Invested capital January 1 .... .$1,125,000.00 Deduction from invested capital on account of dividend paid out of surplus ($39,436.03X 275. 365 Invested capital for 1921 29,712.08 .$1,095,287.92 REFERENCES: Art. 857, Regulations 62: "Method of determining available net income. Whether at the time of any payment made during the taxable year there is sufficient income of the taxable year available for such payment, or whether the surplus or undivided profits as of the beginning of the taxable year must be reduced by the amount of such payment, shall be determined according to the following principles: (1) The aggregate amount of earnings of the taxable year available for all purposes up to any given date will be determined upon the basis of the same proportion of the net income for the taxable year, (as finally determined for the purpose of income and excessprofits taxes) as the part of the year already elapsed is of the entire year (determined in the manner provided in article 853), unless the corporation shows from its books or other records that a greater proportion of its earnings for the year was available on such date. (2) The aggregate amount available will be deemed to be applied for the following purposes in the order in which they are stated: (a) Accrued federal income and war profits and excess-profits taxes for the taxable year (see article 845), and (b) dividends paid after the expiration of the first sixty days of the taxable year (see section 201 of the statute and article 1541) and other corporate purposes, including the purchase of outstanding stock of the corporation previously issued (see article 862). In any case where the above computation would be indeterminate because of the effect of the provisions of this article upon the invested capital for the year, the amount of such invested capital for the purpose of this computation may be deemed to be the invested capital as of the beginning of the taxable year, plus any additional capital paid in during such year and minus any specific withdrawal or liquidation of capital during such year." See Bul. 31-20-1110; O. D. 619 for further illustration. PROBLEM 319 Illustrating Effect on Invested Capital of Cash Dividend Paid in the First Sixty Days of the Distributing Company's Taxable Year which Dividend is Greater in Amount than the Surplus at End of Previous Year FACTS: The Up-To-Date Furnishers, Inc., which keeps its books on the calendar year basis, showed on its balance sheet as of January 1, 1921, an earned surplus of $10,000. The company declared a dividend payable February 1, 1921, of $25,000. Its income for the calendar year 1921 after providing for accrued Federal income and profits taxes was $30,000. QUESTION: How does this dividend affect invested capital for 1921? ANSWER: $10,000 of the dividend will come out of invested capital as of February 1, 1921, being paid in the first 60 days. Of the remaining $15,000, $12,500 will come out of invested capital as of February 1, 1921, this being the excess of the amount of the dividend over the earnings for January ($30,000 divided by 12). Since there is not enough surplus from the prior year, current year earnings have to be considered to February 1, 1921. REFERENCES: Art. 858, Regulations 62: ". . . The surplus and undivided profits as of the beginning of the taxable year will be reduced as of the date when the dividend is payable by the entire amount of any dividend paid during the first sixty days of the taxable year and by the amount of any other dividend in excess of the current net income available for its payment. In the case of a dividend paid during the first sixty days of a taxable year which exceeds in amount the surplus and undivided profits as of the beginning of the taxable year the excess will be deemed to be paid out of earnings of the taxable year available at the date when the dividend is payable, and to the extent that such earnings are insufficient it will be deemed to be a liquidation of paid-in capital or surplus. . . .” Sec. 201 (f) (Quoted under Problem 12) PROBLEM 320 Illustrating Effect of Stock Dividend on Invested Capital FACTS: The Lewis Lace Selling Corporation, which keeps its books on the calendar-year basis, declares a stock dividend payable February 15, 1921 in the amount of $50,000. QUESTION: What is the effect of this dividend on invested capital for 1921? ANSWER: None, except that if cash dividends are paid later in the year, the stock dividend will serve to reduce the amount of current earnings available for application against such cash dividends. REFERENCE: Art. 859, Regulations 62: "Neither the payment nor the receipt of a true stock dividend has any effect upon the amount of invested capital. . . ." PROBLEM 321 Illustrating Effect of Operating Deficit on Invested Capital FACTS: The U-No-Us Cigar Company at the beginning of its taxable year has an operating deficit of $25,000. QUESTION: In computing invested capital must this fact be taken into consideration, and the amount of the deficit be deducted from capital and surplus originally paid in, in order to compute the invested capital? ANSWER: No. An operating deficit does not ordinarily affect invested capital through a reduction of the original investment representing capital or surplus paid in. However, if surplus reserves (not paid in) are to be included in invested capital, they must be reduced by the amount of this deficit. REFERENCE: Art. 860, Regulations 62: "Capital or surplus actually paid in is not required to be reduced because of an operating deficit, but where there has been directly or indirectly a liquidation or return of their investment to the stockholders, full effect must be given to any liquidation of the original capital." PROBLEM 322 Illustrating the Computation of the Invested Capital of a Corporation for a Fractional Part of a Year FACTS: The Inventories Computing Corporation was organized September 1, 1921, with an authorized capital stock of $100,000, of which $50,000 was issued for cash at par on September 1, 1921. On November 1 an additional $25,000 was issued for cash at par. There were no other transactions affecting the invested capital of the company. The company keeps its books on the calendar-year basis. QUESTION: What is the invested capital of the company for the period September 1 to December 31, 1921, inclusive? ANSWER: The invested capital is $20,890.41, and is computed as follows: Fifty thousand dollars were invested in the business during the full period of 122 days and $25,000 were invested for only 61 days (Nov. 1 to Dec. 31, inclusive). 61 122 $50,000 plus (- of $25,000) equals $62,500, the total in |