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ANSWER:

$600,000, as under:

The stockholders of the Banner Brake Company continue to have an interest in excess of 50% in the assets transferred by them to the Acme Axle Company. Therefore, these assets cannot be included in the Axle Company's invested capital at a figure higher than they could have been included in the Brake Company's invested capital, i. e., $250,000. The assets transferred by the stockholders of the other two companies, since the stockholders of these companies now have less than 50% interest in the assets transferred, will be taken into invested capital at their value on the date paid in, January 1, 1921.

The invested capital of the Acme Axle Company, is, therefore, as follows:

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Illustrating the Computation of the Excess-Profits Tax in the
Case of a Domestic Corporation (Other Than a Personal
Service Corporation) Having a Fiscal Year
Ending in 1921

FACTS:

The Danbury Crown Company, a domestic corporation, reports on the basis of a fiscal year ending June 30th.

For the year ended June 30, 1921, the company reports an income under the 1918 Act of $250,000, and under the 1921 Act an income of $240,000, the income differing by reason of the fact that an allowable addition to the reserve for bad debts has

been taken as a deduction under the 1921 Act. The invested capital of the corporation for that fiscal year is $900,000.

QUESTION:

What is the excess-profits tax for the fiscal year ended June 30, 1921?

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Tax for 6 months ending December 31, 1920-12 of the excess-profits tax computed for the entire period under the 1918 Act, or 12 of $49,000, which is $24,500.

Computation of tax under 1921 Act:

Invested capital

$900,000

Excess-profits credit (same as under 1918 Act)

75,000

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Excess-profits tax for 6 months ending June 30, 1921-12 of the excess-profits tax computed for the entire twelve-months period, or 12 of $45,000, which is $22,500.

Total excess-profits tax for the fiscal year ended June 30, 1921, equals the sum of the taxes as computed for the six months under the 1918 Act and the six months under the 1921 Act.

Excess-profits tax computed under 1918 Act.. $24,500

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Sec. 335 (a): "That if a corporation (other than a personal service corporation) makes return for a fiscal year beginning in 1920 and ending in 1921, the war-profits and excess-profits tax for the taxable year 1921 shall be the sum of: (1) the same proportion of a tax for the entire period computed under the Revenue Act of 1918, which the portion of such period falling within the calendar year 1920 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title, which the portion of such period falling within the calendar year 1921 is of the entire period.

PROBLEM 335

Illustrating the Computation of Excess-Profits Taxes
for a Corporation Having a Fiscal Year Ending

in 1922

FACTS:

The Klein Silk Company is a domestic corporation and is located in New York City. It reports on the fiscal-year basis ending March 31 of each year. For the year ended March 31, 1922, it reports a net income of $300,000 under the Act of 1921. At the beginning of the taxable year the invested capital was $1,200,000. There were no changes in invested capital during the year.

QUESTION:

What is the excess-profits tax liability of the corporation?

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Excess-profits tax for 9 months in 1921-12 of $52,200—

$39,150.

REFERENCES:

Sec. 335 (b): "If a corporation (other than a personal service corporation) makes a return for a fiscal year beginning in 1921 and ending in 1922, the war-profits and excess-profits tax for the portion of the year falling within the calendar year 1921 shall be an amount equivalent to the same proportion of a tax for the entire period computed under this title, which the portion of such period falling within the calendar year 1921 is of the entire period."

For further illustration see Art. 955, Regulations 62.

See Problem 44 for computation of full tax liability of corporation for fiscal year ended in 1922.

FACTS:

PROBLEM 336

Illustrating Limitation on Excess-Profits Tax

in Case of Sale of Mine

The Sioux Holland Company, a New Jersey corporation, agents for farm property, in 1921 sells for $1,000,000 a mine which the company in 1916, had discovered on some of its property which it had acquired for no consideration many years before. The mine was located on land which on March 1, 1913,

had been considered worthless. The expense of making the sale was $10,000. In addition to the $990,000 profit on the mine, the company had ordinary net income of $210,000. The company reports on the calendar year basis. Its invested capital for 1921, is $2,000,000.

PROBLEM:

Compute the excess-profits tax for 1921.

SOLUTION:

Excess profits-credit, $3,000 plus 8 per cent of $2,000,000, or $163,000.

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Since the profit from the sale of the mine was $990,000 and the total taxable net income was $1,200,000, the portion of the net income attributable to the sale is

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990,000 1,200,000 or 822%. This percentage of the $367,400 surtax arrived at by the above computation is $303,105, but this portion of the tax under the provisions of Sec. 337, can not exceed 20% of the selling price ($1,000,000) and must accordingly be reduced to $200,000. The other 172% of the $367,400, or $64,295, need not be reduced. The total surtax is therefore $200,000 plus $64,295, or $264,295.

REFERENCES:

Sec. 337: "That in the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this title attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest."

See Art. 972, Reg. 62 for further illustration,

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