The City of Chicago Bonds were purchased July 1, 1921. The net income of the company for the first six months of 1921, after providing for all accrued Federal taxes, had been distributed as dividends on that day. Except for the adjustment necessary on account of inadmissible assets, the capital stock and surplus as shown by the January 1, balance sheet, represent the invested capital for 1921. QUESTION: What is the invested capital of the corporation for 1921? ANSWER: The invested capital is $622,222.22 as under: Capital stock Surplus Total .... Less adjustments for inadmissible assets as under: (a) Amount of inadmissible assets Jan. 1, 1921 N. Y. City Bonds ... U. S. Steel Corp. Stk. Total $30,000 $100,000 (b) Amount of inadmissible assets Dec. 31, 1921 150,000 (c) Average inadmissible for year (d) Amount of admissible assets Jan. 1, 1921 ($1,400,000 total assets less $100,000 in- $1,300,000 $500,000 200,000 $700,000 (e) Amount of admissible assets Dec. 31, 1921 ($1,300,000 total assets less $200, 11%% of $700,000-(invested capital before 77,777.78 Adjusted invested capital .$622,222.22 NOTE: It will be observed from the balance sheet that the reserve for depreciation is taken off the asset rather than allowing it to remain as a liability. Each item on the balance sheet must be evaluated in accordance with the statute prior to the determination of the total admissible or inadmissible assets. REFERENCES: Sec. 325 (a) The term 'inadmissible assets' means stocks, bonds, and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income, . . . "The term 'admissible assets' means all assets other than inadmissible assets, valued in accordance with the provisions of subdivision (a) of section 326 and section 331." Sec. 326 (c): "There shall be deducted from invested capital as above defined a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of admissible and inadmissible assets held during the taxable year." PROBLEM 288 Illustrating the Method of Computing the Amount of Inadmissible Assets Which Becomes Admissible in Case Income Derived from Such Assets Consists in Part of Gain or Profit Derived from Sale or Other Disposition Thereof or in Case All or Part of the Interest Derived from Such Assets is in Effect Included in the Net Income Because of the Limitation on the Deduction of Interest Under Paragraph (2) of Subdivision (a) of Section 234 FACTS: The Manly Phonograph Corporation owns one-third of the $300,000 par value outstanding of the Everlasting Phonograph Motor Corporation stock. The Manly Company also owns $200,000 of the $500,000 par value of the outstanding capital stock of the Ajax Phonograph Corporation. In 1921, the Manly Phonograph Corporation received dividends in the amount of $6,000 from the Everlasting Phonograph Motor Corporation, and $12,000 from the Ajax Phonograph Corporation. On July 1, 1921, the Manly Phonograph Corporation sold its Ajax Phonograph Corporation stock at a profit of $12,000. The dividends received both from the Everlasting Phonograph Motor Corporation and from the Ajax Phonograph Corporation, are not includable in taxable net income. The Manly Phonograph files its return on the calendar-year basis. QUESTION: How much of the inadmissible assets become admissible, and for what period! ANSWER: $100,000 of Ajax Phonograph Corporation's stock becomes admissible for the period from January 1, 1921, to June 30, 1921, and is computed as shown in the following: Income from sale of stock equals 50% of total income from the same class of stock; hence 50% of $200,000, or $100,000, of Ajax Phonograph Corporation stock becomes admissible up to the date sold. REFERENCE: Sec. 325 (a): "... The term 'inadmissible assets' means stocks, and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income, but where the income derived from such assets consists in part of gain or profit derived from the sale or other disposition thereof, or where all or part of the interest derived from such assets is in effect included in the net income because of the limitation on the deduction of interest under paragraph (2) of subdivision (a) of section 234, a corresponding part of the capital invested in such assets shall not be deemed to be inadmissible assets; . . . See also Art. 817, Reg. 62. PROBLEM 289 Illustrating Contract Considered as Intangible Property in Connection with Computation of Invested FACTS: Capital The Amos Realty Construction Corporation was organized with $100,000, capital stock. The company issued $20,000 of its capital stock for a contract to construct a business building, which contract has been obtained by one of the company's organizers. No part of the contract has been performed. QUESTION: Is this contract to be considered tangible property, or is it intangible? |