In this case, the 100 shares of new stock spread the investment in the old stock over the 1100 shares, but there is no taxable income to the shareholder. The cost of each share of stock is then the quotient arising from dividing the investment in the old stock by the total number of shares, old and new. This new cost per share will be the basis for determining gain or loss upon a sale of the stock.

The Supreme Court of the United States has recently held that if a corporation (A) should sell to corporation (B) the assets representing the $10,000 of surplus of (A), in consideration of 100 shares of (B), that while there might be no taxable profit to (A) arising from the transaction, yet if the 100 shares of (B) stock should be delivered to the shareholders of corporation (A), so that they held 1100 shares representing the same assets as in the first example above, the 100 shares of (B) stock would represent taxable income to the shareholders of corporation (A), and as a "profit" would be subject to both the normal and surtax to individuals; whereas if corporation (A) owned the shares of (B), or had it taken shares of (B) in payment for the assets of (A), and then (A) had declared a dividend of 10% on the outstanding shares of (A) and had paid this dividend with the shares of (B), such dividend would have been taxable but subject to only the surtax to shareholders of (A).

Domestic

The term "domestic" when applied to a corporation or partnership means created or organized in the United States.

Fiduciary

The term "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate.

Fiscal Years 1920-1921 and 1921-1922

A fiscal year is a period of twelve months ending with the last day of some month other than December.

Individuals and corporations having a fiscal year beginning in 1920 and ending in 1921, or beginning in 1921 and ending in 1922 will compute their net taxable income for the entire fiscal year

(a) The tax on the entire net income will be computed at the rates for the calendar year in which the fiscal year begins;

(b) The tax on the entire net income will be computed at the rates for the calendar year in which the fiscal year ends;

(c) The tax to be paid, will be the sum of:

(1) Such a portion of (a) as the part of the fiscal year falling within the calendar year in which the fiscal year begins, or as such fraction of the fiscal year, is of that calendar year, and

(2) Such a portion of (b) as the part of the fiscal year falling within the calendar year in which the fiscal year ends, or as such fraction of the fiscal year, is of that calendar year.

In the case of partnerships, however, the rule is different. Partnerships compute their net income without regard to its taxation. The several interests of the partners are determined. The members of the partnership then separate their several shares of partnership profits in the proportions

(a) which the portion of the taxable year falling within the calendar year in which the fiscal year begins, or as such fraction of the fiscal year, is of that calendar year, and (b) which the portion of the fiscal year falling within the calendar year in which the fiscal year ends, or as such fraction of the fiscal year, is of that calendar year.

(1) The rates for the calendar year in which (a) falls will be applied to the amount of (a)

(2) The rates for the calendar in which (b) falls will be applied to the amount of (b)

And the sum of (1) and (2) will be the amount of tax on partnership income payable by the person making the return therefor.

As a rule, individuals make returns of income on the basis of the calendar year. Partnership profits are included in individual returns for the calendar year in which the fiscal year of the partnership ends-(where the partnership year is also the calendar year, no question arises)—so that the portion of partnership profits represented by (b) (in the second paragraph above) would take the same rates as the other income of the taxpayer for the calendar year in which (b) falls.

The change in rate is on the basis of the calendar year. Where change in the law makes tax computed for part of a fiscal year incorrect, any amount paid before or after passage of the Act making the change will be adjusted in accordance with the application of the new law by way of credit or refund, as the case may be, so that the tax paid will conform to legal prescription as between the old and the new law.

Foreign

The term "foreign" when applied to a corporation or partnership, means created or organized outside the United States. Gain or Loss-Basis for Determining:

Three cases are provided for by the Law:

(a) Where property was acquired after February 28, 1913; (b) Where property was acquired before March 1, 1913; (c) Upon an exchange of property.

The basis for determining gain or loss in the first case is the cost of the property. There are three exceptions to the general rule:

(1) If the determination is in connection with property which should be included in the inventory, the last inventory value is the basis for determining gain or loss. (2) In case the property was acquired by gift after December 31, 1920, the basis shall be what should have been the basis in the hands of the donor, if such donor did not acquire the property by gift, or in the hands of the last preceding owner by whom it was not acquired by gift. If the gift was on or before December 31, 1920, the basis, is the fair market price or value of the property at the time it was acquired.

(3) In the case of property acquired by bequest, devise, or inheritance, the basis is the fair market price or value of the property at the time of acquisition.

The basis for determining the gain or loss in the second case (where property was acquired prior to March 1, 1913) is cost, but the method of allocating this gain or loss for the purpose of income tax is determined in the following manner:

(The difference between sales price and the following bases goes in the return)

(a) In the case of gain, the higher of the two values, "cost or value March 1, 1913."

(b) In the case of loss, the lowest of the two values "cost or value March 1, 1913.”

(c) Where sales price falls between these two values (cost, or value March 1, 1913) there is neither gain nor loss to be included in a return of income.

EXAMPLE

1 share of stock purchased for $100 prior to March 1, 1913, and sold after that date:

In the third case (c) (exchange of property)

The basis for determining gain or loss is, "the readily realizable market value" of the properties exchanged. The excess of this value on one side over that on the other side will constitute the amount of gain and the reverse will constitute the amount of loss, resulting from the transaction; Provided, that neither a gain nor loss is to be recognized

(1) When the property exchanged is held for investment, or for productive use in trade or business (not including stock in trade or other property primarily held for sale). This exception is confined to cases where the exchange on both sides is of a like kind or is devoted to a like use.

(2) When stock or securities are exchanged for stock or other securities as a result of a reorganization.

(3) When a person who owns property, real, personal or mixed, causes a corporation to be formed to which he conveys this property and immediately after such conveyance he is in control of the corporation, or where a corporation already formed is availed of and immediately after the conveyance such person is in control of the corporation. Control means 80% of all classes of stock issued and outstanding.

The basis of "cost" or "market value March 1, 1913” may continue in the case of "exchanged" property, where the exchange is treated as merely taking the place of property exchanged, except that if on one or both sides, there is money or other property which has a readily realizable market value, this money or value shall be applied and reduce the "basis" for determining gain or loss of him who receives the money or property of readily realizable market value and if the result of the application shall exceed the "basis" used in comparison, the excess shall be taxable to him.

Where property is involuntarily or compulsorily converted into cash or its equivalent, the proceeds of such conversion may be used in replacing the property which was converted and the replaced property will be "held to take the place" of the property it replaces. Any surplus remaining after such replacement would be taxable.

Property acquired as a result of a wash sale so that no loss would be allowed as a deduction in a return of income, will be held to have behind it the same capital investment as was the case with the property which was sold and repurchased.

Government Contract

The term "government contract" means (a) a contract made with the United States, or with any department, bureau, officer, commission, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a contractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States. The term