The 25% limitation is lower than the cash value of the intangible when acquired, and is also lower than the par value of the stock issued for the intangible, and therefore applies in this instance. FACTS: (Case B) Assume the same facts to obtain as in Case "A" except that the cash value of the patent at the time of organization was $40,000. QUESTION: What is the invested capital for 1921! ANSWER: The invested capital is $200,000, as under: The cash value is the lowest of the limitations, and therefore applies in this instance: FACTS: (Case C) Assume same facts to obtain as in Case "A" except that the par value of the stock issued for the patent was $35,000, and the total outstanding stock, therefore, $175,000. QUESTION: What is the invested capital? The par value of the stock issued for the patent is the lowest of the limitations and therefore applies in this instance. Since the patent is carried on the books at the par value of the stock issued therefor, no adjustment is necessary. REFERENCE: Sec. 326 (a) (5) (Quoted under Problem 308) PROBLEM 310 Illustrating Case in Which Leasehold May Not be Included in Invested Capital FACTS: The Brown Theatre Corporation, organized in 1900, obtained in 1914 without cost an original lease for 100 years on a theatre building. On December 31, 1920, this leasehold had a value of $50,000, and the corporation wrote this value into its books on that date and credited paid-in surplus. Returns are filed on the calendar-year basis. QUESTION: Can this leasehold be included in the invested capital for 1921? ANSWER: No. Appreciated values cannot be included in invested capital, REFERENCE: Bul. 19-20-925; A. R. R. 86: "Held, . . . that a claim for paid-in surplus can not be allowed in the case of appreciated value in a leasehold which was acquired by the company as original lessee without cost and which was not paid in at a fixed value for stock or shares." PROBLEM 311 Illustrating Determination of Invested Capital in Case Bondholders Purchase at Foreclosure Sale the Property Covered by the Mortgage Securing the Bonds and Then Transfer said Property to a New Corporation in Exchange for its Capital Stock FACTS: The Logan Local Transport Company had outstanding $1,500,000 in bonds. In 1900 it could not meet its interest payments. Under foreclosure proceedings the bondholders bought for $600,000 the property covered by the mortgage, and exchanged the property for the entire stock in a new corporation. The property was at that time worth $1,000,000. QUESTION: Disregarding depreciation, at what amount may this property be taken into invested capital? ANSWER: $1,000,000, as this was the value of the property paid in for the stock at the time of payment. REFERENCE: Bul. 8-19-334; T. B. R. 32 (as given in the Digest of Income Tax Rulings): "Where bondholders purchase at foreclosure sale the property covered by the mortgage securing the bonds and form a new corporation to which the property is transferred in exchange for its entire capital stock, the corporation should be allowed to set up an invested capital equal to the value of the property transferred to the corporation as of the date of transfer, such value to be established by evidence acceptable to the Commissioner." PROBLEM 312 Illustrating Computation of Invested Capital-Fair Market Value of Assets as of March 1, 1913 has no Bearing on Invested Capital FACTS: The Chamberlain Piano Corporation for income tax purposes valued its buildings at $150,000, or $50,000 more than cost, $150,000 being the March 1, 1913, value of the buildings. The company depreciated its buildings on this basis. QUESTION: May the March 1, 1913, value appreciation be included in invested capital? ANSWER: No, unless this appreciation has been realized prior to the beginning of the taxable year. The March 1, 1913, value cannot be used for invested capital, as it represents an appreciation of value which is not allowed under the law. REFERENCES: Art. 831, Regulations 62: “. . . The fair market value of the assets as of March 1, 1913, has no hearing on invested capital." Art. 1561, Regulations 62: ". . . The fair market value as of March 1, 1913, has no bearing on the determination of the invested capital of a corporation for the purpose of the war-profits and excess-profits tax." PROBLEM 313 Illustrating the Computation of Invested Capital— Bonus Stock FACTS: The Patent Fuel Corporation, needing additional funds, issued $100,000 Debenture Bonds on December 31, 1920, maturing in fifty years and bearing 6% interest. An underwriting syndicate offered to take the whole issue in $1000 denominations at 950, or to take the whole issue at par if it received with every $1,000 share one share of the common capital stock of the corporation. This second offer was accepted and the exchange was accordingly made. QUESTION: At what amount, if any, may this bonus stock be included in the invested capital of the Patent Fuel Corporation? ANSWER: At $5,000. One hundred shares of stock were issued for which $50 per share was received in excess of what would have been received for the bonds alone. REFERENCE: Art. 832, Regulations 62: "Capital stock issued as a bonus in connection with the sale of a corporation's bonds may not be included in invested capital unless the corporation proves to the satisfaction of the Commissioner that such stock bonus enabled the corporation to secure a higher price for the bonds than it could otherwise have secured. Wherever this fact is established such stock shall be included in computing invested capital to the extent of the difference between the selling price of the bonds and the price at which they could have been sold if issued without such stock bonus. . . PROBLEM 314 Illustrating the Determination of the Amount of Capital Stock Paid for Intangibles in Case a Mixed Aggregate of Tangible and Intangible Property has been Acquired FACTS: by the Issue of Stocks and Bonds The Latest Fiction Magazine, Inc., was organized April 5, 1916, to take over the business and assets of the Fairview Magazine, Inc., which it succeeded. The tangible property acquired was valued at $4,000,000 while the intangible property acquired was valued at $1,000,000. For this entire property The Latest |