Sec. 717. Daily invested capital.—The daily invested capital for any day of the taxable year shall be the sum of the equity invested capital for such day plus the borrowed invested capital for such day determined under section 719.

Section 717, supra, originated 1940 as Sec. 717,
I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 796.

Sec. 718. Equity invested capital.

Sec. 718. (a) Definition.-The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b)—

Sec. 718. (a) (1) Money paid in.-Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital;

Sec. 718. (a) (2) Property paid in.-Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its basis (unadjusted) for determining loss upon sale or exchange. If the property was disposed of before such taxable year, such basis shall be determined under the law applicable to the year of disposition, but without regard to the value of the property as of March 1, 1913. If the property was disposed of before March 1, 1913, its basis shall be considered to be its fair market value at the time paid in. If the unadjusted basis of the property is a substituted basis, such basis shall be adjusted, with respect to the period before the property was paid in, by an amount equal to the adjustments proper under section 115 (1) for determining earnings and profits;

Sec. 718. (a) (3) Distributions in stock.-Distributions in stock

(A) Made prior to such taxable year to the extent to which they are considered distributions of earnings and profits; and

(B) Previously made during such taxable year to the extent to which they are considered distributions of earnings and profits other than earnings and profits of such taxable year;

Sec. 718. (a) (4) Earnings and profits at beginning of year.-The accumulated earnings and profits as of the beginning of such taxable year;

See. 718. (a) (5) Inercase- -account of gain tax free liquidation.—

Repealed prior to 1944. See Ninth Edition, p.

798.

Sec. 718. (a) (6) New capital.—An amount equal to 25 per centum of the new capital for such day. The term "new capital" for any day means so much of the amounts of money or property includible for such day under paragraphs (1) and (2) as was previously paid in during a taxable year beginning after December 31, 1940, and so much of the dis

tributions in stock includible for such day under paragraph (3) as was previously made during a taxable year beginning after December 31, 1940, subject to the following limitations:

Sec. 718. (a) (6) (A) There shall not be included money or property paid in by a corporation in an exchange to which section 112 (b) (3), (4), er (5), 5, or 10 or so much of the section 112 (c), (d), or (e) as refers to section 112 (b), (3), (4), er (5) 5, or 10 is applicable (or would be applicable except for section 371 (g)), or would have been applicable if the term "control" had been defined in section 112 (h) to mean the ownership of stock possessing more than 50 per centum of the total combined voting power of all classes of stock entitled to vote or more than 50 per centum of the total value of shares of all classes of stock.

Sec. 718 (a) (6) (A), I. R. C., supra, amended by Sec. 121 (d) (6), R. A. of 1943, by striking out "112 (b) (3), (4), or (5), or so much of section 112 (c), (d), or (e) as refers to section 112 (b) (3), (4), or (5)" and inserting in lieu thereof "112 (b) (3) (4), (5), or (10), or so much of section 112 (c), (d), or (e) as refers to section 112 (b) (3), (4), (5), or (10)."

Retroactivity

Sec. 121 (e) of said Act provides that the provision having the effect of the amendment made by Sec. 121 (d) (6), R. A. of 1943, shall be deemed to be included in the revenue laws, respectively, applicable to taxable years beginning after Dec. 31, 1933, but shall not affect any tax liability for any taxable year beginning prior to Jan. 1, 1943.

Sec. 718. (a) (6) (B) There shall not be included money or property paid in to the taxpayer by a transferor corporation if immediately after such transaction the transferor and the taxpayer are members of the same controlled group. As used in this subparagraph and subparagraph (C), a controlled group means one or more chains of corporations connected through stock ownership with a common parent corporation if (i) more than 50 per centum of the total combined voting power of all classes of stock entitled to vote, or more than 50 per centum of the total value of shares of all classes of stock, of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations, and (ii) the common parent corporation owns directly more than 50 per centum of the total combined voting power of all classes of stock entitled to vote, or more than 50 per centum of the total value of shares of all classes of stock, of at least one of the other corporations.

Sec. 718. (a) (6) (C) There shall not be included a distribution in stock described in paragraph (3) made to another corporation, if immediately after the distribution the taxpayer and the distributee are members of the same controlled group.

Sec. 718. (a) (6) (D) Increase in inadmissible assets. The new capital for any day of the taxable year, computed without the application of subparagraph (E), shall be reduced by the excess, if any, of the amount computed under section 720 (b) with

respect to inadmissible assets held on such day, over the amount computed under section 720 (b) with respect to inadmissible assets held on the first day of the taxpayer's first taxable year beginning after December 31, 1940. For the purposes of this subparagraph, in determining whether obligations which are described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income are to be treated as admissible or inadmissible assets, such obligations shall be treated in the same manner as they are treated for the taxable year for which tax under this subchapter is being computed.

Sec. 718. (a) (6) (E) Maximum new capital allowable.-The new capital for any day of the taxable year shall not be more than the amount, if any, by which—

(i) the sum of the equity invested capital (computed without regard to this paragraph) and the borrowed capital (as defined in section 719 (a)) of the taxpayer as of such day, reduced by the amount of money or property paid in which is excluded by reason of the limitation of subparagraph (A) or (B) of this paragraph, exceeds

(ii) the sum of such equity invested capital and borrowed capital as of the beginning of the first day of such taxpayer's first taxable year beginning after December 31, 1940, reduced by the amount, if any, by which the accumulated earnings and profits as of such first day of such first taxable year exceed the accumulated earnings and profits (computed without regard to distributions made in taxable years beginning after December 31, 1940) as of the beginning of the first day of the taxable year for which the tax under this subchapter is being computed.

Sec. 718. (a) (6) (F) Reduction on account of distributions out of pre-1941 accumulated earnings and profits.-The new capital for any day of the taxable year, computed without the application of subparagraph (E), shall be reduced by the amount which, after the beginning of the first taxable year which begins after December 31, 1940, has been distributed out of earnings and profits accumulated prior to the beginning of such first taxable year.

Sec. 718. (a) (7) Deficit in earnings and profits of another corporation.-In the case of a transferee, as defined in subsection (c) (5), an amount, determined under such paragraph, equal to the portion of the deficit in earnings and profits of a transferor attributable to property received previously to such day.

Section 718 (a), supra, originated 1940 as Sec.
718 (a), I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 796.

Sec. 718. (b) Reduction in equity invested capital. The amount by which the equity invested capital for any day shall be reduced as provided in subsection (a) shall be the sum of the following amounts

Sec. 718. (b) (1) Distributions in previous years.-Distributions made prior to such taxable year which were not out of accumulated earnings and profits;

Sec. 718. (b) (2) Distributions during the year.-Distributions previously made during such taxable year which are not out of the earnings and profits of such taxable year;

Sec. 718. (b) (3) Earnings and profits of another corporation.-The earnings and profits of another corporation which previously at any time were included in accumulated earnings and profits by reason of a transaction described in section 112 (b) to (e), both inclusive, or in the corresponding provision of a prior revenue law, or by reason of the transfer by such other corporation to the taxpayer of property the basis of which in the hands of the taxpayer is or was determined with reference to its basis in the hands of such other corporation, or would have been so determined if the property had been other than money; and

Seer 718. (b) (4) Roduction om-tam-free-liquidation,

Repealed prior to 1944.

806.

See Ninth Edition, p.

Sec. 718. (b) (5) Deficit in earnings and profits transferred to another corporation.-In the case of a transferor, as defined in subsection (c) (5), an amount, determined under such paragraph, equal to the portion of the deficit in earnings and profits of the transferor attributable to property transferred previously to such day.

Section 718 (b), supra, originated 1940 as Sec.
718 (b), I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 806.

Sec. 718. (c) Rules for application of subsections (a) and (b).-For the purposes of subsections (a) and (b)—

Sec. 718. (c) (1) Distributions to shareholders.-The term "distribution" means a distribution by a corporation to its shareholders, and the term "distribution in stock" means a distribution by a corporation in its stock or rights to acquire its stock. To the extent that a distribution in stock is not considered a distribution of earnings and profits it shall not be considered a distribution. A distribution in stock shall not be regarded as money or property paid in for stock, or as paid-in surplus, or as a contribution to capital.

Sec. 718. (c) (2) Distributions in first sixty days of taxable year.-In the application of such subsections to any taxable year beginning after December 31, 1940, so much of the distributions (taken in the order of time) made during the first sixty days thereof as does not exceed the accumulated earnings and profits as of the beginning thereof (computed without regard to this paragraph) shall be considered to have been made on the last day of the preceding taxable year.

Sec. 718. (c) (3) Computation of earnings and profits of taxable year.-For the purposes of subsections (a) (3) (B) and (b) (2) in determining whether a distribution is out of the earnings and profits of any taxable year, such earnings and profits shall be computed as of the close of such taxable year without diminution by reason of any distribution made during such taxable year or by reason of the tax under this subchapter or chapter 1 for such year and the determination shall be made without regard to the amount of earnings and profits at the time the distribution was made.

Sec. 718. (c) (5) Deficit in earnings and profits-Earnings and profits of transferor and transferee.-If a corporation (hereinafter called "transferor") transfers substantially all its property to another corporation formed to acquire such property (hereinafter called "transferee"), if—

(A) the sole consideration for the transfer of such property is the transfer to the transferor or its shareholders of all the stock of all classes (except qualifying shares) of the transferee. (In determining whether the transfer is solely for stock, the assumption by the transferee of a liability of the transferor or the fact that the property acquired is subject to a liability shall be disregarded);

(B) the basis of the property, in the hands of the transferee, for the purposes of this subsection, is determined by reference to the basis of the property in the hands of the transferor;

(C) the transferor is forthwith completely liquidated in pursuance of the plan under which the acquisition of the property is made; and

(D) immediately after the liquidation the shareholders of the transferor own all such stock;

for the purposes of this subchapter, in computing the equity invested capital for any day after the date of the acquisition of the property, the earnings and profits or deficit in earnings and profits of the transferee and the transferor shall be computed as if, immediately before the beginning of the taxable year in which such transfer occurs, the transferee had been in existence and sustained a recognized loss, and the transferor had realized a recognized gain, equal to the portion of the deficit in earnings and profits of the transferor attributable to such property.

Section 718 (c), supra, originated 1940 as Sec.
718 (c), I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 808.

Sec. 718. (d) For special rules affecting computation of property paid in for stock in connection with certain exchanges and liquidations, see Supplement C.

Sec. 718. (e) For determination of equity invested capital in special cases, see section 723.

Sec. 718. (f) The reserves of an insurance company shall not be included in computing equity invested capital under this section but shall be treated as borrowed capital as provided in section 719. Section 718 (d)-(f), supra, originated 1940 as Sec. 718 (d)-(f), I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 814.

Sec. 719. Borrowed invested capital.

Sec. 719. (a) Borrowed capital.-The borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following:

Sec. 719. (a) (1) The amount of the outstanding indebtedness (not including interest) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, plus,

Sec. 719. (a) (2) In the case of a taxpayer having a contract (made before the expiration of 30 days after the date of the enactment of the Second Revenue Act of 1940) with a foreign government to furnish articles, materials, or supplies to such foreign government, if such contract provides for advance payment and for repayment by the vendor of any part of such advance payment upon cancellation of the contract by such foreign government, the amount which would be required to be so repaid if cancellation occurred at the beginning of such day, but no amount shall be considered as borrowed capital under this paragraph which has been includible in gross income; plus,

Sec. 719. (a) (3) In the case of an insurance company, the mean of the amount of the pro rata unearned premiums determined at the beginning and end of the taxable year, plus,

Sec. 719. (a) (4) In the case of a life insurance company, the mean of the amount of the adjusted reserves, and the mean of the amount of the reserves on insurance or annuity contracts (or contracts arising out of insurance or annuity contracts) which do not involve at the time with reference to which the computation was made, life, health, or accident contingencies, determined at the beginning and end of the taxable year.

Sec. 719. (b) Borrowed invested capital.-The borrowed invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be an amount equal to 50 per centum of the borrowed capital for such day.

Section 719, supra, originated 1940 as Sec. 719,
I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 814.

Sec. 720. Admissible and inadmissible assets.

Sec. 720. (a) Definitions.-For the purposes of this subchapter

Sec. 720. (a) (1) The term "inadmissible assets"

means

(A) Stock in corporations except stock in a foreign personal-holding company, and except stock which is not a capital asset; and

(B) Except as provided in subsection (d), obligations described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income.

Sec. 720. (a) (2) The term "admissible assets" means all assets other than inadmissible assets.

Sec. 720. (b) Ratio of inadmissibles to total assets. The amount by which the average invested capital for any taxable year shall be reduced as provided in section 715 shall be an amount which is the same percentage of such average invested capital as the percentage which the total of the inadmissible assets is of the total of admissible and inadmissible assets. For such purposes, the amount attributable to each asset held at any time during such taxable year shall be determined by ascertaining the adjusted basis thereof (or, in the case of money, the amount thereof) for each day of such taxable year so held and adding such daily amounts. The determination of such daily amounts shall be made under regulations prescribed by the Commissioner with the approval of the Secretary. The adjusted basis shall be the adjusted basis for determining loss upon sale or exchange as determined under section 113.

Sec. 720. (c) Computation if gain from the sale or exchange of a capital asset held for not more than 6 months.—If during the taxable year there has been a gain from the sale or exchange of a capital asset held for not more than 6 months with respect to an inadmissible asset, then so much of the amount attributable to such inadmissible asset under subsection (b) as bears the same ratio thereto as such gain bears to the sum of such gain plus the dividends and interest on such asset for such year, shall, for the purpose of determining the ratio of inadmissible assets to the total of admissible and inadmissible assets, be added to the total of admissible assets and subtracted from the total of inadmissible assets.

Sec. 720. (d) Treatment of government obligations as admissible assets. If the excess profits credit for any taxable year is computed under section 714, the taxpayer may in its return for such year elect to increase its normal-tax net income for such taxable year by an amount equal to the amount of the interest on, reduced by the amount of the amortizable bond premium under section 125 attributable to, all obligations held during the taxable year which are described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income. In such case, for the purposes of this

section, the term "admissible assets" includes such obligations, and the term "inadmissible assets" does not include such obligations.

Section 720, supra, originated 1940 as Sec. 720,
I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 818.

Sec. 721. Abnormalities in income in taxable period.26

Sec. 721. (a) Definitions.-For the purposes of this section

Sec. 721. (a) (1) Abnormal income.-The term "abnormal income" means income of any class includible in the gross income of the taxpayer for any taxable year under this subchapter if it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class but the amount of such income of such class includible in the gross income of the taxable year is in excess of 125 per centum of the average amount of the gross income of the same class for the four previous taxable years, or, if the taxpayer was not in existence for four previous taxable years, the taxable years during which the taxpayer was in existence.

Sec. 721. (a) (2) Separate classes of income.— Each of the following subparagraphs shall be held to describe a separate class of income;

(A) Income arising out of a claim, award, judgment, or decree, or interest on any of the foregoing; or

Repealed prior to 1944. See Ninth Edition, p.

822.

(C) Income resulting from exploration, discovery, prospecting, research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months; or

(D) Income includible in gross income for the taxable year rather than for a different taxable year by reason of a change in the taxpayer's accounting period or method of accounting; or

(E) In the case of a lessor of real property, income included in gross income for the taxable year by reason of the termination of the lease; or

(F) Income consisting of dividends on stock of foreign corporations, except foreign personal holding companies.

All the income which is classifiable in more than one of such subparagraphs shall be classified under the one which the taxpayer irrevocably elects. The classification of income of any class not described in subparagraphs (A) to (F), inclusive, shall be subject to regulations prescribed by the Commissioner with the approval of the Secretary.

Sec. 721. (a) (3) Net abnormal income.—The term "net abnormal income" means the amount of

the abnormal income less, under regulations prescribed by the Commissioner with the approval of the Secretary, (A) 125 per centum of the average amount of the gross income of the same class determined under paragraph (1), and (B) an amount which bears the same ratio to the amount of any direct costs or expenses, deductible in determining the normal-tax net income of the taxable year, through the expenditure of which such abnormal income was in whole or in part derived as the excess of the amount of such abnormal income over 125 per centum of such average amount bears to the amount of such abnormal income.

Sec. 721. (b) Amount attributable to other years. The amount of the net abnormal income that is attributable to any previous or future taxable year or years shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary. In the case of amounts otherwise attributable to future taxable years, if the taxpayer either transfers substantially all its properties or distributes any property in complete liquidation, then there shall be attributable to the first taxable year in which such transfer or distribution occurs (or if such year is previous to the taxable year in which the abnormal income is includible in gross income, to such latter taxable year) all amounts so attributable to future taxable years not included in the gross income of a previous taxable year.

Sec. 721. (c) Computation of tax for current taxable year.-The tax under this subchapter for the taxable year, in which the whole of such abnormal income would without regard to this section be includible, shall not exceed the sum of:

Sec. 721. (c) (1) The tax under this subchapter for such taxable year computed without the inclusion in gross income of the portion of the net abnormal income which is attributable to any other taxable year, and

Sec. 721. (c) (2) The aggregate of the increase in the tax under this subchapter for the taxable year (computed under paragraph (1)) and for each previous taxable year which would have resulted if, for each previous taxable year to which any portion of such net abnormal income is attributable, an amount equal to such portion had been included in the gross income for such previous taxable year. Seer 721, (d) Computation of tax-for-future taxable year.—

Repealed prior to 1944. See Ninth Edition, p.

826.

Sec. 721. (d) Computation of tax for future taxable year.-The amount of the net abnormal income attributable to any future taxable year shall, for the purposes of this subchapter, be included in the gross income for such taxable year.

Sec. 721. (d) (1) The tax under this subchapter for such future taxable year shall not exceed the sum of

(A) the tax under this subchapter for such future taxable year computed without the inclusion in gross income of the portion of such net abnormal income which is attributable to such year, and

(B) the decrease in the tax under this subchapter for the previous taxable year in which the whole of such abnormal income would, without regard to this section, be includible which resulted by reason of the computation of such tax for such previous taxable year under the provisions of subsection (c); but the amount of such decrease shall be diminished by the aggregate of the increases in the tax under this subchapter for the future taxable year as computed under subparagraph (A) and for the taxable years intervening between such previous taxable year and such future taxable year which have resulted because of the inclusion of the portions of such net abnormal income attributable to such intervening years in the gross income for such intervening years.

Sec. 721. (d) (2) If, in the application of subsection (c), net abnormal income from more than one taxable year is attributable to any future taxable year, paragraph (1) of this subsection shall be applied with respect to such future taxable year in the order of the taxable years from which the net abnormal income is attributable beginning with the earliest, as if the portion of the net abnormal income from each such year was the only amount so attributable to such future taxable year, and (except in the case of the portion for the earliest previous taxable year) as if the tax under this subchapter for the future taxable year was the tax determined under paragraph (1) with respect to the portion for the next earlier previous taxable year.

Sec. 721. (d) (3) If in the application of paragraph (1) to any future taxable year it is determined that the decrease in tax computed under paragraph (1) (B) with respect to the net abnormal income, a portion of which is included in the gross income for the future taxable year, does not exceed the aggregate of the increases in tax computed under paragraph (1) (B) with respect to such net abnormal income, then the portions of such net abnormal income attributable to taxable years subsequent to such future taxable year shall not be included in the gross income for such subsequent taxable years. For the purpose of computing the tax under this subchapter for a taxable year subsequent to the future taxable year, the portion of net abnormal income attributable to the future taxable year shall not be included in the gross income for such future taxable year to the extent that the inclusion of such portion of net abnormal income in the gross income for such future taxable year did not result in an increase in tax for such future taxable year by reason of the provisions of paragraph (1).