the case of a foreign corporation or of a corporation entitled to the benefits of section 262 the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations. "In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are, as nearly as may be similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war-profits or excessprofits, and all other relevant facts and circumstances. "(b) For the purposes of subdivision (a) the ratios between the average tax and the average net income of representative corporations shall be determined by the Commissioner in accordance with regulations prescribed by him with the approval of the Secretary. "(c) The Commissioner shall keep a record of all cases in which the tax is determined in the manner prescribed in subdivision (a), containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, and the amount of invested capital as determined under such subdivision. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257." Art. 911, Regulations 62: "Computation of tax in special cases: -In the cases specified in section 327 of the statute the tax is to be computed by comparison with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are engaged in a like or similar trade or business and similarly circumstanced. The provisions of section 328 do not permit the determination of a general average for any trade or business. In each case which comes under the provisions of section 327 the Commissioner will determine, as nearly as may be, the group or class of corporations with which the corporation should be compared and the amount which bears the same ratio to the net income of the corporation (in excess of the specific exemption of $3,000) for the taxable year as the average tax of such representative corporations bears to their average net income (in excess of the specific exemption of $3,000) for such year. The comparison will take account of similarity with respect to character of business, size and condition of plant, gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances." NOTE: In the case of a foreign corporation or a corporation entitled to the benefits of section 262 the profits tax is computed in the same manner as stated in the answer to the foregoing problem excepting that the specific exemption of $3,000.00 is not deducted either for the taxpayer or the representative corporations. PROBLEM 331 Illustrating Computation of Invested Capital in Case of Reorganization, Consolidation, or Change of Ownership of Property, After March 3, 1917, in Which an Interest or Control of Less Than Fifty Per Cent Remains FACTS: in the Same Persons, or Any of Them The Pompon Hat Company which was owned by an individual, Max Pompon, on February 1, 1918, sold out its business to the Pompon Hat Corporation. The assets of the Pompon Hat Company, including nothing for goodwill, which had a cash value of $50,000, were valued at $50,000. The Pompon Hat Corporation bought these assets for $100,000, paying therefor $25,000 in cash and $75,000 in its own capital stock. The shares of stock received by Mr. Pompon represented only 25% of the entire capital stock issued, the other 75% being owned by other individuals. The capital stock of the Pompon Hat Corporation as of January 1, 1921, was $300,000, and the surplus $20,000. Except for any adjustment to be made on account of the acquisition of the Pompon Hat Company's business, the capital and surplus of the corporation January 1, 1921, represented its invested capital for 1921. The goodwill is carried on the books of the corporation at $50,000. QUESTION: What is the invested capital for 1921? ANSWER: The invested capital is $320,000, as under: Capital stock and surplus .$320,000 Since upon the sale of the business of the Pompon Hat Company, the interest of Max Pompon which remained in the prop erty of the Pompon Hat Company through his ownership of the stock of the Pompon Hat Corporation was less than 50%, the limitations prescribed in section 331 in the case of reorganizations, etc., do not apply. In the absence of evidence to the contrary, it is to be assumed that the $25,000 cash was paid for tangible property. Therefore, the good will was acquired entirely with stock, i. e., good will valued at $50,000 was acquired for $50,000 par value of stock. It is necessary to apply the limitations with respect to intangible property acquired with capital stock after March 3, 1917, in order to determine what adjustments if any, should be made in connection with the computation of invested capital. Par value of stock issued for good will Cash "good will when acquired 25% of capital stock outstanding on January 1, $50,000 75,000 Since the value at which the good will is carried on the books of the corporation is not in excess of any of the limitations, no adjustment of invested capital is necessary. REFERENCES: Sec. 331: (Quoted under Problem 332.) Art. 835, Regulations 62: "Where stock or shares and bonds or other obligations have been issued for a mixed aggregate of tangible and intangible property, it will be presumed in the absence of satisfactory evidence to the contrary that the bonds were issued for tangible property and that the stock was issued for the balance of the tangible property, if any, and for the intangible property. . . ." PROBLEM 332 Illustrating the Computation of Invested Capital in the Case of a Corporation Reorganized after March 3, 1917, an Interest of More Than Fifty Per Cent Remaining in the Same Persons FACTS: The Cellulose Manufacturing Corporation took over the assets of the Frier Brothers Corporation June 30, 1917, and issued its whole capital stock of $500,000 therefore to the old stockholders of the Frier Brothers Corporation, which amount represented the net value on that date of the assets (all tangible) acquired. The original cost of the assets was $400,000. QUESTION: Can the increased value be included in invested capital under the 1921 Act? ANSWER: No. The assets acquired by the new company from the old cannot be taken into the invested capital of the new company at a figure greater than that at which they would have been permitted to be taken into the invested capital of the old company had there been no reorganization. REFERENCE: Sec. 331: "That in the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation." PROBLEM 333 Illustrating the Computation of 1921 Invested Capital In the Case of a Corporation Organized After March 3, 1917, to Take Over the Net Assets of Two or More Businesses FACTS: The Acme Axle Company was organized January 1, 1921, with an authorized capital stock of $750,000 (all of one class) to take over the business of the Banner Brake Company, the Speedster Spoke Company, and the Walkover Wheel Company, the stockholders of each of these companies just prior to the sale of their respective businesses being separate individuals. The stockholders of the three companies last named turned over all the assets of these companies to the Acme Axle Company for stock in the new corporation equal to the cash value of the net tangibles turned over, as follows: If no reorganization had taken place, the assets of the three old companies could have been taken into the respective invested capitals for 1921, at the following values: The new company files its first return for the calendar year 1921. The status of the company at January 1, 1921, reflects its invested capital for the entire year. QUESTION: What is the invested capital of the Acme Axle Company for 1921? |