PROBLEM 307 Illustrating Computation of Invested Capital in Case Intangible Property Has Been Paid in for Stock or Shares Prior to March 3, 1917 The Tobacco Process Corporation was organized January 2, 1917, with capital stock of $150,000, of which $100,000 was issued for cash and $50,000 was issued to H. Hernandy for a secret process for curing tobacco. Mr. Hernandy had been offered about the time of the incorporation, $75,000 in cash for the secret process by an old established firm, but turned this offer down in order to become a stockholder in the Tobacco Process Corporation of which he was one of the organizers. The surplus as of the beginning of the taxable year 1921, was $50,000. Capital stock remained unchanged. No adjustments of invested capital are necessary except for the intangibles acquired for capital stock. The secret process was carried or the books at $50,000. QUESTION: What is the invested capital? ANSWER: The invested capital is $187,500.00, and is computed as follows: Capital stock Total $150,000 50,000 $200,000 Less: Adjustment for intangible property (secret process): Amount at which carried on books, $50,000 Less: 25% of $150,000 capital stock outstanding March 3, 1917, and on The 25% limitation in this case is lower than the cash value of the intangibles when acquired, and is also lower than the par value of the stock issued for the intangibles, and is therefore the one which applies. FACTS: (Case B) Assume that at the time the Tobacco Process Corporation was organized, the cash value of Mr. Hernandy's secret process had been $30,000 instead of $75,000 as in Case "A." QUESTION: What would the invested capital have been? ANSWER: The invested capital would have been $180,000, as under: The lowest value here is the cash value, and therefore the cash value is the one which applies. FACTS: (Case C) Assume the facts to be the same as in Case "A" above, except that Mr. Hernandy accepted $25,000 in stock for his secret process, the remainder of the stock being paid in cash, $175,000. In this case the process is carried on the books at $25,000. The lowest value here is the par value of the stock paid for the intangible property ($25,000), and therefore no change is made. REFERENCE: Sec. 326 (a) (4) and (5) (Quoted under Problem 308) PROBLEM 308 Illustrating the Computation of Invested Capital in Case of Intangible Property Acquired for Stock or Shares Before March 3, 1917-Par Value of Capital Stock Outstanding on First Day of Taxable Year Less Than Amount Outstanding March 3, 1917 FACTS: The North American Pencil Corporation was organized February 1, 1917, with a capital stock of $200,000. The corporation purchased the going business of J. M. Sharp for $100,000 par value of stock. The assets acquired consisted of plant and equipment of a cash value of $80,000 and goodwill of a cash value of $50,000. The liabilities assumed amounted to $30,000. The remainder of the capital stock was issued for cash at par. During 1919 the capital stock was reduced to $100,000, the balance being retired at par. On January 1, 1921, the capital stock outstanding was $100,000, and surplus $25,000. Except for the adjustment necessary on account of the goodwill, which was carried on the books at $50,000, the capital stock and surplus of the company on January 1, 1921, represented the company's invested capital for 1921. QUESTION: What is the invested capital for 1921? ANSWER: The invested capital is $100,000, as under: Sec. 326 (a): "That as used in this title the term "invested capital" for any year means (except as provided in subdivision (b) and (c) of this section): . . . (4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest; (5) Intangible property bona fide paid in for stock or shares on or after March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, whichever is lowest: Provided, That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year; . . .” PROBLEM 309 Illustrating Computation of Invested Capital in Case Intangible Property has been Paid in for Stock or Shares After FACTS: (Case A) March 3, 1917 The Electron Separator Corporation was organized June 3, 1919, for the purpose of separating metals by a patented proc ess. The company had a capital stock of $200,000, par value, of which $100,000 was issued for cash to Aaron Straus at par, $40,000 to Richard Goodnow for tangible property, and $60,000 to Eldridge Corey for the separation patent. The capital stock was unchanged at January 1, 1921, and the surplus at that time as shown by the balance sheet was $20,000. Just prior to the company's taking over the patent the previous owner had been offered $100,000 for his patent. The patent was carried on the books at the par value of the stock issued therefor. Except for the adjustments necessary on account of the issue of stock for an intangible, the capital stock and surplus of the company January 1, 1921, represented its invested capital for 1921. QUESTION: What is the invested capital of the company for 1921? ANSWER: The invested capital is $210,000, as under: |