come from its printing operations amounting to $200,000. The expense of carrying on these operations is $150,000, leaving net profit of $50,000, from that source. The company has no other income or expense except a capital gain of $12,000 realized on the sale of a paper factory which the company had built and had operated for a number of years. The total net income of the company was, therefore, $62,000. All the above amounts were arrived at by computations made in accordance with the provisions of the Revenue Act of 1921.

QUESTION:

What is the ordinary net income of the company?

ANSWER: $50,000.

REFERENCE:

Sec. 206 (a) (5): "The term 'ordinary net income' means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions."

PROBLEM 51

Illustrating the Meaning of Capital Assets as that Term is Used in Connection with Capital Gain or Capital Loss

FACTS:

In an appraisal of the properties of H. J. Werner, a wholesale grocer, the following assets were listed:

Show which of the above if disposed of in 1921 would be considered capital assets for the purpose of computing capital gain or capital loss.

ANSWER:

Nos. 1, 3, 4, 5, 9, and 10 would be considered capital assets. Nos. 2 and 6 would not be so considered because they had been held less than two years.

No. 7 would not be considered a capital asset because it constitutes stock in trade.

Nos. 8 and 11 are held for the personal use of the taxpayer. No. 12 is not held for profit or investment.

REFERENCE:

Sec. 206 (a) (6): "The term 'capital assets' as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year."

PROBLEM 52

Illustrating Computation of Tax of an Individual in Case Capital Net Gain Included in 1922 Net Income-Application of the Minimum Limitation on Total Tax

FACTS:

Equal to 122% of Net Income

Allen Hartford, a citizen of the United States, engaged in farming, sells his farm in 1922 for $150,000, which in 1914 had cost $45,000. There are no buildings on the farm and no depreciation has been deducted. Expenses in connection with completing the sale totaled $1,000, leaving a capital net gain of $104,000. Mr. Hartford had ordinary net income of $6,000. His exemption is $2,000, and he reports on the calendar-year basis.

The total tax liability by this computation is $8,480, plus $27,260, or $35,740.

The computation under the option provided by Sec. 206 follows:

1212% of capital net gain (1212% of

None

122% of total net income ($110,000) ...... $13,750

This amount, $13,750, being less than the $35,740, arrived at by the first computation, represents Mr. Hartford's total tax liability. The $13,160, can not be used, since it is lower than the minimum limitation set in Sec. 206 (b).

REFERENCES:

Sec. 206 (b): (Quoted under Problem 58)

PROBLEM 53

Illustrating the Computation of the Tax of a Corporation in 1922 Where Capital Net Gain Included in Income

FACTS:

The gross income (all taxable) of the Green Grocery

Company for the calendar year 1922 is $400,000. Included in this amount is $150,000 capital net gain.

The total business expenses (all deductible) of the company for the year were $225,000.

The portion of the law providing for the special taxation of capital net gains by express provision of the statute does not apply to corporations.

PROBLEM 54

Illustrating Taxability of Capital Net Gain of a Partnership, Estate or Trust

FACTS:

(1) The Arthur-Bennett Company, a partnership, in the calendar year 1922 has ordinary net income amounting to $60,000, and a capital net gain of $40,000. The partnership is composed of Mr. Arthur and Mr. Bennett, Mr. Arthur taking one-fifth of all profits and Mr. Bennett four-fifths.

(2) A certain estate, one-fifth of the income of which accrues to a Mr. Martin, has a total net income in the calendar year 1922