valued for the purpose of this tax at their average market value, will show 30, 40 or 50 per cent per annum earned on their par value, although their selling prices in the open market may not be much above par.

An industrial stock to be valued at par should have net tangible assets equal to par, unless the average earnings exceed 20 per cent per annum on the capital stock.

If the earnings are considerably above 20 per cent per annum, fair value may be more than par, but the physical assets must always be considered. If earnings are on a downward trend, the average may be disregarded. Only in exceptional cases should the item of goodwill be a factor in valuations under this act.

An excise tax imposed on the privilege of doing business as a corporation should be construed in favor of the taxpayer, and speculative values and other items which sometimes influence high prices for shares should be ignored.

Income and excess profits taxes should be deducted before earnings are capitalized for the purposes of the excise tax.

When net profits of past years are used in calculating average earnings, net losses must also be used in the computation.

Deductions and Credits

LAW. Section 1000. (a) ... a tax

. . equivalent to

so much of the fair average value of its capital stock . . . . as is in excess of $5,000.

Corporation must file return even though the fair average value of its stock does not exceed $5,000.

REGULATION. From the total fair average value of the capital stock the sum of $5,00022 is deductible and the tax is upon each full $1,000 of any balance. Accordingly, corporations the fair value of whose capital stock is not more than $5,000 are not subject to any tax. However, for the purpose of avoiding errors every corporation must file a return as directed in article 101, even though the par value or the fair average value of its capital stock does not exceed $5,000. (Reg. 50, Art. 23.)

"Prior to July 1, 1918, the exemption was $99,000.

Returns

Time of making returns.

REGULATION. It shall be the duty of every corporation liable to the tax on or before the 31st day of July in each year to make a return, verified by oath, to the collector of the district where it is located. If any corporation fails to make and file a return at the time prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return, the collector or deputy collector shall make the return from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes. If the failure to file a return is due to sickness or absence, the collector may allow such further time, not exceeding 30 days, for making and filing the return as he deems proper. (Reg. 50, Art. 104.)

Affiliated corporations, returns of. —

REGULATION. So-called subsidiary corporations, all or a part of the stock of which is owned by another corporation, must render returns in the same way as other corporations. No deduction is allowed in the return of a holding corporation for the tax paid by a subsidiary. Although section 240 of the Revenue Act of 1918 requires a consolidated return for affiliated corporations for the purpose of the income tax, for the purpose of the capital stock tax each corporation must render a separate return. If the fair value of its capital stock is based upon a consolidated report, a copy of such report should be attached to the capital stock tax return of each affiliated corporation. In order that the Commissioner may have the benefit of all information possible in the audit the following suggestions are made: (a) that the parent company submit with its return a list of all subsidiaries and the districts in which the returns were filed; (b) that the return of the subsidiary company should show the name of the parent company and the district in which the return was filed; (c) that the method of determining the fair value, if other than by exhibits A, B and C, should be fully explained; (d) that a copy of any agreement existing between parent company and subsidiary should be furnished, or a statement made that none exists; and (e) that a combined balance sheet and a combined net income statement be submitted for consideration in connection with any estimate of fair value made on behalf of the reporting corporation (Reg. 50, Art. 106.)

RULING. In reply to your letter of May 17, 1919, requesting an interpretation of article 106 of Regulations 50, regarding capital stock tax returns required of affiliated corporations, you are advised that the sentence, "If the fair value of its capital stock is based upon a consolidated report, a copy of such report should be attached to the capital stock tax return of each affiliated corporation," refers to each corporation of an affiliated group, that is, the parent company as well as each subsidiary.

Article 101, Regulations 50, requires every domestic corporation to file a return regardless of the par value of its capital stock unless specifically exempt under section 231. An exemption of $5,000 is allowed.

In many cases, as for instance, in the case of selling agencies separate corporations are formed in order properly to handle certain business under various state laws and in reality are branches or departments of the parent corporation. The business is controlled by the parent corporation and the result of operations is a matter of bookkeeping.

The capital stock tax being imposed upon the fair value of the capital stock of corporations it makes little difference by what method such fair value is determined. Therefore, if affiliated corporations are best able to determine the fair value of the respective companies through a consolidated report such privilege is permitted by the Department, but it seems preferable to leave this to the corporations interested subject to approval by the Commissioner of Internal Revenue rather than attempt to outline a specific method that would apply to all. (Letter to The Corporation Trust Company, signed by Deputy Commissioner J. Hagerman, and dated June 2, 1919.)

RULING. Referring to office letter of June 2, 1919, it has come to the attention of this office that a number of taxpayers are construing this letter as granting spec al privileges not intended and not permitted under the law and regulations. This letter properly interpreted reflects the views of this office and is applicable to such cases. The taxpayers, however, may have been misled by the wording of the heading, which reads:

"Consolidated Returns of Affiliated Corporations"

and it is suggested with a view to avoiding further misunderstanding that the heading be revised, as follows:

"Returns of Affiliated Corporations based upon a Consolidated. Report."

The difficulty of outlining a general ruling that covers all questions relating to affiliated corporations should be appreciated and the taxpayer must realize that the tax is imposed upon the fair value of the capital stock of each individual corporation as disclosed by the facts in a given case, regardless of corporate affiliations. Only under

certain conditions are corporations permitted to arrive at the fair value of the capital stock of the respective companies through a consolidated report, that is, where the fair value cannot be determined independently.

In interpreting the letter above mentioned, distinction must be drawn between the word "return" and the word "report." Under all circumstances individual returns are required of every corporation regardless of the basis used in arriving at the fair value. (Letter to The Corporation Trust Company, signed by Deputy Commissioner J. Hagerman, and dated November 11, 1919.)

When return must be filed before information is available.RULING. Answering your letter of July 3, 1919, in which you make inquiry as follows:

"What is the best procedure for reporting net income under exhibit C of capital stock tax returns, form 707, in the case of corporations whose fiscal year ends June 30, and who have not filed return for Federal income tax purposes before the time for filing capital stock tax returns has expired?”

you are advised paragraph 3, special instructions 1, page 4, form 707,

states:

66

and the taxpayer will complete each exhibit or state why the required data are not available."

The law provides that capital stock tax returns shall be filed during the month of July for the taxable period beginning July 1 and that the collector is empowered to grant an extension of thirty days beyond the due date of filing only in case of sickness or absence of the officer charged with the preparation of the return. You will therefore note there is no authority under the law for granting an extension for any reason beyond thirty days from July 31, 1919.

Capital stock tax returns should therefore be completed so far as practicable and filed with the collectors within the prescribed time with the statement that unavailable data will be furnished in a supplemental report at the earliest possible date.

In the case of any failure to make and file a return within the prescribed time a penalty of 25 per centum of the amount of the tax attaches, except that when the failure to file was due to a reasonable cause and not to willful neglect no such addition shall be made to the tax.

The above procedure will avoid any assertion of the penalty or question as to what constitutes a reasonable cause. (Letter to The Corporation Trust Company, signed by Deputy Commissioner J. Hagerman, and dated July 11, 1919.)

The law should be amended to provide ample time within which to file accurate returns.

Additional returns for taxable year ended June 30, 1919, when required on account of retroactive features of law.

REGULATION. Under the Revenue Act of 1916 the time for filing capital stock tax returns for the fiscal year ending June 30, 1919, was extended to September 30, 1918, and in the case of Hawaii to October 31, 1918. Any corporation which failed to file a return for such fiscal year for the former tax, whether or not it was liable thereto, must file a return for such fiscal year under the present statute before June 1, 1919. . . . . Where returns were filed for the fiscal year ending June 30, 1919, such returns will be used so far as practicable in making the additional or original assessments for such taxable period. In the case of domestic and foreign mutual insurance companies, the new basis for the tax will necessitate supplemental statements, which should be furnished upon request. For the taxable period July 1, 1918, to June 30, 1919, letters will be forwarded to taxpayers showing how the original or additional assessment has been determined, in order that the collector's bill when presented may be understood and payment promptly made. (Reg. 50, Art. 105.)

As previously stated the provisions of the 1918 law were made retroactive to July 1, 1918. Formerly some corporations were not required to file returns but due to the small exemption provided by the 1918 law the Treasury decided to require returns from all corporations beginning with returns for the taxable year July 1, 1918, to June 30, 1919. Returns made necessary by the new regulations of the Treasury were due before June 1, 1919. So far as practicable the tax at the increased rate after giving effect to the reduced exemption. for the year ended June 30, 1919, was computed by the Treasury from information contained in the returns previously filed.

Payments

Time of payment of tax.—

REGULATION. All assessments shall be made by the Commissioner. The collector shall within ten days after receiving any list of taxes from the Commissioner give notice to each corporation liable to pay any tax stated therein, to be left at its place of business or to be sent by mail, stating the amount of such tax and demanding payment thereof. If such corporation does not pay the tax within ten days after the service or the sending by mail of such