(5) of subdivision (a) of Section 326 of the statute shall be applied to each corporation separately and the aggregate of the intangible property, so valued, shall be included in invested capital in the consolidated return. In respect of each of the affiliated corporations the aggregate of the amounts ascertained under the provisions of paragraphs (4) and (5) shall in no case exceed 25 per cent of the outstanding capital stock of such corporation at the beginning of the taxable year.215

INADMISSIBLE ASSETS. Where adjustment is required in respect of inadmissible assets, such adjustment must be made on the basis of the consolidated balance sheet with due regard to the adjustments and eliminations set forth in the preceding paragraphs and the general provisions relating to inadmissible assets.216

STOCK OF SUBSIDIARY ACQUIRED FOR CASH. When all or substantially all of the stock of a subsidiary corporation was acquired for cash, the cash so paid will be the basis to be used in determining the value of the property acquired.217

STOCK OF SUBSIDIARY ACQUIRED FOR STOCK. Where stock of a subsidiary company was acquired with the stock of the parent company, the amount to be included in the consolidated invested capital in respect of the company acquired will be computed in the same manner as if the net tangible assets and the intangible assets had been acquired instead of the stock. If in accordance with such acquisition a paid-in surplus is claimed, such claim must be supported by substantially the same sort of evidence as is required in the case of a claim for paid-in surplus in respect of tangible property paid in by a stockholder to a corporation as a gift or at a value definitely known or accurately ascertainable as of the date of payment clearly and substantially in excess of the cash or other consideration paid by the corporation therefor.218

INVESTED CAPITAL FOR PREWAR PERIOD. The invested capital of affiliated corporations for the prewar period will be computed on the same basis as the invested capital for the taxable year, except that where any one or more of the corporations included in the consolidation for the taxable year were in existence dur

215 Reg. 45, Art. 865.

216 Reg. 45, Art. 866.

217 Reg. 45, Art. 867; T. D. 2901, modifying T. D. 2662.

218 Reg. 45, Art. 868; T. D. 2901, modifying T. D. 2662. See also Reg. 45, Art. 837

ing the prewar period, but were not then affiliated, then the average consolidated invested capital for the prewar period will be the average invested capital of the corporations which were affiliated in the prewar period plus the aggregate of the average invested capital for each of the several corporations which were not affiliated during the prewar period.219

PREWAR NET INCOME OF AFFILIATED CORPORATIONS. The consolidated net income of affiliated corporations for the prewar period will be the average consolidated net income for the prewar years of such of the several corporations included in the consolidation for the taxable year as were affiliated during the prewar period plus the aggregate of the average net income for each of the corporations not affiliated during the prewar period which were in existence during all of the prewar period or during at least one full year within the prewar period. The net income of a subsidiary corporation organized during the prewar period by an existing corporation should also be included.220

Balance Sheet. Every corporation is required to submit a balance sheet as of the first day of the taxable year and also a balance sheet as of the close of the taxable year. Balance sheets are required to be made in accordance with the books of the taxpayer and changes in respect of any items therein made pursuant to the regulations are to be explained in a separate statement attached to the balance sheet to which it relates.2 221

Returns. Every corporation not expressly exempt from tax and every personal service corporation must make a return regardless of the amount of its net income.222 Corporations which have no taxable income for the year are required to fill out only Schedules A and B of Form 1120, which relate to the income tax, and the schedules in support thereof, and are not required to furnish the other information called for by this form.223 Excess-profits

219 Reg. 45, Art. 869. See p. 692. Full recognition, however, must be given to the provisions of Section 330 of the statute, particularly the last paragraph thereof, and of articles 931-934, Reg. 45.

220 Reg. 45, Art. 802.

221 Reg. 41, Art. 53. As to the preparation of consolidated balance sheets, see p. 168.

222 Reg. 45, Art. 621.

223 Letter from Treasury Department dated March 24, 1919; W. T. S. 1919, ¶ 1016.

tax returns are now a part of the income tax returns of corporations, and are governed by the same rules as to time, place, and manner of filing.

RETURNS IN SPECIAL CASES. Where a corporation computes its war-profits credit upon the basis of the sum of (a) the specific exemption and (b) an amount equal to 10 per cent of the invested capital for the taxable year, the items on form 1120 which relate solely to the net income or to the invested capital for the prewar period need not be filled in.224 Where a corporation enters on its return a war-profits and excess-profits tax equal to the amount of the maximum tax, the items on form 1120 which relate solely to the net income for the prewar period and the items which relate to the invested capital for the prewar period and for the taxable year need not be filled in. Likewise in the case of a foreign corporation the same items may be disregarded, except that all of schedule I on form 1120 should be filled in and balance sheets as of the beginning and the end of the taxable year for the entire business of the corporation both within and without the United States should be submitted. Corporations which have no taxable income for the year are required to fill out only schedules A and B and the schedules in support thereof on their (separate or consolidated) returns (Form 1120) and are not required to furnish the other information called for by these returns.225 The Commissioner may at any time specifically call for all or any part of the information which is not so required to be entered on the return. In any case, however, where a claim is made for assessment by reference to representative corporations other than in the case of a foreign corporation, the corporation should fill out all items of the return so far as possible and submit a statement explaining why it is impracticable to fill out the entire return.2 226

Time and Manner of Paying Tax. The war-profits and excessprofits taxes are to be paid at the same times and places, in the

224 Telegram from Treasury Department dated April 10, 1919; W. T. S. 1919, 1022. Under the 1917 Law it was held that a return of information as to invested capital and net income for the prewar period would not be required if the taxpayer accepted the minimum percentage of 7% as a deduction. 225 Letter from Treasury Department dated March 24, 1919; W. T. S. 1919, ¶ 1076.

same manner, and subject to the same conditions, as provided in the case of payments of income tax; that is the tax will be paid in installments on the dates specified with reference to the income tax.227

Penalties. All the provisions of the income tax law not inapplicable, including the provisions relating to penalties, are made. applicable to the filing of returns and payment of war-profits and excess-profits taxes.228.

Administrative Provisions. In general, the administrative provisions applicable to the income tax law are also applicable to the administration of the war-profits and excess-profits tax law.229

227 Revenue Act of 1918, § 336. As to the time and manner of paying income taxes see Chapter 35.

228 Revenus Act of 1918, § 336.

229 Revenue Act of 1918, § 336.

CHAPTER 44

THE CAPITAL STOCK TAX

This tax is popularly known as the Capital Stock Tax, although the statute describes it as "a special excise tax with respect to carrying on or doing business." The present law 1 describes the tax in the same manner as did the 1916 Law 2 and imposes a tax on and after July 1, 1918, in lieu of the tax imposed by the 1916 Law. The tax is imposed upon every domestic corporation and upon every foreign 5 corporation doing business in the United States. The Revenue Act of 1918 in imposing this tax, does not, like the 1916 Law, limit the corporations taxed to those organized "for profit" and apparently applies to every corporation having capital stock whether organized for profit or not, except those exempt from income tax under Section 231 of the Revenue Act of 1918. The tax is imposed "with respect to carrying on or doing business" and is payable in advance by every taxable corporation engaged in business during any part of the preceding year.

Definitions. The word "corporation" is used in this chapter, unless otherwise stated, in the sense defined in the Revenue Act of 1918, and includes a corporation, association, joint-stock company, or insurance company.7 The phrase "taxable year" as

1 Revenue Act of 1918, § 1000.

2 Act of September 8, 1916, § 407.

3 The term "domestic" when applied to a corporation, means "created or organized in the United States," (Revenue Act of 1918, §1), including only the states, the territories of Alaska and Hawaii, and the District of Columbia. (Reg. 50, Art. 11.)

4 The term "corporation" includes "associations, joint-stock companies and insurance companies." (Revenue Act of 1918, § 1.)

5 The term " 'foreign," when applied to a corporation, means created or organized outside the United States. (Revenue Act of 1918, § 1.)

6 Revenue Act of 1918, § 1000. The 1916 Law provided expressly that corporations exempt under the provisions of Section 11 of the 1916 income tax law were also exempt for purpose of the capital stock tax.

7 Revenue Act of 1918, § 1; Reg. 50, Art. 11.