Act of 1921. Under previous acts the ownership or control of not less than 95 per cent of such outstanding voting capital stock has been accepted as satisfying the requirement that substantially all of the stock be owned or controlled. Under Article 633 of Regulations 62, however, it is made clear that a lower percentage of ownership or control when considered in conjunction with other existing factors influencing invested capital or income or both may warrant consolidating the returns of the corporations concerned.

REFERENCE:

Sec. 240 (c): "... Two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others."

PROBLEM 228

Illustrating the Requirement to File Consolidated ReturnsClass B, or Brother-brother, Relationship

FACTS:

The outstanding voting capital stock of domestic corporations X and Y was owned during the calendar year 1921, as follows:

Both the above corporations keep their books on the calendaryear basis.

QUESTION:

Are Companies X and Y required to file consolidated returns for the taxable year 1921?

ANSWER:
Yes.

REFERENCES:

Sec. 240 (c): "For the purpose of this section two or more domestic corporations shall be deemed to be affiliated . . . (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests."

Sec. 240 (e): "Corporations which are affiliated within the meaning of this section shall make consolidated returns for any taxable year beginning prior to January 1, 1922, in the same manner and subject to the same conditions as provided by the Revenue Act of 1918."

PROBLEM 229

Illustrating Option of Filing Consolidated Returns or Separate Returns for Taxable Years Beginning on or after January

FACTS:

1, 1922

The outstanding voting capital stock of domestic corporations X and Y is owned by the same stockholders in the same proportions, rendering these corporations affiliated under the law. The accounting periods of the two corporations end December 31.

QUESTION:

Are corporations X and Y required to file consolidated returns for the taxable year 1922 and subsequent years?

ANSWER:

The companies have the option of filing consolidated returns for 1922 or separate returns. The basis which is adopted for the year 1922 cannot be subsequently changed, however, unless permission to do so is granted by the Commissioner.

REFERENCE:

Sec. 240 (a): "That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner."

PROBLEM 230

Illustrating Consolidated Returns-Fiscal Years Ending in

1922

FACTS:

Domestic corporation A owns all the capital stock of domestic

corporation B. Both companies close their fiscal year November 30th.

QUESTION:

Are they required to file a consolidated return for the fiscal year ended November 30, 1922?

ANSWER:

Yes; the option given in section 240 (a) permitting corporations which are affiliated within the meaning of that section to file consolidated or separate returns applies only to corporations reporting for a taxable year beginning on or after January 1, 1922.

REFERENCE:

Sec. 240 (e): (Quoted under Problem 228.)

PROBLEM 231

Illustrating Consolidated Returns-Allocation of Taxes

FACTS:

Domestic Corporations A, B and C file a consolidated return for their taxable year ending December 31, 1921. The consolidated net income is $100,000, of which Corporation A's portion is $50,000, Corporation B's $30,000, and Corporation C's $20,000. The total tax payable is $20,000. The consolidated return contains no direction as to the allocation of the tax against the several corporations.

QUESTION:

What amount of tax will be assessed against the respective corporations?

ANSWER:

The total tax will be allocated to the several corporations on the basis of the proportion of net income of each corporation to the consolidated net income, as follows:

The tax may be allocated to the several corporations in any proportion that may be agreed upon among them, but in the absence of such agreement the allocation will be made as above outlined.

REFERENCE:

Sec. 240 (b): "In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each."

PROBLEM 232

Illustrating Case in Which the Commissioner of Internal Revenue May Request a Consolidation of the Account of a Foreign Corporation with that of a Domestic Corporation for the Purpose of Properly Apportioning

FACTS:

Gains or Losses, Deductions and Capital

The Irish Linen Company, a foreign corporation manufacturing linens in Ireland, sells them to the Irish Linen Corporation of New York, a domestic corporation 100% owned by the foreign corporation. The selling price of the linens to the American corporation is considerably above the market price in Ireland, with the result that the American corporation shows no income while the foreign corporation shows a large income. This situation prevailed during 1921.

QUESTION:

Is the American corporation subject to tax, and if so, how?