vested capital for the period. This must be reduced by the fraction which the taxable period is of a full year. The statu

122 365

tory invested capital is therefore, -of $62,500, or $20,890.41.

REFERENCES:

Sec. 326 (d): "The invested capital for any period shall be the average invested capital for such period, but in the case of a corporation making a return for a fractional part of a year, it shall be the same fractional part of such average invested capital." For further illustration see Art. 856, Reg. 62.

PROBLEM 323

Illustrating Computation of Excess-Profits Tax for a Fractional Part of a Year

FACTS:

The Powell Paper Company, a domestic concern incorporated July 1, 1921, closed its books December 31, 1921, and showed a taxable net income of $40,000 for the six-months period ended on that date. The invested capital of the company for the six months was $250,000. The company files its first return for the six months ended December 31, 1921.

QUESTION:

What is the amount of the excess-profits tax for the six months period?

Net income, at same rate, for full year (1% of

The excess-profits tax for the six-months period will be 12 of the $17,400 shown above, or $8,700.

REFERENCES:

Sec. 326 (d) (Quoted under Problem 322)

Sec. 305:

"That if a tax is computed under this title for a period of less than twelve months, the specific exemption of $3,000, wherever referred to in this title, shall be reduced to an amount which is the same proportion of $3,000, as the number of months in the period is of twelve months."

NOTE:

In the solution to this problem the method outlined in Article 718, Regulations 62, has been followed, which the author regards as a common-sense solution, despite the fact that a literal reading of the statute would not appear to warrant the solution given. Thus, section 320 provides that for the purpose of the excess-profits tax the net income of a corporation shall be ascertained and returned for the taxable year upon the same basis and in the same manner as provided for income tax purpose in Title II. In Title II under section 239, paragraph (b), provision is made that corporations required to file income tax returns are subject to the provisions of section 226. Paragraph (c) of section 226 provides that "in the case of a return for a period of less than one year the net income shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in such period; and

the tax shall be such part of a tax computed on such annual basis as the number of months in such period is of twelve months." Accordingly, the net income of the Powell Paper Company would be put on an annual basis, which would give $80,000. The invested capital in accordance with paragraph (d) of section 326 is required to be reduced. With the income and invested capital adjusted in the manner just described it is clear that the resulting excess-profits tax would be out of proportion to what Congress evidently intended.

PROBLEM 324

Illustrating Case in Which Profits Tax is Assessed by Comparison with Representative Concerns-Commissioner Unable to Determine Invested Capital According to

FACTS:

Ordinary Method

The New Bedford Company is a New England cotton mill, organized in 1885, resulting from the incorporation of a partnership. The assets as taken over by the corporation were valued very conservatively, some being set up at merely nominal amounts. It has been the consistent policy of the corporation to charge off as expenses additions and betterments which should have been capitalized. It is impossible at this date to make proper adjustments in order to state invested capital in accordance with Sec. 326.

QUESTION:

Would these irregularities warrant assessing the excess-profits tax for 1921 under Sec. 328, providing for comparison with representative corporations?

ANSWER:
Yes.

REFERENCE:

Sec. 327: "That in the following cases the tax shall be determined

as provided in Sec. 328: (a) Where the Commissioner is unable to determine the invested capital as provided in Sec. 326. . . ."

NOTE:

Section 328 provides for the assessment of the excess-profits tax by comparison with representative concerns. See Problem

330.

PROBLEM 325

Illustrating Case in Which Profits Tax is Assessed by Comparison with Representative ConcernsForeign Corporations

FACT:

Wing Lee & Co., a foreign corporation located in Canton, China, deals in chinaware which it manufactures abroad and sells principally in this country through its own branches here. Its records are clear and its investment in this country could be stated accurately together with the profits earned here.

QUESTION:

How will the company's 1921 excess-profits tax, if any, be determined?

ANSWER:

The company's 1921 excess-profits tax, if any, will be determined by comparison with representative concerns in accordance with section 328.

Being a foreign corporation it comes specifically within the purview of section 327 (b) requiring such assessment.

REFERENCE:

Sec. 327: "That in the following cases the tax shall be determined as provided in section 328: . . . (b) In the case of a foreign corporation. . . ."

PROBLEM 326

Illustrating Case in Which Profits Tax Is Assessed by Comparison with Representative Concerns-Corporations

FACTS:

Entitled to Benefits of Section 262

The Martini Company, a domestic corporation, has a branch in the Philippine Islands. The Martini Company's accounting year closes December 31. For the years 1919, 1920, and 1921, the Philippine branch produced in the regular conduct of its business gross income amounting to at least 80 per cent of the total gross income of the Martini Company. None of the income of the Philippine branch was brought into the United States during the taxable year. The Martini Company is able from its records to clearly compute its statutory invested capital.

QUESTION:

Upon what basis will its 1921 excess-profits tax, if any, be assessed?

ANSWER:

From the facts above stated the Martini Company comes within the scope of section 262. Its profits tax will therefore be determined as provided in section 328 notwithstanding its ability to clearly state its invested capital, because of the specific provision in section 327 directing that a corporation coming within the purview of section 262 be taxed under section 328.

REFERENCE:

Sec. 327: "That in the following cases the tax shall be determined as provided in section 328: . . . (b) In the case of a corporation entitled to the benefits of section 262. . . .”