ANSWER:

It is considered intangible property. While the contract relates to tangible property, its value, if any, arises not from that fact but from the expectation of a realization of profit upon the performance of the contract, and is, therefore, under the Bureau's interpretation, regarded as intangible property.

REFERENCES:

Bul. 33-20-1140; O. D. 635: ". . . Held, that an unperformed contract to furnish manufactured products represents no rights in tangible property which would entitle it to be regarded as deriving its value chiefly therefrom. On the contrary, the value of the contract is of an intangible nature, contingent upon the performance of its terms and the realization of the anticipated profit. The intangible rights under such a contract would, therefore, be subject to the limitation contained in section 207 of the Revenue Act of 1917, and section 326 of the Revenue Act of 1918, in the case of intangible property purchased with corporate stock.

Art. 811, Regulations 62: ". . . Most contracts are intangible property and in the absence of a specific ruling by the Commissioner to the contrary should be so regarded for the purpose of making returns. A contract may be treated as tangible property only after the submission of a full statement as to its exact nature, showing to the satisfaction of the Commissioner that it relates to rights in tangible property to such an extent that its value arises chiefly therefrom..." Sec. 325 (a): "That as used in this title The term 'intangible property' means patents, copyrights, secret processes and formulae good will, trade-marks, trade-brands, franchises and other like property; .

PROBLEM 290

Illustrating Inadmissible Assets-Federal Reserve Bank Stock

FACTS:

The Industrial Commercial Bank, which is a member of the Federal Reserve Bank, owns $40,000 par value of Federal Reserve Bank stock, acquired in 1919.

QUESTION:

Is this stock to be treated as an admissible or inadmissible asset in the computation of invested capital for 1921 ?

ANSWER:

It is to be treated as an inadmissible asset.

REFERENCE:

Bul. 1-19-118; O. 781: "Federal reserve bank stock held by member banks is held to be an inadmissible asset in determining invested capital for excess-profits tax purposes."

PROBLEM 291

Illustrating War Finance Corporation Bonds as Inadmissible Assets

FACTS:

The Fragrant Tea Corporation invested $10,000 in War Finance Corporation bonds.

QUESTION:

Are these bonds inadmissible assets for purposes of determining the 1921 invested capital?

ANSWER:

Since interest on these bonds up to $5,000 principal amount is exempt from taxation, the principal up to that amount is inadmissible. In this case $5,000 is inadmissible and $5,000 admissible.

REFERENCES:

"In

Bul. 1-19-116; 0. 781 (as per Digest of Income Tax Rulings): terest on an amount of bonds of the War Finance Corporation, the principal of which does not exceed in the aggregate $5,000, is exempt from Federal income and excess profits taxes. Corporate funds invested in such bonds are inadmissible assets to the extent that they are invested in bonds of a face value of not more than $5,000, but funds of a corporation or an association invested in such bonds are admissible assets so far as they are invested in such bonds beyond a principal or face value of $5,000."

Sec. 325 (a): "That as used in this title.. 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. . . .”

PROBLEM 292

Illustrating Inadmissible Assets-Stock of Foreign Corporations

FACTS:

The Oriental Goods Trading Company, a domestic corporation, during the entire calendar year 1921, owned 10% of the capital stock of the China Trading Company (a foreign corporation). The China Trading Company, organized in 1920, for the entire period since the date of its organizaton to the close of 1921 derived 90% of its gross income from sources within the United States. The Oriental Goods Trading Company filed its 1921 return on the calendar-year basis and was subject to the excessprofits tax.

QUESTION:

Is the stock of the China Trading Company to be treated as an admissible or an inadmissible asset?

ANSWER:

It is to be treated as an inadmissible asset as the dividends receivable by the domestic corporation from the foreign corporation are deductible in the computation of net income subject to tax.

REFERENCES:

Sec. 325 (a): "That as used in this title 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..

Sec. 234 (a) (6) (Quoted under Problem 217)

PROBLEM 293

Illustrating Capital Stock Which May be Included as An

Admissible Asset

FACTS:

The Chair Carving Corporation of Massachusetts, owns stock

in the Chair Carving Corporation of England, which has no income from sources within the United States.

QUESTION:

Does this stock constitute an admissible asset in the hands of the Massachusetts corporation?

ANSWER:

Yes, as the dividends thereon are taxable.

REFERENCES:

Sec. 325 (a): "That as used in this title. . . 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."

Bul. 22-19-538; T. B. R. 67 (as given in the Digest of Income Tax Ruling): "Where a domestic corporation exchanges patent rights and cash for stock in a foreign corporation which derives no income from sources within the United States, the shares of stock so received are admissible assets in determining the invested capital of the domestic corporation.

PROBLEM 294

Illustrating the Determination of the Value for Invested Capital Purposes of Stock or Shares Issued at a Nominal Value or Having No Par Value

FACTS:

The Truesdale Timber Corporation was organized in 1898 to hold certain lands, and cut and sell the timber therefrom. The company paid all its capital stock of 1000 shares of no par value for this land, which consisted of approximately 200 acres. Sales of neighboring property at about the time of this transaction indicated that the land acquired by the corporation for its stock was unquestionably worth $20 an acre. There were no sales of stock itself, on which its value could be based.

QUESTION:

At what value may the capital stock be included in invested capital?

ANSWER:

Four thousand dollars, i. e., based upon the value of the property paid in for such stock, the actual value of such stock at the date of issue.

REFERENCE:

Sec. 325 (b): "For the purposes of this title the par value of stock or shares shall, in the case of stock or shares issued at a nominal value or having no par value, be deemed to be the fair market value as of the date or dates of issue of such stock or shares."

PROBLEM 295

Illustrating the Computation of Invested Capital-Capital Stock and Surplus

FACTS:

The balance sheet of the Strong Furniture Company on January 1, 1921, appeared as follows:

Cash

$10,000 Accounts payable Accounts receivable.. 25,000 Capital stock

$95,000

The capital stock had all been issued January 1, 1914, for cash at par. The surplus account reflected only actual earned surplus. None of the asset accounts had been adjusted above or below cost, except for depreciation sustained. There were no changes in invested capital during 1921. The company reports on a calendar year basis.

QUESTION:

What is the invested capital of the company for 1921?