Treasury Department

ureau of Interna Revenue

Interna Revenue uetn
Cumuatve uetn 19 1-1
NU RY- UN 19 1
C 1 D
OCT 2 1965
I .1.
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SP CI L TT NTION d rc te h cautonary notce on ths page that pub-
shed rungs of the ureau do not have the force and effect
of Treasury Decsons and that they are appcabe ony to facts presented n the pubshed case
Treasury Department : : : : : ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn 19 1-1
NU RY- UN , 19 1
IN T IS ISSU
Introductory Notes III
Contents II
Rungs Nos. 105 9-10761
oard of Ta ppeas 1-20
Reguatons 110; Reguatons 103 and 109, amended 21-186
Income Ta
Part I ( . Interna Revenue Code and 1939 and
19 0 cts; . 1938 ct) 187 300
Part II (1937 and 1936 cts) 301313
Part III (1935 and 193 or Pror cts) .... 31 397
mpoyment Ta es 398- 23
Msceaneous Ta es
state and Gft Ta es 2 - 9
Saes Ta es, Stamp Ta es, etc 50- 78
Msceaneous Rungs and Commttee Reports . . . 79 576
Inde 577-589
The rung reported n the I at em a 1 Revenue uetn re for the nformaton of ta payers and ther counse aa
showng the trend of offca opnon n the admnstraton of the ureau of Interna erenue; the rung other than
Treasury Decsons have none of the force or effect of Treasury Decsons and do not commt the Department to
any nterpretaton of the aw whch has not been formay approved and promugated by the Secretary of the
Treasury. ach rung embodes the admnstratve appcaton of the aw and Treasury Decsons to the entre
state of facts upon whch a partcuar case rests. It s especay to be noted that the same resut w not neces-
sary be reached n another case uness a the matera facts are dentca wth those of the reported case. a t a
ot aways feasbe to pubsh a compete statement of the facts underyng each rung, there can be no assurance
that any new case s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
rungs pubshed from tme to tme may appear to reverse rungs prevousy pubshed.
Offcers of the ureau of Interna Revenue are especay cautoned aganst reachng a concnson n any case
merey on the bass of smarty to a pubshed rung, and shoud base ther |udgment on the appcaton of a
pertnent provsons of the aw and Treasury Decsons to a the facts n each case. These rungs shoud be used
aa ads n studyng the aw and ts forma constructon as made n the reguatons and Treasury Decsons pre-
vousy ssued.
In addton to pubshng a Interna Revenue Treasury Decsons, t s the pocy of the ureau of Interna
Revenue to pubsh a rungs and decsons, ncudng opnons of the Chef Counse for the ureau of Interna
Revenue whch, because they announce a rung or decson upon a nove queston or upon a queston n regard
to whch there e sts no prevousy pubshed rung or decson, or for other reasons, are of such mportance aa
to he of genera nterest. It s aso the pocy of the ureau to pubsh a raugs or decsons whch revoke,
modfy, amend, or a feet n any manner whatever any pubshed rung or decson. In many nstances opnons
of the Chef Counse for the ureau of Interna Revenue are not of genera nterest because they announce no
new rung or no new constructon of the revenue aws but smpy appy rungs aready made pubc to certan
stuatons of fact whch are wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons.
Therefore, the numbers assgned to the pubshed opnons of the Chef Counse for the ureau of Interna
Revenue are not consecutve. No unpubshed rung or decson w be cted or reed upon by any offcer or
empoyee of the ureau of Interna Revenue as a precedent n the dsposton of other cases. Uness otherwse
specfcay ndcated, a pubshed rungs and decsons hare receved the consderaton and approva of the
Chef Counse for the ureau of Interna Revenue.
UNIT D ST T S GO RNM NT PRINTING OFFIC : W S INGTON : 1W1
For sab hy the Superntendent of Documents, Washngton, D. C - Sec back of tte for prces
LI R RY
UNI RSITY OF C LIFORNI
D IS
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The Interna Revenue uetn servce for 19 1 w consst of
weeky buetns and semannua cumuatve buetns.
The weeky buetns w contan the rungs and decsons to be
made pubc and a Treasury Department decsons (known as Treas-
ury decsons) pertanng to Interna Revenue matters. The sem-
annua cumuatve buetns w contan a rungs and decsons
(ncudng Treasury decsons) pubshed durng the prevous s
months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C, for 3 per year; foregn, .25. Snge
copes of the weeky uetn, 5 cents each.
New subscrbers and others desrng to obtan the 1919, 1920, and
1921 Income Ta Servce may do so from the Superntendent of Docu-
ments at prces as foows: Dgest of Income Ta Rungs No. 19
(contanng dgests of a rungs appearng n Cumuatve uetns
1 to 5, ncusve), 50 cents per copy; Cumuatve uetns Nos. 1 to 5,
contanng n fu a rungs pubshed snce pr, 1919, to and n-
cudng December, 1921, as foows: No. 1, 30 cents; No. 2. 25 cents;
No. 3, 30 cents; No. , 30 cents No. 5, 25 cents.
Persons desrng to obtan the Saes Ta Cumuatve uetns for
anuary- une and uy-December, 1921, may procure them from the
Superntendent of Documents at 5 cents per copy.
Persons desrng to obtan the Interna Revenue uetn servce for
the years 1922 to 19 1, ncusve, may do o at prces as foows:
Year.
Cumuatve uetn.
Frst 6 months. Second 6 months
Prce,
(cents)
1922
1923
192
1925
1926
1927
1928
1029
1930
1931
1932
1933
193
1935
1936
1937
1938
1939
19 0
19 1
1-1
II-
III-
I - 1
-
I-1
II-1
III-1
I -1
-
I-1
II-1
III- 1
I - 1
-1
1937- 1
1938- 1
1939-1
Part 1
Part 2
19 0- 1
19 1- 1
1-2
11-2
III- 2
I - 2
-2
I-2
II-2
II1-2
I -2
-2
I-2
I1-2
III- 2
I - 2
-2
1937- 2
1938- 2
1939- 2
19 0- 2
0, 30
30, 0
50, 50
0, 35
0, 30
0, 0
35, 50
50, 55
50, 50
65, 30
30, 30
30, 50
50, 60
50, 50
55, 5
60,50
60, 50
50
SI
60
30, 60
5
Persons desrng to obtan the servce n dgest form may do so at
prces as foows: Dgest No. 13 (1922-192 ), 60 cents; Dgest No. 17
(1925), 25 cents; Dgest No. 21 (192G), 15 cents; Dgest No. 22 (1925-
1927), 35 cents; and Dgest (ncome ta rungs ony, pr, 1919, to
December, 1930, ncusve), 1.50.
nqures n regard to these pubcatons and subscrptons shoud
be sent to the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C.
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn 19 1-1, n addton to
a decsons of the Treasury Department (caed Treasury decsons)
pertanng to Interna Revenue matters, contans opnons of the
Chef Counse, and rungs and decsons pertanng to ucome, estate,
gft, saes, capta stock, e cess profts, empoyment, soca securty,
and msceaneous ta es, as ndcated on the tte page of ths uetn,
pubshed n the weeky uetns (19 1, Nos. 1 to 26, ncusve) for
the perod anuary 1 to une 30, 19 1. It aso contans a cumuatve
st of announcements reatng to decsons of the Unted States oard
of Ta ppeas pubshed n the Interna Revenue uetn Servce
from anuary 1, 19 0, to une 30, 19 1.
Income Ta rungs are prnted n three parts. The rungs n
Part I are prnted as Part I, (Interna Revenue Code and Revenue
cts of 1939 and 19 0) and (Revenue ct of 1938), the aw
headngs cofrespondng wth the sectons of the Code and 1939 and
1938 cts, respectvey, and the reguatons headngs correspondng
wth the secton headngs of Reguatons 103 and the artce headngs
of Reguatons 101. Rungs under the- Revenue cts of 1937 and 1936
are prnted as Part II, the aw headngs correspondng wth the
secton headngs of those cts and the reguatons headngs corre-
spondng wth the artce headngs of Reguatons 9 . Rungs
under the Revenue cts of 1935 and 193 or pror cts are prnted
as Part III, the aw headngs correspondng wth the secton head-
ngs of the Revenue ct of 193 and the reguatons headngs cor-
respondng wth the artce headngs of Reguatons 86.
Rungs under Ttes III and I of the Soca Securtv ct and
under Subchapters and C, Chapter 9, of the Interna Revenue
Code n force pror to anuary 1, 19 0, are pubshed under artce
headngs of Reguatons 91 and 90, respectvey; rungs under Sub-
chapters and C, Chapter 9, of the Code n force on or after anuary
1, 19 0, are pubshed under the secton headngs of Reguatons 106
and 107, respectvey; rungs under the Carrers Ta ng ct of 1937
and under Subchapter , Chapter 9, of the Code are pubshed
under the artce headngs of Reguatons 100; and rungs under
Tte III of the Revenue ct of 1936 Ta on un|ust enrchment
are coded under the sectons of that ct and the artce headngs of
Reguatons 95.
R I TIONS.
The foowng abbrevatons are used throughout the uetn:
, , C, etc. The names of ndvduas.
. R. M. Commttee on ppeas and Revew memorandum.
. R. R. Commttee on ppeas and Revew recommendaton.
. T. coho Ta Unt.
. T. oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court decson.
C. S. T. Capta Stock Ta Dvson.
C. T. Ta es on mpoyment by Carrers.
D. C. Treasury Department crcuar.
( I)
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. T. state Ta Dvson.
G. C. M. Genera Counse s, ssstant Genera Counse s, or Chef Counse s
memorandum.
I. R. . Interna Revenue uetn.
I. T. Income Ta Unt.
M, N, , Y, Z, etc. The names of corporatons, paces, or busnesses, accordng
to conte t.
Mn. Mmeographed etter.
MS. Msceaneous Dvson.
O. or L. O. Soctor s aw opnon.
O. D. Offce decson.
Op. . G. Opnon of the ttorney Genera.
P. T. Processng Ta Dvson.
S. T Saes Ta Dvson.
S. Sver Ta Dvson.
S. M. Soctor s memorandum.
So. Op. Soctor s opnon.
S. R. Soctor s recommendaton.
S. S. T. Ta es on mpoyment by others than Carrers.
T.- Tobacco Dvson.
T. . M. dvsory Ta oard memorandum.
T. . R. dvsory Ta oard recommendaton.
T. D. Treasury decson.
and y are used to represent certan numbers, and when used wth the word
doars represent sums of money. .
The practce of promugatng Treasury Decsons that embody
court decsons reatng to the nterna revenue has been dscontnued..
ereafter opnons of the courts, wth approprate headnotes for the
nformaton and gudance of ta payers and offcers and empoyees of
the ureau of Interna Revenue, w be pubshed n the Interna
Revenue uetn wthout forma approva and promugaton by the
Secretary of the Treasury.
NNOUNC M NT R L TING TO O RD OF T PP LS D CISIONS.
Under the provsons of the recent Revenue cts, reatng to ap-
peas to the oard of Ta ppeas, the Commssoner may acquesce
n the decson of the oard or he may, f the appea was heard by
the oard pror to the passage of the 1926 ct, cause to be nsttuted
a proceedng n court for the coecton of any part of a ta determned
by the Commssoner to be due but dsaowed by the oard, pro-
vded that such proceedng s commenced wthn one year after
fna decson of the oard. s to appeas heard by the oard after
the passage of the 1926 ct, the Commssoner may, wthn s months
after the oard s decson s rendered, fe a petton for a revew of
the decson by a Crcut Court of ppeas or by the Unted States
Court of ppeas for the Dstrct of Coumba; however, as to dec-
sons rendered on and after une 7, 1932, pettons for revew must be
fed wthn three months after the decson s rendered. In order
that ta payers and the genera pubc may be nformed as to whether
or not the Commssoner has acquesced n a decson of the oard of
Ta ppeas dsaowng a ta determned by the Commssoner to be
due, announcement w be made n the weeky uetn at the earest
practcabe date. notce that the Commssoner has acquesced or
has nonacquesced n a oard decson reates, however, ony to the
ssue or ssues decded n favor of the ta payer. Dessons so ac-
quesced n shoud be reed upon by offcers and empoyees of the
ureau of Interna Revenue as precedents n the dsposton of other
cases before the ureau.
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CONT NTS.
6m
6037.
SMI.
50 2.
SOU.
S0 .
501S.
50 6.
50 7.
Court decsons:
1 80
1 81
1 82
1 83
1
1 8S
1
1 87
1 88
1 89
1 90
1 91
1 92
1 93
1 9
1 95
1 96
1 97
1 9S
1 99
1SO0
1501
1502
150 .
1505.
1508.
1507.
1508.
Rung No.
19 1-1-10555
19 1-1-10556
19 1-1-10553
19 1-1-10552
19 1-1-1055
19 1-3-10570
19 1-6-1058
19 1-5-10588
19 1-8-10593
19 1-6-10591
19 1-6-10595
19 1-7-10607
19 1-7-10005
19 1-10-10631
19 1-10-10632
19 1-10-10633
19 1-12-10655
19 1-19-10712
19 1-18-10702
19 1-19-10713
19 1-22-10727
19 1-23-107 0
19 1-23-107 1
19 1-2 -107 5
19 1-2 -107 6
19 1-2 -107 7
19 1-2 -107 8
19 1-26-10759
19 1-26-10760
19 1-3-10567
19 1-3-10668
19 1-3-10569
19 1-5-10581
19 1-6-10591
19 1-8-10692
19 1-7-10598
19 1-7-10599
19 1-7-10600
19 1-7-10001
19 1-8-10611
19 1-11-10638
19 1-11-10839
19 1-11-106 1
19 1-11-106 0
19 1-11-108 2
19 1-11-108 3
19 1-13-10002
19 1-13-10683
19 1-1 -10607
19 1-16-10(378
19 1-15-10079
19 1-1.5-10675
19 1-15-10676
19 1-18-10685
19 1-16-10686
19 1-16-10687
19 1-17-10696
19 1-19-16707
19 1-19-10709
19 1-19-10708
19 1-19-10710
19 1-21-10721
19 1-21-10722
19 1-23-10733
19 1-23-10735
19 1-23-16736
19 1-23-10737
19 1-23-10738
19 1-25-10752
19 1-26-10758
Page.
18
20
09
08
13
605
78
502
89
270
117
187
S1
195
38
2
79
88
69
280
25
200
255
82
8
233
76
227
2 2
375
378
380
383
289
.50
339
5
7
8
3 6
36
33
38
3
1
3
31
315
7
363
357
319
321
360
36
360
516
302
3 2
32
3
320
330
358
370
371
39
391
52
71
Rung.
Chef Counse s memoranda
22100
22332.
2236 .
22366.
22 61.
22 91.
22 99.
22503.
22S19.
22525.
2255
22.5.56
22580
22613
22636
22617.
226.56
22682
22689.
22730
oard of Ta ppeas:
31110
332 1.
67867
73891.
73892
73893.
7389 .
73895.
76377.
76815.
76816.
823.50.
83199.
83936.
8 638.
80178.
80179.
80518.
86.861.
87127.
87128.
87 1.
87675.
8-892
88970.
88988.
89950.
90012.
90.599.
9IM5.
920S3.
92099.
921 SO.
92373..
93013.
931 0.,
93255.
93.113..
933 0..
93302..
93.500..
93601..
9350 ..
93503..
93.501..
93517..
93.589..
93718..
Rung No.
Pago.
19 1-9-10618
2 6
19 1-6-10.577
228
19 1-1-105.51
296
19 1- -10575
210
19 1-2-10559
295
19 1-2-10560
37
19 1-8-10010
272
19 1-5-10578
265
19 1- -1057
330
19 1-8-10612
8.50
19 1-8-10609
193
19-11 18-10699
2 3
19 1-11-10637
310
19 1-11-100
59
19 1-19-10706
301
19 1-15-10677
362
19 1-16-10888
381
19 1-21-10719
293
19 1-21-10720
307
19 1-25-10751
225
19 1-26-10755
21
19 1-11-10635

19 1-11-10835

19)1-11-10635

19 1-8-10808
6
19 1-8-10008
9
19 1-S-1O0O8

19 1-8-10808
6
19 1-8-10808
6
19 1-8-10808
9
19 1-8-10808
7
19 1-8-10608
7
19 1-2-105.58
2
1911-19-10703
8
1911-19-10703
2
1911-11-10635
8
19 1-23-10729
6.16
1911-23-10729
6,16
19 1-21-10719
10
1911-11-10835
8
19 1-7-10596
15
19 1-7-10598
15
19 1-11-10835
8
19 1-19-10703
2
19 1-5-10570
8
1911-19-10703
3
19 1-9-10617
8
19 1-25-107 9
19
1911-19-10703
9
19 1-19-10701
5
19 1-26-107.5
7
19 1-19-10703
7
19 1-21-1071S
9
19 1-9-10617
6
1911 1-10.519
7
19 1-6-10.587

19 1-13-10857
11,20
19 1-6-10587
7
19 1 -7-10.590
2, 12
19 1-17-10692

19 1-23-10729
8
1911-2.5-10719
3
1911 2,5-10719

19 1-25 107 9
3
19 1-2.5-107 9
3
1911-25-107 9
8
19 1-3-10563
17
19 1-17-10092
6
18 1-10-108S2

( )
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I
Rung.
Rung No.
Pago.
oard of Ta ppeas Con.
93821
11) 1- -10571
8,18
93 39
19 1-10-1062
8
19 1-20-1071
9
9 75
19 1-20-1071
9
9 76.
19 1-20-1071
9
0 86
19 1-19-10703
3
8 768
19 1-25-107 9
9
9 78
19 1-21-10718
7,10
9 7S6
19 1-21-10718
10
19 1-21-10718
10
9 820
19 1-21-10718
7,10
9 821
19 1-21-10718
7,10
9 886
19 1-6-10587
1
95026
19 1-5-10576
2
95 1
19 1-3-10563
17
85 51
19 1-18-10698
1,9
19 1-8-1000.8
12.13
9. /17
19 1-17-10692
5
9:.n9o I I IIIIIIII r
19 1-10-1062
2
19 1-13-10657
5, 16
957
19 1-11-10635
12
957 6
19 1-11-10635
12
95776
1911-2-10558
9
95901
19 1-5-10576
S
95953
19 1-25-107 9
2,13
19 1-23-10729
8
90036
19 1-10-1062
6
96037
19 1-10-1062
7
96038
19 1-10-1062
10
9631
19 1-25-107 9
16
90360
19 1-10-1062
9
90373
19 1-8-10608
11
90 98
19 1- -10571
13
19 1-15-10670
2
96520
19 1-2-10558

19 1-10-1062
17
19 1-12-10650
13
96827
19 1-25-107 9
11,20
19 1-25-107 0
11,20
95831
19 1-25-107 9
11,20
909 8
19 1-10-1062
17
9701
19 I-1-I05 9
16
970 5
19 1-18-10698
18
97116
19 1-1-105 9
18
9723
19 1-11-10635
12
972150
19 1-2-10558
12.19
97305
19 1-12-10650
2
97311
19 1-20-1071
17
97312
19 1-20-1071
19
97388
19 1-20-1071
16
97 01.
19 1-1 -1066
19
19 1-11-10635
16
97132
19 1-3-10563
1
97 39.
19 1-1 -1006
12
97 2
19 1-13-10657
7
97 7
19 1-22-1072
11
19 1-16-10682
13
97673
19 1-9-10617
19
97713
19 1-13-10657
7
9771
19 1-13-10657
7
97715
19 1-2-10558
9
97716
19 1-13-10657
7
977 0
10 1-17-10692
13
9781
19 1-9-101.17
8
97902
1911-25-107 9
13
97917
19 1-13-10657
10
97037
19 1-11-10635
19
97938
19 1-17-10692
13
97939
19 1-8-10608
3
979 3
19 1-7-10596
12,17
979S8
19 1-25-107 9
1
98020
19 1-7-10506
9
9802 ..
19 1-5-10576
11
98057
19 1-7-10506
6
98112.
19 1-12-10650
9
98131
19 1-17-10602

98188
19 1- -10571
8,18
98207
19 1-5-10576
2,8
19 1-8-10f S
12
19 1-20-1071
1,12
19 1-20-1071
1,12
19 1-10-1062
2
98503
19 1-10-1062
11
19 1-7-10596
2,12
Rung.
Rung No.
Pago,
oard of Ta ppeas Con.
98726
19 1-26-1075
15,16
98766..,
19 1-11-10635
12
98770
19 1-12-10650
6
98835
19 1-25-107 9
IS
98895
19 1-19-10703
18
98898
19 1-20-1071
9
9890O
19 1-2-10558
2,
98901
19 1-2-10558
2,
98902.
19 1-2-10558
2,
99038 .
19 1-8-10608
9
19 1-10-1062
6
99171
19 1-26-1075
,1
99197
19 1-11-10635
19
99210
19 1-7-10596
8
19 1-23-10729
16
99262
19 1-25-107 9
10,19
99266
19 1-21-10718
16
99280
. 19 1-5-10576
2,10
99300
19 1-2-10558
7
99301
19 1-2-10558
7
19 1-16-10682
19
99 39
19 1-12-10650
12
99 83
19 1-16-10682
19
99.507
19 1-16-10682
16
99522
19 1-2-10558
2.
19 1-2-10658
2,
19 1-2-1C |8
2,
99532
19 1-21-10718
18
99562
19 1-9-10617

99579.
19 1-1 -1066
10,11
99599
19 1-1 -1006
7
99655
19 1-26-1075
13,19
99752
19 1-10-1062
11
19 1-20-1071
17
99961
19 1-23-10729
9,10
99999
19 1-7-10596
2, 12
100008
19 1- -10571
11
100025
19 1-23-10729
11
100036
19 1-23-10729
10
19 1-25-107 9

1002 1
19 1-12-10650
6
19 1-2 -107 2
7
100 10
19 1-8-10608
1
100 21
19 1-13-10657
11
100 0
19 1-26-1075
9
100 1
19 1-26-1075
9
100
19 1-23-10729

100 82
19 1-10-1062
7
100516
19 1-26-1075
7
100552
19 1-7-10596
15
100S6
19 1-25-107 9
18
100865
19 1-25-107 9
18
1009
19 1-20-1071
17
101161
19 1-15-10670
1
101162
19 1-15-10670
12
101163
19 1-15-10670
1
10116 .
19 1-15-10670
17
101165
19 1-15-10670
17
101166
19 1-15-10670
1
101167.
19 1-15-10670
20
101168
19 1-15-10670
1
101169
19 1-15-10670
18
101170
19 1-15-10670
1
101259
19 1-26-1075
13
101260
19 1-26-1075
18
10126
19 1-23-10729
3,1
101268
19 1-25-107 9
18
101269
19 1-25-107 9
18
101295.
19 1-20-1071
13
12
101308
19 1-16-10682
7
101309
19 1-16-10682
7
101330
19 1-23-10729
2
1013 7
19 1-21-10718
6
101358
19 1-9-10617
S
101676
19 1-25-107 9
8
102055
19 1-25-107 9
13,15
103776
19 1-20-1071
17
103 06
19 1-25-107 9
8
Offce decsons (I. T.):
3 39
19 1-1-10550
267
3 0
10 1-2-10561
375
3 1
19 1-3-1056
203
3 2
1911-3-10556
212
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II
Offce decsons (I. T.) Con.
3 3.
Rung No.
19 1-3-10566
19 1- -10572
19 1- -10573
19 1-6-10588
19 1-6-10589
1 1-6-10590
19 1-7-10597
19 1-7-10606
19 1-8-10016
19 1-9-10619
19 1-9-10620
19 1-10-10625
19 1-10-10628
19 1-11-10036
19 1-12-106. .
19 1-12-10652
19 1-13-10658
19 1-13-10659
19 1-13-10660
19 1-13-10661
19 1-1 -10668
19 1-15-1067
19 1-15-10672
19 1-15-10673
19 1-16-1068
19 1-16-10689
19 1-17-10893
19 1-17-1069
19 1-18-10700
19 1-19-1070
19 1-10-10705
19 1-20-10715
19 1-20-10716
19 1-20-10717
19 1-22- 0725
19 1-23-10730
19 1-23-10731
19 1-23-10732
19 1-2 -107 3
19 1-2 -107
19 1-25-10750
19 1-26-10756
19 1-8-10613
19 1-9-10621
19 1-10-10630
19 1-11-106 0
19 1-15-10680
19 1-17-10895
Pace.
261
236
250
191
206
258
2 1
28
205
25
292
193
20
236
232
236
209
251
268
287
257
ass
238
252
231
382
191
271
252
192
207
.t

270
2- ;
212
262
27
288
397
207
2 0
15
02
398
00
08
12
Rung.
Offce decsons (S. 8. T.)-
Contnurd.
15
18
17
18
Offce decsons (S. T.):
912
913
91 _
915
816
917
918
Offce decsons (MS.):
233
23
235
236
237
2 0
Offce decsons (T.|:
79
80
81
82
83
Mmeographs:
298 (rev.)
61 8
8175
818
520
Msceaneous:
Legsaton
Commttee reports.
Rung No.
Msceaneous.
19 1-21-10723
19 1-22-10726
19 1-23-1073
19 1-25-10753
19 1-2-10562
19 1-8-1061
19 1-12-10853
19 1-12-1065
19 1-16-10690
19 1-16-10691
19 1-19-10711
19 1-1-10557
19 1-5-10582
19 1-9-10623
19 1-1 -10668
19 1-15-10671
19 1-17-10697
19 1-23-10739
19 1-26-10761
19 1-5-10585
19 1-9-10622
19 1-1 -10669
19 1-18-10701
19 1-22-10728
19 1-11-106 5
19 1-5-10583
19 1-10-1063
19 1-1 -10665
19 1-26-10757
19 1-7-10602
19 1-10-10027
19 1-11-106 7
I . 1 I. , SI
19 1-7-10603
19 1-7-1060
19 1-10-10628
19 1-10-10629
19 1-11-106 8
19 1-11-106 9
19 1-11-10618
19 1-18-10656
19 1-16-10683
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CONT NTS OF CUMUL TI ULL TINS CI. T.) 1 to 5; S. T. FOR 1920 ND 1921; INT RN L
R NU 1-1,1-2, II-. II-2. III-. I 2, I -1, I -2. -, -2. I-1, I-2. II-1, II-2. III-1, 1II-2.
U.-1, I -2. -. -2. I-, I-2. II-1. 1I-2. III-1, III 2. I -1. I -2. -1. -2. 1937-1. 1937-2.
1938-1. 1938-2. 1939-1 (P RT 1 ND P RT 2). 1939-2. 19 0-1. 19 0-2. ND 19 1-1.
Cumuatve uetn
Income Ta :
December, 1919 (No. 1)
anuary- une, 1920 (No. 2) _
uy-December, 1920 (No. 3)
anuary- une, 1921 (No. )
uy-December, 1921 (No. 5)..
Saes Ta :
1920 (S. T. 1-20)
anuary- une, 1921
uy-December, 1921..
Interna Revenue uetn:
anuary- une, 1922 (No. 1-1)
uy-December, 1922 (No. 1-2)
anuary- une, 1923 (No. II 1)
uy-December, 1923 (No. II-2)
anuarv- une, 192 (No. III-)
uy-December, 192 (No. III-2)
anuary- une, 1925 (No. I -1)
uy-December, 1925 (No. I -2)
anuary- une, 1926 (No. -)._.
uy-December, 1926 (No. -2)
anuary- une, 1927 (No. I-1)
uy-December, 1927 (No. I-2)
anuary- une, 1928 (No. II-1)
uy-December, 1928 (No. II-2)
anuary- une, 1929 (No. III-1)
uy-December, 1929 (No. III-2)
anuary- une, 1930 (No I -)
uy-December, 1930 (No. I -2)...
anuary- une, 1931 (No. -)
uv-December, 1931 (No. -2)
anuary- une, 1932 (No. I-1)
uy-December, 1932 (No. I-2).
anuary- une 1933 (No. II-1)...
uy-December, 1933 (No. II-2)
anuary- une, 193 (No. III-1)
uy-December, 193 (No. III-2)
anuary- une, 1935 (No. I -1)
uy-December, 1935 (No. I -2)
anuary- une, 1936 (No. -1)
uy-December, 1936 (No. -2)
anuary- une, 1937 (1937-1)..
uy-December, 1937 (1937-2)
anuary- une, 1938 (1938-1)...
uy-December, 1938 (1938-2)
anuary- une, 1939 (1939-1 Part 1 and Part 2).
uy-December, 1939 (1939-2)
anuary- une, 19 0 (19 0-1)..
uy-December, 19 0 (19 0-2)..
anuary- une, 19 1 (19 1-1)..
(vn)
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O RD OF T PP LS.
CUMUL TI LIST OF NNOUNC M NTS R L TING TO
D CISIONS OF T UNIT D ST T S O RD OF T
PP LS PU LIS D IN T INT RN L R NU UL-
L TIN S R IC FROM NU RY 1, 19 0, TO UN 30, 19 1,
INCLUSI .
( nnouncements reatng to the acquescence or nonaequescence of the Commssoner In
decsons of the Unted States oard of Ta p| eas, as pubshed In the weeky Interna
Revenue uetns from December 22, 102 . to December 31, 1031, Incusve, are prnted n
Cumuatve uetn -2, pages 1-1O0. Those prnted In w eeky uetns from anuary 1, 1932,
to December 31, 1939, ncusve, are pubshed In Cumuatve uetn 193 -2, pages 1-73. The
st beow, therefore, contans ony such announcements pubshed In the weeky uetns
from anuary 1, 19 0, to uno 30, 19 1, ncusve.
The Commssoner acquesces n
Unted States oard of Ta ppeas:
Ta payer.
19 1-26-1075
the foowng decsons of the
Docket
No.
oard of Ta ppeas.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
T raser 1
dar, Mrs. Cornea, estate of
der, . P
ffated nterprses, Inc.1
en, Laura, estate of
mercan Lberty O Co.
mercan Socety of Cnematographers, Inc
nderson, ohn, transferee of estate of Frank
urrdge - -;. __
pe rewng Co., Inc
ppeby, ohn S.s.,
tantc Land Co., The
ugustus, zabeth G
o.
91958
95 51
97988
96603
89703
98 87
98 88
96 11
9333
91977
9 080
100 10
96061
1
3

2
0
3
2
10
1(1
1
3
0
228
38
1 12
300
721
76
675
9
1109
18
7
1200
cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
cquescence reates ony to the ssue, What amounts consttute reasonabe aowance for servces per-
formed In 1935 and 1930 by the wves of the two prncpa ocers of the corporaton
state ta decson.
cquescence reates ony to the Issue, Dd the respondent err In ncudng In pettoner s consodated
ncome for 1932 and 1933, sub|ect to depeton, the sums of 25,727.65, 27, 21.09, and W0. 5.27 whch pet-
toner s affate, the Woord Producton Co., pad durng sad years to owners of o payment contracts on
Its Pnkston ease
cquescence reates ony to the ssue. Was the sum of 150 whch was added by the Commssoner to
ohn S. ppeby s ncome, ta abe to hm
ungNo. 1075 ncudes a acquescence and nonacqucscence notces pubshed In the Interna
Revenue uetn servce from anuary 1, 19 0, to une 30, 19 1.
(1)
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2
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
.
aker, Inc.. mert .
anfed, T. .1
ank of merca Natona Trust Savngs ssoca-
ton, trustee of Tonnngsen Trust
ekns, atherne, estate of2
ekns et a., Mo W., e ecutors of estate of ath-
erne ekns2
echer, arret obrook
enaga et. u ., rthur 3
erks County Trust Co., aeged successor trustee of
Mortgage Trust Certfcate Poo
ack Motor Co., Inc
enhem Co., Ltd
ohn, Chares . - -
ondhoders Commttee5.
rggs- an Co_
rnk et a.,
Trusts ,
C, Trustees of Mnne M Fay
, and S ...
rtt, Car M
rookman, Murray.
C.
Can, mma Wetmuer, e ecutr of estate of
ohn . Can, Sr.7
Can, Sr., ohn ., estate of7
Caneo, arry F
Carey-Reed Co.8
Carey Trust (Second)
Carter, Shrey, estate of
Castner Garage, Lmted
Cavett et a., ., e ecutors of estate of W. T.
aes --
Center Investment Co
Chamberan et u ., Lowe
Cherokee Co
Chrvser Corporaton
Caborne et a., ustn Legh, e ecutors of
estate of Laura en 7
the
9236G
I 9 01 |
f 93313 )
98688
99999 |
99280
87675
87675
9 879
87638
98207
97232
95026
95953
90 52
90 86
90 87
92562
98900-
98902
99522-
9952
95566
95871
101330
101330
/ 66150
906 1
83936
93611
93917
98502
93208
82350
96 10
93962
97305
89703
10
2
3
38
38
2
36
2
1
2
3
0
0
2
3
11
3
3
1
36
1
0
3
0
3
3
1
2
0
1 cquescence reates ony to the ssue, Is the pettoner entted to a deducton of 6,5 6.96 for the year
1937. as and for a debt ascertaned to be worthess and charged off durng that year
1 Pror nonacquescence pubshed n Cumuatve uetn 1939-1 (Part 1). page 0, wthdrawn.
1 Nonacquescence pubshed n Cumuatve uetn 1938-1, page 35, wthdrawn.
cquescence reates ony to the ssue. Where a ta payer ses stock to a trust created by hm for the bene-
ft of hs daughter, does the transacton fa wthn secton 2 (a)6 of the Revenue ct of 193 so that no deduct-
be oss resuts
cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
cquescence s as to resut ony.
T state ta decson.
Pror nonacquescence pubshed In Cumuatve uetn 1939-2. page , wthdrawn.
6 cquescence s ony as to the Issue, Do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
by them aganst the purchase of stock n the Loca Federa Savngs and Loan ssocaton nto whch the
budng and oan assocaton was converted, represent ncome In 1935 sub|ect to norma ta and surta
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3
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Cohen Sons Co.,
Cohen Testamentary Trust, oeC
Coumba O Cas Co.1
Combs Lumber Co
Cook Drng Co.
Coocdge, Norman u... -
Cooper, ugene ., admnstrator of the estate of
Lews F. Cooper
Cooper, Lews F., estate of
Cooperatve Insurance
Cooperatve Power Pant
Crabb, Doores
Crawford Musc Corporaton
D.
Daas Tte Guaranty Co. .
Dashe, C. R.
Davdson, Cnton 8
Davdson, r. Cnton
Davdson, Fora S.s
Davson- oseph Campau Reaty Co., Inc
Dean, Mason L.
Dearng, Roy ., estate of
Dearng, R. ., estate of, and trust estate
Dearng, Mrs. R. .7 -
Dearng et u ., Ws R.7
Dearng, Ws R., e ecutor of estate of Roy .
Dearng 7
Dearng, Ws R., e ecutor of estate and trust
estate of R. . Dearng 7
DeLong, Davd .
Deube, George -
Dstrct ond Co.
Doenz, nton
Doar, gnes arr
Doar, . arod, estate of.
97039
96231
9062
915 3
82231
92289
9 088
9 088
95292
95291
95002
/ 85389
88290
90160
75056
93500
93503
9350
93502
97306
61205
69832
8 195
8 193
8 19
8 196
8 192
. 8 197
8 195
8 193
8 19
10126
92055
950
88970
9 86
93311
97283
98728
97282
98727
2
2
1
1
38
0
0
10
1
1
1
0
0
86
3
3
3
1
85
86
36
86
86
30
30
3
2
0
1
1
1
1 cquescence does not reate to Issue pertanng to aocaton of cost of equpment on the property n
queston.
cquescence reates ony to the Issue, whether the far market vaue of future o payments, under the
drng and sae of ease contracts, shoud be ncuded n cross Income of pettoner for the year 1932. Pre-
vous acquescence pubshed n Cumuatve uetn 1939-2, page 8, affrmed as to ths ssue ony.
cquescence reates ony to the ssue whether or not (|cttoncr s an Insurance company as that term
Is used n secton 701(c) 2 of the Revenue ct of 193 .
Nonacquescence pubshed n Cumuatve uetn 1937-2, pace 30, wthdrawn.
1 cquescence wth respect to ssue nvovng the ta abty of certan commssons on fe nsurance
oontracU s as to resut ony.
Pror nonacquescence pubshed In Cumuatve uetn 1937-2, pace 36, wthdrawn.
T Pror nonacquescence pubshed n Cumuatve uetn 1938-1, pace 39, wthdrawn.
1 cquescence reates ony to the Issue, Is the 1 ,000 cash receved by the wttoner on February 6, 1938,
from Francs . Lapont a part of the consderaton of the pettoner s mercan roach Machne Co.
stock
Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 7, wthdrawn.
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cqukscences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Doar, et a., Robert II, e ecutors of estate of .
arod Doar -
Downng et u ., Rchard 1
.
nhorn, Ma
more Mng Co., Inc
verson Corporaton
qutabe Lfe ssurance Socety of the Unted
States, The - - --
state Pannng Corporaton 8
usts, ugustus .
vans, Mary .7
wng, Sherman --
F.
Farre, Robert S...
Fay, Mnne M, Trust, , C, and S .
Ferree, C. .
Frst Mortgage onds
Fsh, Isaac, estate of
Ftch, F. W -
Feschmann, Raou
Femng, Mrs. nna Maud 11
Femng- mbc Corporaton u
Femng, Wam ...
Foyd, Incorporated -
Foreman, Frank C -
Forrester o Co. -
Frend et a., Mton ., trustees of estate of enry
Frend
Frend, enry, estate of
Frost Co., G. C -
97282
98727
99171
73893
96520
93281
31110
332 1
57867
93501
71637
95527
93013
100139
98900-
98902
)99522-
I 9952
615 2
90 52
90 86
90 87
96527
933 0
98131
90305
92958
9 690
92959
/ 92957
9 689
99562
93915
937 8
90672
91 15
90672
91 15
100
1
3
86
2
0
33
3
30
12
10

2
32
0
2
3
0
1
1
n
3
0
3
0
10

cquescence reates ony to the ssue nvovng the deductbty of 95.7 as a bad debt.
1 Pror nonacquescence pubshed n Cumuatve uetn 1938-1, page 0, wthdrawn.
1 cquescence reates ony to the ssue nvovng the far market vaue of certan pedged coatera on
the date of Its surrender.
Pror nonacquescence pubshed n Cumuatve uetn -1, page 31 (1936), wthdrawn.
1 cquescence wth respect to ssue nvovng the ta abty of certan commssons on fo nsurance
contracts s as to resut ony.
Pror nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
T cquescence reates to a ssues e cept as to the deductbty of attorney s fees and abstract fees n-
curred ncdenta to the estabshment of forfeture of a ease and obtanng rewssesson of the eased premses.
I Pror nonacquescence pubshed n Cumuatve uetn 19 0-2, page 11, wthdrawn.
cquescence s as to resut ony.
Nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
II cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
11 cquescence reates ony to the foowng ssues: ( ) Dd each of the communtes of ay rube and
we and Wam Femng and wfe constructvey receve o aynents of 60,8 S.f5 and 53, 01.35, resec-
tvey, for 193 and 1935 from the Femng- mbe Corporaton, and O) was a certan ,000 reservaton n
connecton wth the transfer by Wam Femng n 193b of a easehod nterest n the tchtcr ease,
etc., ta abe to tfao pettoners
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5
cquescences Contnued.
Ta payer.
G.
G. . R. O Corporaton...
Gardner, . Ws M
Garand et u ., Wam . .
Gayord, Inc., Robert ...
George ros. Co
Gespe, Maud
Gmore, een, estate of, transferee of estate of
Frank 0. urrdgc - --
Graff, verett D
Grm, Cfford D...
Gruy, oseph, ndependent e ecutor of estate of
Luce Gruy - -
Gruy, Luce, estate of
Gump, fred S., estate of - - -
Gump et a., Camo R., e ecutors of estate of -
fred S. Gump
aes, George .1
aes, Mrs. Oneta
aes, r., W. T. -
aes, W. T.p estate of .
arrs Trust Savngs ank et a., e ecutors of es-
tate of Isaac Fsh --
awaan Trust Co., Ltd., trustee of oe Cohen
Testamentary Trust
eath, arret .
eer, dward .
ggns, ugene
ghand Farms Corporaton
rsch, L. ..
onokaa Sugar Co
ooper, ames P., estate of510
ooper, Mathde ., admnstratr of estate of
ames P. ooper510
oover, erbert W
opkns,
,
tm
Docket
No.
92R0
92115
93589
955 7
96953
932 8
98770
93231
92212
93919
95901
95901
90650
90656
93210
93209
93211
93208
96527
96231
90599
9 79
9 795
80052
85961
95690
95782
101358
85776
85776
9097
91753
oard of Ta ppeas.
oume.
n
2
3
1
1
3
0
0
0
2
2
2
2
0
0
0
0
2
12
38
1
39
2
2
3
)
1
2
1
Oft ta decson.
cquescence reates ony to the ssue, f the benefcares of a certan trust be treated as donees, were
the gfts made to them gfts of present Interests or future nterests
cquescence wth respect to the decson of une 28,19 0 ( 2 . T. ., 321), reates to the Issue nvovng
the ta abty of nterest from muncpa bonds Issued under the Caforna Muncpa Improvement Dstrct
ct of pr 20, 1915. cquescence wth respect to the decson of February 27. 1911 ( 3 . T. ., 731),
reates to the ssue nvovng the ta abty of the ncome from o certan trust estabshed hy the pettoner
for the support of hs wfe, the ony ssue presented at the second hearng and decded party n favor of the
pettoner and party for the respondent.
cquescence s as to resut ony.
state ta decson.
cquescence s ony as to the ssue, do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners In anuary, 1935, but apped
by them aganst the purchase of stock In the Loca Federa Savnsrs and Loan ssocaton, nto whch the
budng and oan assocaton was converted, represent ncome In 1935 sub|ect to norma ta and surta
Pror nonacquescence pubshed In Cumuatve uetn 1939-1 (Part 1), page 50, wthdrawn.
cquescence reates to the ssue pertanng to the trust for the pettoner s mnor son manue.
cquescence reates ony to the Issue, Dd the pettoner reaze ta abe gan as the resut of recevng
n award for compensatory damages
cquescence reates ony to the determnaton of the vaue of tho stock of Wam . ooper Son
Co. on ugust 3,1933.
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c tr sc NC s Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume. Page.
ote stora, Inc.1
oward, Grace dams, estate of
oward et a., George dams, e ecutors of estate of
Grace dams oward
uey Php ardware Co
umme-Ross Fbre Corporaton
umphreys, Murray
yde, Mdred ., estate of
yde, Suffok erks, Marguerte1
vde, Ws O., admnstrator of estate of Mdred
. yde...
Ide, ohn
Industra Cotton Ms Co., Inc.
Isand Securtes, Lmted
.
ask, Sophe, tradng as Whte ouse akery
oe Co
ohnston, . dward
ones, Carre L., estate of
ordan Creek Pacers
oseph, Wam
.
ahn, ea5
ahn, Isdor 5
ahn, Lenora
aufmnnn, oe W
aufmann, Mdred ..
eer, Charotte
esser O Gas Co
esau Petroeum Corporaton-
mbe, ay 8 ---
mbe, Mrs. ema 1
eberg, ce G. .7
eberg, ce G. ., e ecutr of estate of Robert
. eberg, Sr.
eberg, Sr., Robert ., estate of7
nowes, dwn C. F
97230
99 51
99851
92801
93077
87899
95182
81 17
93257
95182
1013 7
92186
99082
1002 1
96535
93768
91831
98057
99210
96036
73895
73891
7389
95082
95083
93026
930 1
95760
92956
9 67
92955
9 673
86178
86178
86179
91 95
2
2
2
0
0
2
2
0
2
3
3
3
13
1
1
1
3
3
36
36
36
1
1
1
1
2
1
1
3
3
3
0
759
9
9
7S0
820
857
738
1120
738
799
107
1
321
825
550
1279
131
273
95
95
95
08
08
78
31
69
9 0
9 0
277
277
277
860
cquescence s as to resut ony.
cquescence on the foowng ssue Is as to resut ony; In determnng the net ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded tho rent due under a ong-term ease,
the essee havng mproved, the premses wth an offce budng whch woud become the essor s property
on forfeture, the trust on the accrua bass havng accrued the. rent but aso havng charged t to a reserve
for uncoected rents
Un|ust enrchment ta decson. cquescence s as to resut ony.
1 state ta decson.
Pror nonacqueseence pubshed n Cumuatve uetn 1938-1, page 6, wthdrawn.
cquescence reates ony to the foowng ssues: (a) Dd each of the communtes of ay mbe and
wfe and Wam Femng and wfe constructvey receve o payments of 60,8 8.65 and 53, 01.35, respec-
tvey, for 193 and 1935 from the emng- mbe Corporaton, and (6) was a certan ,000 reservaton n
connecton wth the transfer by Wam Femng n 1936 of a ease-hod Interest n the chtor ease,
etc., ta abe to the pettoners
cquescence reates to a ssues e cept that nvovng a bad-debt deducton of 20 .60.
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cquescences Contnued. .
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
L.
Lster, Caroyn Faust, transferee
Laster, . C., transferee
Laster, dward Carro, transferee
Laster Incorporated, . C
Lawrence, Wam amton 1
Lawson et u ., dward C
Lawson, Roberta C
Leary, Sr., . .
Leary, Myra L.1
Legg , Mdred Sheppard, estate of
Letts, r., rthur --
Levy, en
Lpstate et u ., Php arry
Lousve Fre rck Works, Inc., The
Lucas, eury M
Lyon, Incorporated
M.
MacConaughey, arry
Macon, Dubn Savannah Raroad Co
MacPherson, Mae Recor
Madgan et u ., . P
Ma|estc O Corporaton 5
Maery et u ., Otto T.
Manufacturers Lfe Insurance Co., The
Marborough ouse, Inc., et a.
Marborough Investment Co.
Marthe, Louse, transferee of estate of Frank 0.
urrdge
Martn, Thomas W
Mc pne Land Deveopment Co., Ltd., . .._
McCormac, Gertrude ., trustee for . . Mc-
Cormac, r
McCormac, r., . . (trust)
Mc nght, fred, admnstrator of estate of Thomas
Spruance
9771 3
97716 3
97713 3
97 2 3
10036
99300 2
99301 2
768 5 3
768 6 3
899 2 0
92857 1
96037 3
93255 3
100 82 3
100516
93858 1
965 6 2
99832
92052 1
90592 0
92083 39
101308
101309 d
96380 2
92373 2
908 5 3
90 52
90 86 f 0
90 87
90 52
90 86 f 0
90 87
93333 0
93916 0
99599 3
93920 I 0
93920 0
9 78
9 820 f 3
9 821
77 19
77 20
81391
81392 m .
8680
86S05
9 02
9 03
cquescence s as to resut ony.
Pror nonacquascenee pubshed In Cumuatve uetn 1937-1, page 1, wthdrawn.
state ta decson.
1 Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 57, wthdrawn.
cquescence reates to a ssues e cept the ssue, Is the pettoner entted to a 1935 oss deducton for
the undeprecated cost of certan casng and other ease equpment whch coud not be removed from a
certan o we whch the pettoner ceased to operate, durng that year, because such operaton had
become unproftabe
cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
McLean et u ., Marrs.
G
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cqttescences Contnued.
Ta payer.
oard of Ta ppeas.
oume.
Page.
Medca Dagnostc ssocaton.
Mbank, Dunevy 1
Mooney ectrc Co.
Monarch Lfe Insurance Co.
Moock ectrc Suppy Co., The
Morrs Pan Co. of St. oseph, The
Morrson ond Co., Ltd
Mortgage Trust Certfcate Poo
Morton, rthur F
Mott, Dee Furey
Myers, George R
N.
Nchos, . C
Ncoa, arry T.
Norweb, mery May oden .
O.
Ortz, ce duPont ..
O Suvan Rubber Co.,
Inc. (n dssouton).
P.
96563
93050
96076
86861
87 1
9628
9781
93362
95986
98207
91 9
71903
9 76
89169
93821
98188
92575
93159
97399
2
1
2
38
1
2
1
2
2
1
35
2
2
2
1
2.
2
610
101
78
716
1209
1190
669
720
1238
7 2
195
6 0
618
899
179
173
721
Pan- mercan Lfe Insurance Co. 8 638 38 1 30
Parker, . rooks 101676 369
Parrsh, Percva... - -- 103 06 1
Patton, T. - 93918 0 7 9
Peck Peck (New York) 99288 2 651
Peck Peck Corporaton, The 9931 2 651
Perkns, Raph 96126 1 1225
Phnev odng Co., Inc 88988 3 215
Perce, D. W 92278 1 1261
Pnkney Packng Co. 8892 2 823
Pttsburg Canners, Inc 93560 1 67
Punkett, Theodore R 9 017 1 700
Pontare , Mchae 10 83199 35 872
Porter et a., . oward trustees, dentfed as
Porter Propertes Trustees, Ltd 95762 2 681
Porter Propertes Trustees, Ltd. 95762 2 681
Producers O Corporaton 93839 3 9
Pupn, Mchae I., estate of 92177 38 1218
cquescence s ony wth respect to the ta abty of the ncome from the wfe s trust
cquescence reates ony to tno deductbty n 1930 of the amount pad to tho Frst Natona ank of
St. Lous n connecton wth the qudaton of the Frankn mercan Trust Co., such acquescence beng
ony n the resut.
Pror nonacquescenoe pubshed In Cumuatve uetn 1939-1 (Part 1), page 56, wthdrawn.
Nonacquescence pubshed n Cumuatve uetn 1937-1, page 3, wthdrawn.
8 cquescence reates ony to the ssue, Is the pettoner entted tft a deducton of 13,225 as a bad debt
for the year 1935T
Gft ta decson.
cquescence reates ony to the ssue, whether the pettoner s entted to any deducton as the resut
of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of the year 193 .
1 Parta nonacquoscence pubshed In Cumuatve uetn 1939-1 (Part 1), page 59, wthdrawn.
cquescence reates ony to the ssue, Was the pettoner entted to a oss on an nvestment of 17,250
In the Fourteenth Carnege Co. for the year 192 T
10 Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 63, wthdrawn.
11 state ta decson.
Pror nonacquescenoe pubshed n Cumuatve uetn 1939-1 (Part 1), page 60, wthdrawn.
G
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1
3
-
0
1
-
2
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9
cquescencks Contnued.
Docket
No.
oard of Ta ppeas.
oume.
R.
Regas Reaty Co.1 - -
Retsa Drng Co
Rtche, Montgomery . W., admnstrator d. b. n.
of estate of Mrs. Cornea dar
Robnson, W. C --- -
Rooke, Robert L --
Rosenstock, nna, ndvduay and as e ecutr of
estate of Isaac M. Rosenstock 1
Rosenstock, Isaac M., estate of 1
Ross ros. orse Mue Co
Ross, Mary Catherne
Ross, W. R -- -
Ross, ndrew .
Rotorte Corporaton
Rowey, dward G., transferee of estate of Frank
O. urrdge
.
; ecutor of
Safe Depost Trust Co. of Ratmorc
estate of Mdred Sheppard Legg ..-
St. Lous Unon Trust Co. et a., e ecutors of estate
of Carre L. ones -
Scanon, Robert .
Scheffen, Lucy S., estate of -
Schcsnger, Rosa 5 --
Schey et u ., uan Larcombe
Schoekopf, r., acob F - -
Schutz et u ., Nes
Schuman Carrage Co., Ltd
Seavey Farshem rokerage Co...
Second Carey Trust
Seward Cty Ms...
Shamrock O Gas Co
Sharp et u ., . Cec
Sheden Land Co.
Shenandoah aey Natona ank (Shrey Carter
estate)
Sherman, Dors ond 7
Sver, Ma
Smon, ose, estate of
Smon et a., ose P., e ecutors1
Sav, rthur M ---
Smth, Chares G
Smth, Madene Weder
96360
.-,77f,
97715
95 51
99038
98112
91686
91686
9 76
9 75
f 9 7
98898
96 70
88606
93332
899 2
91831
98020
99961
73892
99 0
76377
/100 0
100 1
90012
91618
93611
92099
98588
/ 97 25
97 26
93196
93917
95300
100186
918 0
918 0
9 768
9391
95003
3
2
3
3
3
1
1
3
3
3
1
0
0
0
11
2

36
2
35

3
1
1

2
2
2
0
1
2
0
0
3
0
1
1 cquescence Is as to resut ony.
state ta decson.
Un|ust enrchment ta decson.
Oft ta decson.
Pror nonacqucscence pubshed n Cumuatve uetn 1018-1. paee 55, wthdrawn.
cquescence reates ony to the ssue, whether certan osses suffered by pettoner as the resut of fore-
cosures of propertes owned by the pettoner are deductbe n the year of forecosure or n the year n
whch tbe equty of redempton e pred.
cquescence reates ony to the year 1935.
G
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U
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t
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)

o
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

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6
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#
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e
10
cquescences Contnued.
oard of Ta ppeas.
oume.
Smth, arvara Pupn, admnstratr of estate of
Mchae I. Pupn 11
Smoak, ott ...
Smyth, r., Francs G., transferee of estate of Frank
O. urrdge
Smyth, erbert C, transferee of estate of Frank O.
urrdge.
Smyth, erbert C, admnstrator of the estate of
een Gmore, transferee of estate of Frank O.
urrdge
Spor, Sr., Cypran ., estate of 1
Spratt, Chares N
Sprngford, erbert
Spruance, Mrs. ortense
Spruance, Thomas, estate of
Staey, ugustus .
Staey, mma L.
Standard O Co. (and affated subsdares).
Staney, Wam
Stern, son L. S.
Strecker, Lous
Suffok erks, Marguerte yde .
Sutana O Corporaton (Deaware).
Sunset-Luce Co
Suteffe Co., The
Swastka O Gas Co
Tabott, atherne ., estate of1
Tabott et a., arod ., e ecutors of estate of
atherne . Tabott1
Tayor et us., arden F
Tefhune, Wesey .
Thatcher, ster ., transferee of estate of Frank O.
urrdge
Tmmernan, Lous F
Tte Guarantee Trust Co. et a., e ecutors of es-
tate of Lucy S. Scheffen
Tonnngsen Trust, ohn and Paune
Tomey, eannette Wrght, admnstratr of estate
of Me Langey Wrght 1
Traser, Rchard ., estate of
Trevor, my
92177
100036
93331
93232
93231
92588
97917
972 7
/ 9 785
9 786 I
9 78
9 820
9 821
88772
88773
86516
96558
9313
96038
81 17
93257
90078
90079
9396
9 235
90861
97128
97128
99262
9389
93335
96317
99961
99280
99579
91958
89820
38
3
0
0
0
0
3
1
3
3
1
1
3
1
0
3
0
0
2
-11
0
2
2
3
0
0
2
1
3
3
1
0
1218
907
9
9
9
92
503
1001
221
221
752
752
973
1233
756
273
1120
1195
2 6
1009
797
1081
1081
563
7 9
9
188
137
37
551
228
12 0
state ta decson.
Pror nonacquesecnce pubshed In Cumuatve uetn 1939-1 (Part 1), page 60. wthdrawn.
Gft ta decson.
1 cquescence reates ony to the ssue, Is the pettoner ta abe on the ncome of a trust whch was created
for the support and mantenance of hs wfe and mnor chd
cquescence on the foowng ssue s as to resut ony: In determnng the not ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded the rent due under a ong-term ease, the
essee havng Improved the premses wth an offce budng whch woud become the essor s property on
forfeture, the trust on the accrua bass havng accrued the rent but aso havng charged t to a reserve for
uncoected rents
cquescence reates ony to the Issue, whether gans were reazed n 1936 or n 1937 from saes made on
the ast two days of December. 1938.
cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
G
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U
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t
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)

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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

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6
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e
11
cquescences Contnued.
Ta payer.
U.
Unon Guardan Trust Co
Unon Shpbudng Co., aeged transferee.
Unted States Fdety Guaranty Co
Co-
aey Lumber Co. of Lod
aey Tractor qupment Co.
auaton Servce Co., The
W.
Water, Wam
Washngton Raway ectrc Co.
Wegeforth, Le S
Weder, r., ames F
Wheeer, een vans 1
Wco , se .
Wco , Gayord P.
Wco , Mabe I.1
Wson, ohn P.1
Wson, Morrs
Wnston ros. Co.
Wnthrop, eekman
Wocott, Frank
Wof, dth ..
Wood, F zabeth
Wood, Orrn G. 7
Woods Lumber Co.
Word, nna
Word, T. T
Word Suppy Co., T. T
Wrght, Me Langey, estate of
Young, Du os I0..
Y.
Docket
No.
9 687
100025
91398
98503
99752
8735
100 21
95878
96373
f 97537
99162
92 35
9 708
95005
95528
96830
96831
96827
931 0
9802
59270
79850
10000S
92 29
9500
92 89
97 7
935 3
935 2
935
99579
783 5
oard of Ta ppeas.
oume.
1
3
0
3
39
3
2
II
2
0
2
1
2
3
3
3
2
2
29
36
2
1
1
0
1
1
I
1
3
3
Page.
1306
11 3
1010
1
962
23
311
811
9 1
12 8
633
686
2 6
931
931
931
1260
125
905
31
1151
1231
686
90
88
965
965
965
551
0 8
1 cquescence reates to a ssues e cept as to the deductbty of attorney s fees and abstract fees n-
curred ncdenta to the estabshment of forfeture of a ease and obtanng repossesson of the eased
premses.
cquescence reates ony to the ssue. re the pettoners ta abe n 193 as benefcares under the
wu of George N. Wco upon ncome earned n 193 by the estate durng admnstraton
I cquescence reates ony to the ssue, Where ta payer creates a trust for the fetme of hs adut daugh-
ter. Is the trust ncome ta abe to the grantor under the provsons of secton 166 of the Revenue ct of 1931
Pror nonacquescence pubshed n Cumuatve uetn 1II-2, page 38 (193 ), wthdrawn.
1 Nonacquescence pubshed n Cumuatve uetn 1937-2, page 56, wthdrawn.
Oft ta decson.
cquescence reates ony to the ssues nvovng (1) the vauaton of 38S shares of rown Paper M
stock, and (2) the queston whether the renqushment of a power to prevent future amendments to a trust
nstrument consttutes a compete gft.
cquescence Is as to resut ony wth respect to the ssue. Were the operatons of the pettoner, the
Woods Lumber Company of Tennessee, and tho Woods Lumber Company, Inc.. of rkansas, the
operatons of a snge ta abe entty, so that the oss sustaned by tho rkansas busness coud be used to
reduce ta abe ncome of the Tennessee corporaton
state ta decson.
II cquescence reates ony to ths ssue, Was the e change of certan certfcates of ownershp n a trust
tor underyng portfoo stock represented there by an e change of dfferent assets, resutng n a capta oss
Prevous nonacquescence pubshed n Cumuatve uetn -2, page 51 (1936), wthdrawn wth respect
to ths ssue ony.
G
e
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(
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Y
o
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k

U
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v
e
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s

t
y
)

o
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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12
The Commssoner docs NOT acquesce n the foowng decsons of
the Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
Treser 1
cme reweres (transferee)
ffated nterprses, Inc.2
abama sphatc Lmestone Co
en, . Wadegh, estate of.
en, ohn
en, r., et a., ona
en, r., et a., ona, e ecutors --.
en et a., ctor
ng, Noyes ., estate of
mbrose et u ., W. D
mercan Lberty O Co.
mercan Lght Tracton Co
ppeby, dgar S., estate of --
p|prby et a., dgar T., e ecutors of estate of
dgar S. ppeby
ppeby, ohn S.
rmour, Lota S
tknson, Wam G. (aso known as Pau Cava-
nagh)
vaon Paper Co., transferor
.
ard et u ., Warner G. and ua Doe.
anfed, T. .
ateman, Lady Maran -
eck, Martn
edford Trust, dward T
e et a., Maude ., e ecutors of estate of Ida .
Whte
ernhemer Co., 8. . M. --.
ngham, Mary Ly (Fager), estate of
shop Trust Co., Ltd., e ecutor of estate of ohn
. McCandess
ase, . F
91958
101296
96603
91793
93811
93812
93809
93811
93810
87136
957
957 5
98 87
98 88
9723
938S6
93886
9 080
88151
. 93150
95500
101162
97 39
93313
98688
99999
98766
99 39
97260
93575
88978
9 985
979 3
9829
1
3
2
1
1
1
2
3
2
1
1
1
1
2
3
2
2
3
3
2
1
1
0
2
2
228
721
390
32
206
191
1 05
76
1121
18
18
18
777
1037
5 1
970
769
69
1 7
7 8
525
2 9
823
1309
1232
1 Nonacquescence reates ony to that part of the oard s opnon whch hods, wthout supportng ev-
dence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
Nonacquescence reates ony to the ssue, Is the pettoner sub|ec to surta as a persona hodng com-
pany under sectons 351 of the Revenuo cts of 193 and 193G
state ta decson.
Nonacquescence reates to a ssues e cept the Issue. Dd the respondent err In ncudng n pettoner s
consodated ncome for 1932 and 1933. sub|ect to depeton, the sums of 25,727.55, 27, 21.09, and 0, 5.27
whch pettoner s affate, the Wofford Producton Co., pad durng sad years to owners of o payment
contracts on ts Pnkston ease
Nonacquescence reates to a ssues e cept the ssue wth respect to the 150 added by the Commssoner
to the pettoner s ta abe Income.
Nonacquescence reates ony to the ssue, Shoud the ta abe Income of the pettoner for the year 1935
be ncreased, for the reason that a certan oss sustaned durng that year by the partnershp, of whch be s a
member, resuted from the short sae of property, wthn the meanng of secton 117(e) of the Revenue
ct of 193 7
Gft ta decson.
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1
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1

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13
Nonacqt|esctnceb Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Page.
ohn, Chares .
ondhoders Commttee .
onfs, F. G., estate of1
onfs Trust, F. G :vf
onfs et a., een G., e ecutors of estate of F. G.
onfs
ranch, Caude R
rdgeport Cty Trust Co. et a., The, e ecutors of
estate of Noyes . ng ..
rsto, ennet .
rown, ntonette - --
ruckner, rnod
uck, sworth ...
urnett, O. L.. -
umqust, ert
Caforna rewng ssocaton.
Co
Carte Ms, Inc
Caspersen, Freda R
Caughey, Caroyn G., estate of
Cavanagh, Pau (aso known as Wam G. tkn-
son)
Cavett et a., ., e ecutors of estate of W. T. aes ..
Centra anover ank Trust Co., e ecutor of
estate of W. M. L. Fske -
Centra Loan Investment Co.T
Chamberan, Park
Chaparra O Co
Chase, Gertrude -
95953
90 52
90 86
90 S 7
91501
931 8
91501
9 2 8
87136
96289
977 3
97507
93330
902 8
101259
101295
86776
87378
88616
97698
92765
99655
95500
93208
102055
82565
88067
97552
97902
9385
93855
93856
93857
96 96
96589
936 8
9062
977 0
97938
3
0
0
0
0
0
1
2
2
2
1
0

3
1
2
0

2
0

39

3

1
2
2
1
1
3
3
38
953
881
1079
1085
1079
10 3
191
263
693
3
99
60
8
721
93
89
758
385
1037
12
227
981
10
57
39
30
11 2
1110
213
38
263
10
291
Chase Natona ank of the Cty of New York,
The, trustee under agreements wth mercan
Depostor Corporaton
Cary, P. T. (Patrck)
Coe, Rufus S
Coona Trust Co. et a., e ecutors
Coumba O Gas Co.
Coumba Rver Paper Ms
Cook Drng Co. .
Nonacqoescence reates ony to the ssue, Dd the oss resutng from the e changes of and contracts
for ome Owners Loan Corporaton bonds consttute a capta oss
1 Nonacquescenoe reates to ssue pertanng to bases for deprecaton of pettoner s assets.
Prevous acquescence pubshed n Interna Revenue uetn 19 0-15, page 1, wthdrawn.
state ta decson.
Gft ta decson.
1 N onacqucscence s ony as to the ssue. Is the cash receved by pettoners n 11135 from the Loca Federa
Savngs and Loan ssocaton, whch Is admtted to be Income, ta abe as ordnary ncome or as capta
I sn
cquescence pubshed In Cumuatve uetn 1939-3, page 6, wthdrawn.
1 . onacquesrence reates to ssue pertanng to aocaton of cost of equpment on the property In queston.
onacquescenco reates ony to the ssue whether the pettoner s entted to deduct the costs Incurred
n drng wes- Pror acquescence pubshed In Cumuatve uetn 1939-2, page 8, wthdrawn u to ths
ssue ony.
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1
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1

2
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1
Nonacquescence8 Contnued.
Corporate Investment Co
Corpus Chrst Termna Co.
Covngton et u ., George W .
Credt ance Corporaton..
Crchton. ate
Crown Zeerbach Corporaton, transferee.
Cushman, Louse C, transferee of estate of Mary
W. Cushman 1
Cushman, Mary W estate of 1 -
D.
Daas Tte Guaranty Co.
Deerng, Frank C, estate of
Deerng et a., oseph Godfrey, e ecutors of the
estate of Frank C. Deerng
Deaware Termna Corporaton
DeLong, Davd .s
Denhom Mc ay Co
Denver Natona ank et a., trustees u/w F. G.
onfs
Downng et u ., Rchard 5
Dunnng, enry .
Durkhemer, S. F
dwards Drng Co. .
as, dna
mhrst, Dorothy Whtney.
ston Co., Ltd...
verson Corporaton T
rb et a., rthur L., e ecutors of estate of Ges W.
Mead 8
states dmnstraton, Inc., admnstrator of
estate of Zachary Smth Reynods 1
vans, Mary oyd
vans, Mary .
78363
88103
98283
100561
97025
101161
101163
101166
101168
101170
92881
/ 92882
92883
90 66
95996
95996
86105
10126
89606
931 8
99171
92629
95209
75931
90827
850 0
85880
95298
9660
93281
97566
86395
97 32
95527
3
0
0
0
0
0
0
3
39
0
3
1
1
35
1
1
2
0
1
2
2
2
1155
9
601
1020
90
5 1
9 7
9 7
1021
983
983
1179
1185
767
1085
11 7
1101
585
3 1
1109
3 8
208
615
2
1 5
851
2 6
1 state ta decson.
Nonacquescence reates ony to the ssue nvovng the ta abty of an amount of 0,000 transferred
from Premum reserve account to Undvded profts account pursuant to resouton of the board
Of drectors on uy 5, 193 .
Nonacquescence reates ony to the ssue nvovng the amount of gan recogntabe n 1936 upon the
recept of cash and stock In the Sundstrand Machne Too Co. for stock n the mercan roach Machne
Co.
Prevous acquescence pubshed n Interna Revenue uetn 19 0-15, page 1, wthdrawn.
Nonacquescence reates ony to the ssue whether Mrs. Inna Downng s abe for any part of the de-
fcency.
Nonacquescence reates ony to the Issue whether the pettoner s entted to deduct the costs ncurred
In drng o wes. Pror acquescence pubshed n Cumuatve uetn 1939-1, page 11, wthdrawn as
to ths ssue ony.
1 Nonacquescence reates ony to the ssue, Was the ncome resutng from the recept of surrendered
coatera n e tngushment of a debt persona hodng company ncome
1 Gft ta decson.
Nonacquescence reates ony to the deductbty of attorney s fees and abstract fee.s ncurred ncdenta
to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
G
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2
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1
3
-
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1
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2
1

2
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15
Nonacquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
w.
F. . . O Co....
Facon Co
Farmers Gnners Cotton O Co
Farmers Unon Cooperatve change.
Frst Mortgage onds 1
Frst Trust Depost Co. et a., guardans.
Fske, W. M. L., estate of
Femng, Mrs. nna Maud
Femng- mbe Corporaton
Femng, Wam 1 .-
Fower et u ., ohn O
Frazer, Frederc --
Gadan Co., Ltd
Gardner, . Ws 1
Gannn et u ., . P
Goss Gos , Lucy M.
Goodman, dwn
Greene, . Crawford, guardan of estate of ce .
Lester
Greve, Wam M
Grote et u ., en
92960
92001
93 36
100552
90 52
90 8G
90 87
907 9
90750
90751
102055
92958
9 690
92959
92957
9 689
91162
91 12
96605
92115
87127
87128
90391
87799
93 0
96315
97522
9 2
9 3
93210
93209
93211
93208
96 0
90 0
92882
9 79
9 795
92225
98726
1
1
1
2
10
1

1
1
1
0
1
3
11
12
II
II
11
2
II
aes, George .
aes, Mrs. Oneta
aes, r., W. T.
aes, W. T., estate of ..
asey, Lan ohnson, e ecutr of estate of
Rchard emmons asey
asey, Rchard emmons, estate of
artford-Connectcut Trust Co., The, e ecutor of
estate of Mary W. Cushman 11
eer, dward .
ercues Motor Corporaton
ghand, Cec ., e ecutor of estate of rg L.
ghand
Nonacqaescence reates to Issue pertanng to bases for depredaton of pettoner s assets.
Nonacquesoence Is ony wth respect to the hodng that the pettoners woud reaze no ta aho Income
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
they recovered the cost of the e changed property from the o payments receved.
1 Gft ta decson.
1 Nonacquescenoe reates ony to the Issue, In the ease of a gft of securtes In trust, shoud the trust ho
treated as the donee, resutng n ony one e cuson, or shoud the beneucures be treated as donees, resutng
m one e cuson for each benefcary
1 Nonacquescenoe s ony as to the ssue, Is the cash receved by pettoners n 1935 from the Loca Fedora
Savngs and Loan ssocaton, whch s admtted to be ncome, ta abe as ordnary ncome or as capta gan
1 state ta decson.
Nonacquescence reates to the ssue whether pettoner was ta abe on the ncome derved from certan
rttes paced In certan agency accounts wth a Dank n pettoner s name as trustee for hs mnor ohdru.
10
2
12
10
1
0
3
G
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f
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U
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2
0
1
3
-
0
1
-
2
1

2
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:
5
3

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#
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16
Nonacquescence8 Contnued.
Ta payer.
oume.
ghand Farms Corporaton 1
ghand, rg L., estate of
offman, atherne M
offman, W. W
offman etu ., W. W
ooper, ames P., estate of 25
ooper, Mathde ., admnstrat of estate of
ames P. ooper21
opknson, esse
ughes Too Co.
.
95690
98726
967 1
967 2
92 1
85776
85776
9701
90002
arvs, r., mus, guardan of Wam D. P.
arvs
arvs, Wam D. P., an nfant
ewe Mnng Co
ohnson County Reaty Co
ohnson, are F
ohnson et a., Thomas M., trustees.
ohnston, atherne S., estate of .
onas, Louse
.
ansas Cty, St. Lous Chcago R. R. Co
eogg, Cornea . W., e ecutr of estate of
Frederck R. eogg 1
eogg, F. W
eogg, Frederck R., estate of
enan et a., Wam R., r., trustees u/w Mary
Ly (Fager) ngham
ennedy Mnng Mng Co.
mbe, ay
mbe, Mrs. ema
eberg, ce G. .
eberg, ce G. ., e ecutr of estate of Robert
. eberg, Sr.5
eberg, Sr., Robert ., estate of 5
yce, . S., estate of
yce, M. P., admnstrator
napp, George O
Lamont, zabeth
Lester, ce ., an ncompetent, estate of .
9 886
891 3
95135
891 3
9 985
99507
92956
9 67
92955
9 673
86178
86178
86179
9017
9017
91699
97 07
93 0
96315
2
3
0
1
1
2
0
99227
3
99227
3
99266
3
9631

97388
3
86776
1
87378
1
1
88616
86395
2
91010
0
2
0
2
0
0
3
1
1
3
3
3
1
1
0
3
1
Nonacquesocnce reates to a Issues e cept the ssue. Dd the pettoner reaze ta abe gan as the resut
of recevng an award for compensatory damages
1 state ta decson.
Nonacquescence reates ony to the ssue, Was the sum of 132,3 5.73, representng the net proceeds of
certan fe nsurance poces assgned by the decedent to a certan trust, propery ncudbe n the gross
estate; and, f so, may the sum of 0,000 be e cuded under the provsons of secton 302(g) of the Revenue
ct of 1926
Nonacquescence s ony wth respect to the hodng that the pettoners woud reaze no ta abe ncome
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
they recovered the cost of the e changed property from the o payments receved.
Nonacquescence reates ony to the ssue Invovng a bad-debt deducton of 20 .(0.
Gft ta decson.
G
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d

f
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Y
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U
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t
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)

o
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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2
0
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7
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1
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b
3
2
9
6
8
0
6
P
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17
Nonacqukscences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Lpe, Gordon C
Lpe, Suzanne
Lpe, r., Ward C.
M.
Ma|estc O Corporaton 1
Marborough ouse, Inc., et a. _
Marborough Investment Co. .
Marsha, erbert --
Marsha, Margaret Whte (formery Margaret
Whte Wood)
Mason et a., Sam ., coadmnstrators of estate of
Sas . Mason
Mason, Sas ., estate of -
Masterson, nna za
McCandess, ohn ., estate of
McGue, G. Percy, estate of
McGue, M. dth, e ecutr of estate of G. Percy
McGue r -
McGovern, Inc., Patrck
McLean et u ., Marrs
Mead, Ges W., estate of
Mesta, L. W
Mche, Morrs
Mchgan Sca Co
Mbank, Duncvy s
Mooney ectrc Co.
Morehead, atharne oyd
Morrc, ohn dgery, estate of.
Mueer Co., C. F
N.
ona ank of Commerce of San ntono, Te ..
tona ank of Commerce of Seatte
tona ank of Topeka, ans., admnstrator of
state of ohn dgery Morrc
ona Paper Products Co., transferor
Nebraska rdge Suppy Lumber Co
Neustadt et a., gnes, trustees u/w Sgmund
Neustadt
eustadt, Sgmund, Trust under w of
Newport Industres, Inc
90750
W7.-.I
907 9
9(1380
90 52
90 SC.
90 87
90 52
90 86
90 87
99559
909 8
1009
1009
93517
979 3
98 6
98 6
918 6
91170
91171
97566
96531
97311
96786
93050
96072
95 1
103776
8596
96331
9316
89720
103776
101165
908 6
99935
99935
92331
1
2
0
0
1
3
3
3
2
2
1
1
0
1
1
2
3
1
1
2
2
3
0
0
0
8
3
0
3
3
0
1 Nonacquescence reates ony to the ssue, Is the pettoner entted to a 1935 oss deducton for the unde-
precated cost of certan casng and other ease equpment whch coud not be removed from a certan o
ve whch the pettoner ceased to operate durng that year, because such operaton had become unproft-
abe
Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s assets.
1 Gft ta decson.
state ta decson.
1 Nonacquescence s ony wth respect to the ta abty of the ncome from the so-caed short term trusts.
Nonacquescence reates ony to the ssue, Is the pettoner entted to a credt under secton 2f(c)2 of
the Revenue ct of 1936 n the amount of 13,810, representng 2 per cent of the argest amount of bonds at
any one tme outstandng durng 193t
cquescence as to one ssue pubshed n Cumuatve uetn 1939-2. page 28, wthdrawn.
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18
Nonacquescences Contnued.
Tapayer.
oard of Ta ppeas.
No.
oume.
Page.
97325
2
73
9732
2
73
93821
98188
-
899
93159
2
173
97116
2
91
90515
1
9567
1
952
96186

8985
0
1001
96126
1
1225
98835
3
10 1
92883
0
9 7
970 5
3
297
101260

8
9616
1
27
92387
0
1051
99532

36
8639
2
1 5
86395
2
1 5
9128
1
62
9128
1
62
85905
39
927
95922
1
220
95SS0
1
832
95880
1
832
8639
2
1 5
95218
2
190
101169
3
5 1
98895
3
829
100865
3
1177
101269
3
1177
10086
3
1177
101268
3
1177
Newton, r., ames
Newton Trust, ames .
Ncoa, arry T.1.

O.
Ortz, ce duPont
P.
Pacfc Grape Products Co.
Page O Co.
Pamer, Careton
Perkns, Raph
P- Group...
Phoen State ank Trust Co., trustee under
deed of trust from Mary W. Cushman, as trustee
and transferee
Pedras Negras roadcastng Co
Prce et u ., .
Prouty, Ove .
R.
Reaty Operators, Inc
Rebsamen Motors, Ino
Reynods, R. ., estate of
Reynods, Zachary Smth, estate of .
Rhodes, Mame D., estate of .
Rhodes et a., ugh D., admnstrators of estate of
Mame D. Rhodes
Rchardson, unsford
Rubnsten, Wton
Rust, r., et a., . ., e ecutors of estate of . .
Rust.-
Rust, . ., estate of
S.
Safe Depost Trust Co. of atmore, trustee under
ws of R. . Reynods and atherne S. ohns-
ton, and deed of atherne S. ohnston
Sanford Cotton Ms, Inc. ---
Santary Products Corporaton, The, transferor
Schrndapp, Car .s
Schwabacher, bert
Schwabacher, ames
Schwabacher, May
Schwabacher, Sophe D
Nonacquesccnee reates ony to the Issue, Is the ncome of a trust pad to the pettoner s dvorced and
remarred wfe ta abe to hm, as the grantor
1 Nonacqcsoence reates to a ssue e cept the ssue, whether the pettoner s entted to any deducton
as the resut of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of tno
year 193 .
Nonacquesoence reates ony to the ssue, Dd the pettoner sustan a oss n the amount of (13,903.30
on the sae of second preferred and common stock of tho Cutch Machne Foundry Co.
state ta decson
Gt ta decson.
Sec O. C. M. 22 0 (page 20 , Cumuatve uetn 19 0-2).
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19
Nonacquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Seerey, ohn
Sheden Land Co.1
Sherman, Dors ond 2
Sobe, Inc.. N
Soomon, mea s
Spor Co., Inc., C.
Spreckes, doph
Stacy, Mar|ore Lpe
8tanart Co., Ltd
Sten, Nathan
Stern, son L. S. _.
Stewart, ames R.
Straus, Fredrch
Straus, Meer
Straus, Mortz
Strong Manufacturng Co., The_
Swope, Lorenzo W., estate of
T
Tavor et u ., arden F.6
Thompson, Mary ., e ecutr of estate of Wam
G. Thompson 7
Thompson, Wam G., estate of7
Tte Guarantee Trust Co., trustee under deed of
trust from dward T. edford, dated December 1,
1928
Tobn Packng Co., Inc., The
Towne, Wam Stark
Traser, Rchard ., estate of8
Trco Securtes Corporaton
U.
Unon Trust Co. of the Dstrct of Coumba, The
e ecutor of estate of Caroyn G. Caughey 7
W
Waker, Wam T.
Warner, ack L.
Washngton Pup Paper Corporaton, transferor
Watson, rchbad R
97673
93196
95300
93822
97937
9035
9 621
95639
99 20
96606
83178
9313
89950
83181
83180
83179
95626
936 8
99262
96358
963 8
97260
99 83
99197
91958
85176
99655
92600
97 01
10116
87873
880 8
89650
97312
92215
3
2
1
0
3
0
1
3
2
0
0
39
0
1
1
3
1
1
2
3
2
1
1

0
2
3
2
3
2
1 Nonacquescenee reates ony to the Issue whether pettoner Is entted to a deducton for an asserted
oss on an aeged sae of certan and to another corporaton.
Oft ta decson.
Nonacquescenee reates ony to the year 193f.
N or.acquescence reates ony to the ssue, Where termnaton of a trust coud occur ony at the eecton
of the grantor wth concurrence of attorneys who represented two wrsons nterested n the trust, s the
nt eat of the attorneys a substanta adverse nterest
1 Pror acquescence pubshed n Cumuatve uetn 1939-1 (Part 1), page 3 , wthdrawn.
Nonacquescenee reates ony to the ssue nvovng the e change n 1936 of 600 shares of Pressed Stee
Car Co. (N. .) for stock and rghts n Pressed Stee Car Co. (Pa.)
state tat decson.
Nonacquescenee reates ony to that part of the oard s opnon whch hods, wthout supportng
evdence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
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20
Nonacquesckncf.s Contnued.
oard of Ta ppeas.
Ta payer.
Docket
No.
oume.
Page.
West Producton Co
88997
1
10 3
Western Wa ed Paper Co. of Caforna, transferor.
101167
3
5 1
95528
2
2 6
Whte, Ida ., estate of
93575
1
525
96830
3
931
96831
3
931
96827
3
931
931 0
2
1260
92 89
0
90
Nonacquescence reates ony to the deductbty of attorney s fees and abstract fees ncurred ncdenta
to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
Non acquescence reates ony to the ssue. re the pettoners ta abe n 1936 as benefcares under
the w of mma Lyman Wco upon ncome earned n 193.5 by the estate durng admnstraton
Non acquescence reates to the ssues. Whether the ncome of a 2-year trust created for the beneft of
the ta payer s adut son s ta abe to the grantor under secton 166 of the Revenue ct of 103 , and whether
the capta gans of a fetme trust created for the benct of an adut daughter are ta abe to the grantor under
secton 167 of the Revenue ct of 193
Gft ta decson.
Non acquescence reates ony to the ssue, Is the vaue of fe nsurance poces to be determned by the
cost to purchase smar contracts as determned by the Commssoner, or s the vaue mted to the cash
u render vaue as contended by pettoner
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CONSOLID T D C SS PROFITS T R GUL TIONS.
(R GUL TIONS 110.)
19 1-12-10656
TITL 26 INT RN L R NU . C PT R I. SU C PT R . P RT 33.
Reguatons reatng to consodated returns of affated corpora-
tons prescrbed under secton 730(b) of the cess Profts Ta ct
of 19 0 (Subchapter of Chapter 2 of the Interna Revenue Code as
added by the Second Revenue ct of 19 0).
Tabe of Contents.
statutory and nteoductobt provsons.
Secton 730 of the Interna Revenue Code, as added by the Second Revenue
ct of 19 0.
Secton 7 of the cess Profts Ta mendments of 19 1 (amendng secton
730(e) (6) of the Interna Revenue Code).
G N R L PRO ISIONS.
Secton.
33.0 Introductory.
33.1 Prvege of Makng Consodated Returns.
33.2 Defntons.
(a) Code.
(6) ffated Group.
(c) Consodated Return Perod.
(d) Subsdary.
(e) Ta .
(f) Consodated Return.
g) Terms Defned n Interna Revenue Code, as amended.
ppcabty of Other Provsons of Law.
DMINISTR TI PRO ISIONS.
33.10 ercse of Prvege.
(a) When Prvege Must be ercsed.
(6) ffect of Tentatve Returns.
Sectons 33.0 to 33. Issued under the authorty contaned n secton 730(b) of the In-
terna Revenue Code, added by secton 201 of the Second Revenue ct of 19 0 (Pubc, No.
801, 70th Cong., 3d sess.).
(21)
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Secton.
33.11 Consodated Returns for Subsequent Years.
(a) Consodated Returns Requred for Subsequent Years.
(6) ffect of Separate Returns When Consodated Return Requred.
(c) When ffated Group Remans n stence.
(d) When ffated Group Termnates.
33.12 Makng Consodated Return and Fng Other Forms.
(a) Consodated Return Made by Common Parent Corporaton.
(b) uthorzatons and Consents Fed by Subsdares.
(c) ffatons Schedue Fed by Common Parent Corporaton.
(d) Persons uafed to Swear to Returns and Forms.
(e) Sgnatures n Case Subsdary as Left ffated Group.
83.13 Change n ffated Group Durng Ta abe Year.
(a) Genera Rue.
(b) Formaton of ffated Group fter egnnng of Year.
(c) Compete Termnaton of ffated Group Pror to Cose of Ta abe
Year.
(d) ddton to ffated Group of a Subsdary Durng Year.
(e) mnaton from ffated Group of a Subsdary Durng Year.
( ) Perod of 30 Days or Less May be Dsregarded.
(g) Separate Returns for Perods Not Incuded n Consodated Return.
(h) Tme for Makng Separate Returns for Perods Not Incuded n
Consodated Return.
33.1 ccountng Perod of an ffated Group.
33.15 Labty for Ta .
(a) Severa Labty of Members of ffated Group.
(b) Labty of a Corporaton n ankruptcy or Recevershp.
(c) Labty of Subsdary fter Wthdrawa.
(d) ffect of Intercompany greements.
(e) Labty of Transferee Not ffected.
83.16 Common Parent Corporaton gent for Subsdares.
(a) Scope of gency of Common Parent Corporaton.
(b) ffect of Wthdrawa of Subsdary.
(c) ffect of Dssouton of Common Parent Corporaton.
83.17 Wavers.
(a) ffect of Waver Gven by Common Parent Corporaton.
(b) cceptance of Wavers from Common Parent Corporaton and
eged Subsdary.
83.18 Faure to Compy wth Reguatons.
(a) cuson of a Subsdary from Consodated Return.
(b) Common Parent Corporaton Incorrecty Desgnated n Conso-
dated Return.
(c) Incuson of One or More Subsdares Not Members of ffated
Group.
(d) ffect of uthorzaton and Consent Fed Pursuant to Notce.
(e) ocaton of Payments n the vent of Change by One or More
Corporatons to Separate Returns.
COMPUT TION OF T , R COGNITION OF G IN O LO S, ND SIS.
83.30 Computaton of Ta .
(a) In Case of bnormates.
(6) In Case of Merchant Marne Contracts.
(c) In Case of Profts from Mnng Strategc Metas.
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Secton.
33.31 ases of Ta Computaton,
(a) Defntons.
(1) Consodated net ncome.
(2) Consodated net short-term capta gan.
(3) Consodated net ong-term capta gan.
( ) Consodated net ong-term capta oss.
(5) Consodated net operatng oss deducton.
(6) Consodated net operatng oss carry-over.
(7) Consodated net operatng oss.
(8) Consodated norma-ta net ncome.
(9) Consodated ad|usted net ncome.
110) Consodated credt for dvdends receved.
(11) Consodated credt reatng to nterest on Government
obgatons.
(12) Consodated e cess profts net ncome.
(13) Consodated secton 711(a) ad|ustment.
(1 ) Consodated ad|usted e cess profts net ncome.
(15) Consodated e cess profts credt.
(16) Consodated e cess profts credt based on nvested capta.
(17) Consodated nvested capta for the ta abe year.
(18) Consodated average nvested capta for the ta abe year.
(19) Consodated nadmssbe asset ad|ustment.
(20) Consodated accumuated earnngs and profts as of the
begnnng of the ta abe year.
(21) Consodated e cess profts credt based on ncome.
(22) Consodated average base perod net ncome.
(23) Consodated e cess profts net ncome for consodated base
perod year endng after May 31, 19 0.
(2 ) Consodated base perod e cess profts net ncome for con-
sodated base perod year.
(25) Consodated base perod defct for consodated base perod
year.
(26) Consodated base perod years.
(27) Consodated net capta addton.
(28) Consodated net capta reducton.
(29) Consodated day capta addton.
(30) Consodated day capta reducton.
(31) Consodated e cess profts credt carry-over.
(32) Consodated unused e cess profts credt.
(33) ghest bracket amount of the affated group.
(6) Computatons.
(1) Net ncome of the severa affates.
(2) Dvdends receved and other factors.
() Dvdends receved.
() Short-term capta gans and osses and ong-term
capta gans and osses.
() Net operatng oss.
(v) verage nvested capta.
(v) ccumuated earnngs and profts or defct.
(v) dmssbe and nadmssbe assets.
(v) ase perod e cess profts net ncome or defct.
(v) Day capta addton or reducton,
(z) cuded capta.
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Secton.
23.31 ases of Ta Computaton Contnued.
(b) Computatons Contnued.
(3) Consodated net operatng oss carry-over, mtaton on
porton based on osses sustaned pror to ncuson n
consodated return.
( ) Consodated net operatng oss carry-over, mtaton on
certan of secton 122 ad|ustments.
(5) Consodated net operatng oss carry-over, mtaton on
ad|ustments to osses from second precedng ta abe year.
(6) Consodated e cess profts credt carry-over, mtaton on
porton based on unused credt sustaned pror to ncuson
n consodated return.
(7) Consodated e cess profts credt carry-over, mtaton on
ad|ustment to carry-over from second precedng ta abe
year.
(8) Consodated e cess profts credt based on nvested capta,
mtaton on porton attrbutabe to certan nsurance
companes.
(c) Statements and Schedues for Subsdares.
(d) Net Operatng Loss Deducton fter Consodated Return Perod.
(e) Unused cess Profts Credt fter Consodated Return Perod.
(/) Ta abe Year of Less Than Tweve Months.
33.32 Method of Computaton of Income for Perod of Less Than Tweve Months.
83.33 Gan or Loss from Sae of Stock or onds.
83.3 Sae of Stock ass for Determnng Gan or Loss.
(a) Scope of Secton.
(6) Saes Whch Do Not reak ffaton.
(c) Saes Whch reak ffaton Made Whe Seng Corporaton s
Member of ffated Group.
(d) Saes fter Seng Corporaton as Ceased to be Member of
ffated Group.
( ) Defnton of Loss, Consodated Loss, and Net Loss or Net
Operatng Loss.
83.35 Sae of onds ass for Determnng Gan or Loss.
83.36 Lmtaton on owabe Losses on Sae of Stock or onds.
(a) Genera Rue.
(6) uafcaton of Genera Rue.
33.37 Lqudatons Recognton of Gan or Loss.
(a) Durng Consodated Return Perod.
(6) fter Consodated Return Perod.
33.38 ass of Property.
(a) Genera Rue.
(6) Intercompany Transactons.
(c) ass fter Lqudaton.
(d) ass Not ffected by cquston or Sae of Stock
83.39 Inventores.
(a) Consodated Return for Frst Year of ffaton.
(6) Consodated Return fter Separate Return by ffates.
(c) Separate Returns Made fter Consodated Returns.
(d) ase Perod Years.
83. 0 ad Debts.
(a) Deducton Durng Consodated Return Perod.
(6) Lmtaton on owance fter Consodated Return Perod.
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Fee on.
33. 1 Sae and Retrement by Corporaton of ts onds.
(a) Issued at Dscount or Premum.
(6) cquston of onds by Issung Company.
33. 2 Capta Loss Lmtaton and Carry-over.
33. 3 Credt for Foregn Ta es.
33. Methods of ccountng.
(a) In Genera.
(6) Combnaton of Methods.
(c) Change to ccrua Method.
S CTION 730(b) OF T C SS PROFITS T CT OF 10 0 (SU C PT R OF
C PT R 2 OF T INT RN L R NU COD S DD D Y T S COND
R NU CT OF 19 0).
C. 730. CONSOLID T D R TURNS.
(a) Prvege to Pe Consodated Returns. n affated group of cor-
poratons sha, sub|ect to the provsons of ths secton, have the prv-
ege of makng a consodated return for the ta abe year n eu of
separate return The makng of a consodated return sha be upon
the condton that a the corporatons whch have been members of
the affated group at any tme durng the ta abe year for whch the
return s made consent to a the reguatons under subsecton (b) pre-
scrbed pror to the ast day prescrbed by aw for the fng of such
return; and the makng of a consodated return sha be consdered as
such consent. In the case of a corporaton whch Is a member of the
affated group for a fractona part of the year the consodated
return sha Incude the Income of such corporaton for such part of
the year as It s a member of the affated group.
(b) Reguatons. The Commssoner, wth the approva of the Secre-
tary, sha prescrbe such reguatons as he may deem necessary n
order that the ta abty of any affated group of corporatons mak-
ng a consodated return and of each corporaton In the group, both
durng and after the perod of affaton, may be returned, determned,
computed, assessed, coected, and ad|usted, In such manner as ceary
to refect the e cess profts ta abty and the varous factors neces-
sary for the determnaton of such abty, and In order to prevent
avodance of such ta abty.
(c) Computaton and Payment of Ta . In any case n whch a con-
sodated retnrn s made the ta sha he determned, computed, as-
sessed, coected, and ad|usted n accordance wth the reguatons under
subsecton (b) proscrbed pror to the ust day prescrbed by aw
for the fng of such return. Ony one s| efc e empton of 5,000
provded n secton 710(b)(1) sha be aowed for the entre affated
group of corporatons.
(d) Defnton of ffated Group . s used In ths secton, an aff-
ated group means one or more chans of ncudbe corporatons con-
nected through stock ownershp wth a common parent corporaton
whch s an ncudbe corporaton f
(1) t east 95 per centum of each cass of the stock of each of
the ncudbe corporatons (e cept the common parent corporaton)
Subchapter cess Profts Ta .
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26
Is owned drecty by one or more of the other ncudbe corpora-
tons; and
(2) The common parent corporaton owns drecty at east 95
per centum of each cass of the stock of at east one of the other
ncudbe corporatons.
s used n ths subsecton, the term stock does not ncude nonvotng
stock whch s mted and preferred as to dvdends.
(e) Defnton of Incudbe Corporaton . s used n ths secton, the
term ncudbe corporaton means any corporaton e cept
(1) Corporatons e empt from the ta Imposed by ths sub-
chapter.
(2) Foregn corporatons.
(S) Corporatons organzed under the Chna Trade ct, 1922.
( ) Corporatons entted to the benefts of secton 251, by reason
of recevng a arge percentage of ther Income from possessons
of the Unted States.
(5) Persona servce corporatons.
(6) Insurance companes sub|ect to ta aton under secton 201,
20 , or 207.
(f) Incudbe Insurance Companes. Despte the provsons of para-
graph (6) of subsecton (e), two or more domestc nsurance companes
each of whch s sub|ect to ta aton under the same secton of Chapter 1
sha be consdered as ncudbe corporatons for the purpose of the
appcaton of subsecton (d) to such nsurance companes aone.
(g) Subsdary Formed to Compy Wth Foregn Law. In the case of a
domestc corporaton ownng or controng, drecty or ndrecty, 100
per centum of the capta stock (e cusve of drectors quafyng shares)
of a corporaton organzed under the aws of a contguous foregn coun-
try and mantaned soey for the purpose of compyng wth the aws
of such country as to tte and operaton of property, such foregn cor-
poraton may, at the opton of the domestc corporaton, be treated for
the purpose of ths subchapter as a domestc corporaton.
(h) Suspenson of Runnng of Statute of Lmtatons. If a notce under
secton 272(a) n respect of a defcency for any ta abe year Is maed
to a corporaton, the suspenson of the runnng of the statute of mta-
tons, provded n secton 277, sha appy n the case of corporatons
wth whch such corporaton made a consodated return for such
tattbe year.
S C. 7. CONSOLID T D R TURNS OF INSUR NC COMP NI S
OT R T N LIF OR MUTU L. ( C SS PROFITS T
M NDM NTS OF 19 1.)
Secton 730(e)(6) of the Interna Revenue Code s amended to read
as foows:
(6) Insurance companes sub|ect to ta aton under secton
201 or 207.
Secton 33.0 Introductory.
These reguatons, authorzed by secton 730(b)1 of the Interna
Revenue Code as added by the Second Revenue ct of 19 0, are pre-
1 The report of the Commttee on Fnance (Rept. No. 211 , 78th Cong., 3d sess., p. 17)
accompanyng the Second Revenue ct of 19 0 contans the foowng statement:
The reguatons whch the Commssoner s authorzed to prescrbe are sueh reguatons
as he may deem necessary n order that the ta abty of any affated group of cor-
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27
scrbed as a suppement to the e cess profts ta reguatons appcabe
generay under the Code. They are appcabe to a ta abe years
begnnng after December 31, 1939.
The severa sectons of these reguatons have been gven numbers
correspondng respectvey to the secton numbers of pror ncome ta
consodated returns reguatons but, n accordance wth the rues of
the Federa Regster, preceded by the Code number 33.
poratons makng a consodated return and of ench corporaton n the group, both durng
and after the perod of affaton, may be returned, determned, computed, assessed, co-
ected, and ad|usted, n such manner as ceary to refect the e cess-profts ta abty
and the varous factors necessary for the determnaton of such abty, and n order to
prevent avodance of such ta abty n addton to the matters whch, n the ght of
current and prevous consodated returns reguatons, are e pected to be covered In deta
In the reguatons to be ssued by the Commssoner, are the e tent to whch and the
manner n whch the foowng Items, among others, w be computed and gven effect n
determnng the e cess-profts-ta abty of an affated group: (a) quty nvested capta,
borrowed capta, and Invested capta, (b) admssbe and nadmssbe assets, and e cuded
capta, (c) net capta addtons and reductons, (d) consodated net operatng osses,
net operatng osses Incurred by members of the group n ta abe years pror to that for
whch the consodated return Is fed, and the net operatng oss deducton of members of
the group n ta abe years foowng that for whch the consodated return was fed, and
(e) e cess-profts net ncome and ad|usted e cess-profts net ncome.
The report of the Commttee on Ways and Means ( ept. No. 1860, 75th Cong., 3d sess.,
p. ) accompanyng the revenue b of 1938 (the pertnent provsons of whch were
reenacted wthout change n substance In the Interna Revenue Code) contans the foow-
ng statement n regard to ncome ta consodated returns reguatons :
mong the matters to be detaed In reguatons whch the Commssoner Is e pected
to prescrbe under the provsons of subsecton (b) of ths secton are (a) the treatment
of ntcr-corapany dvdend dstrbutons, (b) of defntons of the net ncome, the ad|usted
net Income, and the speca cass net ncome of the affated group, and (c) the com-
putaton of the net operatng oss, the basc surta credt, the dvdend carry-over, the
dvdends pad credt, and the capta gans and osses, Insofar as these severa factors
may pertan to the case of an affated group.
Wth respect to the correspondng Income ta secton of the Revenue ct of 1928, the
report of the Commttee on Fnance (S. Rept. No. 960, 70th Cong., 1st sess., p. o) accom-
panyng the revenue b of 1928 contans the foowng statement (a smar statement
beng contaned aso n the statement of the managers on the part of the ouse, accom-
panyng the conference report upon the b, see . ept. No. 1882, 70th Cong., 1st sess.,
pp. 16-17) :
mong the reguatons whch t s e pected that the Commssoner w prescrbe are:
(1) The e tent to whch gan or oss sha be recognzed upon the sae by a member of the
affated group of stock Issued by any other member of the affated group or upon the
dssouton (whether parta or compete) of a member of the group; (2) the bass of prop-
erty (ncudng property ncuded In an nventory), acqured, durng the perod of affa-
ton, by a member of the affated group, ncudng the bass of sucb property after such
perod of affaton: (3) the e tent to whch and the manner n whch net osses sustaned
by a corporaton before It became a member of the group sha be deducted In the conso-
dated return ; and the e tent to whch and the manner n whch net osses sustaned
durng the perod for whch the consodated return s fed sha be deducted In any ta abe
year after the affaton s termnated In whoe or n part; ( ) the e tent to whch and
the manner n whch gan or oss 1b to be recognzed, upon the wthdrawa of one or more
corporatons from the group, by reason of transactons occurrng durng the perod of
affaton; and (5) that the corporaton fng the consodated return must desgnate one
of ther members as the agent for the group, n order that a notces may be maed to the
agent, defcences coected, refunds made, nterest computed, and proceedngs before the
oard of a ppeas conducted as though the agent were the ta payer.
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G N R L PRO ISIONS.
Sec. 33.1 Prvege of Makng Consodated Returns.
(a) Secton 730 gves to the corporatons of an affated group the
prvege of makng a consodated e cess profts ta return for the
ta abe year n eu of separate returns. Ths prvege, however,
s gven upon the condton that a corporatons whch have been
members of the affated group at any tme durng the ta abe year
for whch the return s made consent to these reguatons, and any
amendments thereof duy prescrbed pror to the ast day prescrbed
by aw for the fng of the return; and the makng of the con-
sodated return s consdered as such consent. The ast day pre-
scrbed by af for the fng of the return ncudes the ast day of the
perod of any e tenson of tme granted by the Commssoner.
( ) The ta abty of the members of the affated group for
such year w be determned n accordance wth such reguatons and
wthout regard to any changes made subsequent to the ast day pre-
scrbed by aw for the fng of such return of the rues theren
prescrbed.
Sec. 33.2 Defntons.
(a) Code.
The term Code means the Interna Revenue Code, as amended,
and the sectons of statutory aw referred to n these reguatons,
uness otherwse stated, are sectons of that Code.
(b) ffated Group.
The term affated group ncudes the common parent corpora-
ton and every other corporaton for the perod durng whch such cor-
poraton s a member of the affated group wthn the meanng of
secton 730. It does not ncude (1) any corporaton whch under sec-
ton 730 cannot be ncuded n a consodated return, (2) an nsurance
company ta abe under secton 201 or 207 n the case of a consodated
return for corporatons ta abe under secton 13, 1 , or 20 , (3) a
corporaton ta abe under secton 13, 1 , or 20 n the case of a
consodated return for nsurance companes ta abe under secton
201 or 207, ( ) an nsurance company ta abe under secton 201 n
the case of a consodated return for nsurance companes ta abe
under secton 207, or (5) an nsurance company ta abe under secton
207 n the case of a consodated return for nsurance companes ta -
abe under secton 201.
In the case of a domestc corporaton ownng or controng, drecty
or ndrecty, 100 per cent of the capta stock (e cusve of drectors
quafyng shares) of a corporaton organzed under the aws of
Canada or of Me co and mantaned soey for the purpose of com-
pyng wth the aws of such country as to tte and operaton of prop-
erty, such foregn corporaton may, at the opton of the domestc cor-
poraton, be treated for e cess profts ta purposes as a domestc cor-
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29
poraton. The opton to treat such foregn corporaton as a domestc
corporaton so that t may be ncuded n a consodated return must
be e ercsed at the tme of makng the consodated return, and cannot
be e ercsed at any tme thereafter. If the eecton s e ercsed to
treat such foregn corporaton as a domestc corporaton, t must be
ncuded n the consodated return of the affated group of whch t
s a member for each year thereafter for whch such group makes or s
requred to make a consodated return.
n affated group of corporatons, wthn the meanng of secton
730, s formed at the tme that the common parent corporaton becomes
the owner drecty of at east 95 percent of each cass of the stock (us
defned by secton 730(d)) of another corporaton. corporaton
becomes a member of an affated group at the tme that one or more
members of the group become the owners drecty of at east 95 per-
cent of each cass of ts stock. corporaton ceases to be a member
of an affated group when the members of the group cease to own
drecty at east 95 percent of each cass of ts stock.
(c) Consodated Return Perod.
The term consodated return perod means the frst ta abe year
begnnng after December 31, 1939, or any subsequent ta abe year,
for whch a consodated return s made or s requred, ncudng the
perod durng whch a subsdary corporaton s engaged n dstrbutng
ts assets n qudaton.
(d) Subsdary.
The term subsdary means a corporaton (other than the common
parent corporaton) whch s a member of the affated group durng
any part of the consodated return perod.
(e) Ta .
The term ta means the e cess profts ta mposed by the cess
Prots Ta ct of 19 0, and ncudes any nterest, penaty, addtona
amount, or addton to the ta , payabe n respect thereof.
(/) Consodated Return.
The term consodated return means a consodated e cess profts
ta return.
(g) Terms Defned n Interna Revenue Code, as amended.
Terms whch are defned n the Code, as amended, sha, when used
n these reguatons, have the meanng assgned to them by the Code,
as amended, uness specfcay otherwse defned. (See, for e ampe,
ad|usted net ncome, secton 13; norna-ta net ncome, secton 13
as amended by secton 201 of the Revenue ct of 1939: speca cass
net ncome, secton 1 pror to ts amendment by secton 201 of the
Revenue ct of 1939; net ncome, secton 21; gross ncome, secton
22; ta abe year and fsca year, secton 8; defcency, secton
271; and the terms defned n secton 3797, partcuary the terms per-
son, stock, and corporaton. )
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Sec. 33.3 ppcabty of Other Provsons of Law.
ny matter n the determnaton of whch the provsons of these
reguatons are not appcabe sha be determned n accordance wth
the provsons of the Code or other aw appcabe thereto.
DMINISTR TI PRO ISIONS.
Sec. 33.10 ercse of Prvege.
(a) When Prvege Must be ercsed.
The prvege of makng a consodated return under these regua-
tons for any ta abe year of an affated group must be e ercsed
at the tme of makng the return of the common parent corporaton
for such year. Under no crcumstances can such prvege be e ercsed
at any tme thereafter. The fng of separate returns for a ta abe
year does not consttute an eecton bndng upon the corporatons n
subsequent years. If the prvege s e ercsed at the tme of makng
the return, separate returns cannot thereafter be made for such year.
(See, however, secton 33.18, reatng to the mproper ncuson n
the consodated return of the ncome of a corporaton.)
(6) ffect of Tentatve Returns.
In no case w the prvege under paragraph (a) be consdered as
e ercsed at the tme of makng a so-caed tentatve return (made,
for e ampe, n order to obtan an e tenson of tme for makng the
return requred by aw). owever, f any such tentatve return s
made upon the bass of a consodated return or a separate return,
the ret urn requred by aw must be made upon the same bass, uness
upon the makng of the return requred by aw (ether a separate
return or a consodated return, as the case may be) the payments
theretofore made and to be made are ad|usted n a manner satsfactory
to the Commssoner.
Sec. 33.11 Consodated Returns for Subsequent Years.
(a) Consodated Returns Requred for Subsequent Tears.
If a consodated return s made under these reguatons for any ta -
abe year, a consodated return must be made for each subsequent
ta abe year durng whch the affated group remans n e stence
uness (1) a corporaton (other than a corporaton created or organ-
zed, drecty or ndrecty, by a member of the group) has become a
member of the group durng such subsequent ta abe year, or (2) one
or more provsons of these reguatons, whch have been consented to,
have been amended n a manner adversey affectng the nterests of the
group or any of ts members, or (3) the Commssoner, pror to the
tme of makng the return, upon appcaton made by the common par-
ent corporaton and for good cause shown, grants permsson to change.
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(b) ffect of Separate Returns When Consodated Return
Requred.
If the makng of a consodated return s requred for any ta abe
year, the ta abty of the members of the affated group sha be
computed n the same manner as f a consodated return had been
made, even though separate returns are made; amounts assessed upon
the bass of separate returns sha be consdered as havng been as-
sessed upon the bass of a consodated return; and amounts pad upon
the bass of separate returns sha be consdered as havng been pad
by the common parent corporaton. In such cases the makng of sepa-
rate returns sha not be consdered as the makng of a return for the
purpose of computng any perod of mtaton or any defcency. If
a consodated return for such ta abe year s thereafter made, such
return sha for the purpose of computng perods of mtaton and
any defcency be consdered as the return for such year.
(c) When ffated G-roup Remans n stence.
For the purposes of these reguatons, an affated group sha be
consdered as remanng n e stence f the common parent corporaton
remans as a common parent and at east one subsdary remans
affated wth t, whether or not such subsdary was a member of the
group at the tme the group was formed and whether or not one or
more corporatons have become subsdares or have ceased to be
subsdares at any tme after the group was formed.
(d) When ffated Group Termnates.
For the purposes of these reguatons, an affated group sha be
consdered as termnated f the common parent corporaton ceases to
be the common parent or f there s no subsdary affated wth t.
Sec. 33.12 Makng Consodated Return and Fng Other Forms.
(a) Consodated Return Made by Common Parent Corporaton.
consodated return sha be made on Form 1121 by the common
parent corporaton for the affated group. Such return sha be fed
at the tme and n the offce of the coector of the dstrct prescrbed
for the fng of a separate return by such corporaton.
(b) uthorzatons and Consents Fed by Subsdares.
ach subsdary must prepare dupcate orgnas of Form 1122 ,
consentng to these reguatons and authorzng the common parent
corporaton to make a consodated return on ts behaf for the ta -
abe year and authorzng the common parent (or, n the event of ts
faure, the Commssoner or the coector) to make a consodated
return on ts behaf (as ong as t remans a member of the affated
group), for each year thereafter for whch, under secton 33.11(a),
the makng of a consodated return s requred. One of such forms
as prepared by each subsdary sha be attached to the consodated
return, as a part thereof; and the other sha be fed, at or before the
tme the consodated return s fed, n the offce of the coector for
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the dstrct prescrbed for the fng of a separate -return by such sub-
sdary. No such consent can be wthdrawn or revoked at any tme
after the consodated return s fed.
(c) ffatons Schedue Fed by Common Parent Corporaton.
The common parent corporaton sha prepare Form 851 ( ffa-
tons Schedue), whch sha be attached to the consodated return,
as a part thereof.
(d) Persona uafed to Swear to Returns and Forms.
ach return or form requred to be made or prepared by a corpora-
ton must be sworn to by the persons authorzed under secton 52 to
swear to returns of separate corporatons. In cases where recevers
or trustees n bankruptcy are operatng the property or busness of
corporatons, each return or form requred to be made or prepared by
such corporaton must be e ecuted by the recever or trustee, as the
case may be, pursuant to an order or nstructons of the court, and be
accompaned by a copy of such order or nstructons.
(e) Sgnatures n Case Subsdary as Left ffated Group.
Snce Form 1122 s requred even though, durng the ta abe year
of the common parent corporaton, the subsdary (because of a ds-
souton or sae of stock, or otherwse) has ceased to be a member of
the affated group, t may be advsabe for the common parent to
obtan the proper sgnature to the form pror to the tme the sub-
sdary ceases to be a member of the group.
Sec. 33.13 Change n ffated Group Durng Ta abe Year.
(a) Genera Rue.
cept as herenafter provded, a consodated return must ncude
the ncome of the common parent corporaton and of each.subsdary
for the entre ta abe year of the affated group.
(b) Formaton of ffated Group fter egnnng of Tear.
If an affated group s formed after the begnnng of the ta abe
year of the corporaton whch becomes the common parent corpora-
ton, the consodated return must ncude the ncome of the common
parent for ts entre ta abe year (e cudng any porton of such year
durng whch ts ncome s ncuded n the consodated return of
another affated group) and the ncome of each subsdary from the
tme t became a member of the affated group.
(c) Compete Termnaton of ffated Group Pror to Cose of
Ta abe Year.
If an affated group s termnated pror to the cose of the ta abe
year of the group, the consodated return must ncude the ncome
of the common parent corporaton for ts entre ta abe year (e cud-
ng any porton of such year durng whch ts ncome s ncuded n
Ths secton as no bearng npon the queston whether a consodated return may or
must be made, but reates ony to the effect of changes In the affated group durng the
ta abe year.
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33
the consodated return of another affated group) and of each sub-
sdary for the perod pror to the termnaton. (See paragraphs (c)
and (d) of secton 33.11, n determnng whether the group has term-
nated.)
(d) ddton to ffated Group of a Subsdary Durng Tear.
If a corporaton becomes a member of the affated group durng
the ta abe year of the group, the consodated return must ncude ts
ncome from the tme when t became a member of the group.
(e) mnaton from ffated Group of a Subsdary Durng
Tear.
If a subsdary ceases to be a member of the affated group durng
the ta abe year of the group, the consodated return must ncude
ts ncome for the perod durng whch t was a member of the group.
(/) Perod of 30 Days or Less May be Dsregarded.
subsdary may at ts opton be consdered as havng been a mem-
ber of the affated group durng the entre ta abe year of the group
(or durng the entre perod of the e stence of the subsdary, whch-
ever s shorter) f the perod durng whch t was not a member of
such group does not e ceed 30 days. If a corporaton has been a mem-
ber of the affated group for a perod of ess than 31 days durng
the ta abe year of the group, t may at ts opton be consdered as
not havng been a member of the group durng the ta abe year. n
opton under ths paragraph must be e ercsed at or before the tme
when the consodated return s made.
(g) Separate Returns for Perods Not Incuded n Consodated
Return.
If a corporaton, durng ts ta abe year (determned wthout regard
to the affaton), becomes a member of an affated group, ts ncome
for the porton of such ta abe year not ncuded n the consodated
return of such group must be ncuded n a separate return (or, f a
member of another affated group whch makes a consodated return
for such perod, then n suc consodated return). If a corporaton
ceases to be a-member of the affated group durng the ta abe year
of the group, ts ncome for the perod after the tme when t ceased
to be a member of the group must be ncuded n a separate return (or,
f t becomes a member of another affated group whch makes a con-
sodated return for such perod, then n such consodated return).
(/t) Tme for Makng Separate Returns for Perods N e Incuded
n Consodated Return.
If a corporaton, durng ts ta abe year (determned wthout re-
gard to the affaton), becomes a member of an affated group, the
separate return requred for the porton of such ta abe year durng
whch t was not a member of the group must be made on or before
the oth day of the thrd month foowng the cose of ts ta abe year
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(determned wthout regard to affaton). For e ampe, Corporaton
P, reportng ts ncome on a caendar year bass, acqures on anuary
1,19 1, a the stock of Corporaton S, whch reports ts ncome on a
fsca year bass endng March 31. P and S eect to make a conso-
dated return for the caendar year 19 1. The separate return of S
for the ta abe perod pr 1, 19 0, to December 31, 19 0, shoud be
made on or before une 15,19 1.
Sec. 33.1 ccountng Perod of an ffated Group.
The ta abe year of an affated group whch makes a consodated
e cess profts ta return sha be the same as the ta abe year of the
common parent corporaton; and, upon havng eected to fe conso-
dated returns, each subsdary corporaton sha, not ater than the
cose of the frst consodated e cess profts ta ta abe year endng
thereafter, adopt an annua accountng perod, fsca year or caendar
year as the case may be, n conformty wth that of the common parent.
If a change of accountng perod s made by a subsdary n order
to conform wth that of the common parent and f the requrements
of Secton 19. 6-1, Reguatons 103, reatng to notce of change, can
not otherwse be comped wth, such notce sha be furnshed at or
before the tme of fng the consodated return.
Wth respect to computatons for years nvoved n the change to
the consodated bass, see secton 33.32.
Sec. 33.15 Labty for Ta .
(a) Severa Labty of Members of ffated Group.
cept as provded n paragraphs (b) and (c), the common parent
corporaton and each subsdary, a member of the affated group
durng any part of a consodated return perod, sha be severay
abe for the ta (ncudng any defcency n respect thereof) com-
puted upon the consodated ad|usted e cess profts net ncome of the
group.
(b) Labty of a Corporaton n ankruptcy or Recevershp.
If, at the tme of fng a consodated return, one or more, but not
a, of the members of the affated group are n bankruptcy under the
aws of the Unted States or n recevershp n any court of the Unted
States or of any State, Terrtory, or the Dstrct of Coumba, then
the abty under paragraph (a) of each such member of the group
wth respect to the perod covered by such return sha not e ceed such
porton of the consodated ta abty for such perod as the seve a
corporatons ncuded n the consodated return may, sub|ect to the
approva of the Commssoner, agree upon, or, n the absence of such
an agreement, an amount equa to ts abty for such year computed
as f a separate return had been fed.
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(c) Labty of Subsdary fter Wthdrawa.
If a subsdary has ceased to be a member of the affated group, ts
abty under paragraph (a) sha reman unchanged, e cept that
f such cessaton occurred pror to the date upon whch any defcency
s assessed and resuted from a bona fde sae of stock for far vaue,
the Commssoner may, f he beeves that the assessment or coecton
of the baance of the defcency w not be |eopardzed, make assess-
ment and coecton of such defcency from such former subsdary
n an amount not e ceedng the porton thereof aocabe to t upon
the bass of ts e cess profts net ncome used n the computaton of
the defcency.
(d) ffect of Intercompany greements.
ny agreement entered nto by one or more members of the affated
group wth any other members of such group or wth any other person
sha n no case have the effect of reducng the abty prescrbed
under ths secton.
(e) Labty of Transferee Not ffected.
Ths secton sha not be consdered as e tngushng or dmnshng
any abty, at aw or n equty, of a transferee of property of a ta -
payer, ncudng any abty under any provson of aw, State or
Federa, reatng to abtes pursuant to corporate dssouton or
transfer or dstrbuton of assets, whether or not n connecton wth a
merger or consodaton.
Sec. 33.16 Common Parent Corporaton gent for Subsdares.
(a) Scope of gency of Common Parent Corporaton.
cept as provded n paragraphs (b) and (c) of ths secton
The common parent corporaton sha be for a purposes, n respect
of the ta for the ta abe year for whch a consodated return s made
or s requred, the soe agent, duy authorzed to act n ts own name n
a matters reatng to such ta , for each corporaton whch durng any
part of such year was a member of the affated group. The corpo-
ratons, other than the common parent, sha not have authorty to act
for or to represent themseves n any suc matter. For e ampe, a
correspondence w be carred on drecty wth the common parent;
notces of defcences w be maed ony to the common parent, and
the mang to the common parent sha be consdered as a mang to
each such corporaton; the common parent w fe pettons and con-
duct proceedngs before the oard of Ta ppeas, and any such pet-
ton sha be consdered as havng aso been fed by each such corpora-
ton ; the common parent w fe cams for refund or credt; refunds
w be made drecty to and n the name of the common parent and
w dscharge any abty of the Government n respect thereof to
any such corporaton; and the common parent n ts name w gve
wavers, gve bonds, and e ecute cosng agreements, offers n com-
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36
promse, and a other documents, and any waver or bond so gven,
or agreement, offer n compromse, or any other document so e ecuted,
sha be consdered as havng aso been gven or e ecuted by each such
corporaton. Notwthstandng the provsons of ths paragraph, how-
ever, any notce of defcency, n respect of the ta for a consodated
return perod, w name each corporaton whch was a member of the
affated group durng any part of such perod, and any assessment
(whether of the orgna ta or of a defcency) w be made n the
name of each such corporaton (but a faure to ncude the name of
any such corporaton w not affect the vadty of the notce of def-
cency or the assessment as to the other corporatons); and any notce
or demand for payment, any dstrant (or warrant n respect thereof),
any evy (or notce n respect thereof), any notce of a en, or any
other proceedng to coect the amount of any assessment, after the
assessment has been made, w name the corporaton from whch such
coecton s to be made. The provsons of ths paragraph sha appy
whether or not a consodated return s made for any subsequent year,
and whether or not one or more subsdares have become or have ceased
to be members of the group at any tme. Notwthstandng the prov-
sons of ths paragraph, the Commssoner may, f he deems t advs-
abe, dea drecty wth any member of the group n respect of ts
abty, n whch event such member sha have fu authorty to act
for tsef.
(b) ffect of Wthdrawa of Subsdary.
For the purpose of the asserton, assessment, and coecton of any
defcency, and of a credt or refund of any amount pad by a former
subsdary as a defcency determned under secton 33.15(c), but for
no other purpose, the agency of the common parent corporaton n re-
spect of any subsdary whch has ceased to be a member of the aff-
ated group sha be termnated upon the e praton of 30 days (or
pror thereto f the Commssoner consents) from the date upon whch
such subsdary fes wrtten notce wth the Commssoner that t
has ceased to be a member of the affated group and that t s term-
natng such agency. For e ampe, f a subsdary has ceased to be a
member of the group (and f the 30-day perod has e pred) pror to
the mang of a notce of defcency to the common parent, a separate
notce of defcency w be maed n due course to the subsdary n
respect of ts defcency f t becomes necessary to enforce ts abty.
(c) ffect of Dssouton of Common Parent Corporaton.
If the common parent corporaton contempates dssouton, or g
about to be dssoved, or f for any other reason ts e stence s about
to termnate, t sha forthwth notfy the Commssoner of such fact
and desgnate, sub|ect to the approva of the Commssoner, another
member of the affated group to act as agent n ts pace, to the same
e tent and sub|ect to the same condtons and mtatons as are ap-
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37
pcabe to the common parent. If the notce thus requred s not
gven by the common parent, the remanng members of the group
may, sub|ect to the approva of the Commssoner, desgnate another
member of the group to act as such agent, and notce of such desgna-
ton sha be gven to the Commssoner. Unt a notce n wrtng
desgnatng a new agent has been receved by the Commssoner, any
notce of defcency or other communcaton maed to the common
parent sha be consdered as havng been propery maed to the agent
of the group; or, f the Commssoner has reason to beeve that the
e stence of the common parent has termnated, he may, f he deems
t advsabe, dea drecty wth any member of the group n respect
of ts abty.
Sec. 33.17 Wavers.
(a) ffect of Waver Gven by Common Parent Corporaton.
ny consent gven by the common parent corporaton (or by an
agent n accordance wth paragraph (c) of secton 33.16) e tendng
the tme wthn whch an assessment may be made or dstrant or
proceedng n court begun, n respect of the ta for a consodated
return perod, sha be appcabe (1) to each corporaton whch was
a member of the affated group durng any part of such perod
(whether or not any such corporaton has ceased to be a member of
the group), and (2) to each corporaton the ncome of whch was
ncuded n the consodated return, or whch fed Form 1122 , for
such perod, even though t s subsequenty determned that such cor-
poraton was not a member of the group.
(b) cceptance of Wavers from Common Parent Corporaton and
eged Subsdary.
In no case w a separate waver be accepted from a corporaton
the ncome of whch was ncuded n the consodated return (for
e ampe, a corporaton whch the Commssoner determnes was not
a member of the affated group), or whch fed Form 1122 , uness
a waver s aso obtaned from-the common parent corporaton, or
uness the Commssoner s deang drecty wth such corporaton to
enforce ts abty.
Sec. 33.18 Faure to Compy wth Reguatons.
(a) cuson of a Subsdary from Consodated Return.
If there has been a faure to ncude n the consodated return the
ncome of any subsdary, or a faure to fe any of the forms requred
by these reguatons, notce thereof sha be gven the common parent
corporaton by the Commssoner, and the ta abty of each mem-
ber of the affated group sha be determned on the bass of separate
returns uness such ncome s ncuded or such forms are fed wthn
the perod prescrbed n such notce, or any e tenson thereof, or uness
under secton 33.11 a consodated return s requred for such year.
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(b) Common Parent Corporaton Incorrecty Desgnated n Con-
sodated Return.
If a consodated return ncudes a corporaton as the common
parent and such corporaton was not (under the provsons of secton
730) the common parent, the ta abty of each corporaton ncuded
n the return w be computed n the same manner as f separate re-
turns had been made, uness, upon appcaton, the Commssoner
approves the makng of a consodated return, or uness under secton
33.11 a consodated return s requred for such year.
(c) Incuson of One or More Subsdares Not Members of ffated
Group.
If a consodated return ncudes a corporaton as a subsdary and
such corporaton was not a member of the affated group durng the
consodated return perod, the ta abty of such corporaton w be
determned upon the bass of a separate return (but see paragraph
(a)), and the consodated return sha be consdered as ncudng ony
the corporatons whch were members of the group durng such perod.
If the consodated return ncudes two or more corporatons whch are
not members of the group but whch consttute a separate affated
group, the ta abty of the corporatons consttutng the separate
group w be computed n the same manner as f separate returns had
been made by such corporatons, uness the Commssoner, upon app-
caton, approves the makng of a consodated return for the separate
group, or uness under secton 33.11 a consodated return s requred
for the separate group.
(d) ffect of uthorzaton and Consent Fed Pursuant to Notce.
If Form 1122 s fed by any corporaton, pursuant to a notce un-
der paragraph (a) of ths secton, such corporaton sha bo consdered
for a purposes as havng |oned n the makng of the consodated
return.
(c) ocaton of Payments n the vent of Change by One or More
Corporatons to Separate Returns.
In any case n whch amounts have been assessed and pad upon the
bass of a consodated return and the ta abty of one or more of
the corporatons ncuded n the consodated return s to be computed
n the same manner as f separate returns had been made, the amounts
so pad sha be aocated between the affated group composed of the
corporatons propery ncuded n the consodated return and each of
the corporatons the ta abty of whch s to be computed on a
separate bass, n such manner as the corporatons ncuded n the
consodated return may, sub|ect to the approva of the Commssoner,
agree upon, or, n the absence of an agreement, upon the bass of the
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e cess profts net ncome used n the computaton of the e cess profts
ta shown upon the consodated return.
COMPUT TION OF T , R COGNITION OF G IN OR LOSS, ND SIS.
Sec. 33.30 Computaton of Ta .
In the case of an affated group whch makes or s requred to make
a consodated e cess profts ta return for any ta abe year begnnng
after December 31,1939, the e cess profts ta abty of each corpora-
ton for the perod durng such year that t was a member of such
group sha be computed n accordance wth the provsons of secton
710 upon the consodated ad|usted e cess profts net ncome of the
group (determned n accordance wth these reguatons) e cept
(a) In case of abnormates. If the affated group for any ta abe
year s sub|ect to the provsons of secton 721 (reatng to abnorma-
tes)
(1) The ta abty of the group for the ta abe year n whch the
whoe of the abnorma ncome woud, wthout regard to secton 721,
be ncudbe, sha not e ceed the sum of () the ta computed upon
the consodated ad|usted e cess profts net ncome of the group com-
puted wthout the ncuson n gross ncome of the porton of the net
abnorma ncome whch s attrbutabe to any other ta abe year, pus
() the aggregate of the ncrease n the e cess profts ta whch woud
have resuted for each prevous ta abe year to whch any porton of
such net abnorma ncome s attrbutabe, computed as f an amount
equa to such porton had been ncuded n the gross ncome for such
prevous ta abe year of the corporaton dervng such porton;
(2) The ta abty of the group for any future ta abe year sha
be the ta computed upon the consodated ad|usted e cess profts net
ncome of the group computed wth the ncuson n gross ncome of
the net abnorma ncome attrbutabe to such future ta abe year, but
sha not e ceed the sum of () the ta computed upon the consodated
ad|usted e cess profts net ncome of the group computed wthout the
ncuson n e cess profts net ncome of the porton of the net abnorma
ncome whch s attrbutabe to such year, and () the decrease n the
ta for the prevous ta abe year n whch the whoe of such abnorma
ncome woud wthout regard to secton 721 be ncudbe, whch re-
suted by reason of the e cuson of the whoe or a part of the abnorma
ncome from the gross ncome for such prevous ta abe year; but the
amount of such decrease sha be dmnshed by the aggregate of the
ncreases n the ta whch have resuted for the ta abe years nterven-
ng between such prevous ta abe year and such future ta abe year
because of the ncuson n gross ncome of the portons of such net
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abnorma ncome attrbutabe to such ntervenng years. Whether or
not an abnormaty e sts sha be determned n the ght of the aggre-
gate busness and of the coectve e perence durng the four prevous
ta abe years of the severa members of the group.
(b) In case of Merchant Marne contracts. If the affated group
for any ta abe year ncudes a corporaton sub|ect to the provsons
of secton 726 (reatng to corporatons competng contracts under
the Merchant Marne ct of 1936), the ta abty of the group sha
be the ta under secton 710 computed on the consodated ad|usted
e cess profts net ncome or the ta computed n accordance wth the
provsons of secton 726 (b), whchever s the esser. The computaton
under secton 726(b) sha be made as f the consodated ad|usted e -
cess profts net ncome and the payments made or to be made to the
Unted States Martme Commsson were the ad|usted e cess profts
net ncome of and payments made or to be made by a separate corpora-
ton.
(c) In case of profts from mnng strategc metas. If the affated
group for any ta abe year ncudes a corporaton a porton of the n-
come of whch s, pursuant to secton 731, e empt from ta by reason
of such corporaton havng engaged n the mnng of strategc metas,
the ta abty of the group sha be an amount whch bears the same
rato to the ta computed on the consodated ad|usted e cess profts
net ncome as the porton of the consodated ad|usted e cess profts
net ncome not e empt from ta bears to the entre consodated ad-
|usted e cess profts net ncome. The porton of the consodated
ad|usted e cess profts net ncome not e empt from ta sha be deter-
mned n the same manner as f the consodated ad|usted e cess prof-
ts net ncome were the ad|usted e cess profts net ncome of a separate
corporaton.
Wth respect to the abty of the severa members of the group,
see secton 33.15.
Sec. 33.31 ases f Ta Computaton.
(a) Defntons.
In the case of an affated group of corporatons whch makes or s
requred to make a consodated e cess profts ta return for any ta -
abe year, and e cept as otherwse provded n these reguatons
(1) The consodated net ncome sha be the combned net ncome
of the severa affated corporatons
() Mnus any consodated net operatng oss deducton,
() Pus any consodated net short-term capta gan, and
() Pus or mnus, as the case may be, any consodated net
ong-term capta gan or consodated net ong-term capta oss;
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(2) The consodated net short-term capta gan sha be the e cess
of the sum of the short-term capta gans of the severa affated cor-
poratons over the sum of the short-term capta osses of such
corporatons;
(3) The consodated net ong-term capta gan sha be the e cess
of the sum of the ong-term capta gans of the severa affated cor-
poratons over the sum of the ong-term capta osses of such cor-
poratons ;
( ) The consodated net ong-term capta oss sha be the e cess
of the sum of the ong-term capta osses of the severa affated
corporatons over the sum of the ong-term capta gans of such
corporatons;
(5) The consodated net operatng oss deducton sha be an amount
equa to the consodated net operatng oss carry-over reduced by the
amount, f any, by whch the consodated net ncome (computed wth
the e ceptons and mtatons provded n secton 122(d)) e ceeds the
consodated norma-ta net ncome (computed wthout any net oper-
atng oss deducton) but sha not e ceed the amount of the conso-
dated norma-ta net ncome computed wthout the beneft of such
deducton;
(6) The consodated net operatng oss carry-over sha be the
sum of
() The amount of the consodated net operatng oss, f any,
for the frst precedng ta abe year,
() The amount of the consodated net operatng oss, f any,
for the second precedng ta abe year reduced by the e cess, f
any, of the consodated net ncome (computed wth the e cep-
tons and mtatons provded n secton 122(d)) for the frst
precedng ta abe year over the consodated net operatng oss
for the thrd precedng ta abe year,
and, wth respect to net operatng osses sustaned by a corporaton
for ta abe years pror to the frst ta abe year n respect of whch ts
ncome s ncuded n the consodated return
() The amount of the net operatng oss, f any, sustaned by
such corporaton for the frst precedng ta abe year, and
(v) The amount of the net operatng oss, f any, sustaned by
such corporaton for the second precedng ta abe year reduced
by the e cess, f any, of the net ncome of such corporaton for the
frst precedng ta abe year or, f the ncome of such corporaton
s ncuded n the consodated return for the frst precedng ta -
abe year, ether the net ncome of such corporaton ncreased by
the separate net short-term and ong-term capta gans of such
corporaton or the consodated net ncome for such year (com-
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puted n ether case wth the e ceptons and mtatons provded
n secton 122(d)), whchever s the esser, over the net operatng
oss of such corporaton for the thrd precedng ta abe year;
(7) The consodated net operatng oss sha be an amount equa to
the e cess of the combned net operatng osses of the severa affated
corporatons havng net operatng osses (computed sub|ect to the
e ceptons and mtatons provded n secton 122(d)) over the sum
of
() The combned net ncome of the severa affated corpora-
tons havng net ncome (ad|usted wth respect to the e ceptons
and mtatons provded n secton 122(d) n connecton wth the
computaton of net operatng osses), and
() The consodated net short-term capta gan and the con-
sodated net ong-term capta gan;
. (8) The consodated norma-ta net ncome sha be the conso-
dated ad|usted net ncome mnus the consodated credt for dv-
dends receved;
(9) The consodated ad|usted net ncome sha be the consodated
net ncome mnus the consodated credt reatng to nterest on certan
obgatons of the Unted States and Government corporatons;
(10) The consodated credt for dvdends receved sha be an
amount equa to 85 percent of the aggregate dvdends, of the cass
wth respect to whch credt s aowed by secton 26(b), receved by
the severa affated corporatons, but not n e cess of 85 percent of the
consodated ad|usted net ncome;
(11) The consodated credt reatng to nterest on certan obga-
tons of the Unted States and Government corporatons sha be an
amount equa to the aggregate of the nterest, of the cass wth respect
to whch credt, s aowed by secton 2G(a), receved by the severa
affated corporatons;
(12) The consodated e cess profts net ncome sha be the conso-
dated norma-ta net ncome ncreased or decreased, as the case may
be, by the consodated secton 711(a) ad|ustment;
(13) The consodated secton 711(a) ad|ustment sha be the net
amount of the aggregate ad|ustments provded by secton 711(a)(1)
or 711(a) (2), as the case may be, computed and determned n the case
of each affated corporaton, e cept as otherwse provded n () of
ths secton, n the same manner and sub|ect to the same condtons as
f a separate return were fed, but wthout regard to the ad|ustments
provded for n secton 711(a)(1)( ) or 711(a)(2)(D) on account
of the e cess of gans over osses from certan saes or e changes of
deprecabe property and secton 711(a)(1)(F) or 711(a)(2)( ) on
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account of dvdends receved, ncreased or decreased, as the case may
be, by the sum of
() The e cess of the aggregate gans of the severa corpora-
tons from saes or e changes of property hed for more than
18 months sub|ect to the aowance for deprecaton provded n
secton 2-3(1) over the aggregate osses of the severa corporatons
from saes or e changes of such property, and
() The e cess of the aggregate amount of the dvdends re-
ceved by the severa corporatons of the cass wth respect to
whch ad|ustment s provded for n secton 711(a)(1)(F) or
711 (a) (2) ( ), as the case may be, over the consodated credt for
dvdends receved;
(1 ) The consodated ad|usted e cess profts net ncome sha be
the consodated e cess profts net ncome mnus the sum of
() specfc e empton of 5,000.
() The consodated e cess profts credt, and
() The consodated e cess profts credt cany-over;
(15) The consodated e cess profts credt sha be
() The consodated e cess profts credt based on nvested
capta, or
() In the case of an affated group one or more of the mem-
bers of whch woud have been entted n a separate return to an
e cess profts credt based on ncome, and sub|ect to the provsons
of secton 712(c), ether the consodated e cess profts credt
based on ncome or the consodated e cess profts.credt based
on nvested capta, whchever resuts n the esser ta ;
(16) The consodated e cess profts credt based on nvested cnpta
sha be 8 percent of the consodated nvested capta for the ta abe
year;
(17) The consodated nvested capta for the ta abe year sha be
the consodated average nvested capta for such year reduced by
the consodated nadmssbe asset ad|ustment;
(18) The consodated average nvested capta for the ta abe year
sha be the sum of
() The combned average nvested capta for the ta abe year
of the severa affated corporatons computed n the case of each
corporaton wthout ncudng any accumuated earnngs and
profts, and
() The consodated accumuated earnngs and profts as of
the begnnng of such ta abe year;
(19) The consodated nadmssbe asset ad|ustment sha be an
amount whch bears the same rato to the consodated average n-
vested capta as the aggregate nadmssbe assets of the severa
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affated corporatons bear to the aggregate admssbe and nad-
mssbe assets of such corporatons;
(20) The consodated accumuated earnngs and profts as of the
begnnng of the ta abe year sha be an amount equa to the e cess
of the combned accumuated earnngs and profts as of the begnnng
of such year of the severa affated corporatons havng accumuated
earnngs and profts over the combned defct n accumuated earnngs
ard profts as of the begnnng of such year of the severa affated
corporatons havng such defcts;
(21) The consodated e cess profts credt based on ncome sha
be
() 95 percent of the consodated average base perod net
ncome,
() Pus 8 percent of the consodated net capta addton, or
() Mnus 6 percent of the consodated net capta reducton;
(22) The consodated average base perod net ncome sha be,
whchever s the greater
() n amount whch bears the same rato to the e cess of the
aggregate of the consodated base perod e cess profts net ncome
for each of the consodated base |)erod years over the aggregate
of the consodated base perod defcts n e cess profts net ncome
for any of such years, e cudng the greatest, whch 12 bears to
the tota number of months n the consodated base perod, or
() n amount whch bears the same rato to the e cess of the
aggregate consodated e cess profts net ncome for each of the
ta abe years n the second haf of the consodated base perod
over the aggregate of any consodated defcts n e cess profts
net ncome n such second haf, pus one-haf of the amount, f any,
by whch such e cess n the second haf of the consodated base
perod e ceeds such e cess n the frst haf of such perod, whch
12 bears to the tota number of months n the second haf of
the consodated base perod, but n an amount not greater than
the hghest consodated e cess profts net ncome (paced on an
annua bass, when necessary) for any ta abe year n the conso-
dated base perod.
(2:5) For the purpose of (a)(22)() of ths secton, the conso-
dated e cess profts net ncome for any consodated base perod year
endng after May 31, 11) 0, sha be an amount not greater than the
sum of
() n amount whch bears the same rato to the consodated
e cess profts net ncome for such year as the number of months
before une 1, 19 0, bears to the tota number of months n such
ta abe year, pus
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() n amount whch bears the same rato to the consodated
e cess profts net ncome for the ast precedng ta abe year as
the number of months after May 31,19 0, n the ta abe year bears
to the number of months n such precedng ta abe year, but not
n e cess of the consodated e cess profts net ncome for such ast
precedng ta abe year.
() If the number of months n such ast precedng ta abe
year s ess than the number of months after May 31, 19 0, there
sha be added to the amount ascertaned under () an amount
whch bears the same rato to the consodated e cess profts net
ncome for the second precedng ta abe year as the e cess of such
number of months after May 31, 19 0, over the number of months
n such precedng ta abe year, bears to the number of months
n such second precedng ta abe year.
(2 ) The consodated base perod e cess profts net ncome for a
consodated base perod year sha be an amount equa to the combned
base perod e cess profts net ncome for such year of the affated
corporatons whch woud have been entted n separate returns to an
e cess profts credt based on ncome, reduced by the sum of the defcts
n e cess profts net ncome for such year, n the case of any such
corporatons;
(25) The consodated base perod defct n e cess profts net ncome
for a consodated base perod year sha be an amount equa to the
aggregate of the defcts for such year, n the case of the affated
corporatons whch woud have been entted n separate returns to an
e cess profts credt based on ncome reduced by the combned base
perod e cess profts net ncome of any such corporatons for such
year;
(26) The consodated base perod years sha be, as the case may be
() The base perod years of the common parent corporaton
f such common parent corporaton woud have been entted n
a separate return to an e cess profts credt based on ncome, or
() The four successve 12-month perods begnnng on the date
n 1936 correspondng to the date on whch begns the frst ta abe
year for whch a consodated return s fed f the common parent
corporaton woud not be entted separatey to an e cess profts
credt based on ncome;
(27) The consodated net capta addton for the ta abe year sha
be the e cess, dvded by the number of days n the ta abe year, of
the aggregate of the consodated day capta addton for each day
of the ta abe year over the aggregate of the consodated day capta
reducton for each day of the ta abe year;
(28) The consodated net capta reducton for the ta abe year
sha be the e cess, dvded by the number of days n the ta abe year,
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of the aggregate of the consodated day capta reducton for each
day of the ta abe year over the aggregate of the consodated day
capta addton for each day of the ta abe year;
(29) The consodated day capta addton for any day of the ta -
abe year sha be the combned day capta addtons of the severa
affated corporatons for such day, computed wthout regard to the
ad|ustment for e cuded capta, reduced by the e cess, f any, of the
combned e cuded capta of the severa corporatons for such day over
the combned e cuded capta of the severa corporatons for the frst
day foowng the cose of the ast consodated base perod year;
(30) The consodated day capta reducton for any day of the
ta abe year sha be the combned day capta reductons of the sev-
era affated corporatons for such day;
(31) The consodated e cess profts credt carry-over sha be the
um of
() The consodated unused e cess profts credt for the frst
precedng ta abe year,
() The consodated unused e cess profts credt for the sec-
ond precedng ta abe year reduced by the amount, f any, by
whch the consodated e cess profts net ncome for the frst pre-
cedng ta abe year e ceeds the sum of ( ) the consodated e -
cess profts credt for such frst precedng ta abe year pus ( )
the consodated unused e cess profts credt for the thrd preced-
ng ta abe year,
and, wth respect to the unused e cess profts credt of a corporaton
for ta abe years pror to the frst ta abe year n respect of whch ts
ncome s ncuded n the consodated return
() The unused e cess profts credt, f any, of such corpora-
ton for the frst precedng ta abe year, and
(v) The unused e cess profts credt, f any, of such corpora-
ton for the second precedng ta abe year reduced by
( ) The e cess, f any, of the e cess profts net ncome of
such corporaton for the frst precedng ta abe year over
the sum of the e cess profts credt of such corporaton for
the frst precedng ta abe year and the unused e cess profts
credt of such corporaton for the thrd precedng ta abe
year, or
( ) If the ncome of such corporaton s ncuded n the
consodated return for the frst precedng ta abe year, the
esser of the amount of such e cess or the e cess, f any, of the
consodated e cess profts net ncome for the frst precedng
ta abe year over the sum of the consodated e cess profts
credt for the frst precedng ta abe year and the unused
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e cess profts credt of such corporaton for the thrd pre-
cedng ta abe year.
(32) The consodated unused e cess profts credt sha be the
e cess of the consodated e cess profts credt for any ta abe year
begnnng after December 31,1939, over the consodated e cess profts
net ncome for such ta abe year, computed on the bass of the e cess
profts credt appcabe to such ta abe year.
(33) The hghest bracket amount of the affated group sha be
500,000 or the combned hghest bracket amounts of the severa aff-
ated corporatons, whchever s the smaer.
(b) Com put at ons.
(1) The net ncome of the severa affated corporatons sha be
computed n accordance wth the provsons coverng the determnaton
of net ncome of separate corporatons, e cept
() There sha be emnated unreazed profts and osses n
transactons between members of the affated group and dv-
dend dstrbutons from one member of the group to another mem-
ber of the group (referred to n these reguatons as ntercompany
transactons),
() No net operatng oss deducton sha be taken nto account,
and
() No capta gans or osses sha be taken nto account.
Intercompany profts and osses whch have een reazed by the group
through fna transactons wth persons other than members of the
group, and ntercompany transactons whch do not affect the con-
sodated ta abe net ncome, sha not be emnated. s used n ths
paragraph, the term net ncome ncudes the case n whch the aow-
abe deductons of a member (not ncudng any net operatng oss
deducton) e ceed ts gross ncome.
(2) For a ta abe year for whch a consodated return s made or
s requred, the dvdends receved of the cass wth respect to whch
credt s aowed by secton 26(b), the nterest receved of the cass
wth respect to whch credt s aowed by secton 26(a), the short-
term capta gans and osses and the ong-term capta gans and osses
as defned n secton 117(a), the net operatng oss as defned n secton
122(a), the average nvested capta for the ta abe year, the accumu-
ated earnngs and profts or defct n accumuated earnngs and prof-
ts as of the begnnng of the ta abe year, the admssbe and nadms-
sbe assets, the base perod e cess profts net ncome, the defct n
e cess profts net ncome for a base perod year, the day capta add-
ton for any day of the ta abe year, the day capta reducton for
any day of the ta abe year, the e cuded capta wthn the meanng
of secton 713(g) (3), and the hghest bracket amount sha be com-
puted and determned n the case of each affated corporaton n the
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same manner and sub|ect to the same condtons as f a separate return
were fed, e cept
() In the computaton of the dvdends receved, there sha
be e cuded a dvdends receved from other members of the
affated group;
() In the computaton of short-term capta gans and osses
and ong-term capta gans and osses, there sha be emnated
any gans or osses arsng n ntercompany transactons;
() In the computaton of the net operatng oss, the pro-
vsons of ths secton pertanng to the determnaton of net n-
come sha appy;
(v) In the computaton of average nvested capta (whch,
under ths secton, may be a mnus amount), the foowng ad-
|ustments sha be made
( ) There sha be e cuded any accumuated earnngs
and profts;
( ) There sha be e cuded from borrowed capta the
amount of any outstandng ndebtedness of the corporaton
owng to another member of the affated group;
(C) Intercompany dstrbutons made durng the ta abe
year sha be dsregarded;
(D) Money or property pad n for stock, or as pad-n
surpus, or as a contrbuton to capta, durng the ta abe
year by one member of the group to another member of the
group sha be dsregarded;
( ) Wth respect to the stock of another member of the
affated group hed wth a bass for determnng oss upon a
sae or e change f ed, drecty or ndrecty, by reference to
the bass of such stock n the hands of any precedng owner
(not ncudng a member of the group from whch such stock
was acqured durng a consodated ncome or e cess profts
ta return perod), there sha be subtracted from average n-
vested capta otherwse computed an amount equa to such
bass ad|usted pursuant to the provsons of secton 113, e cept
that no ad|ustment sha be made wth respect to
(aa) Transactons referred to n (C) and (D), and
(bb) Losses of the ssung corporaton subsequent to
the acquston of such stock whch osses were ncuded
n a consodated ncome or e cess profts ta return;
(F) In the case of a subsdary the stock of whch s hed
by another member of the affated group wth a bass for
determnng oss upon a sae or e change not f ed, ether
drecty or ndrecty, by reference to the bass of such stock
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9
n the hands of any precedng owner (not ncudng a mem-
ber of the group from whch such stock was acqured durng
a consodated ncome or e cess profts ta return perod),
there sha be e cuded as of the date on whch such subsdary
became a member of the affated group wthn the meanng
of secton 730(d) that porton of ts average nvested capta
attrbutabe to. the shares of stock so hed; there sha aso
be e cuded, as of the date of any subsequent acquston, that
porton of ts average nvested capta attrbutabe to shares
of stock smary acqured and hed by other members of
the affated group; no addton sha be made on account of
money or property thereafter pad n for stock by any other
member of the group or as pad-n surpus or a contrbuton
to capta pad n wth respect to shares of stock sub|ect
to the provsons of ths paragraph; and no reducton sha
be made on account of any dstrbuton thereafter made to
any other member of the group; stock of one member of the
group ndrecty acqured through the acquston of stock
of another member of the group sha, to the e tent the stock
of such other member s of the character descrbed n ths
paragraph, be deemed to be of the same character; thus, f
the P Corporaton acqures for cash a the stock of the S
Corporaton whch n turn owns a the stock of the S2 Cor-
poraton, the consodated average nvested capta of the
P-S S2 group w be the average nvested capta of the P
Corporaton (pus ts accumuated earnngs and profts and
any earnngs and profts accumuated by S1 and S2 after
acquston by P) regardess of the manner n whch S1 ac-
qured the stock of S2;
(G) Wth respect to dstrbutons made n a consodated
ncome or e cess profts ta return perod pror to the ta abe
year by one member of the group to another member of the
group, the average nvested capta of the dstrbutee sha not
be ncreased by any amount n e cess of the amount by whch
the average nvested capta of the dstrbutor or ts earnngs
and profts, accumuated before March 1,1913, were decreased;
( ) The average nvested capta of a corporaton whch
s a member of the affated group for ony a part of the ta -
abe year sha be ts aggregate day nvested capta com-
puted wth the ad|ustments set forth n ths secton for each
day of such ta abe year durng whch t s a member of the
group (e cudng the day on whch t became a member)
dvded by the number of days n the ta abe year of the
affated group;
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50
(v) In the computaton of accumuated earnngs and profts or
the defct n accumuated earnngs and profts as of the begnnng
of the ta abe year, the foowng ad|ustments sha be made
( ) In the case of a subsdary the stock of whch s hed,
by other members of the affated group wth a bass for deter-
mnng oss upon a sae or e change not f ed, ether drecty
or ndrecty, by reference to the bass of such stock n the
hands of any precedng owner (not ncudng a member of
the group from whch such stock was acqured durng a con-
sodated ncome or e cess profts ta return perod), there
sha be e cuded as of the date on whch such subsdary
became a member of the group wthn the meanng of secton
730(d) that porton of ts earnngs and profts or defct n
earnngs and profts prevousy accumuated and propery
aocabe to the shares of stock so hed; there sha be e cuded
as of the date of any subsequent acquston any earnngs and
profts or defct n earnngs and profts prevousy accu-
muated and propery aocabe to any shares of stock sm-
ary acqured and hed by another member of the group; and
stock of one member of the group ndrecty acqured through
the acquston of stock of another member of the group sha,
to the e tent the stock of such other member s of the char-
acter descrbed n ths paragraph, be deemed to be of the same
character;
( ) There sha be e cuded profts and osses unreazed
by the affated group refected n the openng nventory of
the ta abe year, whether or not a consodated return was
fed for the precedng ta abe years, together wth a other
unreazed profts and osses refected n transactons between
members of the affated group n pror ta abe years for
whch a return was made or was requred on a consodated
bass, ether under the Second Revenue ct of 19 0 or under
pror ncome or e cess profts ta cts;
(C) No reducton sha be made wth respect to any nter-
company dstrbutons made durng the ta abe year;
(D) Wth respect to dstrbutons n stock, as defned by
secton 718(c)(1), made pror to the ta abe year by one
member of the affated group to another member of the
group, the accumuated earnngs and profts of the dstrbutee
sha not be ncreased n any amount n e cess of that by
whch the sum of the average nvested capta and the accumu-
ated earnngs and profts of the dstrbutor s decreased;
( ) Wth respect to dstrbutons made n a pror ta abe
year for whch a return was made or was requred on a con-
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51
sodated bass, ether under the Second Revenue ct of 10 0
or under pror ncome or e cess profts ta cts, by one
member of the group to another member of the group, the
accumuated earnngs and profts of the dstrbutee ha
not be ncreased by any amount n e cess of the amount by
whch ether the average nvested capta or the earnngs
and profts of the dstrbutor were decreased;
(F) If the nvested capta of the affated group s com-
puted pursuant to the provsons of (b)(v)(F) of ths sec-
ton, proper ad|ustment sha be made wth respect to the
amount of any reazatons pror to the begnnng of the
ta abe year upon any unreazed apprecaton or depreca-
ton n assets prevousy refected n consodated average
nvested capta;
(G) In the case of a corporaton whch s a member of the
affated group for ony a part of the ta abe year, the accu-
muated earnngs and profts or the defct n accumuated
earnngs and profts as of the begnnng of the ta abe year
sha be an amount equa to ts accumuated earnngs and
profts or ts defct n accumuated earnngs and profts as of
the begnnng of the ta abe year of the group or the begn-
nng of the day foowng the day on whch t becomes a
member of the group, as the case may be, mutped by the
number of days of such year durng whch t s a member of
the group (e cudng the day on whch t becomes a member)
and dvded by the tota number of days n such year;
(v) In the computaton of admssbe and nadmssbe
assets
( ) There sha be e cuded a ntercompany tems,
( ) Inventores sha be computed pursuant to the prov-
sons of secton 33.39, and
(C) Proper ad|ustment sha be made wth respect to any
unreazed apprecaton and deprecaton n assets refected
n consodated average nvested capta;
(v) In computng base perod e cess profts net ncome or
the defct n e cess profts net ncome for a base perod year n
the case of any affated corporaton whch woud have been
entted n a separate return to an e cess profts credt based on
ncome
( ) The base perod years of such corporaton sha be
the same as the consodated base perod years;
( ) If two or more members of the affated group (n-
cudng any component corporaton of any such member as
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52
defned n secton 7 0 (b) and (g)) -were affated wth each
other durng any of the base perod years wthn the meanng
of secton 730, whether or not consodated ncome ta returns
were fed for such years, there sha be e cuded ntercompany
profts and osses resutng from transactons between such
corporatons for such years to the e tent that such profts and
osses woud otherwse be taken nto account;
(C) The short-term capta gans reazed and short-term
capta osses sustaned by the severa affated corporatons
durng any of the base perod years sha be treated as the
short-term capta gans or osses of the group as a snge cor-
poraton, and, for the purpose of computng, n the case of
the severa corporatons, the net short-term capta oss carry-
over to the succeedng base perod year, any net short-term
capta oss of the group for the year computed pursuant to
the provsons of ths paragraph sha be aocated to the sev-
era corporatons havng net short-term capta osses for such
year n amounts proportonate to such net osses;
(D) In the computaton under secton 713(d) (2), reatng
to that porton of the base perod durng whch the corpora-
ton was not n e stence
(aa) There sha be e cuded that porton of the day
nvested capta of the corporaton for the frst day fo-
owng the cose of the ast consodated base perod year
whch was pad to t by another member of the affated
group, and
(bb) The term precedng ta abe year means the ast
consodated base perod year;
( ) The amount to be e cuded under secton 711(b) (1)
( ) on account of an e cess of gans from the sae or e -
change of property hed for more than 18 months sub|ect
to the aowance for deprecaton provded n secton 23(1)
over osses from such saes or e changes sha be an amount
whch bears the same rato to the e cess of the aggregate of
such gans over the aggregate of such osses of the severa
affated corporatons as the e cess of such gans over such
osses of the partcuar corporaton bears to the sum of such
e cesses of the severa members of the group havng such an
e cess;
(F) The amount of the ad|ustment under secton 711(b)
(1) (F) reatng to repayment of processng ta es to vendees
sha be computed wthout regard to any repayment or credt
to another member of the affated group;
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(G) In the case of a corporaton whch s a member of the
affated group for ony a part of the ta abe year, the amount
to be ncuded wth respect to each base perod year sha be
mted to an amount whch bears the same rato to ts base
perod e cess profts net ncome or the defct n e cess profts
net ncome for such year, as the case may be, as the number of
days of the ta abe year durng whch t was a member of the
group (e cudng the day on whch t becomes a member)
bears to the tota number of days n the ta abe year;
(v) In computng the day capta addton or the day
capta reducton for any day of the ta abe year
( ) There sha be ncuded capta addtons and reduc-
tons made after, but not before, the cose of the ast conso-
dated base perod year wth respect to
(aa) ffated corporatons whch woud have been
entted n a separate return to an e cess profts credt
based on ncome, and
(bb) Subsdary corporatons the stock of whch was
acqured by other members of the affated group n a
transacton not nvovng the ssuance of stock by such
other members;
( ) There sha be ncuded capta addtons and reduc-
tons made after December 31,1939, wth respect to a other
affated corporatons;
(C) No ad|ustment sha be made wth respect to e cuded
capta;
(D) No addton sha be made for money or property pad
n for stock, or as pad-n surpus, or as a contrbuton to
capta by one member of the affated group to another mem-
ber of the group whether or not a consodated return was
fed for the year of the transacton;
( ) No reducton sha be made wth respect to dstrbu-
tons made to other members of the affated group whether
or not a consodated return was fed for the year of the
dstrbuton;
( ) In computng e cuded capta for the purpose of secton
713(g)(3)-
( ) No ncrease or decrease sha be made by reason of
transactons between members of the affated group occurrng
subsequent to the cose of the ast consodated base perod
year, whether or not a consodated return was fed for the
year of the transacton, and
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( ) The ad|usted bass of stock of any members of the
group hed by other members of the group sha be deter-
mned wthout takng nto account any ad|ustment wth re-
spect to osses of the ssung corporaton subsequent to the
acquston of such stock whch osses were ncuded n a con-
sodated ncome or e cess profts ta return;
(3) In no case sha there be ncuded n the consodated net operat-
ng oss carry-over under (a)(6) () and (v) of ths secton (reatng
to net operatng osses sustaned by a corporaton n years pror to the
frst ta abe year n respect of whch ts ncome s ncuded n the con-
sodated return) an amount n e cess of the net ncome of such corpo-
raton (computed wth the e ceptons and mtatons provded n
secton 122(d)) ncuded n the computaton of the consodated net
ncome for the ta abe year ncreased by the separate net short-term and
ong-term capta gans of such corporaton.
( ) If a porton of the consodated net operatng oss carry-over
arses pursuant to the provsons of (a) (6) () or (v) of ths secton
(reatng to osses sustaned by a corporaton pror to the frst ta abe
year n respect of whch ts ncome s ncuded n the consodated
return), the consodated net operatng oss deducton sha not be ess
than the amount of such porton reduced by the amount, f any, by
whch the net ncome of such corporaton (computed wth the e cep-
tons and mtatons provded n secton 122(d)) e ceeds the norma-
ta net ncome of such corporaton (computed wthout any net operat-
ng oss deducton but takng nto account any net ong-term capta
oss), or, n the case of two or more such corporatons, the sum of such
portons so reduced.
(5) If, n the computaton of the consodated net operatng oss
carry-over for the second consodated return perod n respect of
whch the ncome of a corporaton s ncuded n the consodated
returns of the group, there s nvoved the net operatng oss separatey
sustaned by such corporaton for the second precedng ta abe year
together wth a consodated net operatng oss for the second precedng
ta abe year, or f, for the second consodated return perod n re-
spect of whch the ncome of two or more members of the affated
group s ncuded n the consodated returns of the group, there are
nvoved the net operatng osses separatey sustaned by such cor-
poratons for the second precedng ta abe year, no porton of the
consodated net ncome for the frst precedng ta abe year sha be
taken nto account more than once n gvng effect to the provsons of
(a)(6) () and (v) of ths secton (reatng to the computaton of
that part of the consodated net operatng oss carry-over attrbutabe
to osses of the second precedng ta abe year).
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(6) In no case sha there be ncuded n the consodated e cess
profts credt carry-over for any ta abe year under (a) (31) () and
(v) of ths secton wth respect to the unused e cess profts credt of a
corporaton for years pror to the frst ta abe year n respect of whch
ts ncome s ncuded n the consodated return an amount n e cess
of the porton thereof whch coud have been avaed of by such cor-
poraton as an e cess profts credt carry-over f a separate return had
been fed for such ta abe year.
(7) If, n the computaton of the consodated e cess profts credt
carry-over for the second consodated return perod n respect of
whch the ncome of a corporaton s ncuded n the consodated re-
turns of the group, there s nvoved the separate unused e cess profts
credt of swch corporaton for the second precedng ta abe year to-
gether wth a consodated unused e cess profts credt for the second
precedng ta abe year, or f, for the second consodated return perod
n respect of whch the ncome of two or more members of the aff-
ated group s ncuded n the consodated returns of the group, there
are nvoved the separate unused e cess profts credts of such corpora-
tons for the second precedng ta abe year, no porton of the e cess
of the consodated e cess profts net ncome over the consodated e -
cess profts credt for the frst precedng ta abe year sha be taken
nto account more than once n gvng effect to the provsons of
(a) (31) () and (v) of ths secton (reatng to the computaton of
that part of the consodated e cess profts credt carry-over attrbut-
abe to unused e cess profts credts of the second precedng ta abe
year).
(8) If an nsurance company ta abe under secton 20 s ncuded
n a consodated return wth other corporatons ta abe under secton
13 or 1 and f, n the computaton of the nvested capta of such com-
pany, there are ncuded any unearned premum reserves, the porton of
the consodated e cess profts credt based on nvested capta whch s
attrbutabe to such unearned premum reserves sha not be greater
than the e cess, f any, of the porton of the consodated e cess profts
net ncome attrbutabe to such company over the porton of the con-
sodated e cess profts credt attrbutabe to such company computed
wthout the ncuson n nvested capta of such reserves. The porton
of the consodated e cess profts credt attrbutabe to unearned pre-
mum reserves sha be the e cess of such credt computed wth the
ncuson of such reserves n nvested capta over such credt com-
puted wthout the ncuson of such reserves. The porton of the con-
sodated e cess profts net ncome attrbutabe to such company sha
be the e cess of such net ncome computed wth the ncuson of such
company n the consodated return over such net ncome computed
wthout the ncuson of such company. The porton of the conso-
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56
dated e cess profts credt attrbutabe to such company computed
wthout the ncuson of unearned premum reserves sha be the e cess
of such credt computed wth the ncuson of such company wthout
such reserves n nvested capta over such credt computed wthout
the ncuson of such company. Wth respect to any amount e cuded
from the consodated e cess profts credt by vrtue of the provsons
of ths paragraph, there sha be aowed as a part of the consodated
e cess profts credt carry-over n subsequent ta abe years an amount
not n e cess of the porton of the consodated e cess profts net ncome
attrbutabe to such company n the subsequent ta abe year over the
porton of the consodated e cess profts credt attrbutabe to such
company n such subsequent year computed wth the ncuson of
unearned premum reserves. The porton of the consodated e cess
profts credt attrbutabe to such company computed wth the ncu-
son of unearned premum reserves sha be the e cess of such credt
computed wth the ncuson of such company n the consodated
return over such credt computed wthout the ncuson of such
company.
(c) Statements and Schedues for Subsdares.
The statement of gross ncome and deductons and the severa
schedues requred by the nstructons on the return must be prepared
and fed by the common parent corporaton n coumnar form so
that the detas of the tems of gross ncome, deductons, nvested
capta, and credts, for each member of the affated group may be
ready audted. Such statements and schedues sha ncude n
coumnar form a reconcaton of surpus for each such corporaton,
together wth a reconcaton of the consodated surpus. Conso-
dated baance sheets as of the begnnng and cose of the ta abe year
of the group, taken from the books of the members of the group, sha
accompany the consodated return prepared n a form smar to
that requred for reconcaton of surpus.
(d) Net Operatng Loss Deducton fter Consodated Return
Perod.
consodated net operatng oss sustaned by an affated group
durng any consodated return perod of the group sha be used n com-
putng the net ncome n the return of the common parent corporaton
(or n the consodated return of another affated group of whch
such common parent becomes a member) for a ta abe year subse-
quent to the ast consodated return perod of the group n the
same manner, to the same e tent, upon the same condtons, and sub-
|ect to the same mtatons as f the group had been a snge corpora-
ton (the common parent corporaton) when such oss was sustaned;
but no net operatng oss sustaned durng a consodated return perod
of an affated group sha be used n computng the net ncome of a
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57
subsdary (or the consodated net ncome of another affated group
of whch such subsdary becomes a member) for any ta abe year
subsequent to the ast consodated return perod of the group. No
part of any net operatng oss sustaned by a corporaton pror to a
consodated return perod of an affated group of whch such corpo-
raton becomes a subsdary sha be used n computng the net ncome
of such corporaton for any ta abe year subsequent to the conso-
dated return perod, but any part of such net operatng oss whch,
e cept for ths restrcton, mght be so used, sha be treated as havng
been sustaned by the common parent corporaton of the group.
(e) U nused cess Profts Credt fter Consodated Return Perod.
The e cess of the consodated e cess profts credt for the ta abe
year of an affated group over the consodated e cess profts net
ncome for such year sha be used n computng the ad|usted e cess
profts net ncome of the common parent corporaton (or the con-
sodated ad|usted e cess profts net ncome of another affated group
of whch such common parent becomes a member) for a ta abe year
subsequent to the ast consodated return perod of the group n the
same manner, to the same e tent, upon the same condtons, and sub|ect
to the same mtatons as f the group had been a snge corporaton
(the common parent corporaton) when such e cess arose; but no
unused e cess profts credt for a consodated return perod of an
affated group sha be used n computng the ad|usted e cess profts
net ncome of a subsdary (or the consodated ad|usted e cess profts
net ncome of another affated group of whch such subsdary be-
comes a member) for any ta abe year subsequent to the ast con-
sodated return perod of the group.
(/) Ta abe Year of Less Than 12 Months.
ny perod of ess than 12 months for whch ether a separate
return or a consodated return s fed, under the provsons of secton
33.13, sha be consdered as a ta abe year, and the e cess profts net
ncome or the consodated e cess profts net ncome for such year, as
the case may be, sha be paced on an annua bass pursuant to the
provsons of secton 711(a)(3).
Sec. 33.32 Method of Computaton of Income for Perod of Less Than 12
Months.
If a corporaton, durng the ta abe year of the group, becomes a
member or ceases to be a member of an affated group whch makes or
s requred to make a consodated return for such year, the ncome
of such corporaton to be ncuded n the consodated return sha be
computed on the bass of ts ncome as shown by ts books f the ac-
counts are so kept that the ncome for the perod durng whch t s
a member of the group can be ceary and accuratey determned. If the
0 3 1 1 3
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58
accounts are not so kept, the ncome to be ncuded n the consodated
return sha be computed on the bass of that proporton of ts ncome
(sub|ect to the emnaton of tems e empt from ta aton and the add-
ton of tems not aowabe as deductons n computng e cess profts
net ncome) for the fu perod covered by ts books whch the number
of days for whch ts ncome s ncuded n the consodated return bears
to the number of days n the fu perod covered by ts books; but n
the dscreton of the Commssoner there may be emnated before
the proraton s made tems of ncome or deducton ceary and accu-
ratey determned to be attrbutabe to partcuar perods, and, after
the proraton s made, such emnated tems w be added to (f tems
of ncome) or deducted from (f deductbe tems) the ncome deter-
mned by proraton for the perod to whch such tems are appcabe.
The credts aowabe under secton 13 of the Code as amended sha be
gven for the perod to whch they are propery appcabe under the
facts n the case.
Sec. 33.33 Gan or Loss Prom Sae of Stock or onds.
Gan or oss from the sae or other dsposton (whether or not
durng a consodated return perod), by a corporaton whch durng
any perod of tme (ncuded n a ta abe year begnnng after Decem-
ber 31, 1939) has been a member of an affated group whch makes
or s requred to make a consodated return, of any share of stock or
any bond or obgaton ssued by another corporaton whch durng
any part of such perod was a member of the same group, sha be
determned, and the e tent to whch such gan or oss sha be recog-
nzed and sha be taken nto account sha aso be determned, n the
same manner, to the same e tent, and upon the same condtons as
though such corporatons had never been affated (see sectons 111
to 115, ncusve, and secton 117, and the reguatons thereunder),
e cept
(a) In the case of a dsposton (by sae, dssouton, or otherwse)
durng a consodated return perod to another member of the group
(see sectons 33.31 and 33.37); and
(6) That the bass for determnng the gan or oss, n the case of
shares of stock hed durng any part of a consodated return perod,
sha be determned n accordance wth secton 33.3 ; and
(c) s provded n sectons 33.35 and 33.36 (mposng certan mta-
tons upon osses otherwse aowabe upon saes of stock or bonds).
Sec. 33.3 Sae of Stock ass for Deternunng Gan or Loss.
(a) Scope of Secton.
For the purpose of computng e cess profts net ncome, ths secton
prescrbes the bass for determnng the gan or oss upon any sae
or other dsposton (herenafter referred to as sae ) by a corpora-
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59
ton whch s (or has been) a member of an affated group whch
makes (or has made) a consodated ncome or e cess profts ta return
for the ta abe year 1929 or any subsequent ta abe year, of any share
of stock ssued by another member of such group (whether ssued
before or durng the perod that t was a member of the group and
whether ssued before, durng, or after the ta abe year 1929), and
hed by the seng corporaton durng any part of a perod for whch
a consodated return s made or requred under these reguatons.
For the bass n the case of saes whch do not break the affaton,
see paragraph (6).
For the bass n the case of saes whch break the affaton and
whch are made wthn the perod durng whch the seng corpora-
ton s a member of the affated group (whether or not durng a con-
sodated return perod), see paragraph (e).
For the bass n the case of saes made after the seng corporaton
has ceased to be a member of the affated group, see paragraph (d).
For the bass n the case of saes of bonds, see secton 33.35.
(6) Saes Whch Do Not reak ffaton.
If, notwthstandng any such sae, the ssung corporaton remans
a member of the affated group, the bass sha be determned and
ad|usted n the same manner as f the seng corporaton and the
ssung corporaton had never been members of an affated group.
ut see secton 33.38(5).
(c) Saes Whch reak ffaton Made Whe Seng Corporaton
u Member of ffated Group.
If the sae s made wthn a perod durng whch the seng corpo-
raton s a member of the affated group (whether or not durng a
consodated return perod), and f, as a resut of such sae, the ssung
corporaton ceases to be a member of the group, the bass sha be
determned as foows:
(1) The aggregate bases of a shares of stock of the ssung corpo-
raton hed by each member of the affated group (e cusve of the
ssung corporaton) mmedatey pror to the sae sha be determned
separatey for each member of the group and ad|usted n accordance
wth the Code, but wthout regard to any ad|ustment under the ast
sentence of secton 113(a) (11) wth respect to osses of the ssung
corporaton sustaned by such corporaton after t became a member
of the affated group and ncuded n a consodated ncome or e cess
profts ta return of the group.
(2) From the combned aggregate bases as determned n subpara-
graph (1) there sha be deducted the sum of
() osses of such ssung corporaton sustaned durng ta -
abe years for whch consodated ncome ta returns were made
or were requred (ncudng ony the ta abe year 1929 and subse-
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60
quent ta abe years) after such corporaton became a member of
the affated group and pror to the sae of the stock to the e tent
that such osses coud not have been avaed of by such corporaton
as a net oss or net operatng oss n computng ts net ncome for
such ta abe years f t had made a separate return for each of such
years,
() Wth respect to each of such ta abe years for whch con-
sodated returns were made or were requred both for ncome and
for e cess profts ta purposes, the e cess, f any, of a osses of
such ssung corporaton for such year, propery ad|usted n the
computaton of consodated e cess profts net ncome, over the
amount of such osses for such year computed under () to the
e tent that such e cess coud not have been avaed of by such
corporaton as a net operatng oss n computng ts e cess profts
net ncome for such ta abe years f t had made a separate e cess
profts ta return for each of such years, and
() Wth respect to each of such ta abe years for whch con-
sodated returns were made or were requred for e cess profts ta
purposes ony, a osses of such ssung corporaton for such
year, propery ad|usted n the computaton of consodated e cess
profts net ncome, to the e tent that such osses coud not have
been avaed of by such corporaton as a net operatng oss n
computng ts e cess profts net ncome for such ta abe years f t
had made a separate e cess profts ta return for each of such
years.
For any ta abe year (whether begnnng pror to anuary 1, 19 0, or
on or after such date) n whch the group sustaned a consodated oss
not avaed of n subsequent years as a deducton under net oss or net
operatng oss provsons, the amount deducted under ths paragraph
sha be reduced by an amount equa to that proporton of such con-
sodated oss whch the oss of the ssung corporaton for the year n
whch such oss was sustaned bears to the aggregate osses of the
members of the group for such year.
(3) The sum of the aggregate bases of a shares of stock, after
makng the deducton under subparagraph (2), sha then be appor-
toned among the members of the affated group whch hed stock of
the ssung corporaton, by aocatng to each such member that propor-
ton of the sum of the aggregate bases so reduced whch the aggregate
bass of the stock n the ssung corporaton hed by such member bears
to the sum of the aggregate bases.
( ) The aggregate bass as determned under subparagraph (3) for
each member of the affated group sha then be equtaby appor-
toned among the severa casses of stock of the ssung corporaton
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hed by such member accordng to the crcumstances of the case
ordnary by aocatng to each cass of such stock that proporton of
the aggregate bass whch the bass of each cass of such stock hed by
t at the tme of the sae s to the sum of the bases of the severa casses
of such stock hed by t.
(5) The bass of each share of stock of each cass hed by a member
of the affated group sha then be determned by dvdng the bass
apportoned to such cass under subparagraph ( ) by the tota number
of shares of such cass hed by t.
(d) Saes fter Seng Corporaton as Ceased to e Member of
ffated Group.
If the sae s made after the seng corporaton has ceased to be a
member of the affated group, such bass sha be determned n ac-
cordance wth paragraph (c) of ths secton, e cept that
(1) The aggregate bases (under paragraph (c) (1)) sha be deter-
mned for a shares of the ssung corporaton hed by each member
of the group mmedatey pror to the tme the seng corporaton
ceased to be a member of the group (rather than mmedatey pror to
the sae);
(2) The aocatons (under paragraph (c)(3)) sha be made to
each member of the group whch hed stock of the ssung corpora-
ton mmedatey pror to the tme the seng corporaton ceased to be
a member of the group (rather than to the members hodng such
stock at the tme of the sae); and
(3) The bass of each share of stock hed by the seng corporaton
(determned, as above, as of the tme the seng corporaton ceased to
be a member of the group) sha then be ad|usted n accordance wth
the Code (see, partcuary, sectons 111 to 115, ncusve), n order to
determne the bass at the tme of the sae.
(e) Defnton of Loss, Consodated Z ws, and N-et Loss or
Net Operatng Loss.
s used n ths secton the term oss means the e cess over the
gross ncome of the ssung corporaton of the sum of ts aowabe
deductons (not ncudng any net oss or net operatng oss deduc-
ton) pus the proportonate part propery attrbutabe to such cor-
poraton of the credts reatng to nterest on certan Government
obgatons and dvdends receved aowabe n computng conso-
dated norma-ta net ncome, the consodated speca cass net ncome,
or consodated net ncome sub|ect to ta ; the term consodated oss
means the e cess of the sum of the osses, separatey computed, over
the sum of the norma-ta net ncome, the speca cass net ncome, or
the net ncome sub|ect to ta , separatey computed, of the severa
members of the affated group, determned n accordance wth the
provsons of the Code, or the Revenue ct, and pursuant to the pro-
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vsons of consodated returns reguatons, appcabe to the perod;
and the term net oss or net operatng oss means the net oss or
net operatng oss, as the case may be, determned n accordance wth
the provsons of the Code, or the Revenue ct, and pursuant to the
provsons of consodated returns reguatons, appcabe to the
perod.
Sec. 33.35 Sae of onds ass for Determnng Gan or Loss.
In the case of a sae or other dsposton by a corporaton, whch s
(or has been) a member of an affated group whch makes (or has
made) a consodated ncome or e cess profts ta return for the ta -
abe year 1929 or any subsequent ta abe year, of bonds or obgatons
ssued by another member of such group (whether or not ssued whe
t was a member of the group and whether ssued before, durng, or
after the ta abe year 1929), the bass of each bond or obgaton, for
determnng the gan or oss upon such sae or other dsposton, sha
be determned n accordance wth the Code (see, partcuary, secton
113), but the amount of any oss otherwse aowabe sha be decreased
by the e cess (f any) of the aggregate of the deductons computed
under paragraph (c) (2) of secton 33.3 over the sum of the aggre-
gate bases of the stock of the ssung corporaton as computed under
paragraph (c) (1) or (c ), as the case may be, hed by the members
of the group. (See, aso, secton 33. 0, reatng to dsaowance of oss
upon ntercompany bad debts.)
Sec. 33.36 Lmtaton on owabe Losses on Sae of Stock or onds.
(a) Genera Rue.
No oss sha be aowed under secton 33.33, 83.3 , or 33.35 upon the
sae or other dsposton of stock or bonds or obgatons to the e tent
that such oss s attrbutabe to (1) transfers of assets wthn the aff-
ated group (by sae, gft, or otherwse) wthout consderaton or at
markedy fcttous vaues, durng the perod n whch the corporatons
were affated (whether or not a consodated return was made and
whether before, durng, or after the frst ta abe year begnnng after
December 31, 1939), or (2) a dstrbuton durng a perod n whch
the corporatons were affated of earnngs or profts accumuated
pror to the date upon whch the dstrbutng corporaton became a
member of the group.
(b) uafcaton of Genera Rue.
Paragraph (a) of ths secton sha not be consdered as n any way
mtng the operaton of the provsons of the Code reatng to the
bass for determnng gan or oss upon the sae or other dsposton of
property (see sectons 111 to 115, ncusve), but as beng n ampfca-
ton of and not n substtuton for such provsons; sub|ect, however,
to ths quafcaton: that to the e tent that the transfers of assets re-
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ferred to n paragraph (a) are taken nto account under the terms of
the Code n makng ad|ustments n the bass, such transfers w not
be taken nto account n denyng osses under paragraph (a).
Sec. 33.37 Lqudatons Recognton of Gan or Loss.
(a) Durng Consodated Return Perod.
Gan or oss sha not be recognzed upon a dstrbuton durng a
consodated return perod, by a member of an affated group to an-
other member of such group, n canceaton or redempton of a or any
porton of ts stock, e cept
(1) Where such dstrbuton s n compete qudaton and redemp-
ton of a of the stock (whether n one dstrbuton or a seres), fas
wthout the provsons of secton 112(b)(6), and s the resut of a
bona fde termnaton of the busness and operatons of such member
of the group, n whch case t sha be treated as a sae of the stock, the
ad|ustments specfed n sectons 33.3 and 33.35 w be made, and
secton 33.36 w be appcabe; and
(2) Where such a dstrbuton wthout the provsons of secton
112(b) (6) s one made n cash n an amount n e cess of the ad|usted
bass of the stock.
When the busness and operatons of the qudated member of thn
affated group are contnued by another member of the group, t
sha not be consdered a bona fde termnaton of the busness and
operatons of the qudated member. (Wth respect to the acqu-
ston of ts bonds by the ssung company, see secton 33. 1(6).)
For the purpose of determnng whether an affated corporaton
recevng property n a qudatng dstrbuton quafes under the
provsons of secton 112(b)(6)( ), the aggregate amount of the
stock of the qudated corporaton owned by the severa members
of the affated group on the date of the adopton of the pan of qu-
daton and at a tmes subsequent thereto and pror to the recept of
the property n qudaton sha be consdered as owned by the
dstrbutee.
(b) fter Consodated Return Perod.
ny such dstrbuton after a consodated return perod, whether
n compete or parta qudaton, e cept a compete qudaton wthn
the provsons of secton 112(b)(6), sha be treated as a sae of the
stock, and the ad|ustments specfed n sectons 33.3 and 33.35 w
be made, and secton 33.36 w be appcabe.
Sec. 33.38 ass of Property.
(a) Genera Rue.
Sub|ect to the provsons of paragraphs (b) and (c) and e cept
as otherwse provded n secton 33.3 , the bass durng a consodated
return perod for determnng the gan or oss from the sae or other
dsposton of property, or upon whch e hauston, wear and tear,
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obsoescence, amortzaton, and depeton are to be aowed, sha be
determned and ad|usted n the same manner as f the corporatons
were not affated (see sectons 111 to 115, ncusve), whether sucb.
property was acqured before or durng a consodated return perod.
Such bass mmedatey after a consodated return perod (whether
the affaton has been broken or whether the prvege of makng a
consodated return s not e ercsed) sha be the same as mmedatey
pror to the cose of such perod.
(b) Intercompany Transactons.
The bass prescrbed n paragraph (a) sha not be affected by reason
of a transfer durng a consodated return perod, other than upon
qudaton as provded n (c) (whether by sae, gft, dvdend, or
otherwse), from a member of the affated group to another member
of such group.
(c) ass fter Lqudaton.
(1) Where property s acqured durng a ta abe year begnnng
after December 31, 1939, upon a dstrbuton descrbed n secton
33.37(a) n whch gan or oss s recognzed to the dstrbutee, the
bass of such property sha be ts far market vaue at date of
acquston.
(2) Where property s acqured durng a ta abe year begnnng
after December 31, 1939, upon a dstrbuton n whch gan or oss to
the dstrbutee s not recognzed pursuant to the provsons of secton
112(b) (6), the bass of such property sha be the same as t woud be
n the hands of the transferor.
(3) Where property s acqured durng a ta abe year begnnng
after December 31, 1939, upon a dstrbuton (not a compete qu-
daton wthn the provsons of secton 112(b)(6)) n whch gan or
oss to the dstrbutee s not recognzed as provded n secton 33.37(a),
the bass of such property sha be the same as the bass (determned n
accordance wth sectons 111 to 115, ncusve, and secton 33.3 ) of the
stock e changed therefor, ad|usted
() For the transfer of assets wthn the affated group by the
dstrbutng corporaton (by sae, gft, or otherwse) wthout
consderaton or at markedy fcttous vaues, durng the perod
for whch the corporatons were affated (whether or not a con-
sodated return was made and whether before, durng, or after
the frst ta abe year begnnng after December 31,1939);
() For dstrbutons durng a perod n whch the corporatons
were affated of earnngs or profts accumuated pror to the date
upon whch the dstrbutng corporaton became a member of the
group; and
() For cash receved n the dstrbuton.
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(d) azs Not ffected by cquston or Sae of Stock.
Nether the acquston of stock of a corporaton nor ts sae or other
dsposton sha affect the bass of the property of such corporaton
for determnng gan or oss or upon whch e hauston, wear and tear,
obsoescence, amortzaton, and depeton are to be aowed.
Sec. 33.39 Inventores.
(a) Consodated Return For Frst Tear of ffaton.
If the ncome of an affated corporaton s ncuded n a consodated
return for the perod mmedatey foowng the date upon whch such
corporaton became a member of the affated group, the vaue of ts
openng nventory to be used n computng the consodated net ncome
sha be the proper vaue of the cosng nventory used n computng
ts net ncome for the precedng ta abe year.
(b) Consodated Return fter Separate Return by ffates.
If a corporaton whch s a member of the affated group for the
frst consodated return perod was a member of the group n the
precedng ta abe year, the vaue of ts openng nventory to be used
n computng the consodated net ncome for the frst consodated
return perod sha be the proper vaue of the cosng nventory used
n computng ts net ncome for the precedng ta abe year decreased
n the amount of profts or ncreased n the amount of osses refected
n such nventory whch arose n transactons between members of
the affated group and whch have not been reazed by the group
through fna transactons wth persons other than members of the
group.
(c) Separate Returns Made fter Consodated Returns.
If a corporaton whch was a member of an affated group n a
consodated return perod makes or s requred to make a separate
return for the succeedng ta abe year, the vaue of ts openng nven-
tory to be used n computng ts net ncome for such succeedng ta -
abe year sha be the proper vaue of ts cosng nventory used n
computng consodated net ncome for the ast consodated return
perod.
(d) ase Perod Tears.
For each of the base perod years, proper ad|ustment wth respect
to unreazed profts or osses n transact ons between members of the
affated group (ncudng any component corporaton of any such
member as defned n secton 7 0 (b) and (g)) whch were affated
wth each other durng such year wthn the meanng of secton 730
sha be made n the openng and cosng nventores of each such
affated corporaton whch woud have been entted n a separate
return to an e cess profts credt based on ncome.
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Sec. 33. 0 ad Debts.
(a) Deducton Durng Consodated Return Perod.
No deducton sha be aowed durng a consodated return perod
to any member of the affated group on account of worthessness
n whoe or n part of any obgaton (ncudng accounts recevabe,
bonds, notes, debts and cams of whatsoever nature) of any other
member of the group.
(b) Lmtaton on owance fter Consodated Return Perod.
The rues appcabe to the aowance of osses upon the sae of
bonds sha be appcabe to the aowance after the consodated re-
turn perod as bad debts of obgatons (ncudng accounts recev-
abe) of a member of an affated group acqured n any way by
another member of the group pror to or durng the consodated return
perod. (See secton 33.36.)
Sec. 33. 1 Sae and Retrement by Corporaton of ts onds.
(a) Issued at Dscount or Premum.
If a corporaton whch durng any ta abe year (begnnng after
December 31, 1939) has been a member of an affated group whch
makes or s requred to make a consodated return, has ssued ts
bonds at a dscount or premum (whether before, durng, or after
the frst ta abe year begnnng after December 31, 1939, and whether
or not durng a consodated return perod), deducton w be aowed
for the amortzaton of the dscount, and ncome ncuded for the
amortzaton of the premum, n the same manner, to the same e tent,
and upon the same condtons as f the corporaton had never been
affated, e cept that no deducton for amortzaton of dscount sha
be aowed, and no ncome sha be ncuded for amortzaton of
premum, durng a perod for whch a consodated return s made,
on bonds of one member of the group owned by another member of
the group.
(b) cquston of onds by Issung Company.
If a corporaton whch durng any ta abe year (begnnng after
December 31, 1939) has been a member of an affated group whch
makes or s requred to make a consodated return, acqures ts bonds
(whether or not from another member of such group and whether or
not durng a consodated return perod), gan or oss sha be recog-
nzed n the same manner, to the same e tent, and upon the same
condtons as f the corporaton had never been affated, e cept that,
f such bonds are acqured from another member of the group durng
a consodated return perod, n determnng the gan or oss to the
ssung company from such acquston, the bass thereof to such
other member of the group sha be deemed the purchase prce.
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Sec. 33. 2 Capta Loss Lmtatons and Cany-Over.
The provsons of sectons 23(g) and (k), 117(d) and (e), and
122(d) wth respect to gans and osses from saes or e changes of
capta assets sha be apped, n respect of such gans and osses sus-
taned durng a consodated return perod, as f the affated group
were the ta payer.
Wth respect to a net short-term capta oss sustaned by a corpora-
ton n a year pror to the frst consodated return perod n respect
of whch the ncome of such corporaton s ncuded n the consodated
return, such oss (n an amount not n e cess of the net ncome of such
corporaton for such year or n e cess of the net short-term capta gan
of such corporaton for the frst consodated return perod) sha, for
the purposes of secton 117(e), reatng to a net short-term capta
oss carry-over, be treated as f such net short-term capta oss had
been sustaned by the affated group.
consodated net short-term capta oss sustaned by the affated
group durng the ast consodated return perod of the group (n an
amount not n e cess of the consodated net ncome for such year)
sha be treated n the succeedng ta abe year, sub|ect to the e cepton
provded n secton 117(e), as a short-term capta oss of the common
parent corporaton. No porton of any consodated net short-term
capta oss sustaned durng a consodated return perod of an aff-
ated group sha be used n computng short-term capta osses of a
subsdary for any subsequent ta abe year.
Sec. 33. 3 Credt for Foregn Ta es.
The credt aowed to an affated group for ta es pad or accrued
durng the consodated return perod to any foregn country or to any
possesson of the Unted States (under secton 131 as made appcabe
and quafed by secton 729) sha be computed and aowed as f the
affated group were the ta payer, and as f the aggregate ta es pad
by the severa members of the group and the credts aowed for ncome
ta purposes wth respect to such payments were payments made by
and credts aowed to the group.
Sec. 33. Methods of ccountng.
(a) In Genera.
For the purpose of determnng consodated e cess profts net n-
come, a members of the affated group sha adopt that method of
accountng whch ceary refects the consodated e cess profts net
ncome. method of accountng whch does not treat wth reasonabe
consstency a tems of gross ncome and deductons of the varous
members of the group sha not be regarded as ceary refectng the
consodated e cess profts net ncome. For e ampe, one member of
the group w not be permtted to report tems of ncome or deduc-
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tons on the cash method of accountng, whe another member of the
same group reports the same or smar tems on the accrua method.
The provsons of ths paragraph are sub|ect to the e ceptons stated
n paragraph (b).
(b) Combnaton of Methods.
For the purpose of determnng consodated e cess profts net n-
come, f the members of an affated group have estabshed dfferent
methods of accountng, each member may retan such method wth the
consent of the Commssoner, provded that the consodated e cess
profts net ncome s ceary refected, and, provded further that nter-
company transactons affectng consodated e cess profts net ncome,
between members of the group sha be emnated and ad|ustments on
account of such transactons sha be made wth reference to a unform
method of accountng, to be seected by the members of the group wth
the consent of the Commssoner.
(c) Change to ccrua Method.
In the case of a corporaton whch prevousy has reported ts ncome
(whether n a separate or a consodated return) n accordance wth
a method other than the accrua method and s requred under ths
secton to report ts ncome for the ta abe year under the accrua
method, tems of ncome whch accrued pror to the ta abe year but
were propery omtted n the determnaton of net ncome under the
method of accountng formery foowed sha be ncuded n the ncome
for the ta abe year of the change n accountng method, and tems of
ncome whch were propery ncuded n the determnaton of net
ncome under the method of accountng formery foowed sha not
be ncuded n the ncome for the ta abe year of the change, or any
subsequent year. In such a case, deductons whch accrued pror to
the ta abe year but whch were propery omtted n the determnaton
of net ncome under the method of accountng formery foowed sha
be aowed for the ta abe year of the change n accountng method,
and deductons whch were propery ncuded n the determnaton
of net ncome under the method of accountng formery foowed sha
not be aowed n the determnaton of net ncome for the ta abe year
of change or any subsequent year.
Gut T. everng,
Commssoner of Interna Revenue.
pproved March 1 ,19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
1 Ped wth the Dvson of the Federa Regster March 1 , 19 1, 8.31 p. m.)
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INCOM T R GUL TIONS 103 ND C SS PROFITS T R GU-
L TIONS 109 , M ND D.
19 1-18-10702
T. D.50 5
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RTS 19 ND
30. INCOM T ND C SS PROFITS T .
Reguatons 103 and 1C9 amended to conform to the cess Profts
Ta mendments of 19 1.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. and Reguatons 109 Part 30, Tte
26 of such Code, 19 1 Sup. to the cess Profts Ta mendments of
19 1 (Pubc aw 10, Seventy-seventh Congress), approved March 7,
19 1, such reguatons are amended as foows:
R GUL TIONS 103.
Paragraph 1. There s nserted mmedatey precedng secton
19.23(a)- the foowng:
Sec. 10. Captazaton of dvertsng, tc., pendtures. ( cess
Profts Ta mendments of 19 1.)

(b) mendment to Chapter 1. Secton 23(a) of rue Interna
Revenue Code Is amended by addng at the end of a new para-
graph, appcabe to ta abe years begnnng after December 31, 1939,
readng as foows:
(3) pendtuces for advertsng and good w. If a cor-
poraton has, for the purpose of computng ts e cess profts credt
under chapter 2 , camed the benefts of the eecton provded n
secton 733, no deducton sha be aowabe under paragraph (1)
to such corporaton for e pendtures for advertsng or the pro-
moton of good w whch, under the rues and reguatons pre-
scrbed under secton 733(a) may be regarded as capta nvest-
ments.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Pab. 2. There s nserted mmedatey after secton 19.23(a)-13
the foowng new secton:
Sec. 19.23(a)-1 . pendture for advertsng or the promoton of good
tr. corporaton whch has, for the purpose of computng ts e cess profts
credt, eected under secton 733 to charge to capta account e pendtures for
advertsng or the promoton of good w whch may be regarded as capta
nvestments and whch were deducted for ta abe years begnnng after Decem-
ber 81, 1933, and pror to anuary 1, 19 0, may not deduct smar e pendtures
for ta abe years begnnng after December 31, 1939. Such a ta payer has the
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70
burden of provng that e pendtures for advertsng or the promoton of good
w whch t seeks to deduct for such ater ta abe years may not be regarded
as capta nvestments under the provsons of the reguatons prescrbed under
secton 733. For rues for determnng what e pendtures for advertsng or
the promoton of good w may be regarded as capta nvestments, and for
nformaton requred to be submtted wth respect to such e pendtures, see
secton 30.733-2 of Reguatons 109.
R GUL TIONS 109.
Pah. 3. The foowng s nserted mmedatey precedng secton
30.710-1:
Pubc Law 10, Seventy-seventh Congress, pproved March 7, 19 1.
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That ths ct may
be cted as the cess Profts Ta mendments of 19 1 .
Seo. 2. Unused cess Profts Credt. ( cess Profts Ta mend-
ments of 19 1.)
(a) Secton 710(b) (3) of the Interna Revenue Code s amended to
read as foows:
(3) Unused e cess profts credt. The amount of the e cess
profts credt carry-over for the ta abe year, computed n accord-
ance wth subsecton (c).
(b) Computaton of cess Profts Credt Cabry-oveb. Secton 710
of the Interna Revenue Code Is amended by addng at the end thereof
the foowng new subsecton:
(c) cess Profts Credt Cabby-oveb.
(1) Defnton of unused e cess profts credt. The term
unused e cess profts credt means the e cess, f any, of the e cess
profts credt for any ta abe year begnnng after December 31,
1939, over the e cess profts net Income for such ta abe year,
computed on the bass of the e cess profts credt appcabe to
such ta abe year.
(2) Computaton of e cess profts credt carry-over. The
e cess profLs credt carry-over for any ta abe year sha be the
sum of the foowng:
( ) The unused e cess profts credt for the frst preced-
ng ta abe year; and
( ) The unused e cess profts credt for the second pre-
cedng ta abe year reduced by the amount, f any, by whch
the e cess profts net ncome for the frst precedng ta abe
year e ceeds the sum of
(1) the e cess profts credt for such frst precedng
ta abe year, pus
() the unused e cess profts credt for the thrd pre-
cedng ta abe year.
Seo. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. . Secton 30.710-2 s amended as foows:
( ) That porton of the frst paragraph foowng tem ( ) s
amended to read:
(c) carry-over of the unused e cess profts credt (as defned n sec-
ton 710(c)(1)) for the two precedng e cess profts ta ta abe years,
computed as provded n secton 710(c)(2).
In the case of a ta payer whch s entted to use the e cess profts credt based
on ncome or the e cess profts credt based on Invested capta, whchever credt
resuts n the esser e cess profts ta , and whch has not dscamed the use of
ether credt, the term e cess profts credt appcabe to such ta abe year,
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71
wthn the meanng of secton 710(c) (1), means whchever credt resuts In the
arger unused e cess profts credt.
( ) There s nserted at the end of the secton the foowng:
The computaton of the e cess profts credt carry-over provded In secton
710(c) (2) may be ustrated by the foowng e ampe:
ampe. The Y Corporaton has for the years 19 0, 19 1, 19 2, and 19 3
e cess profts net Income and appcabe e cess profts credts as foows
19 0
19 1
19 2
19 3
50,000
80,000
100,000
150,000
200,000
160,000
210,000
160,000
The e cess profts credt carry-over for the year 19 3 s 0,000, computed as
foows:
The factors to be taken Into consderaton n computng such carry-over are:
(1) The unused e cess profts credt for the frst precedng ta abe
year (19 2) None
(2) The unused e cess profts credt for the second precedng
ta abe year (19 1) 50,0( 0
(3) The e cess profts net ncome for the frst precedng ta abe
year (19 2) 200,000
( ) The appcabe e cess profts credt for the frst precedng ta -
abe year (19 2) 160,000
(5) The unused e cess profts credt for the thrd precedng ta abe
year (19 0) 30,000
The carry-over s the amount of tem (1) and tem (2) reduced by the amount
by whch tem (3) e ceeds the sum of Items ( ) and (5). The amount by whch
tem (3) e ceeds the sum of Items ( ) and (5) s 10,000 ( 200,000 mnus ( 100,-
000 pus 30,000)). Item (2) reduced by such e cess s 0,000. Item (2) so
reduced pus tem (1) s 0,000 ( 0,000 pus 0).
Par. 5. The foowng s nserted mmedatey precedng secton
30.711 (a)-:
Sec. 12. dmssbe ssets or Deaers n Securtes. ( cess Profts
Ta mendments of 19 1.)

(b) Secton 711(a) (2) ( ) s amended by Insertng after companes
a perod and the foowng: Ths subparagraph sha not appy to dv-
dends on stock whch Is not a capta asset .
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 6. Secton 30.711(a)- s amended by strkng out the fourth
sentence and nsertng n eu thereof the foowng:
s to corporatons entted to use the e cess profts credt based on ncome or the
e cess profts credt based on Invested capta, whchever credt resuts n the
esser e cess profts ta , and corporatons requred to use the e cess profts credt
based on nvested capta, see sectons 712 and 7 1.
Par. 7. Secton 30.711 (a)-3 s amended as foows:
( ) That porton of the second sentence precedng the frst coon
s amended to read as foows:
Under secton 711(a) (2) no ad|ustment of norma-ta net ncome sha be made
for dvdends receved on stock whch s not a capta asset as defned In secton
117, such as stock hed prmary for sae to customers by a deaer n securtes.
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72
Otherwse the ad|ustments are the same as the ad|ustments provded In secton
711(a)(1) e cept that the foowng addtona ad|ustments are requred to be
made:
( ) Subdvson (6) of the frst paragraph s amended to read as
foows:
(6) There sha be subtracted from the norma-ta net ncome the amount of
dvdends receved from foregn corporatons on stock whch Is a capta asset,
e cept dvdends (actua or constructve) on stock of foregn persona-hodng
companes.
(C) Immedatey foowng subdvson (b) of the e ampe there
s added a new subdvson readng as foows:
(e) The corporaton hed as a capta asset the stock on whch the dvdends
were receved.
Par. 8. The foowng s nserted mmedatey precedng secton
30.711 (b)-:
Sec. 3. bnorma Deducton n ase Perod. ( cess Profts Ta
mendments of 19 1.)
Sectons 711(b) (1) (G), ( ), and (I), of the Interna Revenue Code
are amended to read as foows:
(G) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to dvdends on stock of domestc
corporatons;
( ) Payment of udgments, and So Forth. Deductons at-
trbutabe to any cam, award, udgment, or decree aganst the
ta payer, or nterest on any of the foregong, f abnorma for the
ta payer, sha not be aowed, and f norma for the ta payer, but
In e cess of 125 per centum of the average amount of such de-
ductons In the four prevous ta abe years, sha be dsaowed n
an amount equa to such e cess;
(I) Intangbe Drng and Deveopment Costs. Deductons
attrbutabe to ntangbe drng and deveopment costs pad or n-
curred n or for the drng of wes or the preparaton of wes
for the producton of o or gas, and for deveopment costs n the
case of mnes, f abnorma for the ta payer, sha not be aowed,
and f norma for the ta payer, but n e cess of 125 per centum of
the average amount of such deductons n the four prevous ta -
abe years, sha be dsaowed n an amount equa to such e cess;
and
( ) bnorma Deductons. Under reguatons prescrbed by the
Commssoner, wth the approva of the Secretary, for the deter-
mnaton, for the purposes of ths subparagraph, of the cassfca-
ton of deductons
() Deductons of any cass sha not be aowed f deduc-
tons of such cass were abnorma for the ta payer, and
() If the cass of deductons was norma for the ta -
payer, but the deductons of such cass were n e cess of 125
per centum of the average amount of deductons of such cass
for the four prevous ta abe years, they sha be dsaowed
In an amount equa to such e cess.
( ) Rues for ppcaton of Subparagraphs ( ), (I), and
( ). For the purposes of subparagraphs ( ), (I), and ( )
(I) If the ta payer was not n e stence for four prevous
ta abe years, then such average amount specfed n such sub-
paragraphs sha be determned for the prevous ta abe years
t was n e stence and the succeedng ta abe years whch
begn before the begnnng of the ta payer s second ta abe year
under ths subchapter. If the number of such succeedng years
Is greater than the number necessary to obtan an aggregate
of four ta abe years there sha he omtted so many of such
succeedng years, begnnng wth the ast, as are necessary to
reduce the aggregate to four.
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M( ) Deductons sha not be dsaowed under such sub-
paragraphs uness the ta payer estabshes that the abnor-
maty or e cess s not a consequence of an ncrease n the
gross Income of the ta payer n ts base perod or a decrease
n the amount of some other deducton n ts base perod, and
s not a consequence of a change at any tme n the type,
manner of operaton, sze, or condton of the busness engaged
n by the ta payer.
( ) The amount of deductons of any cass to be ds-
aowed under such subparagraphs wth respect to any ta abe
year sha not e ceed the amount by whch the deductons of
such cass for such ta abe year e ceed the deduct ons of such
cass for the ta abe year for whch the ta under ths sub-
chapter s beng computed.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 10 0.
Par. 9. Secton 30.711 (b)- s amended as foows:
( ) y strkng out the ast sentence n the frst paragraph.
( ) y strkng out the paragraph foowng the frst e ampe
and nsertng n eu thereof the foowng:
In computng the ta for the purpose of the ad|ustments requred by secton
711(b)(1)( ), the norma-ta net ncome or speca-cass net ncome for each
base perod yeur sha be that used In the determnaton of the avenge base
perod net ncome.
(C) y changng the ast paragraph to read as foows:
In connecton wth the ad|ustments requred to be made by secton 711(b) (1)
( ), (I), and ( ), see secton 30711(b)-2.
Par. 10. The foowng s nserted mmedatey after secton
30.711 (b)-:
Sec. 30.711 (b)-2. bnorma deductons n bate perod. d|ustments n the
e cess profts net Income for a ta abe year n the base perod are requred In
order to dsaow deductons of a cass whch Is abnorma for the ta payer, and
to dsaow the amount by whch deductons of a cass norma for the ta payer
e ceed 125 per cent of the average amount of deductons of such cass for the four
prevous ta abe years. If the ta payer was not In e stence for four prevous
ta abe years, then the average amount of deductons of any cass sha be deter-
mned for the prevous ta abe years durng whch It was n e stence and the
succeedng ta abe years whch begn before the begnnng of the ta payer s
second e cess profts ta ta abe year. If the number of such succeedng years
s greater than the number necessary to obtan an aggregate of four ta abe years
there sha be omtted so many of such succeedng years, begnnng wth the ast,
as are necessary to reduce the aggregate to four. For e ampe, u the case of a
corporaton comng nto e stence on anuary 1, 1938, and makng ts ncome ta
returns on the caendar year bass, the amount of deductons of any cass whch
may be dsaowed for the ta abe year 1939 may be determned from the average
of the deductons for the ta abe years 1938 and 19 0. The ta abe year 19 1
s the ta payer s second e cess profts ta ta abe year and therefore may not be
used.
cass of deductons s abnorma ony f the ta payer had no deductons of
that cass n the ta abe years prescrbed for determnng average deductons.
The ta payer must estabsh that the abnormaty or e cessveness of the
deducton s not a consequence of an ncrease n the gross ncome of the ta payer
n ts base perod or a decrease n the amount of some other deducton n Its base
perod, and s not a consequence of a change at any tme n the type, manner of
operaton, sze, or condton of the busness engaged n by the ta payer. For
e ampe, f n 1939 the deductons of an arpane manufacturer for wages were n
e cess of 125 per cent of the average of such deductons for the four prevous
ta abe years because of a tranng program for mechancs nsttuted by the
corporaton In 1939 to provde for an e panson n operatons, no part of the
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deductons w be dsaowed. If a corporaton dstrbutes ts product through
agents pad commssons on gross saes, and due to a rse n the prce of the
product, both the amount of gross ncome and the amount of deductons for
commssons ncreased, any resutng abnorma amount of deductons for comms-
sons w not be dsaowed. If the Gasone Corporaton n 1938 and a pror
years deducted gasone ta es pad by t as a busness e pense under secton 23(a),
but n 1939 ncuded such ta es for that year n ts deductons for ta es pad under
secton 23(c) so as to ncrease ts deductons for ta es pad for 1939 to an
amount n e cess of 125 per cent of ts average deductons of the same cass for
the four prevous ta abe years, the abnorma amount of such deducton for 1939
w not be dsaowed. s to advertsng e pendtures, the provsons of secton
733 appy before any determnatons are made under ths secton. See secton
30.733-3.
In order for the deducton of any cass to be dsaowed, the deductons of
such cass for the ta abe year n the base perod must e ceed the deductons of
the same cass for the ta abe year for whch the e cess profts ta s beng
computed, and any amount whch may e dsaowed sha be no greater than the
amount by whch the deductons of such cass for the base perod ta abe year
e ceed the deductons of the same cass for the ta abe year for whch the e cess
profts ta s beng computed. For e ampe, f a corporaton n the base perod
ta abe year 193S had a deducton of 200,000 and ts average of deductons of
the same cass for the four prevous ta abe vears was 100,000, the amount
of 75,000 (. 200,000 mnus 125 per cent of 100,000) may be dsaowed, but
ony f the deductons of ths cass n 1938 e ceed by ths or a greater amount
the deductons of the same cass n the ta abe year for whch the e cess
profts ta s beng computed. If the ta s computed for 19 0 and the deduc-
tons of ths cass for 19 0 are 100,000, the fu 75,000 s dsaowed for the
ta abe year 1938. If for 19 1 the deductons of ths cass are 125,000, the
fu 75,000 may agan be dsaowed for the ta abe year 1938 n computng
the e cess profts ta for 19 1. owever, f for 19 2 the deductons of rhs
cass are 150,000, ony 50,000 w be dsaowed for the ta abe year 1938
n determnng the e cess profts credt based on ncome for use aganst the
e cess profts net ncome for 19 2.
(a) Cassfcaton of deductons. Secton 711(b)(1) ( ) and (I) sets forth
specfc casses of deductons, the amount of whch n any base perod ta abe
year may be totay dsaowed f abnorma for the ta payer or dsaowed to
the e tent of the e cess over 125 per cent of the average of such cass If norma
for the ta payer. Secton 711(b)(1) ( ) permts the cassfcaton of other
deductons n accordance wth these reguatons. In any case, the amount of
deductons of any cass whch may be dsaowed sha be determned n the
manner prevousy set forth n ths secton.
Deductons attrbutabe to any cam, award, |udgment, or decree aganst the
ta payer, or nterest on any of the foregong are a of the same cass. There-
fore, In determnng n the case of a deducton for a udgment, for e ampe,
whether the cass of deductons s abnorma or whether the amount thereof
for any ta abe year Is n e cess of 125 per cent of average deductons of the
same cass, account must be taken not ony of the amount of deductons for
udgments, f any, aowed In precedng ta abe years, but aso of any deduc-
tons arsng out of cams, awards, and decrees, and Interest thereon.
Deductons for Intangbe drng and deveopment costs pad or ncurred n
or for the drng of wes or the preparaton of wes for the prcducton of
o or gas, and for deveopment costs n the case of mnes are a of the same
cass. Therefore, for the purpose of determnng whether the deductons for one
ta abe year are abnorma or n e cess of 125 per cent of average deductons of
ths cass, and for the purpose of determnng the amount to be dsaowed In
such event, reference must be made to the deductons of the entre cass, rather
than to any partcuar deductbe tems ncuded theren. Deductons attrbutabe
to the operaton of wes or mnes are not Incuded n ths cass.
Deductons whch do not fa wthn ether of the cnsses specfed n secton
711(b)(1) ( ) and (I) may be grouped by the ta payer, sub|ect to approva
by the Commssoner on the e amnaton of the ta payer s return, In such other
casses as are reasonabe In a busness of the type whch the ta payer conducts,
and are approprate n the ght of the ta payer s busness e perence and
accountng practce. Such a cassfcaton w be appcabe to a other ta abe
years consdered at any tme n ad|ustng deductons under ths secton, and
must be consstent wth any cassfcaton made by the ta payer under the
provsons of secton 721 and secton 722.
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(6) Statement requred. If n computng ts e cess profts net ncome for a
ta abe year n the base perod, the ta payer cams the dsaowance under
secton 711(b)(1) ( ), (I), or ( ) of any amount prevousy aowed as a
deducton, there sha be submtted a fu statement showng the computaton
of the amount to be dsaowed, the prces and gross saes of the ta payer s
product, and the condton of the ta payer s busness whch demonstrate that
the dsaowed amount s not a consequence of an ncrease n the gross Income
of the ta payer n Its base perod or a decrease In the amount of some other
deducton n ts base perod, and Is not a consequence of a change at any tme
n the type, manner of operaton, sze, or condton of the busness engaged n
by the ta payer. Ths statement sha be n dupcate and sha ncude the
foowng: (1) the computaton of the amount dsaowed, showng the amcunt
of the cass of deductons n the base perod ta ahe year for whch any part
of such amount s dsaowed, the average amount of such cass for the four
precedng ta abe years or for such ta abe years as the ta payer s requred
to use n determnng ths average amount, and the e cess amount of deductons
dsaowed; (2) a descrpton and the amount of each tem ncuded n such
cass of deductons for the ta abe year for whch such deductons are dsaowed
and for the ta abe years n the test perod, wth the amount of each and a
descrpton thereof; (3) the amount of such cass and the amount and descrp-
ton of each tem n that cass for the ta abe year for whch the e cess profts
ta s beng computed; and ( ) a other facts upon whch the ta payer rees.
Par. 11. The foowng s nserted mmedatey precedng secton
30.712-1:
Sec. 13. owance of cess Pro-ts ( ef.dt. ( cess Profts Ta
mendments of 19 1.)
Secton 712 of the Interna Revenue Code Is amended to read as
foows:
Sec. 712. cess Profts Credt owance.
(a) Domestc Corporatons. In the case of a domestc corpora-
ton whch was n e stence before anuary 1, 10 0, the e cess profts
Credt for any ta abe year sha be an amount computed under secton
713 or secton 71 , whchever amount resuts n the esser ta under
ths subchapter for the ta abe year for whch the ta under ths sub-
chapter s beng computed. In the case of a other domestc corporatons
the e cess profts credt for any ta abe year sha be an amount com-
puted under secton 71 . (For aowance of e cess profts credt In
case of certan reorganzatons of corporatons, see secton 7 1.)
(b) Fobkon Corporatons. In the case of a foregn corporaton
engaged n trade or busness wthn the Unted States or havng an
offce or pace of busness theren, the frst ta abe year of whch under
ths subchapter begns on any date In 19 0, whch was n e stence on
the day forty-eght months pror to such date and whch at any tme
durng each of the ta abe years n such forty-eght months was en-
gaged n trade or busness wthn the Unted States or had an offce or
pace of busness theren, the e cess profts credt for any ta abe year
sha be an amount computed under secton 713 or secton 71 , whch-
ever amount resuts n the esser ta under ths subchapter for the
ta abe year for whch the ta under ths subchapter s beng com-
puted. In the case of a other foregn corporatons the e cess profts
credt for any ta abe year sha be an amount computed under secton
71 .
(c) ffect of Dscamer, of Credt. If the ta payer states In
Its return for the ta abe year under ths subchapter that t dscams
the use of the credt computed under secton 713 or the use of the
credt computed under secton 71 , the credt so dscamed sha not,
for the purposes of the nterna revenue aws, be appcabe to the
computaton of the ta under ths subchapter for such ta abe year.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
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Par. 12. Secton 30.712-1 s amended to read as foows:
Sec. 30.712-1. cess profts credt; aowance. Two methods are provded for
computng the e cess profts credt: (1) The ncome method under whch the
credt s computed as provded n secton 713, and (2) the nvested capta method
under whch the credt s computed as provded n secton 71 .
In the case of the foowng corporatons, the e cess proms credt ror any ta -
abe year sha be the credt based upon ncome, computed as provded In secton
713, or the credt based on nvested capta, computed as provded n secton 71 ,
whchever credt resuts In the esser ta for the ta abe year for whch the ta
Is beng computed:
(a) domestc corporaton whch was actuay In e stence before anu-
ary 1, 19 0.
(8) domestc corporaton whch s an acqurng corporaton wthn
the meanng of secton 7 0 of Suppement and whch was constructvey n
e stence at the begnnng of ts base perod. (For computaton of e cess
profts credt based on ncome n such cases, see sectons 7 0 to 7 .)
(c) foregn corporaton (1) whch s engaged n trade or busness wthn
the Unted States, or has an offce or pace of busness theren, at any tme
durng the ta abe year; (2) the frst ta abe year of whch for the purposes
of the e cess profts ta begns on any day n 19 0; (3) whch was n e st-
ence on the date 8 months pror to such date; and ( ) whch, at any tme
durng each of the ta abe years In such 8 months, was engaged n trade or
busness wthn the Unted States, or had an offce or pace of busness there-
n. s to what consttutes beng engaged n trade or busness wthn the
Unted States, see secton 19.231-1 of Reguatons 103.
If a ta payer dscams n ts return for a partcuar ta abe year the use of
ether credt, the credt so dscamed sha not, for the purposes of the nterna
revenue aws, be appcabe to the computaton of the ta for the ta abe year
wth respect to whch the dscamer s made.
domestc corporaton whch was not actuay n e stence before anuary
1,19 0, and whch was not constructvey n e stence on the date of the begnnng
of ts base perod, and a foregn corporaton whch docs not meet the requre-
ments of (o) above, are requred to compute ther credt under the nv.ested
capta method provded n secton 71 .
Par. 13. The foowng s nserted mmedatey precedng secton
30.713-1:
Sec. . Computaton of verage ase Perod Net Income. ( cess
Pre fts Ta mendments of 19 1.)
(a) Secton 713(a)(1) of the Interna Revenue Code s amended by
strkng out subsecton (b) and nsertng In eu thereof subsec-
ton (d) , and by strkng out subsecton (c) wherever occurrng
theren and nsertng n eu thereof subsecton (g) .
(1 ) Secton 713(b) of the Interna Revenue Code s amended to read
as foows:
(b) Rase Perod.
(1) Defnton. s used n ths secton the term base perod
( ) If the corporaton was In e stence durng the whoe
of the forty-eght months precedng the begnnng of ts frst
ta abe year under ths subchapter, means the perod com-
mencng wth the begnnng of ts frst ta abe year begnnng
after December 31, 1935, and endng wth the cose of ts ast
ta abe year begnnng before anuary 1, 19 0; and
( ) In the case of a corporaton whch was In e stence
durng ony part of the forty-eght months precedng the be-
gnnng of ts frst ta abe year under ths subchapter, means
the forty-eght months precedng the begnnng of ts frst ta -
abe year under ths subchapter.
(2) Dvson nto haves. For the purposes of subsectons (d)
and (f) the base perod of the ta payer sha be dvded Into haves,
the frst haf to be composed of one-haf the entre number of
months n the base perod and to begn wth the begnnng of the
base perod.
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(c) Defct cess Profts Net Income. For the purposes of ths
eeton the term defct In e cess profts net Income wth respect to any
ta abe year means the amount by whch the deductons pus the credt
for dvdends receved e ceeded the gross Income. For the purposes of
ths subsecton n determnng whether there was such an e cess and In
determnng the amount thereof, the ad|ustments provded n secton
711(b)(1) sha be made.
(d) verage ase Perod Net Income Determnaton.
(1) Defnton. For the purposes of ths secton the average
base perod net ncome of the ta payer sha be the amount deter-
mned under subsecton (e), sub|ect to the e cepton that f the
aggregate e cess profts net ncome for the ast haf of ts base
perod, reduced by the aggregate of the defcts n e cess profts net
Income for such haf, s greater than such aggregate so reduced for
the frst haf, then the average base perod net ncome sha be the
amount determned under subsecton (f), f greater than the amount
determned under subsecton (e).
(2) For the purposes of subsectons (e) and (f), If the ta payer
was n e stence durng ony part of the 8 months precedng the
begnnng of ts frst ta abe year under ths subchapter, ts e cess
profts net ncome
( ) for each ta abe year of tweve months (begnnng wth
the begnnng of ts base perod) durng whch t was not n
e stence, sha be an amount equa to 8 per centum of the
e cess of
(I) the day Invested capta for the frst day of the
ta payer s frst ta abe year begnnng after December 31,
1939, over
() an amount equa to the same percentage of such
day nvested capta as s appcabe under secton 720 n
reducton of the average nvested capta of the precedng
ta nbe year;
( ) for the ta abe year of ess than tweve months consst-
ng of that part of the remander of ts base perod durng whch
It was not n e stence, sha be the amount ascertaned for a fu
year under subparagraph ( ), mutped by the number of days
n such ta abe year of ess than tweve months and dvded by
the number of days In the tweve months endng wth the cose
of such ta abe year.
(3) In no case sha the average base perod net Income be ess
than zero.
( ) For the computaton of average base perod net ncome n
the case of certan reorganzatons, see secton 7 2.
(e) verage ase Perod Net Income Genera verage. The aver-
age base perod net ncome determned under ths subsecton sha be
determned as foows:
(1) y computng the aggregate of the e cess profts net ncome
for each of the ta abe years of the ta payer n the base perod, re-
duced, f for more than one of such ta abe years there was a defct
In e cess profts net ncome, by the sum of such defcts, e cudng the
greatest:
(2) y dvdng the amount ascertaned under paragraph (1) by
the tota number of months n a such ta abe years; and
(3) y mutpyng the amount ascertaned under paragraph (2)
by tweve.
(f) verage ase Perod Net Income Increased arnngs n Last
at.f of ask Perod. The average base perod net ncome determned
under ths subsecton sha be determned as foows:
(1) y computng, for each of the ta abe years of the ta payer
In Its base perod, the e cess profts net Income for such year, or the
defct n e cess profts net ncome for such year;
(2) y computng for each haf of the base perod the aggregate
of the e cess profts net Income for each of the ta abe years n such
haf, reduced, If for one or more of such years there was a defct n
e cess profts net Income, by the sum of such defcts. For the pur-
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poses of such computaton, f any ta abe year s party wthn each
haf of the base perod there sha be aocated to the frst haf an
amount of the e cess profts net ncome or defct n e cess profts
net Income, as the case may be, for such ta abe year, whch bears the
same rato thereto as the number of months fang wthn such haf
bears to the entre number of months n such ta abe year; and
the remander sha be aocated to the second haf;
(3) If the amount ascertaned under paragraph (2) for the second
haf s greater than the amount ascertaned for the frst haf, by
dvdng the dfference by two;
( ) y addng the amount ascertaned under paragraph (3) to
the amount ascertaned under paragraph (2) for the second haf of
the base perod;
(5) y dvdng the amount found under paragraph ( ) by the
number of months n the second haf of the base perod and by mut-
pyng the resut by tweve;
(6) The amount ascertaned under paragraph (5) sha be the
average base perod net Income determned under ths subsecton,
e cept that the average base perod net ncome determned under
ths subsecton sha n no case be greater than the hghest e cess
profts net ncome for any ta abe year n the base perod. For the
purpose of such mtaton f any ta abe year s of ess than tweve
months, the e cess profts net ncome for such ta abe year sha be
paced on an annua bass by mutpyng by tweve and dvdng by
the number of months ncuded n such ta abe year.
(7) For the purposes of ths subsecton, the e cess profts net
ncome for any ta abe year endng after May 31, 19 0, sha not be
greater than an amount computed as foows:
( ) y reducng the e cess profts net ncome by an amount
whch bears the same rato thereto as the number of months after
May 31, 19 0, bears to the tota number of months n such ta -
abe year; and
( ) y addng to the amount ascertaned under subpara-
graph ( ) an amount whch bears the same rato to the e cess
profts net ncome for the ast precedng ta abe year as such
number of months after May 31, 19 0, bears to the number of
months n such precedng year. The amount added under ths
subparagraph sha not e ceed the amount of the e cess profts
net ncome for such ast precedng ta abe year.
(C) If the number of months n such precedng ta abe year
s ess than such number of months after May 31,19 0, by addng
to the amount ascertaned under subparagraph ( ) an amount
whch bears the same rato to the e cess profts net ncome for
the second precedng ta abe year as the e cess of such number
of months after May 31, 10 0, over the number of months n
such precedng ta abe year bears to the number of months In
such second precedng ta abe year.
(c) Secton 713(c) of the Interna Revenue Code s amended by strkng
out (c) and nsertng n eu thereof (g) .

Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 1 . Secton 30.713-1 s amended as foows:
( ) y nsertng mmedatey after the headng a new subsecton
(a) to read as foows:
(a) Introductory. In order for a corporaton to determne for any partcu-
ar ta abe year the amount of ts e cess profts credt based on ncome, t Is
necessary frst to compute the amount of the average base perod net ncome,
95 per cent of whch s the startng pont for computng the e cess profts credt
based on ncome. Two methods are provded for determnng the average base
perod net ncome: (1) The genera average method, set forth n secton 713(e)
and n subsecton (6) of ths secton, and (2) the method set forth In secton
713(f) and n subsecton (c) of ths secton, appcabe to cases In whch the
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earnngs for the ast haf of the base perod nre greater thnn those for the frst
haf. If such method resuts In a greater average base perod net Income than
that resutng from the use of the genera average meto.
( ) y strkng out the headng, the frst sentence, and the porton
of the second sentence precedng the coon, of od subsecton (a) and
nsertng n eu thereof the foowng:
(6) Computaton under the genera average method. The foowng steps
are requred for the computaton of the average base perod net ncome under
the genera average method (for computaton of e cess profts net Income for
portons of ts base perod durng whch the corporaton was not n e stence,
eee subsecton (d) of ths secton):
(C) y nsertng a new subsecton (c) mmedate after new sub-
(c) Computaton under secton 713(f); ncreased earnngs n ast haf of
base perod. The determnaton of the base perod net Income under the
method set forth n secton 713(f) s operatve ony If the aggregate e cess
profts net ncome for the ast haf of the base perod of the ta payer, reduced
by the aggregate of the defcts n e cess profts net ncome for such haf,
s greater than such aggregate so reduced for the frst haf and the average
base perod net ncome determned under secton 713(f) s greater than the
amount determned under secton 713(e). The foowng steps are requred
for the computaton of the average base perod net ncome under the method
set forth n secton 713(f) :
(1) The e cess profts net ncome or the defct In e cess profts net Income
for each of the ta abe years n the base perod (years begnnng after De-
cember 31, 1935, and before anuary , 19 0) Is to be determned as provded
In secton 711(b).
(2) The base perod s to be dvded Into haves, each of an equa number of
months. There Is to be computed for each haf of the base perod the aggre-
gate of the e cess profts net ncome for each of the tu nbe years n such haf,
reduced, f for one or mure of such years there was a defct n e cess profts
net ncome, by the sum of such defcts. In makng ths computaton, a defct
n e cess profts net ncome for any ta abe year (or n the case of more than
one defct, the greatest defct) s not counted as zero as n the case of the
computaton under the genera average method descrbed n subsecton (6) of
ths secton.
(3) The e cess of the amount ascertaned for the second haf over the amount
ascertaned for the frst haf s to be dvded by 2.
( ) The amount ascertaned under paragraph (3) s to be added to the amount
ascertaned under paragraph (2) for the second haf of the base perw.
(5) The amount found under pnragraph ( ) Is to be dvded by the number of
months n the second haf of the base perod and the resut mutped by 12.
(6) The amount ascertaned under paragraph (5) sha he the average base
perod net ncome determned under the method set forth In secton 713(f), e cept
that the average base perod net ncome so determned sha n no case be greater
than the hghest e cess profts net ncome for any ta abe year n the base perod.
For the purpose of ths mtaton f any ta abe year s ess than 12 months, the
e cess profts net Income for such ta abe year sha be paced on an annua bass
by mutpyng by 12 and dvdng by the number of months ncuded In such
ta abe year.
The computaton of the average base perod net ncome under the method set
forth n secton 713(f) may be ustrated by the foowng e umpe:
ampe. The Corporaton, whch makes ts ncome ta returns on the
caendar year bass, has the foowng amounts of e cess profts net ncome
for the ta abe years n ts base perod: 1930, 100,000; )37, 200,000; 1938,
300,000; and 1939, 00,000. Its average base perod net ncome under the
method set forth In secton 713(f) Is 00,000, computed as foows:
(1) ggregate of e cess profts net Income for ta abe years In sec-
ond haf of base perod ( 300,000 pus 00,000) 700,000
2) ggregate of e cess profts net ncome for ta abe years n
frst haf of base perod ( 100,000 pus 200,000) 300,000
(3) Item (1) ess tem (2) ( 700,000 mnus :S00,000)
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( ) Item (3) dvded bv 2 ( 00,000 dvded by 2) 200,000
(5) Sum of tem (1) pus tem ( ) ( 700,000 pus 200.000) MO, 000
(6) Item (5) paced on annua bass by dvdng t by number of
months n second haf of base perod and mutpyng by 12
(( 900,000 dvded by 2 ) mutped by 12) 50.00O
(7) ghest e cess profts net ncome for any ta abe year n base
perod (1930) 00,000
(8) verage base perod net ncome (Item (7) snce such Item s
ess than tem (0)) 00.000
The provson |ot secton 713(f)(2) reatve to the manner of computaton
of the aggregate e cess profts net ncome for each haf of the base perod
where the ta payer, because of changes n ts accountng perod or for other
reasons, has more or ess than four ta abe years n such perod, and where
part of one ta abe year Is In the frst haf and the other part Is In the second
haf of such perod, may be ustrated by the foowng e ampe:
ampe. corporaton has ta abe years n Its base perod and e cess
profts net ncomes for such years as foows:
Years n base perod.
Number of
months.
cess prof-
ts net n-
come.
egnnng
ndng
Sept 1,1936
ug. 31, 1937
12

30,000
20.000
90.000
Sept. 1, 1937
Dec. 31, 1937
an. 1,1938
Dec. 31, 1938
12
12
an. 1,1939
Dee. 31, 1939
100. 000
Tota
0
210,000
The aggregate e cess profts net ncome for the frst haf of the base perod
Ig 70,000, and for the second haf t s 1 0,000, computed as foows:
Number of
months.
cess
profts net
Income.
FIRST LT.
The ta abe year begnnng Sept. 1,1936, and endng ug. 31, 1937
12

30,000
20.000
20.000
The ta abe year begnnng Sept. 1. 1937, and endng Dec. 31, 1937
One-thrd of the ta abe year begnnng an. 1,1938, and endng Doc. 31, 1938
Tota . -
20
70.000
S CONT
LF.
Two-thrds of the ta abe year begnnng
The ta abe year begnnng an. 1, 1939,
an. 1, 1938. and endng Dec. 31, 1939..
and endng Dec. 31,1939
8
12
0.000
100. ooo
Tota
20
1 0.000
For the purpose of computng the average base perod net Income thereunder,
secton 713(f)(7) provdes certan mtatons on the amount of the e cess
profts net ncome for any ta abe year n the base perod endng after May
31, 19 0.
Secton 713(f) (7) ( ) and ( ) may be Iustrated by the foowng e ampe:
ampe. The Y Corporaton makes Its Income ta returns on the bass of
the fsca year endng September 30. It had an e cess profts net Income of
00,000 for the fsca year ended September 30, 1939. It had an e cess profts
net ncome of 000,000 for the fsca year ended September 30, 19 0, before
the appcaton of secton 713(f)(7) ( ) and ( ). oth of these ta abe
years are n Its base perod but four months of the fsca year ended September
30, 19 0, are after May 31, 19 0. Under secton 713(f)(7) ( ) and ( ) the
e cess profts net ncome of the corporaton for the fsca year begnnng
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October 1. 1939, and ended September 30, 19 0, Is 533,333.33, computed as
foows:
(1) cess profts net ncome before appcaton of secton
713(f)(7) ( ) and ( ) 600,000.00
(2) mount by whch tem (1) s to be reduced under secton
713(f)(7)( ) (four-twefths of 600,000) 200,000.00
(3) Item (1) ess tem (2) ( 600,000 mnus 200,000) 00,000.00
( ) mount to be added to tem (3) under secton 713(f)(7)( )
(four-twefths of 00,000) 133,333.33
(5) cess profts net ncome for fsca year ended September 30,
19 0, after appcaton of secton 713(f)(7) (Item (3) pus
tem ( ), or 00,000 pus 133,333.33) 533,333.33
Secton 713(f)(7)(C) may be Iustrated by the foowng e ampe:
ampe. The ast three ta abe years In the base perod of the Z Corporaton
and the number of months n, and the e cess profts net Income for, such
ta abe years are as foows:
Ta abe yean.
Number of
months.
cess
profts ne:
Income.
egnnng-
ndng-
uy 1. 193S -
une 30, 1839
12
3
12
00,000
uy 1. 1939
Sept. 30, 1939
75.000
600,000
Oct. 1,1839 -
Sept. 30, 19 0
Under secton 713(f)(7) the e cess profts net ncome of the corporaton for
the fsca year ended September 30, MO, s 508,333.33, computed as foows:
(1) cess profts net ncome before appcaton of secton 713(f) (7)
( ) and ( ) 600,000.00
(2) mount by whch tem (1) s to be reduced under secton
713(f)(7)( ) (four-twefths of 630,000) 200,000.00
(3) Item (1) ess tem (2) ( 000,000 mnus 200,000) 00,000.00
( ) mount to be added to tem (3) under secton 713(f)(7)( )
(four thrds of 75,000 but not n e cess of 75,000) 75,000. 00
(51 mount to be added to tem (3) under secton 713(f)(7)(C)
(one-twefth of 00,000) 33,333.33
(6) cess profts net ncome for fsca year ended September 30,
19 0, after appcaton of secton 713(f) (7) (sum of tems
(3), ( ), and (5), or 00,000 pus 75,000 pus 33,333.33) 508, 333. 33
(D) y changng od subsecton (b) as foows:
(a) y changng the desgnaton to (d).
b) y changng the headng to read as foows: Computaton of
e cess profts net ncome for portons of bane perod durng whch
corporaton was not n e stence; appcabe both under sectons 713(e)
and 713(f)
(c) y strkng out n the second sentence Secton 713 (b) (5) and
nsertng n eu thereof Secton 713(d) (2).
(d) y changng the e ampe to read as foows:
ampe. The Z Corporaton, a domestc corporaton whch makes ts ncome
ta returns on the caendar year bass, was organzed on uy 1, 1937. The day
nvested capta of the corporaton for anuary 1, 19 0, s 200,000. The per-
centage of such nvested capta whch woud be appcabe under secton 720 n
reducton of the average nvested capta of the corporaton on account of nad-
mssbe assets for the caendar year 1939 s 5.
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The e cess profts net ncome of e Z Corporaton for 1938 s 15,200, and for
the perod anuary 1, 1937, to une 30,1937, 7,537.53, computed as foows:
(1) Day nvested capta for anuary 1, 1910 200, 000. 00
(2) mount equa to the same percentage (5 per cent) of tem (1)
as s appcabe under secton 720 n reducton of the average
nvested capta for precedng ta abe year, 1939 ( 200,000
mutped by 0.05) 10,000. 00
(3) cess of tem (1) over tem (2) 190, 000. 00
( ) cess profts net ncome for 1930 ( 190,000 mutped by 0.08) _ 15, 200. 00
(5) cess profts net ncome for perod from anuary 1, 1937, to
/ 15,200 181
une 30, 1937( 7,537. 53
Par. 15. Secton 30.71 -1 s amended by strkng out the frst sentence
and nsertng n eu thereof the foowng:
Secton 71 appes ony to a corporaton whch under secton 712 s entted or
s requred to compute ts e cess profts credt under the nvested capta method.
Pah. 16. The foowng s nserted mmedatey precedng secton
30.720-1:
Skc.,12. dmssbe sskts of Deaers n Securtes. ( cess Profts
Ta mendments of 19 1.)
(a) Secton 720(a) (1)( ) of the Interna Revenue Code s amended
to read as foows:
( ) Stock n corporatons e cept stock n a foregn persona-
hodng company, and e cept stock whch s not a capta asset; and

Sue. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 17. Secton 30.720-1 s amended as foows:
( ) The second sentence of the frst paragraph s amended to read
as foows:
The term nadmssbe assets means (1) stock n a corporatons, domestc or
foregn, e cept stock n a foregn persona-hodng company, and e cept stock
whch s not a capta asset (such as stock hed prmary for sae to customers
by a deaer n securtes), and (2) a obgatons descrbed n secton 22(b)( ),
any part of the nterest from whch s e cudbe from gross ncome or aowabe
as a credt aganst net ncome.
( ) The frst sentence of the e ampe s amended to read as foows:
The average nvested capta of the Corporaton, not a deaer n securtes, for
Its ta abe year 19 0, determned under secton 716, s 1,000,000.
Pah. 18. Secton 30.721-1 s strcken out, and there s nserted n
eu thereof the foowng:
Sec. 5. bnormates n Income n Ta abe Perod. ( cess Profts
Ta mendments of 19 1.)
Secton 721 of the Interna Revenue Code Is amended to read as foows:
Sec. 721. bnormates n Income n Ta abe Perod.
(a) Defntons. For the purposes of ths secton
(1) bnorma ncome. The term abnorma ncome means
ncome of any cass ncudbe n the gross ncome of the ta payer
for any ta abe year under ths subchapter f It s abnorma for the
ta payer to derve ncome of such cass, or, f the ta payer normay
derves ncome of such cass but the amount of such ncome of such
cass ncudbe n the gross Income of the ta abe year s In e cess
of 125 per centum of the average amount of the gross Income of
the same cass for the four prevous ta abe years, or, f the ta -
payer was not n e stence for four prevous ta abe years, the
ta abe years durng whch the ta payer was In e stence.
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(2) Separate casses of ncome. ach of the foowng sub-
paragraphs sha be hed to descrbe a separate cass of ncome:
( ) Income arsng out of a cam, award. udgment, or
decree, or nterest on any of the foregong; or
( ) Income consttutng an amount payabe under a con-
tract the performance of whch requred more than 12 months;
or
(C) Income resutng from e poraton, dscovery, prospect-
ng, research, or deveopment of tangbe property, patents,
formuae, or processes, or any combnaton of the foregong,
e tendng over a perod of more than 12 months; or
(D) Income Incudbe n gross ncome for the ta abe year
rather than for a dfferent ta abe year by reason of a change
In the ta payer s accountng perod or method of accountng
or
( ) In the case of a essor of rea property, Income n-
cuded In gross ncome for the ta abe year by reason of the
termnaton of the ease; or
(F) Income consstng of dvdends on stock of foregn
corporatons, e cept foregn persona hodng companes.
the Income whch s cassfabe n more than one of such
subparagraphs sha be cassfed under the one whch the ta payer
Irrevocaby eects. The cassfcaton of ncome of any cass not
descrbed In subparagraphs ( ) to (F), ncusve, sha be sub|ect
to reguatons prescrbed by the Commssoner wth the approva
of the Secretary.
(3) Net abnorma ncome. The term net abnorma ncome
means the amount of the abnorma ncome ess, under regua-
tons prescrbed by the Commssoner wth the approva of the
Secretary, ( ) 125 per centum of the average amount of the gross
ncome of the same cass determned under paragraph (1), and
( ) an amount whch bears the same rato to the amount of any
drect costs or e penses, deductbe n determnng the norma-
ta net Income of the ta abe year, through the e pendture of
whch such abnorma ncome was n whoe or n part derved as
the e cess of the amount of such abnorma ncome over 125 per
centum of such average amount bears to the amount of such
abnorma ncome.
(b) mount ttrbutabe to Other Years. The amount of the
net abnorma ncome that s attrbutabe to any prevous or future
ta abe year or years sha be determned under reguatons prescrbed
by the Commssoner wth the approva of the Secretary. In the case
of amounts otherwse attrbutabe to future ta abe years, If the
ta payer ether transfers substantay a ts propertes or dstrbutes
any property In compete qudaton, then there sha be attrbutabe
to the frst ta abe year n whch such transfer or dstrbuton occurs
(or f such year s prevous to the ta abe year n whch the abnorma
Income s ncudbe In grass ncome, to such atter ta abe year) a
amounts so attrbutabe to future ta abe years not ncuded n the
gross ncome of a prevous ta abe year.
(c) Computaton or Ta for Current Ta abe Year. The ta
under ths subchapter for the ta abe year, In whch the whoe of such
abnorma Income woud wthout regard to ths secton be ncudbe,
sha not e ceed the sum of:
(1) The ta under ths subchapter for such ta abe year com-
puted wthout the ncuson n gross ncome of the porton of the
net abnorma ncome whch s attrbutabe to any other ta abe
year, and
(2) The aggregate of the ncrease n the ta under ths sub-
chapter whch woud have resuted for each prevous ta abe year
to whch any porton of such net abnorma ncome s attrbutabe,
computed as f an amount equa to such porton had been ncuded
In the gross Income for such prevous ta abe year.
(d) Computaton of Ta for Future Ta abe Year. The amount
of the net abnorma ncome attrbutabe to any future ta abe year
sha, for the purposes of ths subchapter, be Incuded n the gross
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Income for such ta abe year. The ta under t a subchapter for
such future ta abe year sha not e ceed the sum of
(1) the ta under ths subchapter for such future ta abe
year computed wthout the ncuson n e cess profts net ncome
of the porton of such net abnorma Income whch s attrbutabe to
such year, and
(2) the decrease n the ta under ths subchapter for the
prevous ta abe year n whch the whoe of such abnorma n-
come woud wthout regard to ths secton be ncudbe, whch
resuted by reason of the e cuson of the whoe or a part of the
abnorma ncome from the gross ncome for such prevous ta abe
year; but the amount of su h decrease sha be dmnshed by
the aggregate of the ncreases In the ta under ths subchapter
whch have resuted for the ta abe years Intervenng between
such prevous ta abe year and such future ta abe year because
of the ncuson n the gross ncome of the portons of such net
abnorma Income attrbutabe to such Intervenng years.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Sec. 30.721-1. bnormates n ncome n ta abe year. Secton 721 provdes
reef where abnorma ncome (as defned n secton 721(a)) for any e cess
profts ta ta abe year s attrbutabe to other ta abe years. The term abnor-
ma ncome means ncome of any cass ncudbe n the gross ncome of the
ta payer for any e cess profts ta ta abe year ( ) f t s abnorma for the
ta payer to derve gross ncome of such cass, or ( ) f the ta payer normay
derves gross Income of such cass but the amount of such ncome of such cass
Is n e cess of 125 per cent of the average amount of the gross ncome of the same
cass determned for the four prevous ta abe years or, f the ta payer was not
n e stence for four prevous ta abe years, the ta abe yenrs durng whch the
ta payer was In e stence. It s abnorma for a ta payer to derve ncome of
any cass ony f the ta payer had no gross Income of that cass for the four
prevous ta abe years. For the purpose of determnng abnorma ncome under
ths paragraph the gross ncome of the cass for the prevous ta abe years s
not to be ncreased or decreased by any aocaton under the provsons of secton
721. bnorma ncome s to b determned by consderng casses of ncome,
and not merey partcuar tems. s to the cassfcaton of ncome, see secton
30.721-2.
bnorma Income must be ad|usted, as provded n secton 721(a) (3), n order
to determne net abnorma ncome. Net abnorma ncome must then be aocated
to the varous tems ncuded n abnorma ncome. The tems of net abnorma
ncome so determned are the amounts whch mny be attrbuted to other ta abe
years under these reguatons. Net abnorma ncome and the aocated amounts
whch are tems of net abnorma Income are determned n the foowng manner:
(a) Net abnorma Income s determned as foows:
(1) The abnorma neome of each cass s computed;
(2) Such abnorma ncome s then reduced by 125 per cent of the average
amount of the gross Income of the same cass for the four prevous ta abe
years or, f the ta payer was not In e stence for four prevous ta abe years,
the prevous ta abe years durng whch t was n e stence;
(3) The abnorma ncome s further reduced by an amount whch bears
the same rato to the amount of any drect costs or e penses, deductbe n
determnng the norma-ta net Income for the ta abe year, through the
e pendture of whch such abnorma ncome was n whoe or n part derved,
as the abnorma ncome, reduced as provded n (a)(2), bears to the
abnorma ncome. The amount thus determned s the net abnorma ncome.
(6) The tems of net abnorma ncome are determned as foows:
(1) ach tem of abnorma ncome s reduced, but not beow zero, by an
amount equa to 125 per cent of the average ncome, f any, for the four
prevous ta abe years, arsng out of the same property as the ncome
represented by the tem;
(2) ach tem of abnorma ncome s further reduced, but not beow
zero, by an amount whch bears the same rato to the amount of any drect
costs or e penses, deductbe n determnng the norma-ta net ncome for
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the ta abe year, through the e pendture of whch such tem was n whoe
or n part derved, as the amount of the tem of abnorma ncome reduced
n (b)(1) bears to the amount of the tem of abnorma ncome;
(3) The aggregate ef the tems as reduced under (b) (1) and (2) s
determned;
( ) Net abnorma ncome s aocated to each tem n the proporton that
the tem, reduced as provded n (b) (1) and (2), bears to the aggregate
of the tems so reduced, determned n b) (3). The amount so aocated s
an tem of net abnorma ncome.
The foowng e ampes ustrate the computaton of tems of net abnorma
ncome:
ampe ( ). For the ta abe year 19 1, the Corporaton, whch makes Its
ncome ta returns on the caendar year bass, has gross ncome of 1.0 n,000
from udgments. Ths conssts of two tems, one of 800,000 for a |udgment
aganst and the other of 200,000 for a udgment aganst Y. Its average
ncome of ths cass for the four prevous ta abe years was 300,000. For 10 1,
t has drect deductbe e penses of 100,000 appcabe to the |udgment aynnst
. There were no drect deductbe e penses appcabe to the other udgment.
The 1,000,000 Is abnorma Income, snce t s n e cess of 12 ) per cent of the
average ncome of ths cass for the four prevous ta abe years. The tems of
net abnorma ncome represented by the |udgments are determned as foows:
(1) bnorma Income 1,000,000
(2) Less 125 per cent of average ncome ( 300,000) for the four
prevous ta abe years 375,000
(3) cess of (1) over (2) 625,000
1 ) Less an amount bearng same rato to 100,000 (deductons ap-
pcabe to tems In ths cass) as 625,000 bears to 1,000,000__ 100,000
(5) Net abnorma ncome 5 . 5. 000
(O Gross ncome on account of the |udgment aganst S00.000
(7) Less deductons appcabe to such Item 160,000
(8) mount of (6) reduced by (7) 0 0,000
(9) Gross Income on account of the |udgment aganst Y 200,000
(10) Less deductons appcabe to such Item None
(11) mount of (G) reduced by (10) 200,000
(12) ggregate of (8) and (11) 8 0,000
(13) Porton of net abnorma ncome aocated to the udgment
aganst (0 0,000/8 0,000 of 125,000) 00,000
(1 ) Porton of net abnorma ncome aocated to the udgment
aganst Y (200,000/8 0,000 of 525,000) 125,000
ampe (2). For the ta abe year 19 1, the Corporaton has 13 ,062.50
net abnorma Income from the two o eases whch It deveoped. One ease,
on the fed, produced an average of 60,000 a year durng the four prevous
ta abe years, and 85,000 n 19 1. There were 6,80f) drect e pense appcabe
to ths ease. The other ease, on the Y fed, produced no ncome In the four
prevous years. In 19 1, there were 3S,200 drect e penses appcabe to ths
ease. The ease produced 155,000 Income n 19 1. The Item of net abnor-
ma ncome represented by the ease Is 9,788.09, and the Item represented
by the Y ease s 12 ,273.81, computed as foows:
(1) Gross ncome on account of the ease 85,000.00
(2) Less 125 per cent of average ncome of ths ease for the four
prevous ta abe years (125 per cent of 60,000) 75,000.00
(3) Item (1) ess Item (2) 10,000.00
( ) Less amount bearng same rato to 6,800 (e penses appcabe
to ths ease) as 10,000 bears to 85,000 800.00
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(5) Income from ease reduced on account of average Income
and appcabe e penses 9,200.00
(6) Gross ncome on account of Y ease 155, 000.00
(7) Less 125 per cent of average ncome for the four
prevous ta abe years None
(8) Item (6) ess tem (7) 155,000.00
(9) Less amount bearng same rato to 38,200 (e -
penses appcabe to ths ease) as 155,000 bears
to 155,000 38, 200. 00
(10) Income from Y ease reduced on account of aver-
age ncome and appcabe e penses 116, 800. 00
(11) ggregate of tem (5) and tem (10) 126, 000.00
(12) Porton of net abnorma Income aocated to the ease
(9,200/126,000 of 13 ,062.50) 9,788.69
(13) Porton of net abnorma ncome aocated to the Y ease
(116,800/126,000 of 13 ,062.50) 12 ,273.81
Sec. 30.721-2. Cassfcaton of ncome. Secton 721(a)(2) ( ), ( ), (C), (D),
( ), and (F) sets forth s separate casses of Income. Income whch does not
fa wthn those provsons may be grouped by the ta payer, sub|ect to approva
by the Commssoner on the e amnaton of the ta payer s return, n such other
casses as are reasonabe n a busness of the type whch the ta payer conducts,
and as are approprate n the ght of the ta payer s busness e perence and
accountng practce.
the ncome whch reasonaby Is cassfabe In more than one cass sha be
cassfed under the one whch the ta payer rrevocaby eects. Such eecton sha
be made n the manner prescrbed In secton 30.721-3.
The cassfcaton of ncome n any year must be consstent wth the cassfcaton
made under secton 721 for prevous years. The cassfcaton must aso be
consstent wth any cassfcaton made In appyng to the ta payer secton 722 or
secton 711(b) (2) ( ), (I), or ( ).
Sec. 30.721-3. mount attrbutabe to other years. The mere fact that an tem
ncudbe n gross Income s of a cass abnorma ether n knd or n amount does
not resut n the e cuson of any part of such tem from e cess profts net ncome.
It s necessary that the tem be found attrbutabe under these reguatons n
whoe or n part to other ta abe years. Ony that porton of the Item whch s
found to be attrbutabe to other years may be e cuded from the gross ncome of
the ta payer for the year for whch the e cess profts ta Is beng computed.
Items of net abnorma Income are to be attrbuted to other years In the
ght of the events n whch such Items had ther orgn, and ony In such
amounts as are reasonabe n the ght of such events. To the e tent that
any tems of net abnorma ncome n the ta abe year are the resut of hgh
prces, ow operatng costs, or ncreased physca voume of saes due to n-
creased demand for or decreased competton n the type of product sod by
the ta payer, such tems sha not be attrbuted to other ta abe years. Thus,
no porton of an Item s to be attrbuted to other years If such tem Is of a
cass of ncome whch s n e cess of 125 per cent of the average ncome of the
same cass for the four prevous ta abe years soey because of an mprovement
n busness condtons. In attrbutng tems of net abnorma Income to other
years, partcuar attenton must be pad to changes In those years n the factors
whch determned the amount of such Income, such as changes n prces, amount
of producton, and demand for the product. No porton of an tem of net
abnorma ncome s to be attrbuted to any prevous year soey by reason of an
Investment by the ta payer n assets, tangbe or Intangbe, empoyed In or
contrbutng to the producton of such ncome.
Secton 721 has no effect upon the computaton of base perod net ncome or
of earnngs and profts and therefore does not affect the computaton of the
e cess profts credt Smary, t has no appcaton n the determnaton of
ta es other than the e cess profts ta mposed by Subchapter of Chapter 2.
mounts attrbuted to future years are to be ncuded n gross Income for such
years for e cess profts ta purposes ony. If the ta payer ether transfers
substantay a ts propertes or dstrbutes any property n compete qudaton
pror to the cose of the ast future year to whch any such amounts are attrb-
utabe, then a amounts of net abnorma Income attrbutabe to years subsequent
to both
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(a) the frst year n whch such transfer or dstrbuton n qudaton
occurs, and
(6) the ta abe year n the gross ncome of whch such abnorma ncome
woud have been ncuded e cept for secton 721
sha be Incuded n the gross ncome for the year referred to n (a) or the year
referred to In (6), whchever s the ater. For e ampe, f a ta payer reazes n
191 net abnorma Income attrbutabe to the years 19 2 to 19 6, ncusve, and
n 19 5 begns to dstrbute ts property In compete qudaton, the porton of the
net abnorma Income attrbutabe to the future year 19 6 s to be reaocated to
and Incuded n the gross ncome for 19 5 (the frst year of qudaton) n
addton to the amount aready attrbuted to that year. If the frst dstrbuton
n qudaton occurred before the year of reazaton, for e ampe, n 19 3, the
portons of the net abnorma Income attrbutabe to the future years 19 5 and
19 6 woud be Incuded n the gross ncome for 19 (the year of reazaton)
In addton to the amount aready attrbuted to that year. In nether event w
the aocatons orgnay made to 19 2,19 3, and 19 be dsturbed.
Specfc methods of treatng tems of net abnorma ncome of the s casses
specfed In secton 721(a) are set forth n sectons 30.721-6 to 30.721-11. These
methods are to be apped sub|ect to the provsons of ths secton.
ta payer camng the benefts of secton 721 sha fe wth ts e cess profts
ta return a detaed statement In dupcate contanng the foowng nformaton :
(1) the amount and a descrpton of each cass of ncome camed to be
abnorma, and the amount and a descrpton of each tem In each such
cass;
(2) for each cass of Income camed to be abnorma, the amount and a
descrpton of each tem of ncome of the same cass derved durng the four
ta abe years mmedatey precedng the ta abe year, and the aggregate
amount of such Items for each ta abe year;
(3) for each cass of Income camed to be abnorma, the amount of net
abnorma Income, the amount of each tem of net abnorma Income, and the
computatons by whch these amounts were determned ;
( ) the transactons n whch each such tem had ts orgn, the method
used In aocatng such Item, the amount aocated to each year, and the
reasons therefor; and
(5) a other facts upon whch the ta payer rees.
If any tem of Income Is reasonaby cassfabe n more than one cass, the ncu-
son of such tem n any one of such casses n the statement referred to above
ha consttute an Irrevocabe eecton by the ta payer for the purpose of secton
721(a) (2).
Seo. 30.721- . Computaton of ta for evn-ent ta abe year. The e cess profts
ta for the ta abe year sha be the smaer of the foowng amounts:
(a) The e cess profts ta computed wthout e cudng from gross Income
any amounts attrbutabe to other years under secton 721 ; or
(6) The sum of (1) the e cess profts ta for the ta abe year computed
wthout ncudng n gross ncome the amount of tems of net abnorma
ncome attrbutabe to other ta abe years, and (2) the aggregate of the
amounts of addtona e cess profts ta whch woud have resuted for
prevous e cess profts ta ta abe years f the gross ncome for each such
ta abe year had been Increased by the ncuson theren of the amount of
Items of net abnorma ncome attrbutabe thereto.
For an ustraton of the computatons requred by ths secton, see the e ampe
n secton 30.721-6.
Sec. 30.721-5. Computatons of ta for future ta abe years. mounts of tems
of net abnorma Income attrbutabe to a future ta abe year sha be ncuded In
the gross ncome of such ta abe year for the purposes of the e cess profts ta .
The e cess profts ta for a future ta abe year to whch any porton of the
net abnorma ncome for a prevous ta abe year s attrbuted Is the smaer
of the amounts determned under (a) and (6) beow:
(a) The e cess profts ta for such year computed wth the ncuson n
gross ncome of such porton of the net abnorma Income;
(6) The sum of
(1) the e cess profts ta for such year computed wthout the Incuson
n gross ncome of such porton of the net abnorma ncome, and
(2) the e cess of
() the decrease In e cess profts ta for the year of reazaton
whch resuted from the e cuson of the net abnorma Income from
the gross Income for such year, over
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() the aggregate of the Increases n e cess profts ta for
Intervenng years resutng from the ncuson n gross ncome of
other portons of such net abnorma ncome.
Ths secton may be ustrated by the foowng e ampe:
ampe. In the ta abe year 19 0, the Corporaton reazed 18,000 net
abnorma ncome, 2,000 of whch s attrbuted to the ta abe year 19 0 and
,000 to each of the ta abe years 19 1 through 19 . For the years 19 0
through 19 2, the ad|usted e cess profts net ncome, computed wth these
attrbuted amounts ncuded n gross Income, and the resutng e cess profts ta
are as foows:
d|usted
cess
profts ta
profts
ncome.
19 0
,000
5 .000
10 .000
1,000
15, 00
33,100
19 1
19 2
The ad|usted e cess profts net ncome for 19 3, after the Incuson n gross
Income of the amount attrbuted to such year, s 12 ,000. The e cess profts ta
for such year s 0,500, computed as foows:
(a) Ta on 12 ,000, computed wthout regard to the mtatons of sec-
ton 721(d) 1,100
(6) (1) Ta on 120,000 (ncome for 19 3 e cudng amount attrbuted
to such year) 39,500
(2) ( ) Ta for 19 0 f secton 721 were not apped to the
net abnorma ncome for such year (ta on
,000 pus the 1(5,000 attrbuted to other years,
or a tota of 20.000) 5,000
( ) Less ta for 19 0 after appcaton of secton 721_ 1,000
(C) Decrease n ta for 19 0 due to appcaton of sec-
ton 721 ,000
(3) ( ) Ta for 19 1 after appcaton of secton
721 15, 00
( ) Less ta for 19 1 f attrbuted ncome of
,000 were e cuded from gross ncome
(ta on 50,000) 1 ,000
(C) Increase n ta for 19 1 due to ncuson
of attrbuted ncome 1, 00
( ) ( ) Ta for 19 2 after appcaton of secton
721 33,100
( ) Less ta for 19 2 f attrbuted ncome of
,000 were e cuded from gross Income
(ta on 100,000) 31,500
(C) Increase n 19 2 ta due to ncuson of
attrbuted ncome 1,000
(5) ggregate of ncreases n ta for ntervenng years 19 1
and 19 2 (tem (3) (C) pus tem ( )(C) 3,000
(6) cess of decrease n ta for 19 0 over aggregate of ncreases
n ta for ntervenng years 19 1 and 19 2 (tem (2) (C)
mnus tem (5)) 1,000
(7) Sum of ta on Income for 19 3, e cudng amount attrbuted to
such year, pus e cess of decrease n ta for 19 0 over aggre-
gate of ncreases n ta for 19 1 and 19 2 (tem (1) pus
tem (6)) 0,500
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Snce the amount computed In ( )(7), 0,500, Is ess than the amount com-
puted In (a), 1,100, the e cess profts ta of the Corporaton for 19 3 s
0,500, the smaer amount.
In the above e ampe, the decrease n ta for 19 0 ( ,000) has heen equaed
by the aggregate of the ncreases n ta for the ntervenng years 19 1 through
1W3 ( , OO ,600 - ,000). Therefore, the ,000 attrbuted to 19 has no
effect on the ta for that year.
Pak. 19. Secton 30.721-2 s renumbered secton 30.721-6 and s
further amended as foows:
( ) The frst two sentences are amended to read as foows:
The frst cass of potentay abnorma Income specfcay sot forth In secton
721(a)(2) Is ncome arsng out of a cam, award, |udgment, or decree, or
nterest thereon. tems of such ncome are of the same cass.
( ) The frst paragraph of the e ampe s amended by changng
the headng of the ast coumn of the tabuaton from Gross ncome
to Income attrbuted, and by substtutng for the second sentence
thereof the foowng two sentences:
The Corporaton has not n any pror year derved ncome from any ke
source: nor are there any drect e penses nvoved n obtanng the |udgment
whch are deductbe for 19 1. Ths amount, therefore, represents the net ab-
norma ncome, and s the ony Item ncuded theren.
Par. 20. Secton 30.721-3 s renumbered secton 30.721-7, and s
further amended as foows:
( ) The frst sentence s amended to read as foows:
The second cass of potentay ahnorna ncome specfcay set forth In secton
721(a)(2) s ncome consttutng amounts payabe under contracts the per-
formance of whch requred more than 12 months.
( ) The e ampe n such secton s amended to read as foows:
ampe. In 19 1 the Corporaton whch makes ts ncome ta returns on
the caendar year bass competes two contracts for the constructon of budngs,
one of whch was begun In 1938 and the other n 1939. Its gross ncome for 19 1
from the two ong-term contracts amounts to 1,000,000. of whch 800,000 s
derved from the 1938 contract and 200,000 from the 1939 contract. It reports
ncome of ths cass upon the competed contract bass n accordance wth secton
19. 2- (b), Reguatons 103, and correspondng provsons of pror reguatons.
Its gross ncome from ong-term contracts for the years 193 , 1938, 1939, and 19 0
amounted to 250,000, 350,0 ), 200,000, and 00,000, respectvey. Therefore,
n 19 1 the gross ncome ( 1,000,000) arsng from ong-term contracts s n e cess
of 125 per cent ( 375,000) of the average gross ncome ( 300,000) of that cass
for the years 1937, 1938, 1939, and 19 0. Such gross ncome for 19 1 s therefore
sub|ect to the treatment provded n secton 721. If there were no drect e penses
other than those aready taken Into account n determnng gross ncome, the
net abnorma Income of ths cass s 1,000,000 mnus 375,000, or 625,000. The
tem of net abnorma ncome for the 1938 contract s 500,000 (800,000/1,000,000
of 625,000). See secton 30.721-3. Smary the tem of net abnorma ncome
tor the 1939 contract s 125,000 (200,000/1,000,000 of f525,000). ssumng that
the tota e pendtures propery appcabe to the 1938 contract amount to 5,000,000,
of whch the respectve sums of 500,000, 1,250,000, 1,500,000, and 1,750,000 are
Uocabe to the years 1938, 1939, 19 0, and 19 1, then the tem of 500,000 derved
from the 1938 contract s attrbutabe to those years In the respectve amounts of
50,000, 125,000, 150,000, and 175,000. In ke manner the amount of 125,000
representng the gross ncome derved from the 1939 contract sha be attrbuted
to the years 1939, 19 0, and 19 1 In proporton to the e pendtures appcabe to
that contract. For method of computaton of the e cess profts ta for the year
19 1, see secton 30.721- and the e ampe n secton 30.721-6.
Par. 21. Secton 30.721- s renumbered secton 30.721-8, and s
amended to read as foows:
Sec. 30.721-8. poraton, dscovery, prospectng, research, or deveopment.
The thrd cass of potentay abnorma Income specfcay set forth n secton
0 3 1 1
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721(a) (2) Is Income resutng from e poraton, dscovery, prospectng, research,
or deveopment of tangbe property (such as mnes, o producng property, and
tmber tracts), patents, formuae, or processes, or any combnaton thereof,
e tendng over a perod of more than 12 months. The e poraton, ds-
covery, prospectng, research, or deveopment must be that of the ta payer.
Income resutng from actvtes of such a character carred on by a predecessor
s not entted to the treatment provded In secton 721.
n tem of ncome resutng from e poraton, dscovery, prospectng, research,
or deveopment s a such ncome for the ta abe year arsng out of a unt of
property such as an o ease or other mnera property defned n secton
19.23 (m)-(t), a patent, or a formua. If the ta payer engages In manufac-
turng, marketng, mnng, o producton, or smar actvtes, ony such porton
of the resutng ncome as s attrbutabe to e poraton, dscovery, prospectng,
research, or deveopment Is wthn the cass of ncome descrbed n ths secton.
For e ampe, the Corporaton deveops a patented devce and Itsef manufac-
tures and ses such devce. It aso permts other corporatons to manufacture
such devce upon payment of a royaty of 10 for each devce produced. Income
resutng from the deveopment of the devce s the sum of the royates n-
cuded n ncome and so much of the Income arsng out of the sae of the unts
manufactured by the ta payer Itsef as does not e ceed 10 for each devce so
manufactured and sod.
In genera, an tem of net abnorma ncome of the cass descrbed n ths
secton s to be attrbuted to the ta abe years durng whch e pendtures were
made for the partcuar e poraton, dscovery, prospectng, research, or deveop-
ment whch resuted n such tem beng reazed and n the proporton whch the
amount of such e pendtures made durng each such year bears to the tota of
such e pendtures. ocaton of tems of net abnorma ncome of the cass
descrbed n ths secton must be made accordng to the prncpes set forth n
secton 30.721-3.
Ths secton may be further Iustrated by the foowng e ampes:
ampe (1). In anuary, 1938, the Corporaton began the deveopment of
a certan devce on whch t e pended consderabe sums. The corporaton secures
a patent on such devce n December, 19 0, and In the same month ses such
patent at a proft. It dd not n any of the four mmedatey precedng years
derve ncome of the cass specfed In secton 721(a) (2) (C). The net abnorma
ncome represented by ths tem s 250,000. In 1938, the corporaton e pended
50,000 on the deveopment of ths devce, 100,000 n 1939, and 150,000 n 19 0,
a tota of 300,000. For e cess profts ta purposes, one-s th (50,000/300,000)
of the tem of 250,000 s, therefore, attrbutabe to 1938; one-thrd (100,-
000/300,000) s attrbutabe to 1939; and one-haf (150,000/300,000) s attrbutabe
to 19 0. For method of computaton of the e cess profts ta for the year 19 0,
see secton 30.721 1 and the e ampe In secton 30.721-5.
ampe (2). In 1939, the Corporaton purchased from , an nventor, the
rghts to a devce he was deveopng, payng hm ,500 for such rghts. In per-
fectng the devce, the corporaton spent 3,000 n 1939 and 6,000 n 19 0, or a
tota of 9,000. patent was obtaned on the devce n 19 0, and It was censed
for use n the ndustry. The corporaton had a 15,000 tem of net abnorma
ncome n 19 0 as a resut of the royates receved for the use of ths devce.
Of ths tem, 5,000 (U of 15,000) s attrbutabe to 1939, and may be e -
cuded from gross ncome for the year 19 0 In the computaton of e cess profts
ta for that year. For method of computaton of the e cess profts ta for
the year 19 0, see secton 30.721- and the e ampe n secton 30.721-6.
Par. 22. Secton 30.721-5 s renumbered secton 30.721-9, and s
further amended as foows:
( ) The frst paragraph s amended to read as foows:
The fourth cass of potentay abnorma Income specfcay set forth In sec-
ton 721(a) (2) s ncome whch s Incudbe n gross ncome for the ta abe year
rather than for a dfferent ta abe year by reason of a change In the ta payer s
accountng perod or method of accountng. Ths cass may ncude such Items
of ncome as are ncudbe n gross ncome for the ta abe year by reason of a
change from the nstament method to the straght accrua method of accountng,
a change n nventory method, or a change from the reserve method to the specfc
charge-off method for the treatment of bad debts. Items of net abnorma ncome
ncudbe n gross ncome for the ta abe year rather than for a dfferent ta abe
year by reason of a change from the nstament method to the straght accrua
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method of accountng sha be attrbuted to the year or years such tems accrued.
The method of aocatng tems of net abnorma ncome ncudbe n gross ncome
for the ta abe year rather than for a dfferent year by reason of other changes
n accountng method or changes n accountng perod s to be determned n each
partcuar case upon consderaton of a the facts n the case. (See secton
30.721-3 as to the statement requred to be fed where the benefts of secton 721
are camed.)
( ) The ast paragraph s amended to read as foows:
Under the provsons of secton 30.721-3, the tems of net abnorma ncome
Incuded n the abnorma Income of 380,000 resutng from saes contracts
made pror to 19 0 are to be attrbuted to the years n whch such contracts
were made. For method of computaton of the e cess profts ta for the
year 19 0, see secton 30.721- and the e ampe n secton 30.721-6.
Par. 23. Secton 30.721-6 s renumbered secton 30.721-10, and s
amended to read as foows:
Sec. 30.721-10. Income derved by essor from termnaton of ease. The ffth
cass of potentay abnorma ncome specfcay set forth n secton 721(a) (2)
Is amounts ncuded n the gross ncome of a essor for the ta abe year by
reason of the termnaton of the ease. mounts may be requred to be so
Incuded by reason of the fact that mprovements made by the essee upon
the eased property come nto the possesson or contro of the essor upon
termnaton or forfeture of the ease. In such cases, f the ncome ncudbe
s abnorma ether n knd or n amount, the resutng tem of net abnorma
Income sha be aocated n accordance wth the foowng rues:
(a) If the ease has not been canceed or forfeted, but has merey
e pred, the amount of such tem sha be spread over the fe of the ease;
(6) If the ease has been canceed or forfeted, but the remanng usefu
fe of the mprovement s not n e cess of what woud have been the reman-
ng fe of the ease had the canceaton or forfeture not occurred, the amount
of such tem sha be spread over what woud have been the remanng fe
of the ease;
(c) If the ease has been canceed or forfeted and the remanng usefu
fe of the mprovement s n e cess of what woud have been the remanng
fe of the ease had the canceaton or forfeture not occurred, then
(1) n amount whch boars the same rato to the tem of net abnorma
ncome as the perod whch woud have consttuted the remanng fe
of the ease bears to the remanng usefu fe of the mprovement sha
be spread over what woud have been the remanng fe of the ease,
and
(2) The remanng porton of the tem sha be spread over the fe
of the ease, ncudng what woud have been ts remanng fe had the
canceaton or forfeture not occurred.
mounts attrbuted to each future ta abe year are to be Incuded In gross
ncome for such year for the purpose of computng the e cess profts ta .
See secton 30.721-5. Ths paragraph may be ustrated by the foowng
e ampe:
ampe. On anuary 1, 1929, the Corporaton, whch makes ts ncome ta
returns on the caendar year bass, eased to the Corporaton an unmproved
ste. The atter corporaton competed a budng on ths ste on une 30, 1931.
Such ease was for a perod of 20 years and by ts terms e pred on December 31,
19 8. On uy 1, 19 0, the ease s forfeted and the budng comes nto the
possesson and contro of the Corporaton. The vaue of the budng as of
such date s 100,000, and ts remanng usefu fe s 16 years. The Corporaton
dd not, pror to 19 0, derve gross ncome of ths nature, nor dd t report as
gross ncome any amount wth respect to the erecton of the budng. In 19 0
there were no drect costs or e penses attrbutabe to the reazaton of such
ncome. The net abnorma ncome for ths tem s, therefore, 100,000. Snce
the remanng usefu fe of the mprovement s 16 years, but what woud have
been the remanng fe of the ease s ony 8 , years, of 100,000, or 53,125,
s to be spread over what woud have been the remanng fe of the ease, . e.,
the ast haf of 19 0, and the caendar years 1 ) 1 to 19 8, both ncusve. Snce
there are 17 haf-years n such perod, - of 53,125, or 3,125, s to be aocated
to the ast haf of 19 0, and 7 of 53,125, or 6,250, to each of the caendar years
19 1 to 19 8, both ncusve. The remander of the 100,000 tem, or 6,875
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( 100,000 mnus 53,125), s to be spread over the years 1929 to 19 8, both Incu-
sve, . e., 20 of 6,875, or 2,3 3.75, s to be aocated to each such year. The
tota amount aocabe to each year s as foows:
Tears: mount per year.
1929-1939 2, 3 3. 75
19 0
Porton of 53,125 aocated to ast haf of year 3,125. 00
Pus: Porton of 6,825 aocated to such year 2,3 3. 75
Tota 5, 68. 75
19 1-19 8
Porton of 53,125 aocated to each year 6,250. 00
Pus: Porton of 6,825 aocated to each year 2,3 3. 75
Tota 8,593. 75
The amounts aocated to the years 1929 to 1939, both Incusve, w have no
effect upon the computaton of the e cess profts ta . The e cess profts ta for
the ta abe year 19 0 s to be determned by takng nto gross ncome for such year
ony 5, 68.75 of the 100,000 tem otherwse ncudbe. The amounts attrbuted
to future years must be ncuded n gross ncome for such years for the purpose of
computng the e cess profts ta , as provded n secton 30.721-5.
Other tems of net abnorma ncome resutng from the termnaton of the ease
are to be attrbuted to the ta abe year n whch such tems are reazed and
pror or subsequent ta abe years n the ght of the agreement underyng the
reazaton of such tems. If, for nstance, the essee pays the essor a ump sum
as consderaton for the canceaton of a ease, the resutng tem of net abnorma
ncome, f any, sha be attrbuted rataby to the ta abe years ncuded n what
woud have been the remanng fe of the ease had such ease not been canceed.
Par. 2 . Secton 30.721-7 s renumbered secton 30.721-11, and s
amended to read as foows:
Sec. 30.721-11. Dvdends on stock of foregn corporatons other then foregn
persona hodng companes. The s th cass of potentay abnorma ncome
specfcay set forth n secton 721(a)(2) s dvdends on stock of foregn cor-
poratons, e cept foregn persona hodng companes. Ths secton s appcabe
ony to the e tent that such dvdends are not e cuded from e cess profts net
ncome under secton 711(a)(2)( ), and therefore does not appy n the com-
putaton of the e cess profts ta when the e cess profts credt based on n-
vested capta s used uness the stock on whch the dvdends were receved s
not a capta asset. In determnng whether the cass of ncome descrbed n
ths secton s abnorma or n e cess of 125 per cent of the average ncome of
the same cass for the four precedng ta abe years, ony dvdends receved
from foregn corporatons are to be taken nto account. The e cepton reatve
to dvdends from foregn persona hodng companes appes both to dstrbu-
tons actuay receved from foregn persona hodng companes and to con-
structve dvdends deemed to have been receved pursuant to secton 337.
Items of net abnorma Income of the cass heren descrbed are to be attrb-
uted to the years n whch were accumuated the earnngs and profts out of
whch the dstrbutons were made, f accumuated after the acquston by the
dstrbutee of the stock of the dstrbutng corporaton. If the earnngs and
profts out of whch the dstrbuton s made were accumuated pror to such
acquston, the ncome arsng out of the dstrbuton s to be attrbuted to the
ta abe year n whch the stock was acqured. The earnngs and profts out of
whch any dstrbuton s made are, as provded n secton 116, the most recenty
accumuated earnngs and profts.
Ths secton may be Iustrated by the foowng e ampe:
ampe. The Corporaton, a domestc corporaton, computng ts e cess
profts credt on the ncome bass, acqured n 1938 a of the stock of the T Com-
pany, Ltd., a foregn corporaton, whch s not a foregn persona hodng company.
The Y Company, Ltd., pad n uy, 19 0, a dvdend to the Corporaton n the
amount of 100,000. The Corporaton dd not prevousy receve dvdends
from ths or any other foregn corporaton. In 19 0 there were no drect costs or
e penses attrbutabe to the recept of ths dvdend. The 100,000 s therefore a
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snge Item of net abnorma ncome. The Y Company, Ltd., had earnngs and
profts of 75,000 n 19 0 and 125,000 In 1939. Foowng prncpes of e stng
aw wth respect to the source from whch dvdends are deemed to have been pad,
the 100,000 tem of net abnorma ncome sha be aocated between the years 19 0
and 1939 n the respectve sums of 75,000 and 25,0(10. See secton 115(b) and
correspondng provsons of pror revenue aws. For method of computaton of
the e cess profts ta for the year 19 0, see secton 30.721- and the e ampe n
secton 30.721-6.
Par. 25. Secton 30.722-1 s strcken out and there s nserted n eu
thereof the foowng:
Sec. 6. bnorma ase Perod arnngs. ( cess Profts Ta mend-
ments of 19 1.)
Secton 722 of the Interna Revenue Code s amended to read as
foows:
Sec. 722. d|ustment of rnorma ase Perod Net Income.
(a) Genera Rue. In the case of a ta payer whose frst ta abe
year under ths subchapter begns n 19 0, f the ta payer estabshes
(1) that the character of the busness engaged n by the ta -
payer as of anuary 1. 19 0, s dfferent from the character of the
busness engaged n durng one or more of the ta abe years n
ts base perod (as defned n secton 713(b) (1)) ; or
(2) that n one or more of the ta abe years n such base perod
norma producton, output, or operaton was nterrupted or dmn-
shed because of the occurrence of events abnorma n the case of
such ta payer; and
(8) the amount that woud have been ts average base perod
net ncome
( ) f the character of the busness as of anuary 1, 19 0,
bad been the same durng each of the ta abe years of such base
perod; and
( ) f none of the abnorma events referred to n paragraph
(2) had occurred; and
(C) f n each of such ta abe years none of the tems of
gross ncome had been abnormay arge, and none of the tems
of deductons had been abnormay sma; and
( ) that the amount estabshed under paragraph (3) s greater
than the average base perod net ncome computed under secton
713(d) or secton 7 2, as the case may be,
then the amount estabshed under paragraph (3) sha be consdered
as the average base perod net ncome of the ta payer for the purposes
of ths subchapter.
(b Rues for ppcaton of Suhsecton (a). For the purposes
of subsecton (a)
(1) gh prces of materas, abor, capta, or any other agent
of producton, ow seng prce of the product of the ta payer,
or ow physca voume of saes owng to ow demand for such
product or for the output of the ta payer, sha not be consdered
as abnorma.
(2) The character of the busness engaged n by the ta payer
as of anuary 1, 19 0, sha be consdered dfferent from the
character of the busness engaged n durng one or more of the
ta abe years n ts base perod ony f
( ) there s a dfference n the products or servces
furnshed; or
( ) there s a dfference n the capacty for producton
or operaton; or
(C) there s a dfference n the rato of nonborrowed
capta to tota capta; or
(D) the ta payer was n e stence durng ony part of
ts base perod ; or
( ) the ta payer acqured, before anuary 1, 19 0, a
or part of the assets of a compettor, wth the resut that
the competton of such compettor was emnated or d-
mnshed.
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(3) The average base perod net ncome determned under
subsecton (a) (3) sha be computed n the same manner as pro-
Tded n secton 713(d), e cept paragraphs (2) and ( ), but for
such purposes computng e cess profts net ncome and defct n
e cess profts net ncome on the bass of the assumptons made
In subsecton (a) (3).
( ) If subsecton (a) (1), or both subsectons (a) (1) and
(a)(2) are appcabe to any ta payer, ts average base perod
net ncome under subsecton (a) (3) sha not e ceed the e cess
profts net Income (as computed for the purposes of subsecton
(a)(3)) for the ast ta abe year n such base perod. For the
purposes of ths paragraph, f such ast ta abe year s of ess
than tweve months, the e cess profts net ncome for such ta -
abe year sha be paced on an annua bass by mutpyng by
tweve and dvdng by the number of months ncuded n such
ta abe year.
(c) Lmtaton on ppcaton of Genera Rue. Ths secton
sha not be appcabe uness
(1) the ta under ths subchapter for the ta abe year com-
puted wthout reference to ths secton, e ceeds 6 per centum of
the ta payer s norma-ta net ncome for such year; and
(2) the appcaton of ths secton woud resut n a dmnuton
of the ta otherwse payabe under ths subchapter for the ta abe
year by more than 10 per centum thereof.
(d) tent of Reducton n Ta Undeb Ths Secton. The app-
caton of ths secton sha not reduce the ta payabe under ths sub-
chapter for the ta abe year beow 6 per centum of the ta payer s
norma-ta net ncome for such year. The ta under ths subchapter
computed wth the appcaton of subsecton (a) sha be ncreased
by an amount equa to 10 per centum of the ta computed wthout
reference to ths secton.
(e) ppcaton fob Reef Undeb Ths Secton. The ta payer
sha compute ts ta and fe ts return under ths subchapter wthout
the appcaton of ths secton. The benefts of ths secton sha not
be aowed uness the ta payer, wthn s months from the date pre-
scrbed by aw for the fng of Its return, makes appcaton therefor
n accordance wth reguatons to be prescrbed by the Commssoner
wth the approva of the Secretary, e cept that f the Commssoner
n the case of any ta payer wth respect to the ta abty of any
ta abe year
(1) ssues a premnary notce statng a defcency n the ta
Imposed by ths subchapter such ta payer may, wthn nnety days
after the date of such notce, make such appcaton, or
(2) mas a notce of defcency ( ) wthout havng prevousy
ssued a premnary notce thereof or ( ) wthn nnety days after
the date of such premnary notce, such ta payer may cam
the benefts of ths secton In Its petton to the oard or n an
amended petton n accordance wth the rues of the oard.
If the appcaton s not fed wthn s months after the date prescrbed
by aw for the fng of the return, the appcaton of ths secton sha
not reduce the ta otherwse determned under ths subchapter by an
amount n e cess of the amount of the defcency fnay determned
under ths subchapter wthout the appcaton of ths secton. If the
average base perod net ncome has been determned under subsecton
(a) for any ta abe year, the Commssoner may, by reguatons ap-
proved by the Secretary, prescrbe the e tent to whch the mtatons
prescrbed by ths subsecton may be waved for the purpose of deter-
mnng the ta under ths subchapter for a subsequent ta abe year.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
the enactment of the cess Profts Ta ct of 19 0.
Sec. 30.722-1. Genera rue for ad|ustment of abnorma base perod, net ncome.
In computng the e cess profts credt based on ncome, ta payers whose frst
e cess profts ta ta abe year begns n 19 0 may, under the condtons stated n
secton 722 and sub|ect to the mtatons thereof, obtan reef wth respect to
abnormates n ther base perod net ncome.
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Secton 722 sets forth the foowng specfc tests whch the ta payer must meet
to obtan the beneft thereof:
(0) The ta payer must frst estabsh
(1) that the character of ts busness engaged n as of anuary 1,19 0, was
dfferent from the character of ts busness engaged n durng one or more of
the ta abe years n ts base perod (as defned n secton 713(b) (1)), or
(2) that the norma producton, output, or operaton n one or more of the
ta abe years n the base perod was nterrupted or dmnshed because of
events abnorma n the case of the ta payer.
(6) The ta payer must ne t estabsh the amount that woud have been ts
average base perod net ncome
(1) f the character of Its busness as of anuary 1, 19 0, had been the
same durng each of the ta abe years of ts base perod, and
(2) f none of the abnorma events referred to n (a) (2) above had
occurred, and
(3) f n each of such ta abe years the gross ncome of any cass had not
been abnormay arge and the deductons of any cass had not been abnormay
sma.
(c) The ta payer must then show that the amount estabshed under (6) above
Is greater than the average base perod net ncome computed under secton 713(d)
or secton 7 2, as the case may be.
If the foregong tests are met, then the amount estabshed under (6) above
sha be consdered as the average base perod net ncome of the ta payer for the
purpose of computng the ta payer s e cess profts credt based on ncome. See,
however, sectons 30.722- and 30.722-5.
Sec. 30.722-2. Rues for estabshng a change n character of busness or nter-
rupton of producton. (a) Change n character of busness. The character of
the busness engaged n by the ta payer as of anuary 1, 19 0, s consdered df-
ferent from the character of the busness engaged n durng one or more of the
ta abe years n ts base perod ony f:
(1) There s a dfference n the products or servces furnshed. product or
servce s dfferent from another product or servce f the trade custom or practce
treats t as a product or servce of a dfferent cass. mere mprovement n a
product or servce does not consttute a dfference n the product or servce. For
e ampe, a corporaton In one year of ts base perod was engaged n both the
rado broadcastng busness and the department store busness and on anuary 1,
19 0, was engaged ony n the rado broadcastng busness, the department store
busness havng been dscontnued. The corporaton s deemed to have changed
the character of ts busness. The same s true whore a corporaton was engaged
n one of the base perod years n both the whoesae and reta dry goods busness
and on anuary 1, 19 0, was engaged ony n the reta dry goods busness.
(2) There s a dfference n the capacty for producton or operaton. Thus,
for e ampe, a corporaton may have enarged the sze or capacty of ts pant
substantay as compared wth the prevous sze or capacty of ts pant or may
have ncreased ts capta substantay as compared wth ts prevous capta.
(3) There Is a dfference n the rato of nonborrowed capta to tota capta.
corporaton whch durng the base perod was operatng argey on borrowed
capta but as of anuary 1,19 0, was operatng argey on equty capta s deemed
to have such dfference.
( ) The ta payer was n e stence durng ony part of ts base perod. n
e ampe s where a corporaton n 1938 organzed nto two or more new corpora-
tons. The new corporatons were n e stence for ony a part of the base perod.
Smary, any other corporaton organzed ess than 8 months pror to ts frst
e cess profts ta ta abe year was n e stence for ony a part of ts base
perod.
(5) The ta payer acqured before anuary 1, 19 0, a or part of the assets of
a compettor wth the resut that the competton of such compettor was em-
nated or dmnshed. For e ampe, two competng newspapers were operatng at
a oss durng a or part of the base perod. Pror to anuary 1, 19 0, the frst
newspaper purchased the franchses and other assets of the second newspaper
and as a resut of ths transacton the condton of the survvng paper was
much more promsng. dfference n the character of the busness of the ta -
payer has occurred.
(6) Interrupton or dmnuton of norma producton, output, or operaton n
the base perod. ta payer may secure reef under secton 722 If It estabshes
that ts norma producton, output, or operaton n one or more ta abe years n
ts base perod was nterrupted or dmnshed because of events abnorma In the
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case of the ta payer. Not every nterrupton or dmnuton of norma producton,
output, or operaton s a reason for estabshng a dfferent average base perod
net ncome. The nterrupton or dmnuton must be the drect resut of an event
abnorma for the ta payer. In genera, an event s abnorma for the ta payer
f n the ght of the ta payer s busness e perence t s not a usua event. gh
prces of materas, abor, capta, or any other agent of producton, ow seng
prce of the product of the ta payer, or ow physca voume of saes owng to
ow demand for such product or for the output of the ta payer, are not abnorma.
bnorma events mght ncude a food, a fre, a strke, or any other unusua
event hnderng producton, output, or operaton. s to what consttutes norma
producton, output, or operaton, see secton 30.722-3(c).
Skc. 30.722-3. Determnaton of substtute average base perod net ncome.
(a) verage bane perod net ncome under norma condtons: n genera. avng
estabshed a change n the character of ts busness or an nterrupton or dmnu-
ton of norma producton, output, or operaton n accordance wth secton 30.722-2,
the ta payer must estabsh the amount that woud have been ts average base
perod net Income from the begnnng of ts base perod (1) f t had been engaged
durng ts entre base perod n a busness of the same character as that engaged
n as of anuary 1, 19 0, and (2) f ts norma producton, output, or operaton
had not been nterrupted or dmnshed at any tme durng the base perod by
events abnorma for the ta payer, and (3) If, n each of such ta abe years, ts
gross ncome of any cass had not been abnormay arge and ts deductons of
any cass had not been abnormay sma. What woud have been the average
base perod net Income of the corporaton under such crcumstances s a queston
to be determned upon consderaton of a the facts n the partcuar case. No
defnte and concusve tests can be prescrbed by whch t can be determned
fnay n advance of an e amnaton of the facts of each case what substtute
average base perod net ncome may be estabshed.
mong the factors n the base perod whch may be matera n determnng a
substtute average base perod net ncome are genera busness condtons, com-
petton, and demand for the products or servces of the cass produced or ren-
dered by the ta payer. gh prces of materas, abor, capta or any other
agent of producton, ow seng prce of the product, and ow physca voume
of saes owng to ow demand for such products or output durng the base
perod are a factors to be taken nto consderaton and are not to be treated
as abnorma. Thus, for e ampe, n the case of a corporaton whch n 19. 9
changed the character of ts busness from the manufacture of typewrter parts
to the manufacture of rfes, a reconstructon of the e cess profts net ncome
of such a corporaton for the ta abe years n ts base perod as a manufacturer
of res woud have to take nto consderaton, among other factors, the actua
demand for such rfes n 1936, 1937, and 1938.
For ta abe years n whch the e cess profts net Income of the ta payer s
to be reconstructed, the ta payer must estabsh what ts e cess profts net
ncome woud have been under the condtons set forth n secton 722(a)(3)
for each of such years computed wth the ad|ustments provded n secton
711(b). The ta payer s substtute average base perod net ncome s then to be
computed n accordance wth secton 713(d) (1) and (3), that s, wthout
regard to any hypothetca e cess profts net ncome computed under secton
713(d)(2) and wthout regard to the provsons of secton 7 2.
(b) Where there was a change n the character of the busness. In deter-
mnng the substtute average base perod net ncome of a ta payer whch as
of anuary 1, 19 0, was engaged In a busness of a dfferent character from
that engaged n durng one or more of the ta abe years In the base perod,
one of the factors to be consdered s the prevous busness e perence of the
same corporaton or pree stng busness enterprse durng the base perod.
Thus, f a corporaton s reorganzed n the base perod nto two new corpora-
tons, the e cess profts net ncome of each of the new corporatons for the
ta abe years n the base perod n whch each was not n e stence may be
determned from that part of the busness of the orgna corporaton operated
by each of the new corporatons and that part of the e cess profts net ncome of
the orgna corporaton attrbutabe to such part of the busness.
In no case may the amount of the average base perod net ncome estabshed
by reason of a change n the character of the ta payer s busness e ceed the e cess
profts net ncome as estabshed for the ast ta abe year n the base perod.
If such ta abe year conssts of ess than 12 months the e cess profts net Income
for such ta abe year sha be paced on an annua bass by mutpyng by 12
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and dvdng by the number of months Incuded In such ta abe year. The
method of determnng the average base perod net ncome may be ustrated
by the foowng e ampe:
ampe. The Newspaper Corporaton, whose fsca year ended March 31,
19 , acqured the franchses and other assets of a rva newspaper n December,
1939. Pror to that date, both newspapers had operated at a oss. fter such
acquston, the Newspaper Corporaton showed a arge proft. The corpora-
ton estabshes that f t had possessed the assets of the rva newspaper durng
ts entre base perod ts e cess profts net Income for ts ta abe years n the base
perod woud have been as foows:
rects profts
Fsca vear endng net ncome.
Ma rch 31, 1937 310,000
March 31, 1938 320, 000
Murch 31, 1939 290,000
March 31, 19 0 300,000
The nverage base perod net ncome of the Newspaper Corporaton com-
puted under secton 713(e) s 305,000. Snce, however, under secton
722(b)( ) the hghest amount whch may be substtuted f r the average base
perod net ncome s the amount of e cess profts net ncome estabshed for
the ast ta abe year of the base perod, the substtute average base perod
net ncome s 300,000.
If the dfference the character of the busness engaged n by a corpora-
ton as of anuary 1, 19 0, s that t was n e stence durng ony part of ts
base perod, the e cess profts net ncome for a of ts ta abe years n the
base perod may have to be estabshed. The ta abe years n the base perod
durng whch such a corporaton was not n e stence are successve perods
of 12 months each, begnnng wth the forty-eghth month precedng the be-
gnnng of ts frst ta abe year under the e cess profts ta . ny remanng
perod of ess than 12 months durng whch, t was not n e stence s con-
sdered a ta abe year. The determnaton of such a corporaton s average
base perod net ncome may be ustrated by the foowng e ampe:
ampe. The Y Corporaton, whch makes Its ncome ta returns on the
caendar year bass, was organzed on uy 1, 1937, as a resut of the reorgan-
zaton of the Corporaton nto two new corporatons. The e cess profts net
ncome of the Y Corporaton computed wth the ad|ustments provded n secton
711(b) for the years 1938, 1939, and that porton of the year 1937 durng whch
t was n e stence s as foows:
cess proft
Year net ncome.
1937 0, ooo
1938 20,000
1939 150,000
ased on ths e perence and n accordance wth the prncpes set forth In
(a) of ths secton, the Y Corporaton estabshes that ts e cess profts net
Income for 1936, 1937, 1938, and 1939 woud have been as foows:
cess profts
Year net ncome.
1936 62, 000
1937 70, 000
1938 300,000
1939 200,000
The average base perod net ncome of the Y Corporaton, whether computed
under secton 713(e) or secton 713(f), can not under secton 722(b) ( ) e ceed
200,000.
(c) Where there wag an nterrupton or dmnuton of norma producton,
output, or operaton. If the ta payer estabshes that ts norma producton,
output, or operaton n one or more years n the base perod was nterrupted
or dmnshed because of events abnorma n the case of the ta payer, t must
then estabsh what ts average base perod net ncome woud have been f ts
base perod norma producton, output, or operaton had not boon so nterrupted
or dmnshed. The ta payer s norma producton, output, or o raton may be
determned from ts average producton, output, or operaton wth respect to
products or servces of the same cass. Such average producton, output, or
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98
operaton may be estabshed by the arerage amount of producton, output, or
operaton n the four prevous ta abe years, or, f the ta payer was not n
e stence for four prevous ta abe years, then for the prevous ta abe years
durng whch t was n e stence and so many of the succeedng ta abe years
endng before une 1, 19 0, as do not make the tota ta abe years n the test
perod more than four. The average producton, output, or operaton determned
shoud, however, be ad|usted n accordance wth the prncpes set forth n
(a) of ths secton for changes n prces, demand, the condton of the busness
engaged n by the ta payer, and other reevant busness factors occurrng n
the perod n whch the abnorma event affected the producton, output, or
operaton of the ta payer and not occurrng n the test perod. The average
producton, output, or operaton, as ad|usted. Is the ta payer s norma produc-
ton, output, or operaton. For the ta abe years n the base perod n whch,
as a drect resut of an abnorma event estabshed n accordance wth secton
30.722-2(6), such norma producton, output, or operaton was not attaned
the ta payer s e cess profts net ncome shoud be reconstructed as f for such
perod the ta payer had attaned such norma producton, output, or operaton.
In estabshng what woud have been Its average base perod net ncome under
secton 722(a)(3)( ), the ta payer s mted, n the ad|ustments whch t
may make, to ad|ustments for such nterruptons and dmnutons of norma
producton, output, or operaton as t estabshes under secton 30.722-2(6). The
abnorma event, however, need not have occurred In the base perod as ong
as ts consequences are drecty refected n producton, output, or operaton n
the base perod. For e ampe, f a fre n 1935 had destroyed a ta payer s
pant so that the ta payer s norma producton n 1936 was dmnshed, the
ta payer woud be permtted to estabsh what ts e cess profts net ncome
woud have been f ts norma producton had e sted n 1936.
(d) Where there are both a change of busness and an nterrupton of norma
producton. If a ta payer estabshes both a change h the character of ts bus-
ness and the occurrence of an abnorma event nterruptng or dmnshng ts nor-
ma producton, output, or operaton n the base perod, the ta payer must then
estabsh what ts average base perod net ncome woud have been as set forth n
(6) and (c) of ths secton. owever, such a ta payer s sub|ect to the mtaton
that ts average base perod net ncome thus determned can not e ceed the
amount estabshed under ths secton as the amount that woud have been the
e cess profts net ncome for the ast ta abe year In the base perod. If such
ta abe year conssts of ess than 12 months the e cess profts net ncome for
such ta abe year sha be paced on an annua bass by mutpyng by 12 and
dvdng by the number of months ncuded n such year.
(e) bnormates n gross ncome and deductons. In estabshng the subst-
tute average base perod net ncome, the ta payer must estabsh what ts average
base perod net ncome woud have been f n each of the ta abe years n ts base
perod no cass of gross ncome had been abnormay arge n amount and no cass
of deductons had been abnormay sma n amount. The ad|ustments to be made
under secton 722(a) (3) (C) are to be made ony n casses of gross ncome and
casses of deductons whch are abnorma n amount but not as the resut of a
dfference n the character of the busness or an nterrupton or dmnuton In the
norma producton, output, or operaton caused by an abnorma event, estabshed
under secton 30.722-2.
In genera, a cass of gross Income s abnormay arge to the e tent such
cass of gross ncome s arger n amount than 125 per cent of the average
amount (determned as provded beow) of the ta payer s gross Income of the
same cass, and a cass of deductons s abnormay sma to the e tent the
amount of deductons of such cass s smaer than 75 per cent of the average
amount (determned as provded beow) of the ta payer s deductons of the
same cass. In such a case, the average amount of gross ncome of the same
cass or of deductons of the same cass sha be determned by averagng the
amounts of such cass n the four prevous ta abe years, or, f the ta payer
was not n e stence for four prevous ta abe years, then for the prevous ta abe
years durng whch t was n e stence and so many of the succeedng ta abe
years endng before une 1, 19 0, as do not make the tota ta abe years In the
test perod more than four. In determnng the average amount of any cass
of gross ncome or deductons by whch an abnormaty s to be measured for
any year, the amount of gross ncome or of deductons for a year n the base
perod for whch there was a dfference n the character of the busness or an
nterrupton or dmnuton of norma producton, output, or operaton caused
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99
by an abnorma event s the amount of gross ncome or deductons estabshed
for sucb year; the amount of gross ncome or deductons of any cass ad|usted
as provded heren sha be used n computng the average amount of gross
Income or deductons of such cass for the appcaton of secton 722(a)(3)(C)
to a subsequent ta abe year. owever, f the ta payer estabshes that the
dsproporton n the amount of gross ncome or deductons of any cass for any
year s a consequence of hg prces of materas, abor, capta, or any other
agent of producton, ow seng prce of the product of the ta payer, or ow
physca voume of saes owng to ow demand for such product or for the output
of the ta payer, or of a change at any tme n the type, manner of operaton,
sze, or the condton of the busness engaged n by the ta payer, the gross
Income or deductons of such cass are not requred to be ad|usted under secton
722(a)(3)(C). That part of any cass of gross Income whch s determned to
be abnormay arge, as heren provded, sha be emnated from gross ncome.
That part of any cass of deductons determned to be abnormay sma, as
heren provded, sha be ncreased to the e tent t s abnormay sma. The
roes for determnng casses of deductons are set forth n secton 711(b)(1)
( ), (I), and ( ), and the reguatons prescrbed thereunder. The rues for
determnng casses of gross ncome are set forth n secton 721 and the regua-
tons prescrbed thereunder. The rue stated n the frst sentence of ths para-
graph may be ustrated by the foowng e ampes:
ampe ( ). The Corporaton, whch came nto e stence on anuary 1,
1936, and whch makes ts ncome ta returns on the caendar year bass, estab-
shes that t s entted to the benefts of secton 722 because of an abnorma
event nterruptng norma producton n 1937. For 1938, the corporaton s deduc-
ton for nterest on oans was 5,000. The average amount of the ta payer s
nterest deducton s to be determned for 1936, 1937, and 1939. The ta payer s
deductons of the same cass for those years were 1 ,000 for 1936, 0,000 for
1937, and 10,000 for 1S39. The average nterest deducton s therefore 11,000,
and the nterest deducton for 193S for purposes of the substtute e cess profts
net ncome for 1938 shoud be 8.2T)0 (75 er cent of 11,000).
ampe (2). The gross ncome of the Y ote Corporaton n 1939 from room
rent was 1,000,000 because of a Word s Far. The gross ncome from room
rent n 1938 was 700,000. The corporaton estabshes that the hote s gross
Income from room rent In 1937 woud have been 600,000 f a strke, by reason
of whch the corporaton was entted to the benefts of secton 722, had not
occurred. The gross ncome of the same cass n 1936 was 600,000, and n 1935
was 500,000. The average of the gross ncome of ths cass therefore was 600,000.
The gross ncome from room rent n 1938 therefore shoud be reduced to 750,000
(125 per cent of 600,000).
In estabshng the average base perod net ncome as f none of the casses
of gross ncome had been abnormay arge n amount and none of the casses of
deductons had been abnormay sma n amount, the ta payer s gross ncome
and deductons shoud be ad|usted to remove competey the effect of the abnor-
maty. Compementary ad|ustments must be made n other casses of deductons
and of gross ncome for any amount of gross ncome emnated or of deductons
ncreased. Thus, n e ampe (2) above n connecton wth the emnaton of
250,000 from gross ncome from room rent n 1039 there shoud be a correspond-
ng decrease n the deductons for e penses drecty ncurred n obtanng that
part of the gross ncome whch was emnated, such as the deducton for wages
of any addtona empoyees needed to earn the abnormay arge gross ncome.
S c. 30.722- . Lmtaton on appcaton of genera rue. The ad|ustments
provded n secton 722 sha not be operatve n the case of any ta payer uness
such ta payer estabshes that ts e cess profts ta
(a) when computed wthout reference to secton 722, e ceeds 6 per cent
of ts norma-ta net ncome for the ta abe year, and
(6) when computed wth the appcaton of secton 722(a), s an amount
whch s ess than 90 per cent of the e cess profts ta computed wthout
reference to secton 722.
s a necessary compement to these mtatons, further provsons are made
as to the amount of the e cess profts ta n the case of a ta payer entted
to the beneft of the ad|ustments provded n secton 722(a). If the ta payer
meets the tests set forth n (a) and (6) above, then there sha be added to the
ta computed after the appcaton of secton 722(a) an amount equa to 10
per cent of the amount of e cess profts ta computed wthout reference to
secton 722. The resutng ta s the ta payer s e cess profts ta f t s not
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100
ess than 6 per cent of the ta payer s norma-ta net Income for the ta abe
year; f t s ess than 6 per cent of the ta payer s norma-ta net Income, then
the ta sha be an amount equa to 6 per cent of the norma-ta net Income for
the ta abe year. The ta for the purpose of measurng the 8 per cent and
10 per cent mtatons s the ta after the appcaton of the foregn ta credt
provded n secton 729.
The appcaton of ths secton may be Iustrated by the foowng e ampes:
ampe (/). The Corporaton whch makes Its Income ta return on the
caendar year bass has a norma-ta net Income for 19 0 of 500,000 and an
ad|usted e cess profts net Income computed wthout reference to secton 722
of 200,000. The e cess profts ta on such amount Is 71,500, whch Is In e cess
of 6 per cent of the ta payer s norma-ta net ncome for 19 0. The corporaton
estabshes that by reason of a food n 1938 Its norma producton was nter-
rupted and ts e cess profts net ncome for 1038 was 100,000, athough t woud
have been 500,000 If such nterrupton had not occurred. The ta payer s average
base perod net ncome computed under secton 713(e) woud have been 100,000
arger If ts e cess profts net ncome for 1938 were consdered to be 500,000.
other facts remanng the same, the ad|usted e cess profts net ncome of
200,000 set forth above s to be reduced by the resutng 95,000 Increase n the
e cess profts credt (95 per cent of 100,000, the ncrease n average base perod
net ncome). The ad|usted e cess profts net ncome for 19 0 woud be 105,000
and the e cess profts ta on such amount woud be 33,500. To such 33,500
there must be added the amount of 7,150 (10 per cent of the ta , 71,500, com-
puted wthout reference to secton 722) and, thus, the ta payer s e cess profts
ta for 19 0, computed wth the appcaton of secton 722, Is 0,650 ( 33,500
pus 7,150).
ampe (2). The norma-ta net ncome of the Y Corporaton for the caendar
year 19 0 (ts ta abe year) s 200,000 and ts ad|usted e cess profts net
ncome computed wthout the beneft of secton 722 s 50,000. The e cess
profts ta on ths amount s 1 ,000, whch s n e cess of 6 per cent of the
corporaton s norma-ta net ncome for 19 0. The Y Corporaton meets the tests
of secton 722(a) and estabshes that ts ad|usted e cess profts net ncome for
19- 0 computed wth the ad|ustments provded n secton 722(a) woud be
3,000. The e cess profts ta on ths amount woud be 11,900. The Y Cor-
poraton s entted to the reef provded under secton 722 because the appca-
ton of secton 722(a) has reduced ts ta by more than 10 per cent, and, when
10 per cent of the ta computed wthout reference to secton 722 (10 per cent
of 1 ,000, or 1, 00) s added to the ta computed wth the ad|ustments provded
n secton 722(a) ( 11,900), the resutng e cess profts ta , 13,300, s more than
6 per cent of the ta payer s norma-ta net ncome for 19 0.
Skc. 30.722-5. ppcaton for reef under secton 722. (a) In genera. The
ta payer Is not permtted to cam the beneft of secton 722 n computng Its
e cess profts ta upon ts return, e cept as provded n (c) of ths secton.
In order to obtan the benefts of secton 722 for any ta abe year a ta payer
wthn s months after the tme prescrbed by aw for fng ts e cess profts
tn return for such year must fe under oath an appcaton on Form 991 for
the beneft of secton 722, uness the provsons of (6) or (o) of ths secton are
appcabe to such ta payer. For the purposes of ths secton, the tme pre-
scrbed by aw for fng the return ncudes the perod of any e tenson of tme
granted by the Commssoner.
The appcaton on Form 991 must be fed n dupcate wth the Commssoner
of Interna Revenue, Washngton, D. C, attenton of the Income Ta Unt,
Cearng Dvson, Cams Contro Secton. Such appcaton sha, n accordance
wth the provsons of ths secton and the nstructons on the form, set forth
the foowng Informaton:
(1) The name and address of the corporaton;
(2) The date and pace of ncorporaton;
(3) The e cess profts ta ta abe year for whch the benefts of secton 722
are camed;
( ) The coecton dstrct n whch the e cess profts ta return for such
year was fed;
(5) The ta payer s norma-ta net Income and the amount of e cess profn|
ta (after the appcaton of the foregn ta credt) shown upon ts return
for such year;
(6) The date of the begnnng of the ta payer s frst e cess profts ta ta -
abe year;
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(T) The e cess profts net ncome or defct n e cess profts net ncome for
each ta abe year n the base perod, computed wthout regard to secton 722;
(8) If a dfference n the character of busness s the bass of the appca-
ton
() the ta abe years n the base perod n whch It s camed that the
character of the busness was dfferent from that as of anuary 1, 19 0,
() the subparagraph of secton 722(b)(2) n whch such dfference
fas,
() the character of the busness as of anuary 1, 19 0,
(v) the character of the busness n each of the ta abe years n the
base perod,
(v) the amount whch woud have been the ta payer s e cess profts
net ncome for each ta abe year n the buse perod n whch ts busness
was of a dfferent character f the busness had been the same n each
of such years as that on anuary 1,19 0, and
(v) a detaed statement showng how such amount was determned;
(9) If an nterrupton or dmnuton of norma producton, output, or oper-
aton s the bass of the appcaton
() the abnorma events and the tme of ther occurrence,
() the ta abe yenrs n whch such abnorma events nterrupted or
dmnshed norma producton, output, or operaton, and
() the producton, output, or operaton of the ta payer for the ta -
abe years n the base perod and for the four ta abe years mmedatey
precedng the ta abe year n whch norma producton, output, or oper-
aton was nterrupted or dmnshed, or, f the ta payer was not n e -
stence for four prevous ta abe years, then for such prevous ta abe
years as t was n e stence and for so many of the succeedng ta abe
years endng before une 1, 19 0, as do not make the tota more than
four;
(10) schedue of the casses of gross ncome and deductons and the
amounts thereof
() for each of the ta abe years n the base perod (ncudng the
ta abe years for whch ad|ustments were made under secton 722(a) (3)
( ) and ( ) and the amounts of any casses of gross ncome or deduc-
tons estabshed thereunder),
() for each subsequent ta abe year begnnng after December 31,
1939, and endng before une 1, 19 0, and
() for each of the four ta abe years precedng the frst ta abe year
n the base perod;
(11) The e cess profts net Income or defct n e cess profts net ncome
estabshed for each ta abe year n the base perod after a ad|ustments
under secton 722;
(12) statement showng the e tent to whch any cass of Income or
deductons appearng n the schedue requred n (10) above and abnorma n
amount as determned under secton 30.722-3(c) s a resut of hgh prces
of materas, abor, capta, or any other agent of producton, ow seng prce
of the product of the ta payer, or ow physca voume of saes owng to ow-
demand for such product or for the output of the ta payer, or of a change
at any tme In the type, manner of operaton, sze, or the condton of the
busness engaged n by the ta payer;
(13) The average base perod net ncome determned under secton 722
(a)(3);
(1 ) The average base perod net Income determned wthout regard to
secton 722; and
(15) Such other nformaton as may be requred by the Instructons ap-
pearng on Form 991 or ssued therewth.
The appcaton on Form 901 sha be consdered a cam for refund or credt
wth respect to the e cess profts ta for the ta abe year pad at or pror to the
tme such appcaton s fed. In case the ta payer eects to pay n nstaments
the ta shown upon ts return and at the tme the appcaton s fed such ta
has not been pad n fu, the ta payer shoud fe a cam for refund or credt on
Form 8 3 as prompty as possbe after such ta has been pad n fu. The
Informaton aready submtted n the appcaton need not agan be .submtted on
Form 8 3 f reference s made theren to such appcaton. For mtatons upon
refunds and credts generay, see secton 322. s to procedure upon dsaow-
ance of a cam for refund reatng to abnormates, see secton 732.
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(6) fter asserton of defcency. If a ta payer does not fe an appcaton
under (a) of ths secton wthn the 6-month perod provded n secton 722(e),
t may nevertheess obtan reef under secton 722 f there s a defcency n
e cess profts ta asserted aganst t. In such case, the appcaton of secton
722 sha not reduce the e cess profts ta determned wthout reference to such
secton by an amount n e cess of the amount of the defcency fnay determned
wthout reference to such secton.
If a premnary notce of defcency s ssued, the ta payer may obtan the
mted benefts of secton 722 descrbed n the precedng paragraph by fng an
appcaton on Form 991 wthn 90 days after the date of such notce, regard-
ess of when or whether a forma notce of defcency Is ssued. (See secton
272(a).) If a forma notce of defcency s ssued wthout the Issuance of a
premnary notce or wthn 90 days after the ssuance of a premnary notce,
the ta payer may cam such benefts n ts petton, or amended petton, to the
oard of Ta ppeas fed In accordance wth the rues of the oard and wth
respect to the defcency asserted n such forma notce. If, however, a pre-
mnary notce s ssued and the ta payer does not fe a tmey appcaton on
Form 991, and a forma notce of defcency Is Issued after the e praton of 90
days from the date of the premnary notce, the ta payer can not cam the
benefts of secton 722 n a petton, or amended petton, fed wth the oard of
Ta ppeas.
ta payer fng an appcaton on Form 991 after a premnary notce of
defcency sha attach to such appcaton a copy of such notce.
(c) Waver of mtatons for subsequent ta abe years. If a ta payer fes an
appcaton on Form 991 for a ta abe year as provded In (o) or (6) of ths
secton, then n fng au appcaton for a subsequent ta abe year under (a) or
(6) of ths secton the nformaton requred n (a) (8), (9), (10), and (12) of
ths secton need be supped ony to the e tent that such nformaton woud dffer
from that set forth n the pror appcaton, provded reference s made to such
pror appcaton. If the average base perod net ncome of the ta payer s
fnay determned under secton 722(a)(3), or f permsson s granted by the
Commssoner after a determnaton whch has not become fna, such ta payer, n
computng ts e cess profts ta n any return requred to be fed thereafter, may,
wthout the fng of any appcaton on Form 991 but sub|ect to the mtatons
of secton 722 (c) and (d), use as ts average base perod net ncome the average
base perod net ncome thus determned, e cept as further ad|ustments may be
requred by secton 711(b).
Pah. 26. Secton 30.725-3 s amended by strkng out the second para-
graph thereof.
Par. 27. The foowng s nserted mmedatey precedng secton
30.729-1:
Seo. 16. Computaton of Credts on Retubnb. ( cess Profts Ta
mendments of 19 1.)
Secton 729(b) of the Interna Revenue Code s amended by strkng
out (b) Returns. and nsertng n eu thereof the foowng:
(b) Returns.
(1) Computaton of e cess profts credts. In the case of a
ta payer whch under secton 712 or secton 7 1 Is entted to have
the e cess profts credt computed under secton 713 or secton 71 ,
whchever resuts n the esser ta under ths subchapter, the return
under ths subchapter for any ta abe year sha contan computa-
tons of two tentatve ta es, one wth the credt computed under sec-
ton 713 and one wth the credt computed under secton 71 ; and
the return sha contan a Informaton whch the Commssoner, by
reguatons prescrbed by hm wth the approva of the Secretary,
may prescrbe as necessary for such computatons. If the ta payer
states n such return that t dscams the use of one of such credts
n the computaton of the ta under ths subchapter for the ta abe
year, the computaton and nformaton based on such credt may be
omtted from the return.
(2) No TURN R UIR D. .
Seo. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
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103
Par. 28. Secton 30.729-1 s amended as foows:
( ) y changng the headng to read: Tme and pace for fng
return and nformaton to be ncuded
( ) y nsertng at the end thereof the foowng new paragraph:
ny ta payer whch s entted to have ts e cess profts credt computed
under secton 713 or secton 71 , whchever credt resuts n the esser e cess
profts ta , s requred to fe a return on Form 1121 (revsed), and such
return sha (uness the ta payer states theen thut t dscams the use of
one of the credts) contan computatons of the credts computed under sec-
ton 713 and secton 71 and the e cess profts net ncome computed wth the
credt under secton 713 and the e cess profts net ncome computed wth the
credt under secton 71 , and sha contan a the nformaton requred by
such form and by these reguatons wth respect to such romputatons.
ta payer statng n ts return that t dscams the use of one of the credts
n the computaton of the e cess profts ta for the ta abe year may omt
from the return the computaton and nformaton upon whch such dscamed
credt woud be based.
Par. 29. The foowng s nserted mmedatey precedng secton
30.730- 1 :
Sec. 7. Consodated Retttnh of Insurance Companes Other Than
Lfe or Mutua. ( cess Profts Ta mendments of 10 1.)
Secton 730(e)(6) of the Interna Revenue Code s emended to read
as foows:
(6) Insurance companes sub|ect to ta aton under secton 201
or 207.
Sec. 17. ffectve Datk. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Par. 30. Secton 30.730-3 s amended as foows:
( ) y strkng out the fourth sentence of the frst paragraph and
nsertng n eu thereof the foowng:
For nstance, there w not be recognzed as an affated group two non-
nsurance corporatons the common parent corporaton of whch s a persona
hodng company or an nsurance company ta abe under secton 201 or sec-
ton 207.
( ) y strkng out the second paragraph and nsertng n eu
thereof the foowng:
n nsurance company ta abe under secton 201 may be ncuded n an
affated group wth other nsurance companes ta abe under secton 201
but may not he ncuded n an affated group wth other corporatons. Sm-
ary, an nsurance company ta abe under secton 207 may be ncuded n
an affated group wth other nsurance companes ta abe under secton 207
but may not be ncuded n an affated group wth other corporatons. On
the other hand, an nsurance company ta abe under secton 20 may be
ncuded n an affated group wth corporatons other than nsurance com-
panes ta abe under secton 201 or secton 207.
Par. 31. The foowng s nserted mmedatey foowng secton
30.731- 1:
Sec. 9. Procedura Provsons. ( cess Profts Ta mendments of
19 1.)
Part 1 of subchapter of chapter 2 of the Interna Revenue Code
s amended by nsertng at the end thereof the foowng new secton:
Sec. 732. Revew of bnormates by oard of Ta ppeas.
(a) Petton to the oard. If a cam for refund of ta under
ths subchapter for any ta abe year s dsaowed n whoe or n part
by the Commssoner, and the dsaowance reates to the appcaton
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10
of secton 711(b)(1) ( ), (I), ( ), or ( ), secton 721, or secton
722, reatng to abnormates, the Commssoner sha send notce of
such dsaowance to the ta payer by regstered ma. Wthn nnety
days after such notce s maed (not countng Sunday or a ega ho-
day n the Dstrct of Coumba as the nneteth day) the ta payer
may fe a petton wth the oard of Ta ppeas for a redetermna-
ton of the tn under ths subchapter. If such petton s so fed, such
notce of dsaowance sha be deemed to be a notce of defcency
for a purposes reatng to the assessment and coecton of ta es or
the refund or credt of overpayments.
(b) Defcency Found by oard n Case of Cam. If the oard
fnds that there s no overpayment of ta n respect of any ta abe
year n respect of whch the Commssoner has dsaowed, n whoe or
n part, a cam for refund descrbed n subsecton (a) and the oard
further fnds that there s a defcency for such year, the oard sha
have |ursdcton to determne the amount of such defcency and such
amount sha, when the decson of the oard becomes fna, be as-
sessed and sha be pad upon notce and demand from the coector.
(c) Fnaty of Determnaton. If n the determnaton of the
ta abty under ths subchapter the determnaton of any queston
s necessary soey by reason of secton 711(b)(1) ( ), (I), ( ), or
( ), secton 721, or secton 722, the determnaton of such queston
sha not be revewed or redetermned by any court or agency e cept
the oard.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Sec. 30.732-1. Revew of abnormates by oard of Ta ppeas. Secton
732 provdes that, n addton to ts |ursdcton to redetermne a defcency,
the oard of Ta ppeas sha have |ursdcton to revew the Commsson-
er s dsaowance of a cam for refund of e cess profts ta es, f such dsaow-
ance nvoves the determnaton of any queston reatng soey to the appca-
ton of secton 711(b)(1) ( ), (I), ( ), or ( ), secton 721 or secton 722,
whch sectons have reference to abnormates. The ta payer s petton must
be fed wth the oard wthn 00 days (not countng Sunday or a ega hoday
n the Dstrct of Coumba as the nneteth day) after the sendng by regstered
ma of the notce of dsaowance of the cam for refund.
Where the ta payer has fed such a petton the notce of dsaowance of
Its cam for refund s consdered to be a notce of defcency for a purposes
reatng to the assessment and coecton of ta es or the refund or credt of
overpayments. If the oard fnds that there has been no overpayment of ta
wth respect to the ta abe year nvoved, and further fnds that there s a
defcency for such year, the oard w determne the amount of such def-
cency and such amount sha, when the decson of the oard becomes fna,
be assessed and f ad upon notce and demand from the coector.
The e tent and the fnaty of the oard s |ursdcton wth respect to ques-
tons nvovng the appcaton of the sectons deang wth abnormates are
set forth n secton 732(c) and may be ustrated by the foowng e ampe:
ampe. ta payer engaged n the producton and refnng of o cams,
wth reference to a ta abe year begnnng n 19 0, that 80 per cent of an tem
of gross ncome resuts from e poraton carred on n pror years and s
therefore wthn secton 721(a)(2)(C). The Commssoner determnes that
ony 0 per cent of such tem s gross Income resutng from e poraton and
therefore reaches a dfferent resut as to the amount of abnorma ncome of the
cass descrbed n secton 721(a)(2)(C). There Is no dspute as to the tota
amount of the tem of gross ncome. The controversy reates soey to the
percentage thereof resutng from e poraton. The Commssoner s determna-
ton Is therefore upon an ssue arsng soey under secton 721 and s revew-
abe ony by the oard of Ta ppeas. If, however, the Commssoner aso
determnes that the tota amount of the Item of gross Income s greater than
the amount reported by the ta payer, the queston as to such amount Is not
one arsng soey by reason of secton 721 but ndependenty of t, and hence
revew of ths queston s not confned to the oard.
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G. 10. C PIT LIZ TION OF D RTISING, TC., P NDITUR S. ( CeSS
Profts Ta mendments of 19 1.)
(a) Part 1 of subchapter of chapter 2 of the Interna Revenue Code
s amended by nsertng at the end thereof the foowng nevr secton:
Sec. 733. Captazaton of dvertsng, tc., pkndtkbeb.
(a) ecton to Charge to Capta ccount. For the purpose of
computng the e cess profts credt, a ta payer may eect, wthn s
months after the date prescrbed by aw for fng ts return for ts frst
ta abe year under ths subchapter, to charge to capta account so much
of the deductons for ta abe years n ts appcabe base perod on account
of e pendtures for advertsng or the promoton of good w, as, under
rues and reguatons prescrbed by the Commssoner wth the approva
of the Secretary, may be regarded as capta nvestments. Such eecton
must be the same for a such ta abe years, and must be for the tota
amount of such e pendtures whch may be so regarded as capta nvest-
ments. In computng the e cess profts credt, no amount on account of
such e pendtures sha be charged to capta account:
(1) For ta abe years n the base perod uness the eecton au-
thorzed n subsecton (a) s e ercsed, or
(2) For any ta abe year pror to the begnnng of the base
perod.
(b) ffect of ecton. If the ta payer e ercses the eecton au-
thorzed under subsecton (a)
(1) The net ncome for each ta abe year n the bnse perod sha
be consdered to be the net ncome computed wth such deductons
dsaowed, and such deductons sha not be consdered as havng
dmnshed earnngs and profts. Ths paragraph sha be retro-
actvey apped as f t were a part of the aw appcabe to each ta -
abe year n the base perod ; and
(2) The treatment of such e pendtures as deductons for a ta -
abe year n the base perod sha, for the purposes of secton 73
(b) (2), be consdered treatment whch was not correct under the
aw appcabe to such year.

Sec. 17. ffectve Datf.. ( cess Profts Ta mendments of 1911.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Sec. 30.733-1. .Scope of eecton to charge to capta account e pendtures for
advertsng or the promoton of good w. ny ta payer may, for the purpose
of computng ts e cess profts credt under ether the ncome or the nvested
capta method, eect to charge to capta account any deductons based upon
e pendtures for ta abe years n ts base perod on account of advertsng or
the promoton of good w, to the e tent that such e pendtures may be regarded
as capta nvestments under the reguatons prescrbed under secton 733.
Secton 733 provdes for an eecton wth reference ony to deductons for such
e pendtures for ta abe years n the base perod. In order to secure the
benefts of that secton, a ta payer sha make ts eecton wthn s months
after the date prescrbed by aw for fng ts return for ts frst e cess profts
ta ta abe year.
The eecton under secton 733 Is an eecton to captaze a the e pendtures
In each ta abe year In the ta payer s base perod whch were for advertsng
or the promoton of good w and whch may be regarded as capta nvestments
under the reguatons prescrbed under secton 733. ta payer may not
captaze such e pendtures for one base perod ta abe year and treat as a
deducton such e pendtures wth respect to another base perod ta abe year.
No such e pendtures for any ta abe year begnnng pror to the ta payer s
base perod may be charged to capta account. ta payer whch has faed to
make an eecton under secton 733 Is not permtted, In computng ts e cess
profts credt, to charge to capta account base perod e pendtures for adver-
tsng or the promoton of good w whch have been deducted for ta abe
years n such perod.
Sec. 30.733-2. pendtures whch may oe regarded as capta nvestments.
n e pendture for advertsng or the promoton of good w may be regarded
as a capta Investment f, upon consderaton of a the facts and crcumstances
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106
of the partcuar case, t may be regarded as made for the purpose of ncreasng
the ta payer s earnng capacty over a substanta perod subsequent to the
ta abe year n whch such e pendture was made. The fact that a corporaton
faed, because of operatng osses, to receve any benefts wth respect to ts
ncome ta abty from deductons on account of e pendtures s not evdence
that such e pendtures may be regarded as capta nvestments. In addton to
those e pendtures for capta tems ncudng good w whch, under the pro-
vsons of secton 2 , may not be aowed as deductons, the foowng e pend-
tures may n any case be regarded as capta nvestments wthn the contem-
paton of secton 733:
(a) advertsng e pendtures to promote a ta payer s busness n a
terrtory new to such ta payer, or to promote a new product, department,
trade mark, trade brand, or trade name of such ta payer, for the frst 12
months after the ta payer has begun to deveop such new terrtory, or to
promote such new product, department, trade mark, trade brand, or trade
name. new product wthn the meanng of ths secton does not ncude
any product whch s merey an mprovement of an earer product.
(6) advertsng e pendtures for the ta abe year to the e tent that
such e pendtures e ceed the ta payer s average annua e pendtures on
account of advertsng for the 8 months precedng the ta abe year, or, f
the ta payer was not n e stence durng the whoe of such 8-month perod,
then for the perod durng whch the ta payer was n e stence.
very tem cassfabe under ths secton as a capta nvestment consttutes
a permanent asset of the ta payer s busness, and no deducton for deprecaton
w be aowed n respect of such an tem.
ta payer eectng under secton 733 sha submt a statement contanng
compete nformaton wth respect to a e pendtures made durng ts base
perod for advertsng or the promoton of good w, cassfed as to those whch
are deductbe and those whch may be regarded as capta nvestments under
that secton. Ths statement sha set forth whether such e pendtures were
e traordnary n nature or amount and the purposes for whch they were
made. Such a ta payer sha bear the burden of provng that those e pend-
tures whch t seeks to captaze may be regarded as capta nvestments.
It may not deduct smar e pendtures made n any ta abe year begnnng
after December 31, 1939, and sha submt the same compete nformaton wth
respect to such e pendtures.
Sec. 30.733-3. ffect of eecton. Secton 733 retroactvey amends, for the
purpose of determnng the ncome ta abty and the e cess profts credt
of any ta payer e ercsng an eecton under that secton, the revenue aws
appcabe to each of such ta payer s base perod ta abe years. ence, the
prevous treatment as deductons of e pendtures made durng the base perod
for advertsng or the promoton of good w whch may be regarded as
capta nvestments under the reguatons prescrbed under secton 733 s an
erroneous and nconsstent treatment. The norma-ta or speca-cass net
ncome for each appcabe base perod ta abe year must be recomputed wth
such e pendtures dsaowed as deductons, and both the e cess profts net
Income for each such year and the earnngs and profts account w be n-
creased n the amount of such dsaowed deductons.
The dsaowance of deductons n the base perod mnde necessary by ths
secton requres a redetermnaton of the ncome ta abty for such years
and any defcences n ta resutng from the dsaowance of such deductons
sha be assessed and coected under the nterna revenue aws appcabe
wth respect to the assessment and coecton of defcences for such years.
If, however, correcton of the effect of the pror nconsstent treatment of such
tems n the base perod years s prevented, wthn the meanng of secton
73 (b)(1)(C), correcton sha be made by means of an ad|ustment under
secton 73 . Snce the amount of such an ad|ustment under secton 73 s a
part of the e cess profts ta , whch appes ony to ta abe years begnnng
after December 31, 1939, t does not decrease earnngs and profts or e cess
profts net ncome for any perod before the begnnng of the ta payer s frst
e cess profts ta ta abe year.
In the case of a ta payer eectng under secton 733, the provsons of sec-
ton 711(b) (1) ( ), reatng to abnorma deductons n the base perod, do not
nffect deductons for e pendtures for advertsng or the promoton of good
w whch may be regarded as capta nvestments, snce, n such a case,
secton 733 effects a dsaowance of such deductons for ncome ta purposes
before any of the ad|ustments under secton 711(b)(1) are operatve.
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107
Sec. 11. d|ustment n Case or Inconsstent Poston. ( cess Profts
Ta mendments of 19 1.)
Part 1 of subchapter of chapter 2 of the Interna Revenue Code
Is amended by Insertng at the end thereof the foowng new secton:
Sec. 73 . d|ustment n Case or Poston Inconsstent Wth Pror
Income Ta Labty.
(a) Defntons. For the purposes of ths secton
(1) Ta payer. The term ta payer means any person sub|ect
to a ta under the appcabe revenue ct
(2) Income ta . The term ncome ta means an ncome ta
mposed by chapter 1 or chapter 2 of ths tte; Tte I and
Tte I of the Revenue cts of 1938, 1936, and 193 ; Tte I of
the Revenue cts of 1932 and 1928; Tte II of the Revenue cts
of 1926 and 192 ; Tte II of the Revenue cts of 1921 and 1918;
Tte I of the Revenue ct of 1917; Tte I of the Revenue ct of
1916; or secton II of the ct of October 3, 1913; a war profts
or e cess profts ta mposed by Tte III of the Revenue cts of
1921 and 1918; or Tte II of the Revenue ct of 1917; or an
ncome, war profts, or e cess profts ta mposed by any of the
foregong provsons, as amended or suppemented.
(3) Pror ta abe year. ta abe year begnnng after Decem-
ber 31,1939, sha not be consdered a pror ta abe year.
(b) Crcumstances of d|ustment.
(1) If
( ) n determnng at any tme the ta of a ta payer
under ths subchapter an tem affectng the determna-
ton of the e cess profts credt s treated n a manner ncon-
sstent wth the treatment accorded such tem n the determna-
ton of the ncome-ta abty of such ta payer or a prede-
cessor for a pror ta abe year or years, and
( ) the treatment of such tem n the pror ta abe year
or years consstenty wth the determnaton under ths sub-
chapter woud effect an ncrease or decrease n the amount of
the ncome ta es prevousy determned for such ta abe year
or years, and
(C) on the date of such determnaton of the ta under ths
subchapter correcton of the effect of the nconsstent treatment
n any one or more of the pror ta abe years s prevented (e cept
for the provsons of secton 3801) by the operaton of any aw
or rue of aw (other than secton 3761, reatng to compromses),
then the correcton sha be made by an ad|ustment under ths sec-
ton. If n a subsequent determnaton of the ta under ths sub-
chapter for such ta abe year such nconsstent treatment s not
adopted, then the correcton sha not be made n connecton wth
such subsequent determnaton.
(2) Such ad|ustment sha be made ony If there Is adopted n the
determnaton a poston mantaned by the Commssoner (n case
the net effect of the ad|ustment woud be a decrease n the ncome
ta es prevousy determned for such year or years) or by the ta -
payer wth respect to whom the determnaton s made (n case the
net effect of the ad|ustment woud be an ncrease n the ncome ta es
prevousy determned for such year or years) whch poston Is
Inconsstent wth the treatment accorded such Item n the pror ta -
abe year or years whch was not correct under the aw appcabe to
such year.
(c) Method and ffect of d|ustment. (1) The ad|ustment author-
zed by subsecton (b), n the amount ascertaned as provded n subsec-
ton (d), f a net Increase sha be added to, and f a net decrease sha
be subtracted from, the ta otherwse computed under ths subchapter
for the ta abe year wth respect to whch such nconsstent poston s
adopted.
(2) If more than one ad|ustment under ths secton s made because
more than one nconsstent poston Is adopted wth respect to one ta abe
year under ths subchapter, the separate ad|ustments, each an amount
ascertaned as provded n subsecton (d), sha be aggregated, and the
aggregate net Increase or decrease sha be added to or subtracted from
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103
the ta otherwse computed under ths subchapter for the ta abe year
wth respect to whch such nconsstent postons are adopted.
(3) If a the ad|ustments under ths secton, made on account of the
adopton of an nconsstent poston or postons wth respect to one ta -
abe year under ths subchapter, resut n an aggregate net ncrease, the
ta mposed by ths subchapter sha n no case be ess than the amount
of such aggregate net ncrease.
(d) kcebtanment of mount of d|ustment. In computng the
amount of an ad|ustment under ths secton there sha frst be ascer-
taned the amount of the ncome ta es prevousy determned for each of
the pror ta abe years for whch correcton s prevented. The amount
of each such ta prevousy determned for each such ta abe year sha
be (1) the ta shown by the ta payer, or by the predecessor, upon the
return for such pror ta abe year, ncreased by the amounts prevousy
assessed (or coected wthout assessment) as defcences, and decreased
by the amounts prevousy abated, credted, refunded, or otherwse
repad In respect of such ta ; or (2) f no amount was shown as the ta
by such ta payer or such predecessor upon the return, or f no return was
made by such ta payer or such predecessor, then the amounts prevousy
assessed (or coected wthout assessment) as defcences, but such
amounts prevousy assessed, or coected wthout assessment, sha be
decreased by the amounts prevousy abated, credted, refunded, or other-
wse repad n respect of such ta . There sha then be ascertaned the
ncrease or decrease n each such ta prevousy determned for each such
year whch resuts soey from the treatment of the tem consstenty wth
the treatment accorded such tem n the determnaton of the ta a-
bty under ths subchapter. To the ncrease or decrease so ascertaned
for each such ta for each such year there sha be added nterest thereon
computed as f the Increase or decrease consttuted a defcency or an
overpayment, as the case may be, for such pror ta abe year. There sha
be ascertaned the dfference between the aggregate of such ncreases,
pus the nterest attrbutabe to each, and the aggregate of such decreases,
pus the nterest attrbutabe to each, and the net Increase or decrease
so ascertaned sha be the amount of the ad|ustment under ths secton
wth respect to the nconsstent treatment of such tem.
Sec. 17. ffectve Date, ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Sec. 30.73 -1. Purpose and scope of secton 73. . (a) Genera. Secton 73
provdes for an ad|ustment f a determnaton of a ta payer s e cess profts ta
abty treats an tem or transacton affectng the e cess profts credt Incon-
sstenty wth the treatment of such tem or transacton n the determnaton of
the ncome ta abty of the ta payer, or a predecessor, for a pror ta abe year
or years. The ad|ustment s not authorzed uness (1) the treatment of the tem
or transacton for pror ta abe years was ncorrect under the aw appcabe to
such years, (2) a correcton of the effect of such erroneous treatment for one or
more of the pror ta abe years Is prevented by the operaton of a provson or
rue of aw, and (3) the nconsstent poston adopted n the determnaton s
asserted and mantaned by the party (ether the Commssoner or the ta payer)
who woud be adversey affected by the ad|ustment.
(6) Defntons. When used n sectons 30.73 -1 to 30.73 - , ncusve
(1) The terms ta payer, ncome ta , and pror ta abe year sha
have the meanng assgned to such terms by secton 73 (a). s to what
consttutes a ta abe year, see secton 8(a).
(2) The term predecessor ncudes any ta payer (other than the ta -
payer whose e cess profts ta abty s the sub|ect of the determnaton)
whose ncome ta abty for such pror ta abe year woud have been
dfferent f there had been no nconsstency between the treatment accorded
an tem or transacton n the determnaton of the e cess profts ta abty
of the ta payer and the treatment accorded such tem or transacton n the
determnaton of ts (. e., the predecessor s) own ncome ta abty for
such pror ta abe year.
Skc. 30.73 -2. Crcumstances of ad|ustment. (a) Determnaton. fna de-
termnaton of the e cess profts ta abty s not a prerequste to an ad|ustment
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109
under secton 73 . Whenever there s a determnaton of the e cess profts ta
abty and the condtons prescrbed In secton 73 (b) are satsfed, the ad|ust-
ment Is authorzed as an essenta part of the determnaton of such ta abty.
For e ampe, the makng of the e cess profts ta return requred by secton 729
or secton 730 s a determnaton by the ta payer; the asserton of a defcency or
the aowance or dsaowance of a cam for refund s a determnaton by the
Commssoner; and a decson by the oard of Ta ppeas or a court s a
determnaton by such oard or court. If any such determnaton becomes fna,
the ad|ustment aso becomes fna. If, foowng a determnaton, there are
further proceedngs n the case and a subsequent determnaton whch does not
adopt the nconsstent treatment of the tem or transacton, then no ad|ustment
Is authorzed as a part of such subsequent determnaton.
(6) Correcton under ordnary procedure prevented. n ad|ustment s au-
thorzed ony f, on the date of the determnaton of the e cess profts ta abty,
correcton of the effect of the nconsstent treatment for one or more of the pror
ta abe years s prevented (e cept for the provsons of secton 3801, reatng
to mtgaton of effect of mtatons and other provsons n ncome ta cases)
by the operaton, whether before, on, or after the date of enactment of secton
73 , of any provson of aw (other than secton 3761, reatng to compromses) or
rue of aw. Such provsons or rues of aw ncude, for e ampe, statutes of
mtatons and res |udcata.
The ascertanment of whether correcton of the effect of the Inconsstent treat-
ment s prevented wthn the meanng of secton 73 (b) (1) (C) and ths secton
must be made wth respect to each ncome ta for each pror ta abe year affected
by the erroneous treatment of the tem or transacton. Secton 73 s not app-
cabe n respect of any Income ta for any pror ta abe year If, on the date of
the determnaton of the e cess profts ta abty, correcton of the effect of
the erroneous treatment of the tem Is possbe under the ordnary procedure
appcabe to the assessment and coecton of defcences or the refund or credt
of overpayments, as the case may be, n respect of such ta for such ta abe
year. See the e ampe under secton 30.73 - .
If correcton of the effect of the erroneous treatment of the tem or transac-
ton wth respect to an ncome ta for a pror ta abe year s otherwse pre-
vented, the appcaton of secton 73 s not precuded by the fact that the ta
for such year may, under approprate crcumstances, be open to an ad|ustment
under secton 3801.
If any ncome ta abty for a pror ta abe year has been compromsed
under secton 3761, no ad|ustment may be made under secton 73 wth respect
to the ta abty compromsed.
(c) Operaton dependent upon mantenance of nconsstent poston. n ad-
|ustment, wth respect to an tem or transacton, whch woud resut n a net.
ncrease n the amount of the Income ta es prevousy determned for pror
ta abe years s authorzed ony If (1) the ta payer wth respect to whch the
determnaton s made has, n connecton wth an tem or transacton affectng
the determnaton of ts e cess profts credt, mantaned a poston whch s
nconsstent wth the erroneous treatment of such tem or transacton for pror
ta abe years, and (2) such nconsstent poston Is adopted n the determnaton.
n ad|ustment, wth respect to an tem or transacton, whch woud resut
n a net decrease n the amount of the ncome ta es prevousy determned for
pror ta abe years s authorzed ony f (1) the Commssoner, In connecton
wth an tem or transacton affectng the determnaton of the ta payer s
e cess profts credt, has mantaned a poston whch s nconsstent wth the
erroneous treatment of such tem or transacton for pror ta abe years, and
(2) such nconsstent poston s adopted n the determnaton.
Inconsstent treatment wthn the meanng of secton 73 may reate to the
prncpe or rue of aw apped n determnng the ta abe status of an tem
or transacton, or t may reate ony to the amount of the Item or transacton
whch s to be taken nto account for ta purposes. The nconsstency Is to be
ascertaned by reference to the actua treatment of the Item or transacton for
pror ta abe years rather than to what the ta payer or the Commssoner may
have urged.
If a determnaton of the e cess profts ta abty for one ta abe year
adopts wth respect to an Item or transacton an nconsstent poston whch
resuts In an ad|ustment under secton 73 , smar treatment of the same Item
or transacton for subsequent e cess profts ta ta abe years does not author-
ze a further ad|ustment under such secton.
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110
(d) Law appcabe n determnaton of error. Whether there was an errone-
ous treatment of the Item or transacton for pror ta abe years s to be deter-
mned under the provsons of the nterna revenue aws appcabe wth respect
to such years. If the Inconsstent treatment adopted n the determnaton of
the e cess profts ta abty s based upon an authortatve |udca Interpre-
taton of the appcabe revenue aw whch dffers from the nterpretaton of
such aw accepted n the determnaton of the ta abty for such pror years,
then the treatment accorded the tem or transacton for such pror years s
erroneous wthn the meanng of secton 73 .
Secton 73 does not authorze an ad|ustment If the dfference between the
treatment accorded an tem or transacton n computng the e cess profts
credt and the treatment accorded such tem or transacton n computng the
ta abty for pror ta abe years Is occasoned soey by reason of an ad|ust-
ment requred by a specfc provson of the ct, such as the ad|ustments
requred by secton 711(b) to norma-ta net ncome and speca-cass net ncome
In computng e cess profts net Income. Snce the dsaowances under secton
733 of deductons on account of e pendtures for advertsng or the promoton
of good w are not requred by the ct but are merey permssve at the
eecton of the ta payer, and snce secton 733 specfcay provdes that, f an
eecton s made, the treatment of such e pendtures as deductons for pror
ta abe years sha be consdered ncorrect, an ad|ustment under secton 73
may be authorzed n the case of such a dsaowance.
Sec. 30.73 -3. Method and effect of ad|ustment. The ad|ustment authorzed
by secton 73 , athough measured by reference to the ncome ta es prevousy
determned for pror ta abe years, does not operate as an ad|ustment to the
Income ta abty for such years, but te amount of sueh ad|ustment s added
to or subtracted from, as the case may be, the e cess profts ta otherwse
computed for the ta abe year wth respect to whch the nconsstent poston
s adopted.
No ad|ustment wth respect to an tem or transacton s authorzed uness
the nconsstent poston adopted n the determnaton s mantaned by the
party who woud be adversey affected by such ad|ustment. See secton
30.73 -2(c). ccordngy, f a determnaton for one ta abe year adopts
nconsstent postons wth respect to severa Items or transactons, t s
necessary to make separate and dstnct computatons wth respect to each such
tem or transacton n order to ascertan the amount of the potenta ad|ust-
ment wth respect to each such tem or transacton and whether an ad|ust-
ment wth respect to such Item or transacton s authorzed. If severa ad|ust-
ments are authorzed wth respect to one e cess profts ta ta abe year, the
separate ad|ustments are aggregated and the aggregate net ncrease or net
decrease s added to, or subtracted from, as the case may be, the e cess profts
ta otherwse computed for such ta abe year. In ascertanng the amount
of the ad|ustment wth respect to a partcuar tem or transacton, no effect sha
be gven to the computatons made for the purpose of determnng the amount
of the ad|ustment wth respect to any other tem or transacton. If the severa
authorzed ad|ustments resut n an aggregate net Increase, the e cess profts
ta abty for such ta abe year sha not n any case be ess than the
amount of such aggregate net Increase.
The amount of the credt for foregn ta es aowabe under the provsons of
secton 729 sha be determned before gvng effect to any ad|ustment under
ths secton.
Sf.c. 30.73 - . scertanment of amount of ad|ustment. To ascertan the
amount of the ad|ustment, t s necessary to determne the amount of the ncrease
or decrease n each ncome ta prevousy determned for each of the pror ta abe
years whch wou d have resuted f the tem or transacton erroneousy treated
had receved the correct treatment under the aw appcabe wth respect to such
ta for such year. To each such ncrease or decrease there sha be added nterest
thereon computed as f the ncrease or decrease consttuted a defcency or an
overpayment, as the case may be. wth respect to such ta for such year. In a
such cases nterest sha be computed to the 15th day of the thrd month foowng
the cose of the e cess profts ta ta abe year wth respect to whch the determ-
naton of the e cess profts ta abty s made.
If ony one Income ta for one pror ta abe year Is nvoved, the ncrease or
decrease n such ta for such year pus the Interest thereon s the amount of the
ad|ustment wth respect to the partcuar tem or transacton.
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If two or more Income ta es for one pror ta abe year, or two or more pror
ta abe years are Invoved, t s necessary to determne the ncrease or decrease n
each ncome ta prevousy determned for each such year, pus the nterest on
each such ncrease or decrease. The dfference between the sum of the ncreases,
ncudng the nterest thereon, and the sum of the decreases, ncudng the Interest
thereon, sha be ascertaned and the net ncrease or net decrease so determned s
the amount of the ad|ustment wth respect to the partcuar Item or transacton.
The computaton to determne the ncrease or decrease n each Income ta for
each year sha be made as foows:
(a) The amount of the ta prevousy determned must frst be ascertaned.
Ths may be the amount of ta shown on the ta payer s return, but f any
changes n that amount have been made they must be taken nto account, ncud-
ng any ad|ustment prevousy made under the provsons of secton 820 of the
Revenue ct of 1938 or secton 3801 of the Interna Revenue Code. In such cases,
the ta prevousy determned w be the ta shown on the return, ncreased by
the amounts prevousy assessed (or coected wthout assessment) as defcences,
and decreased by amounts prevousy abated, credted, refunded, or otherwse
repad n respect of such ta . If no amount was shown as the ta on the return,
or f no return was made, the ta prevousy determned w be the sum of the
amounts prevousy assessed (or coected wthout assessment) as defcences,
decreased by the amounts prevousy abated, credted, refunded, or otherwse
repad n respect of such ta .
(b) fter the ta prevousy determned has been ascertaned, a recomputa-
ton must be made to ascertan the ncrease or decrease n ta represented by
the dfference, f any, between the ta prevousy determned and the ta as
recomputed upon the bass of the correct treatment of the tem or transacton.
Wth the e cepton of the tems upon whch the ta prevousy determned was
based and the Item or transacton wth respect to whch the erroneous treatment
occurred, no tem sha be consdered n computng the amount of the ncrease
or decrease n the ta prevousy determned. If the treatment of any tem
noon whch the ta prevousy determned was based, or f the appcaton of any
provsons of the nterna revenue aws wth respect to such ta depends upon
the amount of ncome (e. g., chartabe contrbutons, foregn ta credt, earned
ncome credt), read|ustment of such Items n conformty wth the change In the
amount of the ncome whch resuts from the correct treatment of the tem or
transacton n respect of whch the nconsstent poston was adopted s necessary
as part of the recomputaton.
ampe. In December, 193 , the Corporaton transferred deprecabe prop-
erty to the T Corporaton n e change for stock of the Y Corporaton havng a
far market vaue of 100,000. oth corporatons made ther returns on the ca-
endar year bass. t the tme of the transfer, the property had an ad|usted
bass n the hands of the Corporaton of 80,000 and an estmated remanng
fe of 20 years. The e change was treated as nonta abe and the gan of 20,000
reazed by the Corporaton was not recognzed. For each of the years 1035 to
1939, ncusve, the Y Corporaton was aowed a deducton for deprecaton n
the amount of ,000, computed on a bass of 80,000, the same bass the property
had n the hands of the Corporaton. In ts e cess profts ta return for the
ta abe year 19 0, the Y Corporaton camed that the property shoud have a
bass of 100,000 for nvested capta purposes, and aso camed a deducton of
5,000 for deprecaton for such year. Ths poston was based upon the con-
tenton that the 193 e change was ta abe and the gan of 20,000 shoud have
been recognzed and added to the bass of the property In the hands of the
Y Corporaton. Tmey cams for refund based upon the aowance of addtona
deductons for deprecaton for the ta abe years 1938 and 1939 were fed. The
statute of mtatons prevents any refund of overpayments or assessment of
defcences for the ta abe years 193 to 1937, ncusve. The Commssoner s
determnaton of the e cess profts ta abty for the ta abe year 19 0 adopts
the Inconsstent poston asserted by the Y Corporaton and, accordngy, If the
computaton under secton 73 (d) dscoses a net Increase n the ta es prevousy
determned for the ta abe years for whch correcton s prevented, an ad|ust-
ment s authorzed under the provsons of secton 73 .
The Corporaton was not sub|ect to the ncome ta mposed by Tte I of
the Revenue ct of 193 . Its ta prevousy determned for the ta abe year 193
Is ,125, computed upon an ncome of 30,000. The corporaton omtted from
ts gross ncome an tem of renta ncome amountng to 3,000 and negected to
take a deducton for Interest amountng to 1,500. Durng the ta abe year It
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112
sustaned a capta oss of 10,000, of whch amount ony 2,000 was aowed
as a deducton n computng ts net ncome.
The ncrease n the ta of the Corporaton prevousy determned for 193 ,
pus the nterest thereon, s computed as foows:
Ta prevousy determned for 193 ,125
Net ncome for 193 upon whch ta prevousy determned was based 30, 000
Pus: Gan reazed upon e change 20,000
Less: Increased deducton for capta oss ( 10,000 mnus
2,000) 8,000
12,000
Net ncome as recomputed 2, 000
Ta as recomputed 5, 775
Ta prevousy determned ,125
Increase n ta prevousy determned for 103 1, 050
Interest on ncrease n ta 59
Tota ncrease for 193 2, 2
In accordance wth the provsons of secton 73 (d), the recomputaton does
not take nto consderaton the tem of 3,000, representng renta ncome whch
was omtted from gross ncome, or the tem of 1,500, representng nterest pad,
for whch no deducton was aowed.
The Y Corporaton was not sub|ect to the ncome ta mposed by Tte I of
the Revenue cts of 193 or 1936. The decrease n the ta of the Y Corporaton
prevousy determned for each of the ta abe years 1935, 1936, and 1937, whch
resuts soey from the aowance of an addtona deducton of 1,000 for depreca-
ton In each of such years, pus the nterest on each such decrease, s assumed to
be as foows:
1
Year.
Ta.
Interest.
Tota.
1037
137.50
220.00
220.00
1.25
62.80
39.60
178. 76
272.80
269.60
The amount of the ad|ustment to be added to the e cess profts ta of the Y
Corporaton otherwse determned for the ta abe year 19 0 s as foows:
Increase for 193 2,2 .00
Less: Decrease for 1935 178. 75
Decrease for 1936 272. 80
Decrease for 1937 259. 60
711.15
Net ncrease (amount of ad|ustment authorzed) 1,532.85
Par. 32. The foowng s nserted mmedatey precedng secton
30.7 0-1:
Sec. 8. Incorporaton of Partnershp ob Soe r OP TO snrp. ( -
cess Profts Ta mendments of 1911.)
(a) Secton 7 0(a)(1)(C) of the Interna Revenue Code s amended
by strkng out owned by such other corporaton. and nsertng n
eu thereof:
owned by such other corporaton, or
(D) Substantay a the propertes of a partnershp n an
e change to whch secton 112(b)(5), or so much of secton 112(c)
or (e) as refers to secton 112(b) (5), or to whch a correspondng
provson of a pror revenue aw, s or was appcabe.
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113
(b) Secton 7 0(b) ( ) of the Interna Revenue Code Is amended
by strkng out the perod at the end thereof and nsertng n eu
thereof a semcoon and the foowng:
or
(5) In the case of a transacton specfed In subsecton
(a)(1)(D), the partnershp whose propertes were acqured.
(c) Secton 7 0 of the Interna Revenue Code Is amended by nsert-
ng at the end thereof the foowng new subsecton:
(h) Soe Pboprktobshp. For the purposes of sectons 7 0
(a)(1)(D), 7 0(b)(5), and 7 2(g), a busness owned by a soe pro-
pretorshp sha be consdered a partnershp.

Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Par. 33. Secton 30.7 0-1 s amended as foows:
( ) The word eect occurrng n the second sentence s changed
to use.
( ) The thrd and fourth sentences of subsecton (a) are amended
to read as foows:
n acqurng corporaton s a domestc corporaton whch has absorbed one or
more other domestc corporatons, partnershps, or busnesses owned by soe
propretorshps n a transacton meetng the requrements set forth In secton
7 0(a). ach such absorbed con raton, partnershp, or busness owned by a
soe propretorshp s desgnated a component corporaton of the acqurng
corporaton.
(C) The ast sentence of subsecton (a) s amended to read as
foows:
foregn corporaton can not be an acqurng corporaton and nether a fore gn
corporaton, a foregn partnershp, nor a busness owned by a foregn soe
propretorshp can be u component corporaton (see secton 7 ).
(D) Subsecton (b) s amended to read as foows:
(6) The purpose of Suppement Is n genera to attrbute to an acqurng
corporaton the e stence of corporatons, partnershps, or busnesses owned by
soe propretorshps absorbed by t, together wth the base perod e cess pros
net ncome or defct n e cess profts net ncome and the net capta changes of
such predecessors, n order (1) that a corporaton the corporate fe of whch
In substance, though not n form, Incudes the base perod may use the e cess
profts credt based on ncome and (2) that a corporaton composed n whoe
or n part of quafed component corporatons may compute Its e cess profts
credt n the ght of the base perod e perence of the entre enterprse. ccord-
ngy, an acqurng corporaton whch was not actuay n e stence pror to
anuary 1, 19 0, s, notwthstandng secton 712(a), nevertheess gven the
rght to use the e cess profts credt based on ncome, provded that t has a
quafed component corporaton. Furthermore, every acqurng corporaton whch
Is entted to the e cess profts credt based on ncome Is requred. If t was not
actuay n e stence pror to anuary 1, 19 0, and n every other case may
eect, to take the base perod e perence of a quafed component corporatons
nto account n computng ts average base perod net Income. Fnay, an
acqurng corporaton s requred to add to ts day capta addton or reduc-
ton the net capta addton or reducton of each component corporaton.
Par. 3 . Secton 30.7 0-2 s amended as foows:
( ) y nsertng mmedatey precedng the ast paragraph thereof
the foowng new paragraph :
( ) The acquston of substantay a the propertes of a partnershp n an
e change to whch secton 112(b)(5), or so much of secton 112 (c) or (e as
refers to secton 112(b)(5), or to whch the correspondng provsons of a
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11
pror revenue aw, Is or was appcabe. For the purposes of ths paragraph
a busness owned by a soe propretorshp sha be consdered a partnershp.
(13) The ast paragraph s amended to read as foows:
Te types of transactons set forth n secton 7 0(a), other than those set
forth n secton 7 0(a)(1)(C), ether are embraced wthn the defnton of a
reorganzaton contaned In secton 112(g)(1), are transfers to a controed
corporaton wthn the meanng of secton 112(b)(5) and reated sectons, or
are compete qudatons wthn the meanng of secton 112(b)(6). Snce
Suppement appes ony to cases where there Is a suffcent contnuty of
nterest to |ustfy treatng a corporaton by whch the assets of another
corporaton, a partnershp, or a busness owned by a soe propretorshp have
been acqured, as standng In the pace of ts predecessor, such transactons
must satsfy a the requrements of the reguatons prescrbed under secton
112 wth respect to such transactons n order that the transferee corporaton
may be treated as an acqurng corporaton.
Par. 35. The foowng s nserted mmedatey foowng secton
30.7 0- 3:
Sec. 30.7 0- . Partnershp w quafed component corporaton. partnershp
(or a busness owned by a soe propretorshp) can not be an acqurng corpora-
ton and, therefore, secton 7 0(g) can not operate to make any of ts predecessors
component corporatons of ts acqurng corporaton. In order that a partnershp
(or a busness owned by a soe propretorshp) may be a quafed component
corporaton t must have been actuay n e stence at the begnnng of the ta -
payer s base perod. It s not suffcent that such partnershp (or busness owned
by a soe propretorshp) has a predecessor whch was n e stence at 6uch tme.
Par. 36. The foowng s nserted mmedatey precedng secton
30.7 1- 1:
Sec. 1 . cess Profts Credt of cqurng Corporatons. ( cess
Profts Ta mendments of 19 1.)
Secton 7 1 of the Interna Revenue Code s amended to read as
foows:
Sec. 7 1. owance of cess Profts Credt.
(a) owance. In the case of a ta payer whch Is an acqurng
corporaton whch was n e stence on the date of the begnnng of ts
base perod, the e cess profts credt for any ta abe year sha be an
amount computed under secton 713 or secton 71 , whchever amount
resuts n the esser ta under ths subchapter for the ta abe year for
whch the ta under ths subchapter s beng computed.
(b) ffect of Dscamer of Cheut. If the ta payer states n ts
return for the ta abe year under ths subchapter that t dscams the
use of the credt computed under secton 713 or the use of the credt
computed under secton 71 , the credt so dscamed sha not, for the
purposes of the nterna revenue aws, be appcabe to the computaton
of the ta under ths subchapter for such ta abe year.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 37. Secton 30.7 1-1 s amended to read as foows:
Sec. 30.7 1-1. cess profts credt of acqurng corporatons. Lke any other
domestc corporaton, an acqurng corporaton whch was actuay n e stence
pror to anuary 1, 19 0, s entted under secton 712(a) to the e cess profts
credt based on ncome, computed under secton 713, or the e cess profts credt
based on nvested capta, computed under secton 71 , whchever credt resuts
n the esser ta for the ta abe year for whch the ta s beng computed.
Whether or not an acqurng corporaton was actuny In e stence pror to
anuary 1, 19 0, however, any such corporaton whch was constructvey n
e stence at the begnnng of Its 8-month base perod by vrtue of havng
acqured a quafed component corporaton s entted under secton 7 1 to the
e cess profts credt based on Income or the e cess profts credt based on
nvested capta, whchever credt resuts n the esser ta for the ta abe year.
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115
very other acqurng corporaton Is entted to use ony the e cess profts credt
based on nvested capta.
If an acqurng corporaton whch Is entted to whchever credt resuts In
the esser ta dscams n Its return for a partcuar ta abe year the use of
ether credt, the credt so dscamed sha not, for the purposes of the nterna
revenue aws, be appcabe to the computaton of the ta for the ta abe year
wth respect to whch the dscamer s made. See secton 729(b)(1).
Par. 38. The foowng s nserted mmedatey precedng secton
30.7 2-1:
Sec. 8. Incorporaton op Partnershp or Soe Propretorshp. ( cess
Profts Ta mendments of 19 1.)

(d) Secton 7 2 of the Interna Revenue Code s amended by Insertng
at the end thereof the foowng new subsecton:
(g) In the case of a partnershp whch s a component corporaton
by vrtue of secton 7 0(b)(5), the computatons requred by ths Sup-
pement sha be made, under rues and reguatons prescrbed by the
Commssoner wth the approva of the Secretary, as If suc partnershp
had been a corporaton. For the purpose of such computatons, n mak-
ng the ad|ustment for Income ta es requred by secton 711(b) (1) ( ),
the partnershp so regarded as a corporaton sha be consdered as hav-
ng dstrbuted a ts net Income as a dvdend.
Seo. 15. verage ase Perod Net Income of cqurng Corporatons.
( cess Profts Ta mendments of 19 1.)
So much of secton 7 2 of the Interna Revenue Code as foows the
secton bendng and precedes the begnnng of subsecton (a) s
amended to read as foows:
In the case of a ta payer whch s an acqurng corporaton the
e cess profts credt of whch s aowed under secton 7 1, ts average
base perod net ncome (for the purpose of the credt computed under
secton 713) f the ta payer was actuay In e stence before anuary
1, 19-10, sha, at the eecton of the ta payer made n ts return for the
ta abe year, be computed as foows, and f the ta payer was not actu-
ay In e stence before such date, sha be computed as foows, n eu
of the method provded n secton 713: .
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Pab. 39. Secton 30.7 2-1 s amended as foows:
( ) Wherever occurrng theren, the term net oss s changed to
defct n e cess profts net ncome, and the term net osses s
changed to defcts n e cess profts net ncome.
( ) The foowng s substtuted for the frst two sentences n sub-
secton (a) :
In computng the e cess profts credt based on Income, an acqurng corpora-
ton whch was actuay In e stence pror to anuary 1, 19 0, may, at Its eec-
ton, use as ts average base perod net ncome the average base perod net n-
come computed under secton 7 2 wth reference to the base perod e perence of
the ta payer and each quafed component corporaton. If It fas so to eect,
Its average base perod net Income sha be the average base perod net ncome
computed under secton 713 soey wth reference to the ta payer s own base
perod e perence and wthout reference to the base perod e perence of any of
the ta payer s component corporatons. The eecton sha be made n the e cess
profts ta return for the partcuar ta abe year. n eecton once made s
Irrevocabe for a partcuar ta abe year, but a new eecton Is granted for each
succeedng ta abe year.
n acqurng corporaton whch was not actuay In e stence pror to anu-
ary 1, 19 0, but whch s entted under secton 7 1 to use the e cess profts
credt based on ncome, because of havng been constructvey In e stence at the
begnnng of ts base perod, s requred In every case to compute ts average
base perod net ncome under secton 7 2.
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116
The foowng three steps are necessary In computng the average base perod
net Income under secton 7 2:
(C) Subsecton (b) s amended by addng at the end thereof a new
paragraph readng as foows:
In the case of a quafed component corporaton whch s a partnershp or a
busness owned by a soe propretorshp, Its e cess profts net ncome or defct
n e cess profts net ncome for each ta abe year In the base perod sha be
determned as though such partnershp or busness owned by a soe propretorshp
hnd been a corporaton for each such year. mong the ad|ustments whch w
be necessary n computng the e cess profts net ncome or defct n e cess profts
net ncome are the foowng:
(1) reasonabe deducton for saary or compensaton to each partner or the
soe propretor for persona servces actuay rendered sha be aowed;
(2) The credt for dvdends receved provded by secton 26(b) and secton
711(h)(1)(G) sha be aowed;
(3) The treatment of capta gans and osses s-ha be that appcabe to cor-
poratons ;
( ) The deducton for chartabe contrbutons sha be that aowed by secton
23(q) :
(5) The ncome ta es aowed as a deducton ether under secton 711(b) (1)
( ) or under secton 23(c) sha be computed as though the partnershp or bus-
ness owned by a soe propretor were a corporaton and n computng such ta es
the partnershp or busness owned by a soe propretorshp sha be deemed to
have dstrbuted a ts net Income as a dvdend.
(D) The reference to secton 711(a) (1) (F) occurrng n subsec-
ton (c) (2) (v) s changed to secton 711 (b)(1) (G).
Par. 0. The foowng s nserted mmedatey precedng secton
30.7 3-1:
Sec. . Computaton or verage ase Perod Net Income. ( cess
Profts Ta mendments of 19 1.)

(d) Secton 7 3(a) of the Interna Revenue Code s amended by
strkng out secton 713(c) and Insertng n eu thereof secton
713(g)
Par. 1. Secton 30.7 3-1 s amended by nsertng after the second
paragraph thereof the foowng new paragraph:
The net capta addton or reducton of a partnershp (or busness owned by
a soe propretorshp) whch s a component corporaton sha be determned as
neary as may be In the same manner as though such partnershp (or busness
owned by a soe propretorshp) were a corporaton. See secton 7 2(g).
Par. 2. Secton 30.752-8 s amended by changng 83 appearng
n tem (8) of the e ampe n subsecton (b) to 183.
Par. 3. Treasury Dec son 50 3, approved March 15,19 1 page 79,
ths uetn sectons 30.1 to 30. . Tte 26, Code of Federa Regua-
tons, 19 1 Sup. s hereby superseded.
(Ths Treasury decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32; 26 U. S. C, Sup.
, 62) and the cess Profts Ta mendments of 19 1 (Pubc aw
10, Seventy-seventh Congress).)
Gut T. everno,
Commssoner of Interna Revenue.
pproved May 3, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster May 5, 19 1, 35 p. m.)
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117
C SS PROFITS T R GUL TIONS 109 .
19 1-6-10595
T. D. 5037
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 30.
Reguatons prescrbed under the cess Profts Ta ct of 19 0
(Subchapter of Chapter 2 of the Interna Revenue Code as added
by the Second Revenue ct of 10 0).
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Tabe of Contents.
Secton.
30.0. Scope of reguatons.
3 ) 710-1. Scope of ta .
30.710-2. Measure and rate of ta .
30.711 (a)-. cess profts net ncome for the ta abe year.
30.711 (a)-2. cess profts net ncome f ncome credt s used.
30.711 (a)-3. cess profts net ncome f nvested capta credt s used.
30.711(a) . Ta for perod of ess than 12 mouths.
30.711 (b)-. Computaton of e cess profts net ncome for ta abe years n
base perod.
30.712- 1. cess profts credt owance.
30.713- 1. cess profts credt based on ncome Determnaton of average
base perod net ncome.
30.713- 2. cess profts credt based on ncome d|ustments n e cess
profts credt on account of capta changes.
30.71 - 1. cess profts credt based on nvested capta.
30.715- 1. Determnaton of nvested capta.
30.718-1. Determnaton of day equty nvested capta Money and prop-
erty pad n.
30.718-2. Determnaton of day equty nvested capta ccumuated earn-
ngs and profts.
30.718-3. Determnaton of day equty nvested capta Dstrbutons n
stock.
30.718-- . Determnaton of day equty nvested capta Reductons by ds-
trbutons.
30.718- 5. Determnaton of day equty nvested capta d|ustments on ac-
count of recept of property on certan ta -free qudatons.
30.719- 1. orrowed nvested capta.
30.720- 1. Reducton of average nvested capta for nadmssbe assets.
30.721- 1. bnormates n Income n ta abe year.
30.721-2. Income arsng out of a cam, award, udgment, or decree, or
nterest thereon.
30.721-3. Long-term contracts.
30.721 . poraton, dscovery, prospectng, research, or deveopment
30.721-5. Change n accountng perod or method of accountng.
30.721-6. Income derved by essor from termnaton of ease.
Sectons 30.0 to 30.752-8 ssued under the authorty contaned n secton 62 of the
Interna Revenue Code (53 Stat., 32), as made appcabe by secton 72 ) of the Interna
Revenue Code, added by the Second Revenue ct of 19 0 (Pubc, No. 801, Seventy-s th
Congress, thrd sesson), and the statutory provsons whch they foow.
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118
Secton.
80.721- 7. Dvdends on stock of foregn corporatons other than foregn per-
sona hodng companes.
30.722- 1. d|ustment of abnormates n ncome or capta.
30.723- 1. Rues where equty nvested capta can not be determned under
secton 718.
80.72 - 1. Invested capta of certan foregn corporatons and corporatons en-
tted to benefts of secton 251.
30.725- 1. Ta aton of persona servce corporatons.
80.725-2. Defnton of persona servce corporaton.
30.725- 3. ecton as to ta abty.
30.726- 1. Corporatons competng contracts under Merchant Marne ct of 1930.
30.727- 1. empt corporatons.
30.729-1. Tme and pace for fng returns.
30.729-2. Tme for payment of ta .
30.729- 3. Foregn ta credt.
30.730- 1. Consodated e cess-profts ta returns of affated corporatons.
30.730-2. Formaton of and changes n affated group.
30.730-3. Corporatons to be ncuded n consodated e cess-profts ta returns.
30.730- . Foregn corporatons whch may be treated as domestc corporatons.
30.731- 1. Corporatons whch mne strategc metas.
80.7 0-1. Purpose and seo e of Suppement .
30.7 0-2. Transactons whereby a corporaton becomes an acqurng corporaton.
80.7 0- 3. ase perod and base perod years of acqurng corporaton. -
30.7 1- 1. ecton of ncome credt.
30.7 2- 1. verage base perod net ncome.
80.7 3- 1. Net capta changes.
80.750-1. Purpose and scope of Suppement .
30.750-2. change.
30.750-3. Contro.
80.750- 1. ghest bracket amount.
80.751- 1. Property pad n for stock.
30.751- 2. Lmtaton on borrowed capta.
80.752- 1. Nature and functon of hghest bracket amount.
80.752-2. Day nvested capta of transferor upon e change for purpose of
computng hghest bracket amount ppcaton of secton 752(a).
30.752 3. ghest bracket amount of transferor and transferee for year fo-
owng e change where transferor n contro ppcaton of secton
752(b) (2) and (c) (2).
80.752 . ghest bracket amount of transferor and transferee for year fo-
owng e change where transferor not n contro ppcaton of
secton 752(b)(3) and (c)(3).
80.752-5. ghest bracket amount of transferor and transferee for year fo-
owng certan e changes under secton 112(b)(5) ppcaton of
secton 752(b) ( ) and (c)( ).
80.752-0. ghest bracket amount of transferee for year foowng certan
112(b)(6) qudatons ppcaton of secton 752(c)(5).
80.752-7. ghest bracket amount for year after e change or qudaton where
more than one transacton n same ta abe year ppcaton of
secton 752(d)(3).
80.752-S. ghest bracket amount of transferor and transferee for ta abe
year of e change.
TITL II C SS PROFITS T (S COND R NU CT OF 19 0).
Sec. 201. cess Profts Ta of 19 0.
The Interna Revenue Code s amended by nsertng after secton 706
the foowng new subchapter whch may be cted as the cess
Profts Ta ct of 19 0 :
Subchapter cess Profts Ta .
Part I.

Sec. 72S. Meanng of Terms Used.
The terms used n ths subchapter sha have the same meanng
08 when used n Chapter 1.
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119
Sec. 729. Laws ppcabe.
(a) Genera Rue. provsons of aw (Incudng penates)
appcabe n respect of the ta es mposed by Chapter 1, sha, nsofar
as not nconsstent wth ths subchapter, be appcabe n respect of
the ta mposed by ths subchapter.
r
Secton 80.0. cope of reguaton . These reguatons dea wth the e cess
profts ta Imposed by the cess Profts Ta ct of 19 0 (Subchapter of
Chapter 2 of the Interna Revenue Code), whch ct s referred to In these
reguatons as the ct, and whch ta s referred to In these reguatons us
the e cess profts ta . Such ta Is to be dstngushed from the e cess-
profts ta based on decared vaue capta stock Imposed by Subchapter of
Chapter 2 of the Interna Revenue Code, referred to n these reguatons ps
the decared vaue e cess-profts ta , and so desgnated by secton 506 of
the Second Revenue ct of 19 0, whch ta contnues n effect and compements
the capta stock ta .
ach secton, subsecton, or paragraph of the Interna Revenue Code set forth
n these reguatons sha be consdered as a part of the respectve reguatons
secton to whch t corresponds.
ach secton of the reguatons has been gven a key number correspondng
to the number of the secton, subsecton, or paragraph of the Interuu Revenue
Code whch the reguatons secton nterprets. Inasmuch as the reguatons
consttute Part 30 of Tte 26 of the 19 1 Suppement to the Code of Federa
Reguatons, each key number Is preceded by the number 30 and a decma
pont. The key number Is foowed by a dash (-) and the dentfyng number
of the reguatons secton.
The reguatons heretofore ssued under secton 725 reatng to persona
servce corporatons as paragraph 1 of Treasury Decson 5036, approved Febru-
ary 5, 19 1 page 276, ths uetn , and the reguatons heretofore ssued under
secton 729 reatng to the tme and pace for fng returns and the tme for pay-
ment of the ta as Treasury Decson 5025, approved December 21, 19 0 C. .
19 0-2, 172 , are hereby superseded.
Sec. 710. Imposton of Ta .
(a) Imposton. There sha be eved, coected, and pad, for
each ta abe year begnnng after December 31, 1939, on the ad|usted
e cess profts net ncome, as defned n subsecton (b), of every corpora-
ton (e cept a corporaton e empt under secton 727) a ta as foows:
(1) Upon ad|usted e cess profts net Incomes of ess tuau
20,000, 25 per centum of the ad|usted e cess profts net Income.
5,000 upon ad|usted e cess profts net ncomes of 20,000; and
upon ad|usted e cess profts net Incomes n e cess of 20,000, and
not n e cess of 50,000, 30 per centum n addton of such e cess.
1 ,000 upon ad|usted e cess profts net ncomes of 50,000;
and upon ad|usted e cess profts net ncomes n e cess of 50,000,
and not n e cess of 100,000, 35 per centum n addton of such
e cess.
31,500 upon ad|usted e cess profts net ncomes of 100,000;
and upon ad|usted e cess profts net ncomes n e cess of 100,000,
and not n e cess of 250,000, 0 per centum n addton of such
e cess.
91,500 upon ad|usted e cess profts net Income of 250,000;
and upon ad|usted e cess profts net Incomes n e cess of 250,000,
and not n e cess of 500,000, 5 per centum n addton of such
e cess.
20 ,000 upon ad|usted e cess profts net Incomes of 500,000;
and upon ad|usted e cess profts net ncomes n e cess of 500,000,
60 per centum In addton of such e cess.
(2) ppcaton of bates n case of certan e changes.
If the ta payer s hghest bracket amount for the ta abe year
computed under secton 752 (reatng to certan e changes) s
ess than 500,000, then n the appcaton of paragraph (1) of
ths subsecton to such ta payer, n eu of each amount, other
than the percentages, specfed n such paragraph, there sha be
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substtuted an amount whch bears the same rato to the amount
so specfed as the hghest bracket amount so computed bears to
500,000.
(b) Defnton of d|usted cess Profts Net Income. s used
n ths secton, the term ad|usted e cess profts net ncome n the
case of any ta abe year means the e cess profts net ncome (as de-
fned n secton 711) mnus the sum of:
(1) Specfc e empton. specfc e empton of 5,000;
(2) cess profts credt. The amount of the e cess profts
credt aowed under secton 712; and
(3) Unused e cess profts credt. In the case of a ta payer
the norma-ta net ncome of whch for the ta abe year s not
more than 25,000, the amount by whch the e cess profts credt
for the precedng ta abe year (f begnnng after December 31,
1039) e ceeds the e cess profts net ncome for such precedng
ta abe year.
Sec. 30.710-1. Scope of ta . The e cess profts ta s mposed upon the
ad|usted e cess profts net ncome of every corporaton, both domestc and
foregn, for each ncome-ta ta abe year begnnng after December 31. 1 39,
e cept certan corporatons whch are e empt. (See secton 727.) corpora-
ton the e cess profts net Income of whch, computed as provded n secton
711 (a) (2) and (3), s not greater than 5,000 need not fe an e cess profts
ta return. (See secton 729 (b).) persona servce corporaton, as defned
n secton 725, may eect not to be sub|ect to the e cess profts ta , thereby
makng ts ncome ta abe to ts sharehoders as provded n Suppement S
of Chapter 1 of the Interna Revenue Code. (See secton 725.)
Sec. 30.710-2. Measure and rate of ta . The ta s based on the ad|usted
e cess profts net ncome for the ta abe year. The ad|usted e cess profts net
ncome s determned by deductng from the e cess profts net ncome (deter-
mned as provded n secton 711) the sum of:
specfc e empton of 5,000,
The e cess profts credt aowed by secton 712, or secton 7 1 n the
case of certan reorganzatons, and
carry-over, n certan cases, of the unused e cess profts credt of
the precedng ta abe year.
The unused e cess profts credt carry-over conssts of the amount by whch
the e cess profts credt for the precedng ta abe year e ceeds the e cess
profts net ncome for such precedng ta abe year, and s avaabe ony f the
precedng ta abe year began after December 31, 1939, and If the norma-ta
net ncome of the corporaton for the current ta abe year does not e ceed
25,000.
s to the e empton of Income derved from certan mnng operatons, see
secton 731, and as to the e cess profts ta of corporatons competng con-
tracts under the Merchant Marne ct of 1936, see secton 726.
The foowng tabe shows the e cess profts ta due for ta abe years be-
gnnng after December 31, 1939, upon certan specfed amounts of ad|usted
e cess profts net ncome. In each nstance the frst fgure of the ad|usted
e cess profts net ncome n the ad|usted e cess profts net ncome coumn s to
be e cuded and the second fgure ncuded. The percentage gven opposte ap-
pes to the e cess of ncome over the frst fgure n the ad|usted e cess profts
net ncome coumn. The ast coumn gves the tota e cess profts ta on an
ad|usted e cess profts net ncome equa to the second fgure In the e cess profts
net ncome coumn.
cess Profts Ta Tabe.
Tota e -
cess profts
ta .
d|usted e cess profts net ncome.
Percent.
0 to 20,000
26
30
36
0
6
60
5,000
1 ,000
31,600
91,600
20 .000
20,000 to 50,000
60,000 to 100,000.
260,000 to 600,000
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The e cess profts ta for any amount of ad|usted e cess profts net Income
not stated n round fgures n the tabe s computed by addng to the e cess
profts ta for the argest amount stated whch s ess than the ad|usted e cess
profts net ncome, the e cess profts ta upon the e cess over that amount at
the rate ndcated n the tabe.
The computaton of the ta s Iustrated by the foowng e ampe:
ampe: The Corporaton has for the caendar year 19 0 an e cess profts
net ncome of 800,000. The amount of ts e cess profts credt as aowed under
secton 712 s 195,000. The e cess profts ta of the corporaton for the ca-
endar year 19 0 s 25 ,000, computed as foows:
cess profts net ncome 800,000
Less:
Specfc e empton 5,000
cess profts credt 195,000
. 200,000
d|usted e cess profts net ncome 000,000
Computaton of e cess profts ta :
Ta on 500,000 (see tabe) 20 ,000
Ta on 100,000 at 50 per cent 50,000
Tota 25 ,000
d|ustments are requred n the above e cess profts ta tabe n the case of
corporatons whch have been through certan ta -free e changes or qudatons
(after December 31, 1939) descrbed In sectons 750 and 752 and whch, as a
consequence, have a hghest bracket amount of ess than 500,000. For defn-
ton and computaton of hghest bracket amount see sectons 750(e) and 752.
Such ad|ustment s accompshed by appyng to such tabe the rato of the
corporaton s hghest bracket amount, ad|usted as provded n secton 752, to
what ts hghest bracket amount woud have been f the ad|ustments requred
by secton 752 had not been made, that Is, 500,000. Thus, f the hghest
bracket amount of a corporaton as computed under secton 752 Is ony 300,000,
the doar amounts n the tabe appcabe to such corporaton w be ony
300 000
. for 60 per cent, of the amounts theren set forth. The eft-hand coumn
dOO.OOU
(headed d|usted cess Profts Net Income ) of the tabe appcabe to
such a corporaton woud therefore read 0 to 12,000, 12,000 to 30,000,
30,000 to 00,000, 60,000 to 150,000, 150,000 to 300,000, and 300,000 up.
The rght-hand coumn (headed Tota cess Profts Ta ) woud read
3,000, 8, 00, 18,900, 5 ,900, and 122, 00. The mdde, or percentage, coumn
woud reman unchanged.
The tabe as so revsed woud be appcabe whether the corporaton s e cess
profts credt s based on ncome or nvested capta. If, after the ad|ustments
provded by secton 752, the hghest bracket amount of a corporaton s st
500,000, no ad|ustment n the tabe s necessary, snce the rato of the hghest
bracket amount to 500,000 w produce a percentage of 100. The hghest
bracket amount of a corporaton can never e ceed 500,000, and therefore any
ad|ustment n the tabe requred by secton 710(a)(2) w operate to reduce
the doar amounts appearng theren and thus to Increase the tota ta .
If the facts reatve to the Corporaton were the same as assumed n the
precedng e ampe n ths secton e cept that the Corporaton has a hghest
bracket amount of ony 300,000 Instead of 500,000, the e cess profts ta of
such corporaton for the caendar year 19 0 woud be 272, 00, computed as
foows:
Computaton of e cess profts ta :
Ta on 300,000 from tabe as revsed
Ta on 300,000 at 50 per cent
Tota 272, 00
If the hghest bracket amount of a corporaton were an amount other than
300,000, and ess than 500,000, the revson of the e cess profts ta tabe
woud be correspondngy dfferent. For e ampe, f the hghest bracket amount
were 200,000, the ad|usted fgures woud be 0 per cent, n eu of 60 per cent,
of the doar amounts set forth n the tabe.
0 3 1 1 5
122, 00
150, 000
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122
For computaton of ta for perods of ess than 12 months, see secton
711(a)(3).
Sec. 711. cess Profts Net Income.
(a) Ta abe Teabs egnnng fter December 81, 1939. The
e cess profts net Income for any ta abe year begnnng after December
SI, 1939, sha be the norma-ta net ncome, as defned In secton
13(a) (2), for such year e cept that the foowng ad|ustments sha be
made:
(1) cess profts credt computed under ncome credt. If
the e cess profts credt Is computed under secton 713, the ad|ust-
ments sha be as foows:
( ) Income Ta es. The deducton for ta es sha be n-
creased by an amount equa to the ta (not ncudng the ta
under secton 102) under Chapter 1 for such ta abe year|
( ) Long-Term Gans and Losses. There sha be e -
cuded ong-term capta gans and osses. There sha be
e cuded the e cess of gans from the sae or e change of
property hed for more than eghteen months whch s of a
character whch s sub|ect to the aowance for deprecaton
provded n secton 23(1) over the osses from the sae or
e change of such property;
(C) Income From Retrement or Dscharge of onds, and
So Forth. There sha be e cuded, In the case of any ta -
payer, Income derved from the retrement or dscharge by the
ta payer of any bond, debenture, note, or certfcate or other
evdence of ndebtedness, f the obgaton of the ta payer
has been outstandng for more than eghteen months, n-
cudng, In case the ssuance was at a premum, the amount
ncudbe n Income for such year soey because of such
retrement or dscharge;
(D) Refunds and Interest on grcutura d|ustment ct
Ta es. There sha be e cuded ncome attrbutabe to refund
of ta pad under the grcutura d|ustment ct of 1933,
as amended, and nterest upon any such refund;
( ) Recoveres of ad Debts. There sha be e cuded
ncome attrbutabe to the recovery of a bad debt f a de-
ducton wth reference to such debt was aowabe from gross
Income for any ta abe year begnnng pror to anuary 1, 19 0;
(F) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to dvdends on stock of
domestc corporatons.
(2) cess profts credt computed under nvested capta
credt. If the e cess profts credt s computed under secton
71 , the ad|ustments sha be as foows:
( ) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to a dvdends on stock of
a corporatons, e cept dvdends (actua or constructve) on
stock of foregn persona-hodng companes;
( ) Interest. The deducton for Interest sha be reduced
by an amount equa to 50 per centum of so much of such
nterest as represents Interest on the Indebtedness ncuded n
the day amounts of borrowed capta (determned under
secton 719(a)) ;
(O) Income Ta es. The deducton for ta es sha be In-
creased by an amount equa to the ta (not ncudng the ta
under secton 102) under Chapter 1 for such ta abe year;
(D) Long-Term Gans and Losses. There sha be e -
cuded ong-term capta gans and osses. There sha be
e cuded the e cess of gans from the sae or e change of prop-
erty hed for more than eghteen months whch s of a character
whch Is sub|ect to the aowance for deprecaton provded
In secton 23(1) over the osses from the sae or e change of
such property;
( ) Income From Retrement or Dscharge of onds, and
So Forth. There sha be e cuded, In the case of any ta payer,
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123
Income derved from the retrement or dscharge by the ta -
payer of any bond, debenture, note, or certfcate or other
evdence of ndebtedness, f the obgaton of the ta payer
has been outstandng for more than eghteen months, Incudng,
n case the ssuance was at a premum, the amount ncudbe n
ncome for such year soey because of such retrement or
dscharge;
(F) Refunds and Interest on grcutura d|ustment ct
Ta es. There sha be e cuded ncome attrbutabe to refund
of ta pad under the grcutura d|ustment ct of 1933, as
amended, and nterest upon any such refund;
(G) Interest on Certan Government Obgatons. The
norma-ta net ncome sha be ncreased by an amount equa
to the amount of the nterest on obgatons hed durng the
ta abe year whch are descrbed n secton 22(b) ( ) any part
of the nterest from whch s e eudbe from gross Income or
aowabe as a credt aganst net ncome, If the ta payer has
so eected under secton 720(d) ; and
( ) Recoveres of ad Debts. There sha be e cuded
ncome attrbutabe to the recovery of a bad debt f a deducton
wth reference to such debt was aowabe from gross Income
for any ta abe year begnnng pror to anuary 1, 19 0.
(3) Ta abe year .kss than tweve months. If the ta abe
year s a perod of ess than tweve months the e cess profts net
ncome sha be paced on an annua bass by mutpyng the
amount thereof by the number of days n the tweve months
endng wth the cose of the ta abe year and dvdng by the
number of days n the ta abe year. The ta sha be such part of
the ta computed on such annua bass as the number of days In
the ta abe year s of the number of days In the tweve months
endng wth the cose of the ta abe year.

Sec. 30.711 (a)-. cess profts net ncome for the ta abe year. Two
methods are provded for determnng the e cess profts net ncome for the
ta abe year. One method, that provded by secton 711(a) (1), Is to be used If
the e cess profts credt Is computed under secton 713, whch credt s referred to
n these reguatons as the ncome credt. The other method, that provded by
secton 711(a)(2), s to be used f the e cess profts credt Is computed under
secton 71 , whch credt s referred to n these reguatons as the Invested capta
credt. s to corporatons havng the opton to eect as between the Income
credt and the Invested capta credt, and corporatons requred to use the
Invested capta credt, see sectons 712 and 7 1. The norma-ta net Income
for the ta abe year as defned In secton 13(a)(2) must frst be ascertaned
under ether method. The norma-ta net ncome may be a mnus quantty
for the purpose of secton 711 If and to the e tent not attrbutabe to a
net operatng oss deducton. The norma-ta net Income havng been deter-
mned, certan ad|ustments must be made as provded In secton 711(a) (1) or
(2), whchever s appcabe.
Sec. 30.711(a)-2. cess profts net ncome f ncome credt s used. If the
e cess profts credt for the ta abe year Is computed under secton 713, the
norma-ta net ncome for such year sha be ad|usted as provded In secton
711(a)(1).
In makng the ad|ustment provded In secton 711(a)(1)( ), the amount
by whch the deducton for ta es Is to be Increased Is an amount equa to the
ta for the ta abe year under Chapter 1 (not ncudng the ta mposed
under secton 102) after the aowance of the credt for foregn ta es as
provded n sectons 31 and 131.
In makng the ad|ustment provded n secton 711(a)(1)(C), the term
ndebtedness as used theren Incudes Indebtedness assumed by the ta -
payer even though such ndebtedness Is evdenced, so far as the ta payer s
concerned, ony by a contract (whch has been outstandng for more than 18
months) wth the person whose abtes have been assumed. so, a re-
newa obgaton s to be consdered to be outstandng for more than 18
months f the orgna obgatons and the renewa obgatons taken together
have been outstandng for a tota of more than 18 months. The term other
evdence of ndebtedness does not ncude open account book entres.
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12
The refunds of grcutura d|ustment ct ta es referred to In secton
711(a)(1)(D) ncude ony those made under Tte II of the Revenue ct of
1936 and refunds made to processors under secton 15(a) of the grcutura
d|ustment ct as reenacted by secton 601 of the Revenue ct of 1936.
The provsons of secton 711(a)(1)( ), reatng to recoveres of bad debts,
are not appcabe n the case of a ta payer usng the reserve method of
treatng bad debts as provded n sectons 19.23(k)- and 19.23(k)-5 of Regu-
atons 103.
The computaton of the e cess profts net Income In the cases where the Income
credt Is used may be ustrated by the foowng e ampe:
ampe: The facts wth respect to the Corporaton for the caendar year
19 0 are as foows:
(1) The norma-ta net ncome of the corporaton Is 00,000.
(2) The ta of the corporaton under Chapter 1 (e cudng any ta
abty under secton 102 and after credt for foregn ta ) s 83,000.
(3) The corporaton has ong-term capta gans of 100,000 and ong-
terms capta osses of 75,000. It has gans of 50,000 and osses of
100,000 from saes of property hed for more than 18 months and of a
character sub|ect to the aowance for deprecaton provded n secton
23(1).
( ) On anuary 1, 1930, the corporaton ssued at a premum of 0,000
bonds wth a tota face vaue of 800,000, maturng December 31, 19 9.
On anuary 1, 19 0, the corporaton purchases one-haf of the amount of
the bonds for 390,000. For the years 1930 to 1939, ncusve, t had
returned 10,000 as Income wth respect to the premum on the bonds
t so purchased. The corporaton has never been n an unsound fnanca
condton.
(5) The corporaton derves ncome n the amount of 00 attrbutabe
to refund of ta pad under the grcutura d|ustment ct of 1933, as
amended, and Interest upon such refund.
(6) For the caendar year 1935, the corporaton deducted 10,000 as a
bad debt, whch deducton was aowabe. Durng the caendar year 19 0,
t recovers 5,000 wth respect to such debt.
(7) The corporaton receves as dvdends: 100,000 of the cass wth
respect to whch a credt s aowed by secton 26(b), 20,000 from a
Chna Trade ct corporaton, and 20,000 from a foregn corporaton whch
Is not a foregn persona-hodng company.
If the ncome credt s used, the e cess profts net Income of the corpora-
ton for the caendar year 19 0 s 231,600, computed as foows:
Norma-ta net ncome 00,000
Pus:
Long-term capta osses 75, 000
Less:
Income ta under Chapter 1 83,000
Long-term capta gans 100, 000
Income from retrement of bonds 20, 000
Income from refunds of grcutura d|ustment ct
ta es and Interest thereon 00
Income from recovery of bad debts 5,000
ddtona dvdends receved credt (100 per cent of tota
dvdends of 120,000 receved from domestc corpora-
tons ncudng the Chna Trade ct corporaton, ess
credt of 85,000 aready aowed by secton 26(b) for
dvdends receved, or 120,000 mnus 85,000) 35,000
75,000
2 3, 00
cess profts net ncome 231,600
It s to be observed that no ad|ustment under secton 711(a) (1) ( ) Is requred
to be made for the gans and osses from the sae of property hed for more
than 18 months whch s of a character sub|ect to aowances for deprecaton,
snce such osses e ceed such gans. It s aso to be observed that no ad|ust-
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125
ment under secton 711(a) (1) (F) s requred to be made for the 20,000 dv-
dends receved from the foregn corporaton.
Sec. 30.711 (a)-3. cess profts net ncome f nvested capta credt s used.
If the e cess profts credt for the ta abe year s computed under secton 71 ,
the norma-ta net ncome for such year sha be ad|usted os provded n sec-
ton 711(a) (2). Such ad|ustments are the same as the ad|ustments provded n
secton 711(a) (1) e cept that the foowng addtona ad|ustments are requred
to be made:
(a) There sha be added to the norma-ta net Income:
(1) n amount equa to 60 per cent of the deducton for Interest on the
ndebtedness ncuded In the day amounts of borrowed capta (determned
under secton 719(a)); and
(2) n amount equa to the amount of nterest on obgatons hed durng
the ta abe year whch are descrbed In secton 22(b)( ), any part of the
nterest from whch s e cudbe from gross ncome or aowabe as a credt
aganst net ncome, f the corporaton has eected under secton 720(d) to
treat such nterest as ta abe for e cess profts ta purposes. s used In
paragraph (2), the term nterest ncudes, In the case of obgatons
ssued at a dscount, so much of such dscount as (for purposes of determn-
ng gan or oss upon sae or other dsposton) Is treated ns Interest n the
hands of the ta payer for the ta abe year.
(6) There sha be subtracted from the norma-ta net ncome the amount of
dvdends receved from foregn corporatons, e cept dvdends (actua or con-
structve) on stock of foregn persona hodng companes.
The computaton of the e cess profts net Income In cases where the Invested
capta credt s used may be ustrated by the foowng e ampe:
ampe: The facts present n the e ampe In secton 30.711(a)-2 wth respect
to the Corporaton are aso present wth respect to the T Corporaton, and
n addton the foowng facts are present wth respect to the atter corporaton:
(a) Durng the caendar year 19 0 the corporaton pays nterest amount-
ng to 8,000 on the bonds referred to n ( ) of that e ampe.
(6) Throughout the entre caendar year 19 0 the corporaton owns
100,000 of Treasury bonds 19 -5 and 100,000 of bonds Issued by a State.
It derves ncome for the year 19 0 from Interest on such bonds amountng
to 6,000. The corporaton eects under secton 720(d) to ncrease ts
norma-ta net ncome for e cess profts ta purposes for the year 19 0 by
an amount equa to the amount of nterest on a obgatons hed durng
that year whch are descrbed n secton 22(b) ( ).
If the nvested capta credt s used, the e cess profts net ncome of the
corporaton for the caendar year 19 0 s 2 1,600, computed as foows:
Norma-ta net ncome 00,000
Pus:
Long-term capta osses 75, 000
50 per cent of Interest on ndebtedness Incuded In
borrowed capta 2 ,000
Interest on Government and State obgatons 6,000
105,000
505,000
Less:
Income ta under Chapter 1 83, 000
Long-term capta gans 100,000
Income from retrement of bonds 1 20,000
Income from refunds of grcutura d|ustment ct
ta es and nterest thereon 00
Income from recovery of bad debts 5,000
ddtona dvdends receved credt ( 1 0,000 dvdends
receved from both domestc and foregn corporatons
ess credt of 85,000 aready aowed by secton 26(b)
for dvdends receved) 55,000
263, 00
cess profts net ncome under secton 711(a)(2)
2 1,600
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Sec. 30.711(a)- . Ta for perod of ess than 12 months Sectons 711(a) (S)
provdes that f the ta abe year s a perod of ess than 12 months true
e cess profts net ncome sha be paced on an annua bass by mutpyng
the amount thereof by the number of days In the 12 months endng wth the
cose of the ta abe year and by dvdng such product by the number of days
n the ta abe year. tentatve ta sha then be computed as though the
e cess profts net ncome were the amount so ascertaned. The actua ta
for the ta abe year sha be an amount whch bears the same rato to such
tentatve ta as the number of days n the ta abe year bears to the tota
number of days In the 12 months endng wth the cose of the ta abe year.
The frst ta abe year of a corporaton whch fes a return of ncome re-
ceved or accrued from the date of ts ncorporaton to the end of ts frst
accountng perod s a perod of ess than 12 months, where the perod between
the date of Incorporaton and the end of such frst accountng perod s ess than
12 months.
Sec. 711. cess Profts Net Income.

(b) Ta abe Years n ase Perod..
(1) Genera rue and ad|ustments. The e cess profts net
ncome for any ta abe year sub|ect to the Revenue ct of 1930
sha be the norma-ta net Income, as defned n secton 13(a)
of such ct; and for any other ta abe year begnnng after De-
cember 31, 1937, and before anuary 1, 19 0, sha be the speca-
cass net ncome, as defned n secton 1 (a) of the appcabe
revenue aw. In ether case the foowng ad|ustments sha be
made (for addtona ad|ustments n case of certan reorganza-
tons, see secton 7 2(e)) :
( ) Income Ta es. The deducton for ta es sha be n-
creased by an amount equa to the ta (not ncudng the
ta under secton 102) for such ta abe year under Tte I
or Chapter 1, as the case may be, of the revenue aw appcabe
to such year;
( ) Long-Term Gans and Losses. There sha be e cuded
ong-term capta gans and osses. There sha be e cuded
the e cess of gans from the sae or e change of property
hed for more than eghteen months whch s of a character
whch s sub|ect to the aowance for deprecaton provded
n secton 23(1) over the osses from the sae or e change of
Such property;
(C) Income from Retrement or Dscharge of onds, and
So Forth. There sha be e cuded, n the case of any ta -
payer, ncome derved from the retrement or dscharge by the
ta payer of any bond, debenture, note, or certfcate or other
evdence of ndebtedness, f the obgaton of the ta payer has
been outstandng for more than eghteen months, ncudng, n
case the ssuance was at a premum, the amount ncudbe
In Income for such year soey because of such retrement or
dscharge;
(D) Deductons on ccount of Retrement or Dscharge of
onds, and So Forth. If durng the ta abe year the ta payer
retres or dscharges any bond, debenture, note, or certfcate
or other evdence of ndebtedness, f the obgaton of the ta -
payer has been outstandng for more than eghteen months,
the foowng deductons for such ta abe year sha not be
aowed:
() The deducton aowabe under secton 23(a) for
e penses pad or Incurred n connecton wth such retre-
ment or dscharge;
() The deducton for osses aowabe by reason of
such retrement or dscharge; and
() In case the ssuance was at a dscount, the
amount deductbe for such year soey because of such
retrement or dscharge;
( ) Casuaty, Demoton, and Smar Losses. Deductons
under secton 23(f) for osses arsng from fres, storms, shp-
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wreck, or other casuaty, or from theft, or arsng from the
demoton, abandonment, or oss of usefu vaue of property,
not compensated for by nsurance or otherwse, sha not be
aowed;
(F) Repayment of Processng Ta to endees. The de-
ducton under secton 23(a), for any ta abe year, for e penses
sha be decreased by an amount whch bears the same rato to
the amount deductbe on account of any repayment or credt
by the corporaton to ts vendee of any amount attrbutabe to
any ta under the grcutura d|ustment ct of 1933, as
amended, as the e cess of the aggregate of the amounts so
deductbe n the base perod over the aggregate of the amounts
attrbutabe tc ta es under such ct coected from Its vendees
whch were ncudbe n the corporaton s gross ncome n the
base perod and whch were not pad, bears to the aggregate of
the amounts so deductbe n the base perod;
(G) Payment of udgments, and So Forth. Deductons at-
trbutabe to any cam, award, |udgment, or decree aganst the
ta payer, or nterest on any of the foregong, sha not be
aowed f n the ght of the ta payer s busness t was ab-
norma for the ta payer to ncur a abty of such character
or, If the ta payer normay ncurred such abty, the amount
of such abty n the ta abe year was grossy dsproporton-
ate to the amount of such abty n the four prevous
ta abe years;
( ) e pendtures for ntangbe drng and deveop-
ment costs pad or Incurred In or for the drng of wes or the
preparaton of wes for the producton of o or gas, or e pend-
tures for deveopment costs n the case of mnes, whch the
ta payer has deducted from gross Income as an e pense, sha
not be aowed to the e tent that In the ght of the ta payer s
busness t was abnorma for the ta payer to Incur a abty
of such character or, f the ta payer normay Incurred such
abty, to the e tent that the amount of such abty n the
ta abe year was grossy dsproportonate to the amount of such
abty n the four prevous ta abe years; and
(I) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to dvdends on stock of domes- .
tc corporaton.
(2) Capta gans and osses. For the purposes of ths sub-
secton the norma-ta net ncome and the speca-cass net n-
come referred to n paragraph (1) sha be computed as f sec-
ton 23(g) (2), secton 23(k) (2), and secton 117 were part of the
revenue aw appcabe to the ta abe year the e cess profts net
ncome of whch s beng computed, wth the e cepton that the
net short-term capta oss carry-over provded In subsecton (e)
of secton 117 sha be appcabe to net short-term capta osses
for ta abe years begnnng after December 31, 193 . Such e -
cepton sha not appy for the purposes of computng the ta under
ths subchapter for any ta abe year begnnng before anuary
1, 19 1.
Sec. 30.711 (b)-. Computaton of e cess profts net ncome for ta abe year
n base perod. If the e cess profts credt for the ta abe year s computed
under secton 713, t s necessary to compute the e cess profts net ncome
for each ta abe year of the base perod. The ta abe years n the base
perod are those begnnng after December 31, 1935, and before anuary 1,
19 0. For a ta abe year begnnng after December 31, 1935, and before
anuary 1, 1938, the startng pont In the determnaton of the e cess profts
net Income s the norma-ta net ncome, as defned In secton 13(a) of the
Revenue ct of 1936. For a ta abe year begnnng after December 31, 1937,
the startng pont s the speca-cass net ncome, as defned n secton 1 (a)
of the Revenue ct of 1938 and the Interna Revenue Code. The amount
to be used s the correct norma-ta net ncome or speca-cass net Income,
as t e case may be, regardess of the amount shown n the return for such
year and regardess of the fact that the assessment of a defcency or the aow-
ance of a refund may be barred by the statute of mtatons.
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128
The norma-tar net Income or the speca-cass net Income, as the case
may be, a to be ad|usted frst as requred by secton 711(b) (2) and then aa
requred by secton 711(b)(1).
The ad|ustments requred by sectons 711(b)(2) and 711(b)(1)( ) may be
ustrated by the foowng e ampe:
ampe: The norma-ta net ncome of the Corporaton for the caendar
year 1936 Is 50,000 and ts speca-cass net ncome for the caendar year
1939 s 200,000. In December, 1935, the corporaton purchased shares of stock
and bonds of other corporatons for a tota purchase prce of 25,000. The
corporatons were never ncuded n a consodated return. Such shares of
stock and bonds were capta assets. They became worthess n 1936 and the
bonds were charged off durng that year. In addton, the corporaton had
gans and osses as foows:
1938 1 39
Short-term capta gans 12,000 None
Short-term capta osses (dsregardng any carry-over) 26,000 None
Long-term capta gans 10,000 25,000
Long-term capta osses 30,000 1,000
Net gan or net oss from the saes of property hed for
more than 18 months of the character sub|ect to the
aowance for deprecaton provded In secton 23(1) 5,000 3, 000
The ad|ustments requred n computng the e cess profts net ncome of the
corporaton for 1936 and 1939 are as foows:
1936
Norma-ta net ncome 50,000
d|ustment under secton 711(b) (2) :
dd deductons for oss on worthess stock and bonds ( 25,000)
and for capta net oss ( 2,000) ( 25,000 pus 2,000 or 27,000).. 27, 000
77,000
Subtract deducton for net ong-term capta oss of 20,000 and for
net oss of 5,000 from saes of property hed for more than 18
months of the character sub|ect to the aowance for depreca-
ton provded n secton 23(1) 25,000
I orma-ta net Income ad|usted as requred by secton 711(b) (2) 52,000
d|ustments under secton 711(b)(1)( ):
dd net ong-term capta oss of 20,000 20,000
Norma-ta net ncome ad|usted as requred by secton 711(b)(2) and
secton 711(b)(1)( ) 72,000
1939
Speca-cass net ncome 200,000
(No ad|ustment requred under secton 711(b)(2).)
d|ustments under secton 711(b) (1) ( ):
Deduct net ong-term capta gan of 2 ,000 ( 25,000 1,000) and
net gan of 3,000 from saes of property hed for more than
18 months of the character sub|ect to the aowance for depre-
caton as provded n secton 23(1) 27,000
Speca-cass net ncome ad|usted as requred by sectons 711(b)(2)
and 711(b)(1)( ) 173,000
In makng the ad|ustments requred to be made by secton 711(b) (1) ( ) the
amount of the ncome ta requred to be deducted Is the correct amount
for the ta abe year, regardess of the fact that the assessment or coecton
of any defcency or the aowance of any refund may be barred by the statute
of mtatons.
1 Snce under secton 117 of the Code, short-term capta osses are deductbe ony to the
e tent of short-term capta gans, the e cess of short-term capta osses over short-term
capta gans ( 51,000 ( 25,000 on account of worthess stock and bonds, pus 26,000
other short-term capta ooses) mnus 12,000, or 89,000) does not enter Into the ad-
|ustment.
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129
In makng the ad|ustments provded In secton 711(b)(1)(D), the deduc-
ton aowabe for any premum pad on bonds when caed for redempton sha
be dsaowed, but the deducton aowabe for any dscount amortzed up to
the date of retrement or dscharge sha not be dsaowed. penses ncurred
n ssung bonds whch are amortzed sha be treated n the same manner as
dscounts. The ad|ustments requred by secton 711(b)(1)(D) may be Ius-
trated by the foowng e ampe:
ampe: The norma-ta net Income of the M Corporaton for the caendar
year 1936 Is 75,000. On anuary 1, 1936, the corporaton Issued 1,200 non-
sera bonds wth a tota face vaue of 120,000 at a dscount of 1 , 00, matur-
ng on December 31, 195 . On ugust 1, 1936, the corporaton purchased
one-s th of the amount of the bonds for 19,000. The deducton aowabe under
secton 23(a) of the Revenue ct of 1936 for e penses pad In connecton wth
such purchase amounted to 1,200. The ad|ustments requred by secton 711(b)
(1) (D) n computug the e cess profts net Income of the corporaton for 1936
are as foows:
Norma-ta net Income 75,000
d|ustment under secton 711(b)(1)(D) :
dd:
(I) Deducton aowabe for e penses n connecton
wth retrement 1, 200
(II) Deducton for osses aowabe by reason of re-
trement None
( ) mount deductbe because of retrement or ds-
charge of bonds ( 1,210 computed as In Schedue
beow) 1,210
2, 10
Norma-ta net Income ad|usted as requred by secton 711(b) (1) (D)__
Schedue
(a) nnua amortzaton on 1 , 00 dscount ( 1 , 00-5-20)
(b) nnua amortzaton of dscount on bock of bonds retred
( 720 3)
(c) Monthy amortzaton of dscount on bock of bonds retred
( 120-12)
(d) mortzed dscount deductbe on bock of bonds retred on
ugust 1, 1936 ( 10 19)
(e) Purchase prce of bonds retred on ugust 1, 1936
) -
(g) Tota amount of dscount deductbe on account of retrement
of bonds on ugust 1, 1936 ( 19,000 17,600)
(ft) mount deductbe because of retrement or dscharge of
bonds (tem (g) ess Item (d), or 1, 00 190)
The ad|ustments requred by secton 711(b)(1)(F) may be Iustrated by
the foowng e ampe:
ampe: The norma-ta net Income of the O Corporaton for the caendar
year 1936 s 75,000. Durng that year the corporaton coected from ts ven-
dees 2,000 attrbutabe to ta es under the grcutura d|ustment ct of 1933,
as amended. The 2,000 was Incuded n the gross Income of the corporaton
for 1936 and the ta es to whch such amount was attrbutabe were not pad.
Durng the years 1936 and 1937 the corporaton repad to ts vendees 0,000
and 2,000, respectvey, of amounts It had coected from them for 1936 and
pror years attrbutabe to such ta es. It made no such repayments durng the
years 1938 and 1939. The amount repad to the vendees In 1936 s deductbe
from the corporaton s gross Income for that year. The ad|ustments requred by
secton 711(b)(1)(F) In computng the e cess profts net Income of the cor-
poraton for 1936 are as foows:
Norma-ta net ncome 75,000
d|ustment under secton 711(b)(1)(F):
dd: The amount of ,500, computed as shown In the schedue
beow ,500
77, 10
720
120
10
190
19,000
17,600
1, 00
1,210
Norma-ta net ncome ad|usted as requred by secton 711(b) (1) (F)_.
79,500
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130
Schedue
( ) mount deductbe under secton 23(a) for 1936 on account of
repayment to vendees of amounts coected from vendees at-
trbutabe to ta es under grcutura d|ustment ct of 1933,
as amended, whch were not pad 6,000
(6) ggregate amounts descrbed In (a) deductbe n the base
perod ( 6,000 pus 2,000) 8,000
(c) ggregate of amounts descrbed In (a) coected from ven-
dees and ncudbe n gross Income of corporaton n base
perod 2, 000
(d) cess of (6) over (o) ( 8,000 mnus 2,000) 0,000
(e) Rato of (d) to (6) 6/8
(O mount of ad|ustment ( W (a), or 6 of 6,000
(6) 8 /
In connecton wth the ad|ustments requred to be made by secton 711(b) (1)
(G) and ( ), see the reguatons under secton 721 reatng to cams, awards.
udgments, or decrees, and to the determnaton of abnormaty ether n knd
or In amount.
Sec. 732. cess Pbofts Credt owance.
(a) Domestc Corporatons. In the case of a domestc corpora-
ton whch was In e stence before anuary 1, 19 0, the e cess profts
credt for any ta abe year sha, at the eecton of the ta payer made
n ts return for such ta abe year, be an amount computed under sec-
ton 713 or secton 71 . (For eecton n case of certan reorganzatons
of corporatons not quafed under the precedng sentence, see secton
7 1.) In the case of a other domestc corporatons the e cess profts
credt for any ta abe year sha be an amount computed under secton
71 . In the case of a domestc corporaton whch for any ta abe year
does not fe a return before the e praton of the tme prescrbed by
aw for fng such return, the e cess profts credt for such ta abe
year sha be an amount computed under secton 71 .
(b) Foregn Corporatons. In the case of a foregn corporaton
engaged n trude or busness wthn the Unted States or havng an
offce or pace of busness theren, the frst ta abe year of whch under
ths subchapter begns on any date n 19 0, whch was n e stence
on the day forty-eght months pror to such date and whch at any tme
durng each of the ta abe years n such forty-eght months was engaged
n trade or busness wthn the Unted States or had an offce or pace
of busness theren, the e cess profts credt for any ta abe year sha,
at the eecton of the ta payer n ts return for such ta abe year be
an amount computed under secton 713 or secton 71 . In the case of
a other such foregn corporatons the e cess profts credt for any ta -
abe year sha be an amount computed under secton 71 . In the case
of a foregn corporaton whch for any ta abe year does not fe a
return before the e praton of the tme prescrbed by aw for fng
such return, the e cess profts credt for such ta abe year sha be an
amount computed under secton 71 .
Sec. 30.712-1. cess profts credt owance. (a) Two methods are pro-
vded for computng the e cess profts credt: (1) The ncome method under
Whch the credt s computed as provded n secton 713, and (2) the nvested
capta method under whch the credt s computed as provded n secton 71 .
(6) The foowng corporatons are gven the opton to adopt ether method:
(1) domestc corporaton whch was n e stence before anuary 1,
19 0.
(2) domestc corporaton not In e stence before anuary 1, 19 0, but
gven the rght to an eecton under secton 7 1. . (For computaton of e -
cess profts credt based on ncome n such cases, see sectons 7 0 to 7 .)
(3) foregn corporaton () whch s engaged n trade or busness
wthn the Unted States or havng an offce or pace of busness theren
at any tme durng the ta abe year; (II) the frst ta abe year of whch
for the purposes of the e cess profts ta begns on any date In 19 0;
() whch was In e stence on the day 8 months pror to such date;
and (v) whch, at any tme durng each of the ta abe years n such 8
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131
months, was engaged In trade or busness wthn the Unted States or had
an offce or pace of busness theren. s to what consttutes beng en-
gaged n trade or busness wthn the Unted States, see secton 19.231-1
of Reguatons 103.
The eecton, whch wthn the meanng of the ct must be unquafed, sha
be made In the e cess profts ta return for the partcuar ta abe year, fed
wthn the tme prescrbed by aw. The eecton for that year once made s
rrevocabe after the e praton of such tme, but a new eecton s granted
for each succeedng ta abe year. The tme prescrbed by aw for fng
the return ncudes the perod of any e tenson of tme granted by the
Commssoner.
(c) The foowng corporatons sub|ect to the e cess profts ta have no
opton and sha use the Invested capta method provded n secton 71 :
(1) ny corporaton, domestc or foregn, whch fas to fe a return
for the ta abe year wthn the statutory perod for fng the return,
or wthn such perod as e tended.
(2) other domestc and foregn corporatons not descrbed n para-
graph (6) of ths secton.
Seo. 713. cess Profts Ceedt ased on Income.
(a) mount of cess Profts Credt. The e cess profts credt
for any ta abe year, computed under ths secton, sha be
(1) Domestc corporatons. In the case of a domestc cor-
poraton
( ) 05 per centum of the average base perod net ncome,
as defned n subsecton (b),
( ) Pus 8 per centum of the net capta addton as de-
fned n subsecton (c), or
(C) Mnus ( per centum of the net capta reducton as
defned n subsecton (c).
(2) Foregn corporatons. In the case of a foregn corpora-
ton, 95 per centum of the average base perod net Income.
(b) verage ase Perod Net Income. For the purposes of ths
secton the average base perod net Income of the ta payer sha be
determned as foows:
(1) y computng the aggregate of the e cess profts net n-
come for each of the ta abe years of the ta payer begnnng
after December 31, 1935, and before anuary 1, 19 0, reduced, In
the case of each such ta abe year n whch the deductons pus
the credt for dvdends receved e ceeded the gross Income, by
the amount attrbutabe to such e cess under paragraph ( ) ;
(2) y dvdng the amount ascertaned under paragraph (1)
by the tota number of months n a such ta abe years; and
(3) y mutpyng the amount ascertaned under paragraph
(2) by tweve.
( ) For the purposes of paragraph (1)
( ) In determnng whether, for any ta abe year, the
. deductons pus the credt for dvdends receved e ceeded the
gross ncome, and n determnng the amount of such e cess,
the ad|ustments provded In secton 711(b)(1) sha be made;
and
( ) The amount attrbutabe to any ta abe year In whch
there s such an e cess sha be the amount of such e cess,
e cept that such amount sha be zero f there s ony one
such year, or, f more than one, sha be zero for the year
In whch such e cess s the greatest.
(5) For the purposes of paragraph (1), f the ta paytr was
In e stence durng ony part of the 8 months precedng the begn-
nng of ts frst ta abe year under ths subchapter (herenafter
n ths paragraph caed base perod ), ts e cess profts net
Income
( ) For each ta abe year of tweve months (begnnng
wth the begnnng of such base perod) durng whch It was
not n e stence, sha be an amount equa to 8 per centum
of the e cess of
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(1) the day nvested capta for the frst day of the
ta payer s frst ta abe year begnnng after December 31,
1939, over
() an amount equa to the same percentage of such
day nvested capta as Is appcabe under secton 720
n reducton of the average Invested capta of the pre-
cedng ta abe year;
( ) for the ta abe year of ess than tweve months con-
sstng of that part of the remander of the base perod durng
whch t was not In e stence, sha be the amount ascertaned
for a fu year under subparagraph ( ), mutped by the
number of days n such ta abe year of ess than tweve months
and dvded by the number of days n the tweve months end-
ng wth the cose of such ta abe year.
(6) In no case sha the average base perod net ncome be
ess than zero.
(7) For computaton of average base perod net Income In
case of certan reorganzatons, see secton 7 2.
(c) d|ustments n cess Profts Credt on ccount of Capta
Changes. For the purposes of ths secton
(1) The net capta addton for the ta abe year sha be the
e cess, dvded by the number of days n the ta abe year, of the
aggregate of the day capta addton for each day of the ta abe
year over the aggregate of the day capta reducton for each
day of the ta abe year.
(2) The net capta reducton for the ta abe year sha be the
e cess, dvded by the number of days n the ta abe year, of
the aggregate of the day capta reducton for each day of the
ta abe year over the aggregate of the day capta addton for
each day of the ta abe year.
(3) The day capta addton for any day of the ta abe year
sha be the aggregate of the amounts of money and property pad
In for stock, or as pad-n surpus, or as a contrbuton to capta,
after the begnnng of the ta payer s frst ta abe year under ths
subchapter and pror to such day. In determnng the amount of
any property pad n, such property sha be ncuded n an
amount determned n the manner provded n secton 718(a)(2).
dstrbuton by the ta payer to ts sharehoders n ts stock
or rghts to acqure ts stock sha not be regarded as money
or property pad In for stock, or as pad-n surpus, or as a con-
trbuton to capta. The amount ascertaned under ths para-
graph sha be reduced by the e cess, f any, of the e cuded capta
for such day over the e cuded capta for the frst day of the
ta payer s frst ta abe year under ths subchapter. For the pur-
poses of ths paragraph the e cuded capta for any day sha be
an amount equa to the sum of the foowng:
( ) The aggregate of the ad|usted bass (for determnng
oss upon sae or e change) as of the begnnng of such day,
of obgatons hed by the ta payer at the begnnng of such
day, whch are descrbed n secton 22(b)( ) ( ), ( ), or
(C) any part of the nterest from whch Is e cudbe from
gross Income or aowabe as a credt aganst net Income; and
( ) The aggregate of the ad|usted bass (for determnng
oss upon sae or e change) as of the begnnng of such day,
of stock of domestc corporatons hed by the ta payer at
the begnnng of such day.
The day capta addton sha In no case be ess than zero.
(For day capta addtons and reductons In case of certan re-
organzatons, see secton 7 3.)
( ) The day capta reducton for any day of the ta abe year
sha be the aggregate of the amounts of dstrbutons to share-
hoders, not out of earnngs and profts, after the begnnng of the
ta payer s frst ta abe year under ths subchapter and pror to
such day.
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Sec. 30.713-1. cess profts credt based on ncome Determnaton of average
base perod net ncome. (a) Corporaton n e stence durng the entre base
perod. In order for a corporaton to determne the amount of Its e cess profts
credt based on ncome for any partcuar ta abe year, t Is necessary frst to
compute the amount of the average base perod net Income, 90 per cent of
whch s the startng pont for computng the e cess profts credt based on
ncome. If the corporaton was n e stence durng the entre 8 months pre-
cedng the begnnng of ts frst e cess profts ta ta abe year, the foowng
steps are requred for such computaton:
(1) The e cess profts net ncome for each of the ta abe years n the
base perod (years begnnng after December 81, 1985, and before anuary
1, 19 0) s to be determned as provded n secton 711(b).
(2) The aggregate of the e cess profts net Income for the ta abe years
n the base perod, dsregardng any ta abe year for whch the e cess profts
net ncome s ess than zero, Is to be computed.
(3) From such aggregate amount there s to be deducted the sum of
the amounts by whch the deductons pus the credt for dvdends receved
e ceed the gross ncome for those ta abe years for whch there s such
an e cess, e cept the year for whch such e cess s the greatest If there
Is such an e cess for ony one ta abe year, there sha be no such deduc-
ton. In computng such e cess the amounts of gross ncome, deductons,
and credt for dvdends receved must be ad|usted to the e tent requred
In determnng e cess profts net ncome for the ta abe years n the base
perod under secton 711(b). The credt for nterest receved aowed
by secton 26(a), though taken Into account In computng e cess profts
net ncome, s not taken nto account n computng the e cess referred
to n ths paragraph.
( ) Such aggregate amount as so reduced s to be dvded by the num-
ber of months n the ta abe years n the base perod and the quotent
so obtaned s to be mutped by 12. In no case sha the average base
perod net ncome be ess than zero.
The computaton of the average base perod net Income may be ustrated
by the foowng e ampe:
ampe: The e cess profts net ncome, credt for Interest receved, credt
for dvdends receved, deductons, and gross ncome (a computed by makng
the ad|ustments provded n secton 711(b)) of the Corporaton (a domestc
corporaton), for the years 1936 to 1939, are as foows:
1936
1937
1938
1939
100,000
10.000
20,000
60,000
190,000
100, 000
10.000
0,000
150.000
100,000
60,000
10,000
28,000
150,000
125,000
30,000
10,000
80. OO
9ft 000
S f I
Credt for dvdends receved .
Deductons
Gross ncome
160,000
The average base perod net ncome of the corporaton s 20,000, computed as
foows:
(a) ggregate of e cess profts net Income for ta abe years n base
perod (other than those years for whch there s a defct n such
ncome), before reducton requred by secton 713(b)(1) ( 100,000
pus 30,000) 130,000
(6) mount tem (o) above s to be reduced as requred by secton
713(b) (1) and ( ), I. e., e cess for 1938 of deductons pus credt for
dvdends receved over gross Income, or 150,000 pus 25,000
mnus 125,000 50,000
(c) ggregate of e cess profts net Income for ta abe years In base
perod as reduced (Item (o) mnus Item (6)) 80,000
(d) verage base perod net ncome, 80,000 (tem (o)), dvded by 8
(tota number of months n ta abe years n base perod), mutped
80,000
by 12, or 8 12 20,000
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(6) Corporaton n e stence durng ony part of the base perod. The base
perod of a corporaton whch was n e stence durng ony part of the 8-
month perod precedng the begnnng of ts frst e cess profts ta ta abe
year s such perod of 8 months. Secton 718(b) (5) provdes a method for
determnng the e cess profts net Income for such a corporaton for that
porton of such base perod durng whch t was not n e stence. For each
ta abe year of 12 months (begnnng wth the begnnng of the base perod)
durng whch t was not n e stence the e cess profts net ncome s 8 per
cent of the corporaton s day nvested capta (see secton 717) for the frst
day of ts frst e cess profts ta ta abe year reduced on account of nad-
mssbe assets by the same rato as woud be appcabe under secton 720
n reducton of ts average nvested capta for the precedng ta abe year.
The e cess profts net ncome for a ta abe year of ess than 12 months
consstng of that part of the remander of the base perod durng whch
t was not n e stence s a proportonate part of such amount. The provsons
of ths paragraph may be ustrated by the foowng e ampe:
ampe: The Y Corporaton, whch makes ts ncome ta returns on the
caendar year bass, was organzed on uy 1, 1937, under the aws of a State
of the Unted States. The corporaton s not entted under secton 26(a)
to any credt on account of Government obgatons. The e cess profts net
ncome, credt for dvdends receved, deductons, and gross ncome (a com-
puted by makng the ad|ustments provded n secton 711(b)) for the years
1938 and 1939 and that porton of the year 1937 durng whch t was n e st-
ence, are as foows:
1837
1938
1939
0,000
10,000
60,000
30,000
20,000
30,000
100,000
110,000
150,000
35,000
100,000
285,000
The day nvested capta of the corporaton for anuary 1, 19 0, s 200,000.
The percentage of such nvested capta whch woud be appcabe under secton
720 n reducton of the average nvested capta of the corporaton on account
of nadmssbe assets for the caendar year 1939 s 5.
The average base perod net ncome of the Y Corporaton s 38,18 .38,
computed as foows:
(a) Day Invested capta for anuary 1,19 0 200,000.00
(6) mount equa to the same percentage (5 per cent) of Item (a)
as Is appcabe under secton 720 n reducton of the average
nvested capta for precedng ta abe year, 1939 ( 200,000
.05) 10,000.00
(e) cessof tem (a) over Item (6) 190,000.00
(d) cess profts net ncome for 1836 ( 190,000 .08) 15,200.00
(e) cess profts net ncome for perod from anuary 1, 1937, to
/ 15,200 181
une 30, 1937 ( 365 7, 537. 53
(/) ggregate of e cess profts net ncome for ta abe years n
base perod (other than those years for whch there s a
defct n such ncome), before reducton requred by secton
713(b) (1) ( 15,200 pus 7,537.53 pus 150,000) 172,737.53
(g) mount tem (/) above s to be reduced as requred by secton
713(b)(1) 20,000.00
(ft) ggregate of e cess profts net Income for ta abe years n
base perod as reduced by tem (g) above 152,737.53
( ) verage base perod net ncome, 152,737.53 (tem (ft)), dvded
by 8 (tota number of months n ta abe year In base
152,737.53
perod) mutped by 12, or - . 12 38,18 . 38
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Sec. 30.713-2. cess profts credt based on ncome. d|ustments n access
profts credt on account of capta changes. Under the ncome method of
determnng the e cess profts credt t s necessary to make ad|ustments for
capta changes snce the begnnng of the frst e cess profts ta ta abe year.
The amount representng 95 per cent of the average base perod net ncome
whch s the startng pont n the computaton of the e cess profts credt sha
be ncreased by 8 per cent of the net capta addton or reduced by 6 per cent
of the net capta reducton. No capta ad|ustments are permtted or requred
n the case of a foregn corporaton. Capta addtons are money and property
pad In for stock, or as pad-n surpus, or as a contrbuton to capta after the
begnnng of the frst e cess profts ta ta abe year, ad|usted for ncreases n
e cuded capta over the same perod. Capta reductons are dstrbutons
snce the begnnng of the frst e cess profts ta ta abe year whch are not
out of earnngs and profts. The term earnngs and profts ncudes earnngs
and profts of the ta abe year and the accumuated earnngs and profts of the
corporaton, whether accumuated before, on, or after March 1, 1913. For
capta addtons and reductons In case of certan reorganzatons, see secton
7 3. d|ustments on account of capta changes are Iustrated by the foow-
ng e ampes:
ampe ( ) : Computaton of net capta addton. -On anuary 1, 19 0, the
Corporaton, whch makes Its Income ta returns on the caendar year bass,
owns stock n anoher domestc corporaton, acqured n 1938, the ad|usted bass
of whch Is 10,000 and 30,000 of State bonds whch t had purchased n 1938
for 32,000.
The foowng were the ony changes whch occurred durng 19 0 that woud
affect the determnaton of the net capta addton or the net capta reducton
of the corporaton:
(a) On pr 1, 19 0, there was pad nto the corporaton for shares of ts
stock rea estate havng a bass to the corporaton of 30,000.
(6) On uy 1, 19 0, there was pad Into the corporaton for shares of ts stock
Treasury bonds havng a bass to the corporaton of 22, 00 and cash n the
amount of 36,600.
The net capta addton of the corporaton for 19 0 s 0,759.02, computed as
foows:
Perod pr 2, 19 0, to uy 1,19 0, ncusve.
(1) Rea estate pad In for stock pr 1, 19 0 30,000.00
(2) Less: cess of e cuded capta for each day of perod over
e cuded capta on anuary 1, 19 01 None
(3) Day capta addton for each day of perod (Item (1)
mnus tem (2)) 30,000.00
( ) ggregate of day capta addtons for perod ( 30,000
mutped by 91, number of days n perod) 2,730,000.00
Perod uy 2, 19 0, to December SI, 19 0, ncusve.
(5) Rea estate, as above 30,000.00
(6) Treasury bonds pad n for stock uy 1, 19 0 22, 00.00
(7) Cash pad n for stock uy 1, 19 0 36, 600. 00
(8) Tota
(a) cuded capta for each day of perod :
( ) Stock of domestc corporutons--
( ) State bonds
Tota
(t) cuded capta for anuary 1, 19 0:
) Stock of domestc corporatons
) State bonds
Tota
89, 000. 00
10, 000
82,000
2,000
10,000
-- 82, 000
2, 000

(
(c) cess of e cuded capta for each day of perod over e cuded capta on
anuary 1, 19 0 None
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(9) Less: cess of e cuded capta for each day of perod over
e cuded capta on anuary 1, 19 01 22, 00.00
(10) Day capta addton for each day of perod (Item (8)
mnus tem (9)) 66,600.00
(11) ggregate of day capta addtons for perod ( 66,600
mutped by 183, number of days n perod) 12,187,800.00
(12) ggregate of day capta addtons for 19 0 (tem ( )
pus tem (11)) 1 ,917,800.00
(13) Net capta addton ( 1 ,917,800 dvded by 366, number of
days n ta abe year) 0,759.02
ampe (2) : Computaton of net capta reducton. The T Corporaton,
a domestc corporaton whch makes ts ncome ta returns on the caendar
year bass, was organzed on anuary 1, 1910, wth an authorzed and out-
standng capta stock of 2,000 shares of common stock of a par vaue of 100
each and 1,000 shares of partcpatng preferred stock of a par vaue of 100
each. ach share of preferred stock s entted to receve annua dvdends
of 7, and 100 on compete qudaton, n prorty to any payments on common
stock, and s entted to partcpate equay wth each share of the common
stock n ether nstance after the common stock has receved a smar amount.
The preferred stock s redeemabe n whoe or n part at the opton of the
board of drectors at any tme at 106 per share pus ts proporton of the
earnngs of the company at the tme of such redempton. The preferred stock
was ssued at 106 per share for a tota of 106,000, and the common stock was
ssued at 100 per share for a tota of 200,000. On uy 1, 19 0, the com-
pany had a pad-n surpus of 6,000, consstng of the premum receved on
the preferred stock, earnngs and profts of 30,000 accumuated pror to
March 1, 1913, and earnngs and profts accumuated snce February 2S, 1913,
of 75,000. On uy 1, 19 0, the opton wth respect to the preferred stock
Is e ercsed and the entre amount of such stock s redeemed at 1 1 per share
for a tota of 1 1,000, such transacton beng a parta qudaton under sec-
ton 115(c). The corporaton has no other transactons durng the year 19 0
whch affect the capta of the corporaton.
The net capta reducton of the corporaton for 19 0 s . 3,000, computed
as foows:
(a) Tota amount dstrbuted to preferred sharehoders 1 1,000
(6) ocaton of the amount dstrbuted:
( ) ttrbutabe to par vaue 100,000
( ) ttrbutabe to pad-n surpus 6,000
(C) ttrbutabe to earnngs and profts accumuated
as of uy 1, 19 0 (one-thrd of ( 30,000 pus
75,000)) 35,000
Tota 1 1,000
(c) mount of dstrbuton not out of earnngs and profts ( 100,000
pus 6,000) 106,000
(d) ggregate of the day capta reducton from uy 2, 19 0, to
December 31, 19 0, both dates ncusve ( 106,000 mutped
by 183, number of days n ta abe year after dstrbuton) 19,398,000
(e) Net capta reducton ( 19,398,000 dvded by 366, number of
days n ta abe year) 53,000

(a) cudedcapta for each day of perod :

22, 00
6 , 00
2, 000
, 00
( ) Stock of domestc corporatons _ n noo
( ) State bonds 3 ooo
(C) Treasury bonds ZZZZZZ 22 (n
Tota 6. t
(6) cuded capta for anuary 1, 10 0 ZZIZZZZZZ 2 (
(0) ces of e cuded capta for each day of perod over e cuded capta on
anuary 1. 19 0 ( 6 , 00 mnus 2,000) 22 -
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137
Sec. 71 . cess Profts Credt ared on Invested Capta.
The e cess profts credt, for any ta abe year, computed under
Los secton, sha be an amount equa to 8 per centum of the ta -
paver s nvested capta for the ta abe year, determned under secton
715.
Sec. 30.71 -1. cess profts cre t based on nvested capta. Secton 71
appes ony to a corporaton whch under secton 712 eects or s requred to
compute ts e cess profts credt under the nvested capta method. Such
credt s an amount equa to 8 per cent of Its nvested capta for the ta abe
year, regardess of the rato of earnngs to nvested capta for prevous
ta abe years. For computaton of e cess profts net ncome f e cess profts
credt based on Invested capta s used, see secton 711(a) (2).
Sec. 715. Defnton of Invested Capta.
For the purposes of ths su -hapter the nvested capta for any
ta abe year sha be the average nvested capta for such year, de-
termned under secton 71(1, reduced by an amount computed under
secton 720 (reatng to nadmssbe assets). If the Commssoner fnds
that n any case the determnaton of nvested capta, on a bass other
than a day bass, w produce an nvested capta dfferng by not
more than 1,000 from an nvested capta) determned on a dny bass,
he may, under reguatons prescrbed by hm wth the upprovn of the
Secretary, provde for such determnaton on such other bass. (For
computaton of nvested capta n case of foregn corporatons and cor-
poratons entted to the benefts of secton 201, see secton 72 .)
Sec. 716. vehaoe Invested Capta.
The average Invested capta for any ta abe year sha be the
aggregate of the day nvested capta for each day of such ta abe
year, dvded by the number of days In such ta abe year.
S t. 717. Day Invested Capta.
The day nvested capta for any day of the ta abe year sha
be the sum of the equty nvested capta for such day pus the borrowed
nvested capta for such day determned under secton 719.
Sec. 30.715-1. Determnaton of nvested capta. It s necessary for a ta -
payer usng the nvested capta method n computng the e cess profts credt
to determne the nvested capta for the ta abe year. Ths s not the In-
vested capta at the begnnng of the ta abe year but the average nvested
capta for the ta abe year, reduced by an amount computed under secton 720,
f the ta payer owned any nadmssbe assets durng the ta abe year. The
average nvested capta for the ta abe year s the aggregate of the day
nvested capta for each day of the ta abe year, dvded by the number of days
n such ta abe year. The day Invested capta s the sum of the equty
nvested capta, as defned n secton 718, and the borrowed nvested capta,
as defned n secton 719. The nvested capta sha be computed n a cases
on a day bass.
If, durng the ta abe year, a corporaton Is not nvoved In a ta -free quda-
ton and nether receves new capta, whether pad n or borrowed, nor makes
any dstrbuton other than out of earnngs and profts of the ta abe year,
nor retres ndebtedness of the character ncudbe In borrowed capta, Its
average nvested capta for the ta abe year s an amount equa to ts day
nvested capta for the frst day of the ta abe year.
In cases where the changes n nvested capta are not numerous durng the
ta abe year, the determnaton of the average nvested capta may generay
be smpfed by .takng the Invested capta as of the frst day of the ta abe
year and addng thereto such porton of each addton made durng the year
as the number of days remanng n the ta abe year after such addton bears
to the tota number of days n the ta abe year, and subtractng such porton of
each reducton of capta as the number of days after such reducton bears
to the tota number of days n the ta abe year. Ths paragraph may be
Iustrated by the foowng e ampe:
ampe: The nvested capta of the Corporaton on anuary 1, 19 0, s
500,000. The ony changes In nvested capta durng the ta abe year 19 0
are as foows:
(a) On pr 1, 19 0, money amountng to 100,000 s pad n for stock.
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138
(o) On October 1, 10 0, n capta dstrbuton Is made amountng to 200,000.
ggregate nvested capta from anuary 1 to pr 1, ncusve
(92 days), 500.000 92 6,000,000.00
ggregate nvested capta from pr 2 to October 1, ncusve
(183 days) ( 500,000 pus 100,000) 183 109,800,000.00
ggregate nvested capta from October 2 to December 31, ncu-
sve (91 cays) ( 600,000 mnus 200,000) 91 36, 00,000.00
ggregate Invested capta for 19 0 192,200,000.00
verage nvested capta for 19 0 ( 192,200,000 dvded by 366,
number of days n ta abe year) 525,136. 61
Sec. 718. quty Invested Capta.
(a) Defnton. The equty nvested capta for any day of any
ta abe year sha be determned as of the begnnng of such day and
sha be the sum of the foowng amounts, reduced as provded n
subsecton (b)
(1) Money pad n. oney prevousy pad n for stock, or aa
pad-n surpus, or as a contrbuton to capta;
(2) Property pad n. Property (other than money) prevousy
pad n (regardess of the tme pad In) for stock, or as pad-n
surpus, or as a contrbuton to capta. Such property sha be
ncuded n an amount equa to ts bass (unad|usted) for deter-
mnng oss upon sae or e change. If the property was dsposed of
before such ta abe year, such bass sha be determned n the
same manner as f the property were st hed at the begnnng of
such ta abe year. If such unad|usted bass s a substtuted bass
t sha be ad|usted, wth respect to the perod before the property
was pad In, n the manner provded In secton 113(b) (2) ;
(3) Dstrbutons n stock. Dstrbutons n stock
( ) Made pror to such ta abe year to the e tent to whch
they are consdered dstrbutons of earnngs and profts; and
( ) Prevousy made durng such ta abe year to the e tent
to whch they are consdered dstrbutons of earnngs and
profts other than earnngs and profts of such ta abe year;
( ) arnngs and profts at begnnng of year. The accumu-
ated earnngs and profts as of the begnnng of such ta abe year;
and
(5) Increase on account of gan on ta -free qudaton.
In the case of the prevous recept of property (other than prop-
erty descrbed n the ast sentence of secton 113(a) (15)) by the
ta payer n compete qudaton of another corporaton under sec-
ton 112(b)(6), or the correspondng provson of a pror revenue
aw, an amount, wth respect to each such qudaton, equa to the
amount by whch the aggregate of the amount of the money so
receved and of the ad|usted bass, at the tme of recept, of a
property (other than money) so receved, e ceeds the sum of:
( ) The aggregate of the ad|usted bass of each share of
stock wth respect to whch such property was receved: such
ad|usted bass of each share to be determned mmedatey
pror to the recept of any property n such qudaton wth
respect to such share, and
( ) The aggregate of the abtes of such other corpora-
ton assumed by the ta payer In conecton wth the recept of
such property, of the abtes (not assumed by the ta payer)
to whch such property so receved was sub|ect, and of any
other consderaton (other than the stock wth respect to whch
such property was receved) gven by the ta payer for such
property so receved.
(b) Reducton n quty Invested Capta. The amount by whch
the equty nvested capta for any day sha be reduced as provded In
subsecton (a) sha be the sum of the foowng amounts
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(1) Dstrbutons n prevous years. Dstrbutons made pror
to such ta abe year whch were not ont of accumuated earnngs
and profts;
(2) Dstrbutons durng the year. Dstrbutons prevousy
made durng such ta abe year whch are not out of the earnngs
and profts of such ta abe year;
(3) arnngs and profts of another corporaton. The earn-
ngs and profts of another corporaton whch prevousy at any tme
were ncuded n accumuated earnngs and profts by reason of- a
transacton descrbed n secton 112 (b) to (e), both ncusve, or In
the correspondng provson of a pror revenue aw, or by reason of
the transfer by such other corporaton to the ta payer of property
the bass of whch n the hands of the ta payer a or was deter-
mned wth reference to ts bass In the hands of such other
corporaton, or woud have been so determned If the property
had been other than money; and
( ) Reducton on account of oss on ta -free qudaton.
In the case of the prevous recept of property (other than property
descrbed In the ast sentence of secton 113(a) (15)) by the ta -
payer In compete qudaton of another corporaton under secton
112(b)(6), or the correspondng provson of a pror revenue aw,
an amount, wth respect to each such qudaton, equa to the
amount by whch the sum of
( ) The aggregate of he ad|usted b. ss of each share of
stock wth respect to whch such property was receved; such
ad|usted bass of each share to be determned mmedatey
pror to the recept of any property n such qudaton wth
respect to such share, and
( ) The aggregate of the abtes of such other corpora-
ton assumed by the ta payer In connecton wth the recept of
such property, of the abtes (not assumed by the ta payer)
to whch such property so receved was sub|ect, and of any
other consderaton (other than the stock wth respect to
whch such property was receved) gven by the ta payer for
such property so receved,
e ceeds the agg egate of the amount of the money so receved and
of the ad|usted bass, at the tme of recept, of a property (other
than money) so receved. The amount of the reducton under ths
paragraph sha not e ceed the accumuated earnngs and profts
as of the begnnng of such ta abe year.
(c) Rues for ppcaton of Subsectons (a) and (b). For the
purposes of subsectons (a) and (b)
(1) Dstrbutons to sharehoders. The term dstrbuton
means a dstrbuton by a corporaton to ts sharehoders, and the
term dstrbuton n stock means a dstrbuton by a corporaton
In ts stock or rghts to acqure ts stock. To the e tent that a
dstrbuton n stock Is not consdered a dstrbuton of earnngs nnd
profts t sha not be consdered a dstrbuton. dstrbuton n
stock sha not be regarded as money or property pad n for stock,
or as pad-n surpus, or as a contrbuton to capta.
(2) Dstrbutons n frst s ty days of ta abe year. In the
appcaton of such subsectons to any ta abe year begnnng after
December 31, 10 0, so much of the dstrbutons (taken In the order
of tme) made durng the frst s ty days thereof as does not
e ceed the accumuated earnngs and profts as of the begnnng
thereof (computed wthout regard to ths paragraph) sha be
consdered to have been made on the ast (ay of the precedng
ta abe year.
(3) Computaton of earnngs and profts of ta abe year.
For the purposes of subsectons (a) (3) ( ) and (b) (2) n determn-
ng whether a dstrbuton s out of the earnngs and profts of any
ta abe year, such earnngs and profts sha be computed as of the
cose of such ta abe year wthout dmnuton by reason of any
dstrbuton made durng such ta abe year or by reason of the ta
under ths subchapter for such year and the determnaton sha
be made wthout regard to the amount of earnngs and profts at
the tme the dstrbuton was made.
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( ) Stock n case or merger on consodaton. If a corpora-
ton owns stock n another corporaton, and
( ) such corporatons are merged or consodated In a stat-
utory merger or consodaton, or
( ) such corporatons are partes to a transacton whch
resuts In the emnaton of such stock In a manner smar to
that resutng from a statutory merger or consodaton, then
such stock sha not be consdered as property pad n for stock
of, or as pad-n surpus of, or as a contrbuton to capta of,
the corporaton resutng from the transacton referred to In
subparagraph ( ) or ( ).
(d) For speca rues affectng computaton of property pad In
for stock In connecton wth certan e changes and qudatons, see
secton 751(a).
(e) For determnaton of equty Invested capta In speca cases,
see secton 723.
Sew. 30.718-1. Determnaton of day equty nvested capta Money and
property pad n. The equty nvested capta for any day Is determned as
of the begnnng of such day. The bass or startng pont Is found In the
amount of money and property prevousy pad In for stock, or as pad-n
surpus, or as a contrbuton to capta. For the purpose of determnng equty
Invested capta, the amount of any property pad In Is the unad|usted bass
to the ta payer for determnng oss upon a sae or e change under the aw
appcabe to the ta abe year for whch the Invested capta s beng computed.
If the property was dsposed of before such ta abe year, such unad|usted
bass sha be determned as If the property were st hed at the begnnng
of such ta abe year.
If the bass to the ta payer Is cost and stock was Issued for the prop-
erty, the cost Is the far market vaue of such stock at the rme of Its Issuance.
If the stock had no estabshed market vaue at the tme of the e change, the
far market vaue of the assets of the company at that tme shoud be de-
termned and the abtes deducted. The resutng net worth w be deemed
to represent the tota vaue of the outstandng stock. In determnng net
worth for the purpose of f ng the far market vaue of the stock at the tme
of the e change, the property pad n for such stock sha be ncuded n
the assets at ts far market vaue at that tme.
If stock havng no estabshed market vaue Is Issued for Intangbe property,
and t Is necessary to determne the far market vaue of such property, the
foowng factors, among others, may be taken nto consderaton In determn-
ng such vaue: (a) The earnngs attrbutabe to such ntangbe assets whe
In the hands of the predecessor owner; and (6) any cash offers for the pur-
chase of the busness, ncudng the Intangbe property, at or about the tme
of Its acquston. corporaton camng a vaue for Intangbe property pad
In for stock shoud fe wth Its return a fu statement of the facts reatng
to such vauaton.
If the property was acqured after December 31, 1920, by a corporaton from
a sharehoder as pad-n surpus or from any person as a contrbuton to capta,
then the bass sha be the same as It woud be n the hands of the transferor
If the transfer had not been made. (See secton 113(a)(8).) If so acqured
pror to anuary 1, 1921, the bass Is the far market vaue of the property
at the tme It was pad In. If the bass Is the transferor s bass, then such
ad|ustments sha be made as are provded In secton 113(b) (2) wth respect to
the perod before the property was pad n. Thus, f pad Into a corpora-
ton n 1930 as pad-n surpus certan Improved rea estate purchased by hm
In 1920 for 20,000, wth respect to whch deprecaton was aowed for the
perod hed by hm n amounts aggregatng 6,000 (the fu amount aowabe),
s bass of 20,000 sha be reduced by 6,000 for the purpose of computng the
nvested capta of the corporaton.
The fact that the money or property pad In has been ost, destroyed, or
otherwse dsposed of sha not reduce the nvested capta, e cept as such
facts are refected In the earnngs and profts as of the begnnng of the ta abe
year. s to cases wth respect to whch the equty Invested capta at the
begnnng of the year can not be determned, see secton 723. s to determna-
ton of amount of property pad n for stock n connecton wth certan
e changes, see secton 751(a).
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Secton 718(c)( ), whch provdes that In certan cases stock acqured by
a corporaton sha not be treated as property pad n for stock, or as pad-n
surpus, or as a contrbuton to capta, s for the purpose of avodng dupca-
ton to nvested capta. Thus, for e ampe, f the Corporaton owns stock
of the Y Corporaton and both corporatons are merged nto the Z Corporaton,
the Y Corporaton stock receved by the Z Corporaton from the Corporaton
may not be treated as property pad n for stock, or as pad-n surpus, or as a
contrbuton to capta of the Z Corporaton. Ths avods dupcaton, snce
the assets of the Y Corporaton, aganst whch such stock was ssued, are
treated as property pad n for stock, or as pad-n surpus, or as a contrbu-
ton to capta of the Z Corporaton. Secton 718(c)( ) does not appy to a
secton 112(b)(6) qudaton where no possbty of dupcaton e sts.
Sec. 30.718-2. Determnaton of day equty nvested capta ccumuated
earnngs and profts (a) In genera. The term accumuated earnngs and
profts Is not defned n the Interna Revenue Code. See, however, secton 118
and the reguatons prescrbed thereunder as to the effect of certan transactons
on earnngs and profts, and secton 30.718- as to the effect of the decaraton
and dstrbuton of dvdends. In genera, the concept of accumuated earn-
ngs and profts for the purpose of the e cess profts ta Is the same as for the
purpose of the ncome ta . In computng accumuated earnngs and profts as
of the begnnng of the ta abe year, a ta payer keepng ts books and makng ts
ncome ta returns on the accrua bass sha subtract the Income and e cess
profts ta es for the precedng ta abe year. If there s a defct n the accumu-
ated earnngs and profts as of the begnnng of the ta abe year, such defct
sha not be taken nto account n determnng nvested capta, and In such cases
the earnngs and profts as of the begnnng of the ta abe year sha be consd-
ered as zero, but subsequent earnngs and profts sha be apped aganst such
defct. Unreazed apprecaton n vaue of property s not a factor n determn-
ng earnngs and profts.
(6) Current earnngs and proft . arnngs and profts of any ta abe year
can not be ncuded n the computaton of Invested capta for that year. If a
dvdend s decared and pad durng any year out of the earnngs and profts of
that year and the stockhoders pay back Into the corporaton a or a substanta
part of the amount of such dvdends, the amount so pad back can not be
ncuded n the computaton of nvested capta for that year uness the corpora-
ton shows by evdence satsfactory to the Commssoner that the dvdends
were pad n good fath and wthout any understandng, e press or mped, that
they were to be pad back.
Se ). 30.718-3. Determnaton of day equty nvested capta. Dstrbuton n
stock. dstrbuton made pror to the ta abe year by a corporaton n ts
stock, or n rghts to acqure ts stock, to the e tent to whch t consttutes a
dstrbuton of earnngs and profts of the corporaton, consttutes an tem of
nvested capta. Such a dstrbuton made durng the ta abe year out of
earnngs and profts other than out of the earnngs and profts of that year s
aso an tem of nvested capta. If a stock dvdend s pad out of capta and
not out of earnngs and profts, or s of such a character as not to be sub|ect to
ta n the hands of a dstrbutee because e empt as a stock dvdend ether by
statute or otherwse, t s not deemed to consttute a dstrbuton and does not
reduce the earnngs and profts account. See secton 115(h).
Sec. 30.718- . Determnaton of day equty nvested capta Reducton by
dstrbuton. The amount of te day equty nvested capta ns partay
determned by takng the aggregate of the sums descrbed In secton 718(a) sha
be reduced by the amount of the dstrbutons made n pror ta abe years whch
were not out of accumuated earnngs and profts pus the amount of the dstr-
butons prevousy made durng the ta abe year whch were not out of the
earnngs or profts of such year. In determnng whether a dstrbuton s out of
the earnngs and profts of any ta abe year, such earnngs and profts sha be
computed as of the cose of such ta abe year wthout dmnuton by reason of
any dstrbuton made durng such ta abe year or by reason of the e cess profts
ta mposed by the cess Profts Ta ct of 19 0, and wthout regard to the
amount of earnngs and profts at the tme the dstrbuton was made.
For e ampe, f a corporaton makng a return on the caendar yenr bass had
accumuated earnngs and profts as of the begnnng of the ta abe year of
50,000, and earnngs and profts durng the ta abe year (wthout dmnuton
by any dstrbutons or the e cess profts ta for the ta abe year) of 150,000,
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a earned durng the ast s months of the ta abe year, and dstrbuted 175,000
as dvdends durng the ta abe year, 56,000 on pr 1, 70,000 on uy 1, and
9,000 on October 1, s -sevenths of each dstrbuton w be deemed to have
been pad out of earnngs of the ta abe year and one-seventh from accumuated
earnngs and profts, so that accumuated earnngs and profts w be reduced
by 8,000 begnnng pr 2, by an addtona 10,000 begnnng uy 2, and by
an addtona 7,000 begnnng October 2.
In computng accumuated earnngs and profts as of the begnnng of the
ta abe year and n determnng what dstrbutons durng the ta abe year
are made out of the earnngs and profts of such year, for the purposes of secton
718 (a) and (b) dstrbutons made durng the frst 60 days of any ta abe,
year begnnng after December 31, 19 0, are deemed, to the e tent they do not
e ceed the accumuated earnngs and profts as of the begnnng of the ta abe
year, to have been made on the ast day of the precedng ta abe year. In
appyng such rue, such dstrbutons sha be consdered n the order of tme.
For e ampe, If a corporaton on the caendar year bass has accumuated
earnngs or profts of 100,000 on anuary 1, 19 1, and makes dstrbutons of
75,000 on anuary 15, 19 1, and 50,000 on February 15, 19 1, the dstrbuton
of anuary 15, 19 1, and 25,000 of the dstrbuton of February 15, 19 1, are
consdered as havng been made on December 31, 19 0.
dstrbuton s consdered to be made on the date t Is payabe, e cept that
where no date Is set for Its payment, the dstrbuton s consdered to be made
on the date when It Is decared, and e cept that dstrbutons payabe durng
the frst 60 days of a ta abe year begnnng after December 31, 19 0, are con-
sdered to be dstrbutons made on the ast day of the precedng ta abe year
to the e tent such dstrbutons do not e ceed the accumuated earnngs and
profts as of the begnnng of the ta abe year.
The purchase by a corporaton of ts own stock for Investment does not of
tsef resut n a reducton of nvested capta. ut see secton 30.720-1 reatve
to nadmssbe assets. If, however, the corporaton subsequenty cances such
stock, nvested capta s reduced, begnnng wth the day foowng such cance-
aton, by so much of the ad|usted bass of such stock n the hands of the cor-
poraton as s not propery chargeabe to earnngs and profts of the ta abe
year. If stock s purchased for retrement, there Is a dstrbuton on the date
of purchase of the amount pad therefor and the nvested capta s reduced by
the amount thereof not propery chargeabe to earnngs and profts of the ta abe
year.
Sec. 30.718-5. Determnaton of day equty nvested capta d|ustments on
account of recept of property on certan ta -free qudatons. If the ta payer
has prevousy receved property (other than property descrbed n the ast sen-
tence of secton 113(a) (15)) n compete qudaton of another corporaton n
whch no gan or oss was recognzed under secton 112(b)(6) or the same
secton of the Revenue ct of 1936 or 1938, the Invested capta sha be n-
creased by an amount equa to the e cess of the aggregate of the money and
the ad|usted bass, at the tme of recept, of the property other than money so
receved over the sum of the ad|usted bass of the stock wth respect to whch
such property was receved and the aggregate of the abtes assumed by the
ta payer, or to whch the property receved was sub|ect, and any other consder-
aton gven by the ta payer for such property. If the aggregate of the ad|usted
bass of such stock pus such abtes and other consderaton gven for the
property so receved e ceeds such money and the ad|usted bass of such property,
then such e cess sha be deducted from the Invested capta to the e tent
that such e cess does not e ceed the accumuated earnngs and profts as of the
begnnng of the ta abe year. The term ad|usted bass as used n secton
718(a)(5) and (b)( ) means ad|usted bass for determnng oss. The prov-
sons of ths paragraph may be ustrated by the foowng e ampes:
ampe (1): The Corporaton owns a the outstandng stock of the Y
Corporaton for whch It pad 25,000, whch Is Its ad|usted bass for determ-
nng oss. The T Corporaton s competey qudated durng the 19 0 ta abe
year of the Corporaton n accordance wth secton 112(b)(6). The
Corporaton receved upon such qudaton assets havng an ad|usted bass
of 35,000 for determnng oss. Under secton 718(a)(5) there Is an Increase
In equty nvested capta of 10,000, computed as foows:
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d|usted bass to the Y Corporaton of property receved by the
Corporaton n qudaton 35,000
Less:
d|usted bass to the Corporaton of stock In the Y corporaton. 25,000
Increase n equty Invested capta 10,000
ampe (2) : If n the above e ampe the Corporaton had pad 0,000,
nstead of 25,000, for the stock of the Y corporaton and hud accumuated
earnngs and profts as of the begnnng of the ta abe year of 10,000, then
under the appcaton of secton 718(b) ( ) there s a decrease n equty n-
vested capta of 5,000 as shown by the foowng computaton:
d|usted bass to the Corporaton of stock n the Y Corporaton 0,000
Less:
d|usted bass to the Y Corporaton of property receved by the
Corporaton n qudaton 85,000
Reducton In equty nvested capta 5, 000
If at the begnnng of a subsequent ta abe year the accumuated earnngs and
profts are ess than 5,000, the amount of the reducton requred by secton
718(b) ( ) for such ta abe year w be mted to the amount of such accu-
muated earnngs and profts.
If the earnngs and profts of another corporaton prevousy at any tme
were ncuded n the accumuated earnngs and profts of the ta payer by
reason of a transacton referred to n secton 718(b)(3), the amount of such
earnngs and profts sha be deducted n determnng the equty nvested
capta. The provsons of ths paragraph may be ustrated by the foowng
e ampe:
ampe: The Y Corporaton pror to uy 1, 1939, had capta stock out-
standng of 20,000 and accumuated earnngs and profts of . 5,000. The
Corporaton was organzed on uy 1 to take over a the assets of the Y
Corporaton n e change for a of ts stock. Stock n the amount of 25,000
was ssued by the Corporaton n e change for a the assets of the Y
Corporaton whch had an ad|usted bass to the Y Corporaton of 25,000.
Snce the property of the Y Corporaton n the amount of 25,000 s a part
of the nvested capta of the Corporaton as property pad n for stock
and n addton the accumuated earnngs and profts of the Y Corporaton
amountng to 5,000 are consdered part of the accumuated earnngs and profts
of the Corporaton,1 the nvested capta of the corporaton for the ta abe
year must be reduced by 5,000, the amount of the earnngs and profts of
the Y Corporaton, as provded by secton 718(b) (3).
Sec. 719. orrowed Invested Capta.
(a) orrowed Capta. The borrowed capta for any day of any
ta abe year sha be determned as of the begnnng of such day and
sha be the sum of the foowng:
(1) The amount of the outstandng ndebtedness (not ncud-
ng nterest, and not ncudng ndebtedness descrbed n secton
751(b) reatng to certan e changes) of the ta payer whch s
evdenced by a bond, note, b of e change, debenture, certfcate
of Indebtedness, mortgage, or deed of trust, pus,
(2) In the case of a ta payer havng a contract (made before
the e praton of 30 days after the date of the enactment of the
Second Revenue ct of 19 0) wth a foregn government to fur-
nsh artces, materas, or suppes to such foregn government, f
such contract provdes for advance payment and for repayment by
the vendor of any part of such advance payment upon canceaton
of the contract by such foregn government, the amount whch
woud be requred to be so repad f canceaton occurred at the
begnnng of such day, but no amount sha be consdered as bor-
rowed capta under ths paragraph whch has been ncudbe n
gross ncome.
(b) orrowed Invested Capta. The borrowed nvested capta
for any day of any ta abe year sha be determned as of the bega-
1 Commssoner v. Sansome (60 Fed. (2d), 931).
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nng of such day and sha be an amount equa to 50 per centum of the
borrowed capta for such day.
Sec. 30.719-1. orrowed nvested capta. The borrowed Invested capta for
any day of the ta abe year s 50 per cent of the borrowed capta for such day
determned as of the begnnng of such day. orrowed capta s defned to mean :
(a) Outstandng ndebtedness (other than nterest and Indebtedness descrbed
In secton 751(b) reatng to certan e changes, but ncudng ndebtedness as-
sumed or to whch the ta payer s property s sub|ect) of the ta payer whch s
evdenced by a bond, a promssory note, b of e change, debenture, certfcate
of ndebtedness, mortgage, or deed of trust, pus
(6) In the case of a corporaton havng a contract, made before November 8,
10 0, wth a foregn government to furnsh artces, materas, or suppes to such
foregn government, amounts receved as advance payment n connecton wth
and as provded by such contract, to the e tent such amounts woud be repayabe
pursuant to the terms of the contract, If canceaton by such foregn government
occurred at the begnnng of the day for whch the borrowed capta s beng
ascertaned, but no amount sha be Incuded as borrowed capta whch has been
ncudbe n gross ncome.
In order for any Indebtedness to be ncuded n borrowed capta t must be
bona fde. It must be one ncurred for busness reasons and not merey to ncrease
the e cess profts credt. If ndebtedness of the ta payer s assumed by another
person It ceases to be borrowed capta of the ta payer. For such purpose an
assumpton of ndebtedness ncudes the recept of property sub|ect to n-
debtedness.
Whether outstandng certfcates desgnated by such names as debenture
preferred stock or guaranteed preferred stock consttute borrowed capta
depends upon whether the hoder has a propretary Interest n the corporaton or
has the rghts of a credtor, determned n the ght of a the facts. The name
borne by the certfcate s of tte mportance. More Important attrbutes to be
consdered are whether or not there s a maturty date, the source of payment of
any nterest or dvdend specfed n the certfcate (whether ony out of
earnngs or out of capta and earnngs), rghts to enforce payment, and other
rghts as compared wth those of genera credtors.
The term certfcate of ndebtedness ncudes ony nstruments havng the
genera character of Investment securtes Issued by a corporaton as dstn-
gushabe from Instruments evdencng debts arsng n ordnary transactons
between ndvduas. orrowed capta does not ncude Indebtedness Incurred
by a bank arsng out of the recept of a depost and evdenced, for e ampe, by
n certfcate of depost, a passbook, a casher s check, or a certfed check.
The provsons of secton 719(a) (2) reatng to contracts wth a foregn
government may be ustrated by the foowng e ampe:
ampe: The Corporaton, whch makes ts ncome ta returns on the
caendar year bass and reports ts Income on the accrua bass, entered nto
a contract wth a foregn government on November 1, 19 0, for the manufacture
and devery of certan parts for arcraft, and receved thereunder an ad-
vance payment as of that date of 500,000. The contract provded for ts
canceaton by the vendee, and further provded that the advance payment
shoud be returned upon such canceaton ess the sum of 100,000 and 5,000
for each unt devered before canceaton. Ten unts were devered December
1, 19 0, another 10 unts December 30, 19 0, and the contract was canceed
December 31, 19 0, before any other deveres had been made. orrowed
Invested capta woud be Increased 200,000 (50 per cent of 00,000) for each
day begnnng November 2, 19 0, and endng December 1, 19 0; 175,000 ( 50
per cent of 350,000) for each day begnnng December 2, 19 0, and endng
December 30, 19 0; and 150,000 ( 50 per cent of 300,000) for one day, Decem-
ber 81, 19 0.
Sec. 720. dmssbe and Inadmssbe ssets.
(a) Defntons. For the purposes of ths subchapter
(1) The term Inadmssbe assets means
( ) Stock n corporatons e cept stock In a foregn per-
sona-hodng company; and
( ) cept as provded In subsecton (d), obgatons do-
scrbed In secton 22(b) ( ) any part of the Interest from
whch s e cudbe from gross ncome or aowabe as a credt
aganst net Income.
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(2) The term admssbe assets means a assets other than In-
admssbe assets.
(b) Rato or Inadmssb.es to Tota ssets. The amount by
whch the average Invested capta for any ta abe year sha be reduced
as provded n secton 715 sha be an amount whch Is the same per-
centage of such average nvested capta as the percentage whch the
tota of the nadmssbe assets s of the tota of admssbe and nad-
mssbe assets. For such purposes, the amount attrbutabe to each
asset hed at any tme durng such ta abe year sha be determned
by ascertanng the ad|usted bass thereof (or, n the case of money,
the amount thereof) for each day of such ta abe year so hed and
addng such day amounts. The determnaton of such day amounts
sha be made under reguatons prescrbed by the Commssoner wth
the approva of the Secretary. The ad|usted bass sha be the ad-
usted bass for determnng oss upon sae or e change as determned
tnder secton 113.
(c) Computaton rr Short-Term Capta Gan. If durng the ta -
abe year there has been a short-term capta gan wth respect to an
nadmssbe asset, then so much of the amount attrbutabe to such
nadmssbe asset under subsecton (b) as bears the same rato thereto
as such gan bears to the sum of such gan pus the dvdends and n-
terest on such asset for such year, sha, for the purpose of determn-
ng the rato of nadmssbe assets to the tota of admssbe and
Inadmssbe assets, be added to the totu of admssbe assets am
subtracted from the tota of nadmssbe assets.
(d) TR TM NT OP GO RNM NT O LIG TIONS S DMISSI L
ssets. If the e cess profts credt for any ta abe year s computed
under secton 71 , the ta payer may n ts return for such year eect
to ncrease ts norma-ta net ncome for such ta abe year by an
amount equa to the amount of the nterest on a obgatons hed dur-
ng the ta abe year whch are descrbed n secton 22(b)( ) any
part of the nterest from whch s e cudbe from gross ncome or
aowabe as a credt aganst net ncome. In such case, for the purposes
of ths secton, the term admssbe assets ncudes suc obgatons,
and the term nadmssbe assets does not Incude such obgatons.
Sec. 0.720-1. Reducton of average nvested capta for nadmssbe assets.
If a ta payer owns any nadmssbe assets on any day durng the ta abe
year, then secton 715 reatng to the computaton of nvested capta requres
the average nvested capta to be reduced n the same rato as the nadmssbe
assets bear to the tota assets. The term nadmssbe assets means stock
n a corporatons, domestc or foregn, e cept stock n a foregn persona-
hodng company, and a obgatons descrbed n secton 22(b)( ), any part
of the nterest from whch s e cudbe from gross ncome or aowabe as a
credt aganst net Income. Stock hed n the treasury of the ssung corpora-
ton Is an nadmssbe asset. The term admssbe assets means a assets
other than nadmssbe assets. owever, f a ta payer n ts return for a
ta abe year eects to ncrease ts norma-ta net ncome for that year for the
purpose of the e cess profts ta by ncudng a the nterest derved from
tbe obgatons descrbed n secton 22(b)( ), a such obgatons sha be
consdered admssbe assets for such ta abe year. For the purposes of the
precedng sentence, ( ) the term nterest ncudes, In the case of obgatons
Issued at a dscount, so much of-such dscount as (for purposes of determnng
gan or oss upon sae or other dsposton) Is treated as nterest n the hands
of tbe ta payer for the ta abe year, and ( ) the term obgatons descrbed n
secton 22(b)( ) ncudes obgatons, whether or not Issued at a dscount,
tbe dscount on whch, If Issued at a dscount, woud be so treated. The foowng
steps are necessary In the appcaton of secton 720:
(a) There must frst be determned the ad|usted bass for determnng
oss upon the sae or e change, as provded n secton 113, for each asset, or,
In the case of money, the amount thereof, owned at the begnnng of each day
darng the ta abe year.
(6) There must then be determned the aggregate of the admssbe assets
and the aggregate of the Inadmssbe assets for the ta abe year.
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(c) The average nvested capta for the ta abe year must then be reduced
by the percentage whch the tota of the nadmssbe assets s of the tota
of the admssbe and nadmssbe assets.
If the ta payer had a short-term capta gan durng the ta abe year wth
respect to any nadmssbe asset, then the amount of the admssbe assets
sha be ncreased and the amount of the nadmssbe assets sha be decreased
by so much of the amount attrbutabe to such Inadmssbe asset as such
gan bears to the sum of such gan pus the dvdends or nterest on such asset
for such year.
The amount of admssbe assets and the amount of Inadmssbe assets
sha be determned as of the begnnng of each day. If, however, t Is mprac-
tcabe to determne such amounts as of the begnnng of each day but the
amounts hed on a gven day of each month throughout the year or at other
reguar ntervas not e ceedng one year can be determned, the amounts hed
as of the begnnng of each day of such month or other perod may be deter-
mned by dvdng by two the sum of the amounts of such assets hed at the
begnnng of the perod and the amounts hed at the end of the perod. If
at nny tme a substanta change has taken pace ether n the amount of
Inadmssbe assets or n the tota amount of admssbe and Inadmssbe assets,
the effect of such change sha be averaged e acty from the date on whch
t occurred. Ordnary the ta payer w be abe to determne the amount of
Inadmssbe assets actuay hed on each day of the ta abe year. The fact
that It may be mpractcabe to determne the amount of admssbe assets
actuay hed on each day of the ta abe year w not reeve the ta payer
from the necessty of determnng the actua amount of Inadmssbe assets
hed uness such determnaton s kewse mpractcabe.
The ad|ustment for nadmssbe assets may be ustrated by the foowng
e ampe:
ampe: The average nvested capta of the Corporaton for ts ta -
abe year 19 0, determned under secton 716, s 1,000,000. On anuary 1, 19 0,
the corporaton hed bonds of a State whch It had prevousy purchased for
60,000, and stock n another corporaton (not a foregn persona hodng
company) whch t had prevousy purchased for 25,000. On uy 1, 19 0, t
purchased stock n another corporaton (not a foregn persona hodng com-
pany) for 20,000, and on uy , 19 0, addtona State bonds for 8,700.
On September 1, 19 0, t sod for 29,000 the stock purchased on uy 1, 19 0,
after havng receved a dvdend of 1,000 thereon. The aggregate of the day
amounts of the admssbe and nadmssbe assets for the ta abe year 19 0
s 00,000,000. The corporaton does rot eect to Increase ts norma-ta net
ncome for e cess profts ta purposes by the amount of the nterest derved
from the State bonds.
The nvested capta of the Corporaton as defned n secton 715 s 900,000,
computed as foows:
verage Invested capta for 19 0 1, 000, 000
Less:
mount computed under secton 720 for nadmssbe assets
(10 per cent of 1,000,000, see Schedue I beow) 100,000
Invested capta for 1 W0 as defned n secton 715 900, 000
Schedue I.
(a) ggregate of the day amounts of nadmssbe assets for the
vear 19 0 before ad|ustment for short-term capta gan:
(1) State bonds hed anuary 1, 19 0 ( 60,000
mutped by 366 (days)) 21,060.000
(2) State bonds purchased uy , 19 0 ( 8,700
mutped by 180 (days)) 8, 766, 000
(3) Stock n domestc corporaton hed anuary 1,
19 0 ( 25,000 mutped by 360 (days)) 9,150.0:0
( ) Stock In domestc corporaton purchased uy
1, 19 0. for 20,000 and sod September 1,
1910, for 29,000 ( 20,000 mutped by 62
(days)) 1,2 0,000
1,116,000
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(6) Less:
d|ustment on account of short-term capta gan (see Sched-
ue II beow) 1,116,000
(c) ggregate of the day amounts of the Inadmssbe assets
after ad|ustment for short-term capta gan (Item (a)
mnus Item ( )) 0,000,000
(d) ggregate of the day amounts of admssbe and Inadms-
sbe assets for the year 10 0 (ths Item beng unaffected
by the ad|ustment on account of the short-term capta
gan) 00,000,000
(e) Rato of aggregate of day amounts of nadmssbe assets
(tem (c) above) to aggregate of day amounts of adms-
sbe and nadmssbe assets (tem (d) above), 0,000,000
dvded by 00,000,000 per cent 10
Schedue II.
Computaton of ad|ustment on account of short-term capta gan:
(a) mount attrbutabe to Inadmssbe asset before ad|ust-
ment under secton 720(c) for short-term capta gan
(stock n domestc corporaton purchased uy 1, 19 0,
for 20,000 and sod September 1, 19 0, for 29,000),
20,000 mutped by 62 (days)) 1,2 0,000
(6) mount of gan reazed ( 29,000 mnus 20,000) 9,000
(c) Sum of gan pus dvdends receved ( 9,000 pus 1,000). 10,000
d) Rato of gan (tem (6)) to sum of gan pus dvdends re-
ceved (tem (c)), 9,000 dvded by 10,000__per cent-. 90
(e) d|ustment on account of short-term capta gan, 90 per
cent of 1,2 0,000 (tem (a) ) 1,116,000

Sec. 721. bnormautrs n Income n Ta abe Perod.
If there s Incudbe n the gross ncome of the ta payer for any
ta abe year an tem of ncome of any one or more of the foowng
casses:
(a) rsng out of a cam, award, |udgment, or decree, or Inter-
est on any of the foregong; or
(b) Consttutng an amount payabe under a contract the per-
formance of whch requred more than 12 months; or
(c) Resutng from e poraton, dscovery, prospectng, research,
or deveopment of tangbe property, patents, formuae, or processes,
or any combnaton of the foregong, e tendng over a perod of
more than 12 months; or
(d) Incudbe n gross Income for the ta abe year rather than
for a dfferent ta abe year by reason of a change n the ta payer s
accountng perod or method of accountng; or
(e) In the case of a essor of rea property, amounts ncuded
n gross ncome for the ta abe year by reason of the termnaton
of the ease; or
(f) Dvdends on stock of foregn corporatons, e cept foregn
persona hodng companes;
and, n the ght of the ta payer s busness, t Is abnorma for the ta -
payer to derve Income of such cass, or. If the ta payer normay
derves ncome of such cass, the tem ncudbe In the gross Income of the
ta abe year Is grossy dsproportonate to the gross Income of the
same cass In the four prevous ta abe years, then: (1) the amount of
such tem attrbutabe to any prevous ta abe year or years sha be
determned under rues and reguatons prescrbed by the Commssoner
wth the approva of the Secretary; (2) the amount of such Item at-
trbutabe to any future ta abe year or years sha be determned under
rues and reguatons prescrbed by the Commssoner wth the approva
of the Secretary and sha, for the purposes of ths subchapter, be In-
cuded In the gross ncome for the future year or years to whch attrb-
utabe; and (3) the ta under ths subchapter for the ta abe year (n
whch the whoe of such tem woud, wthout regard to ths secton, be
ncudbe) sha not e ceed the sum of:
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( ) The ta under ths subchapter for such ta abe year com-
puted wthout the ncuson n gross ncome of the porton of such
tem whch s attrbutabe to any other ta abe year, and
( ) The aggregate of the Increase n the ta under ths sub-
chapter whch woud have resuted for each prevous ta abe year
to whch any porton of such tem Is attrbutabe, computed as If
an amount equa to such porton had been ncuded In gross ncome
for such prevous ta abe year.
Sk 30.721-1. bnormates n ncome n ta abe year. (a) If there s n-
cudbe n gross ncome an Item of any one of s casses of Income enumerated
In secton 721 propery attrbutabe n whoe or In part to a year other than
the ta abe year and f ether
n the ght of the ta payer s busness It s abnorma for It to receve
ncome of such cass, or
though ts recept Is norma, the amount thereof s grossy dspropor-
tonate to the gross ncome of the same cass reazed by the ta payer In
the four prevous ta abe years,
then the amount of such Income attrbutabe to prevous and to future ta abe
years sha for e cess profts ta purposes be determned n accordance wth
these reguatons. The e cess profts ta for the ta abe year sha be the esser
of the foowng:
Such ta computed wthout regard to secton 721; or
The sum of the e cess profts ta for the ta abe year computed wth-
out the ncuson n gross Income of the porton of the abnorma ncome
whch s attrbutabe to any other ta abe year pus the addtona e cess
profts ta whch woud have resuted for each prevous ta abe year f
the gross ncome for such ta abe year had been ncreased by the ncuson
theren of the porton of the abnorma ncome attrbutabe thereto.
(6) If the ta payer normay derves Income of the same cass but the tem
or tems ncudbe n gross Income for the ta abe year are grossy dspropor-
tonate to the average ncome of such cass n the precedng four ta abe years,
such tem or tems sha be sub|ect to the treatment provded by secton 721.
(c) Secton 721 has no effect upon the computaton of base perod net ncome
or of earnngs and profts and therefore does not affect the computaton of the
e cess profts credt. Smary, t has no appcaton n the determnaton of
ta es other than the e cess profts ta Imposed by Subchapter of Chapter 2.
mounts aocated to future years are to be ncuded n gross ncome for such
years for e cess profts ta purposes. If, however, the ta payer competey
qudates or otherwse dsposes of a ts assets pror to the cose of the ast
year to whch such amounts are aocated, a amounts not theretofore Incuded
n gross ncome sha be Incuded n gross ncome for the ta abe year n whch
the qudaton s competed or the assets transferred.
(d) ta payer camng the benefts of secton 721 sha fe wth ts e cess
profts ta return a statement showng (1) the amount and nature of the tem
of ncome camed to be abnorma; (2) the method used In aocatng such
abnorma ncome and the amount aocated to each year; (3) a schedue show-
ng by years the amount, f any, of ncome of the same cass derved durng the
four ta abe years Immedatey precedng the ta abe year; and ( ) a other
facts upon whch the ta payer rees.
Sec. 30.721-2. Income arsng out of a cam, aoard, |udgment, or decree, or
nterest thereon. The frst cass of potentay abnorma Income Is .Income ars-
ng out of a cam, award, |udgment, or decree, or nterest thereon. Items
of Income covered by ths secton are of the same type or cass. Therefore, n
determnng whether Income arsng out of a |udgment, for e ampe, Is abnor-
ma ether n knd or n amount, account must be taken not ony of other udg-
ment Income, f any, receved n precedng ta abe years, but aso of any Income
arsng out of cams, awards, and decrees, and Interest thereon, so receved.
In determnng the portons of ncome of the cass descrbed whch are attrb-
utabe to other ta abe years, due regard sha be gven to the nature of the
cam upon whch the recovery s founded. ocaton w generay be made
to the year or years durng whch occurred the e potaton, remova, or use, as
the case may be, of the property rght formng the sub|ect matter of the cam,
award, |udgment, or decree. Thus, n the case of a |udgment for Infrngement
of a patent, the number of unts produced through the use by the nfrnger of
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such patent In the respectve years Invoved sha consttute a proper bass of
aocaton. Smary, f the remova of mneras forms the bnss of the recovery,
the unts removed In the respectve years sha consttute a proper bass of ao-
caton. The Income arsng from awards of the M ed Cams Commsson,
Unted States and Germany, to the e tent they consttute compensaton for past
osses, sha be attrbuted to the years durng whch such osses occurred.
Interest sha be attrbuted to the years for whch t was aowed.
Ths secton may be ustrated by the foowng e ampe:
ampe: ased upon encroachment by the Y Corporaton upon mnera
property, the Corporaton n 19 1 obtans |udgment for and payment of
630,000. The Corporaton has not n any pror year derved ncome from
any ke source. s the |udgment s based upon 1 per ton for ore removed n
each year, the amount receved s aocated as foows:
Year.
Tonnage.
ross In-
come.
1888
80,000
200,000
ISO. 000
200,000
80,000
200,000
150.000
200,000
1939
19 0 ...
19 1
Tota
630,000
For the purposes of the computaton of the e cess profts ta there sha be
ncuded n gross ncome for the year 19 1 the amount of 200,000. The
amount of 150,000 aocated to 19 0 affects the tota 19 1 e cess profts ta as
e paned beow. The amount aocated to the years 1938 and 1939 s not sub|ect
to e cess profts ta for the reason that the e cess profts ta s appcabe ony
to years begnnng after December 31, 1939.
The e cess profts ta for the year 19 1 sha be determned as foows:
(1) n e cess profts ta for 19 1 sha be computed wthout regard to
secton 721, that s, by ncudng In gross Income the tem of 630,000, and
(2) parta e cess profts ta for 19 1 sha be computed on the net
ncome arrved at by ncudng In gross ncome ony 200,000 of the tem
of 630,000, and to the parta ta so computed there sha be added the
ncrease n the e cess profts ta whch woud resut from the ncuson
n gross ncome for the year 19 0 of 150,000 of the Item of 630,000.
The e cess profts ta for 19 1 Is ether (1) or (2), whchever s the esser.
To arrve at the ncrease n the e cess profts ta for 19 0 whch woud
resut from the ncuson n the gross ncome for such year of 150,000 of the tem
of 630,000, the e cess profts ta sha (but ony for the purpose of determnng
the 19 1 e cess profts ta abty) be computed frst by Incudng the tem of
150,000 n the gross ncome, and second by e cudng such amount from the gross
ncome. The e cess of the amount obtaned as the resut of the frst computaton
over the amount obtaned as the resut of the second computaton represents such
ncrease.
If n the above e ampe, n addton to the prncpa amount, nterest had been
added to the |udgment, such nterest woud be aso propery aocabe as between
the year 19 1 and pror ta abe years n accordance wth the method sanctoned
by the court n settng the amount of such nterest. If the porton of the tota
nterest attrbutabe to the respectve years can not be ascertaned from the |udg-
ment, such nterest may be aocated among such years, upon the bass of the
respectve portons of the prncpa amount attrbutabe to such years, gvng
effect to the perod of tme each porton remaned unpad.
Sec. 80.721-3. Long-term contracts. The second cass of potentay abnorma
Income Is ncome consttutng an amount payabe under a contract the performance
of -whch requred more than 12 months. Such contracts are herenafter referred
to n ths secton as ong-term contracts. In determnng whether perform-
ance requred a perod of more than 12 months, ony the perod begnnng
wth the commencement of the work and endng wth ts competon sha be
taken Into account If ess than 12 months eapse between begnnng of the
work and ts competon the contract s not a ong-term contract, even though
more than 12 months may have eapsed between the e ecuton of such con-
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trnct and the competon of Its performance. In genera, amounts payabe under
a ong-term contract are entted to the treatment provded by secton 721 ony
If the ta payer reports Its ncome on the competed contract bass.
mounts payabe under a ong-term contract fang wthn the provsons
of ths secton sha be attrbuted to the ta abe years durng whch e pend-
tures were mnde on account of such contract In the proporton whch the
amount of such e pendtures made durng each such year bears to the tota
of such e pendtures, account beng taken of the matera and suppes on hand
at the begnnng and end of each such year for use In connecton wth the work
under the contract but not yet so apped.
Ths secton may be Iustrated by the foowng e ampe:
ampe: In 19 1 the Corporaton whch makes ts Income ta returns on the
caendar year bass competes two contracts for the constructon of budngs,
one of whch was begun n 1938 and the other n 1939. Its gross Income for
19 1 from the two ong-term contracts amounts to 1,000,000, of whch 800,000
Is derved from the 1938 contract and 200,000 from the 1939 contract. It
reports ncome of ths cass upon the competed contract bass In accordance
wth secton 19. 2- (6), Reguatons 103, and correspondng provsons of pror
reguatons. Its gross ncome from ong-term contracts for the years 1937, 1938,
1939, and 19 0 amounted to 250,000, 350,000, 200,000, and 00,000, respec-
tvey. The gross ncome ( 1,000,000) arsng from ong-term contracts n 19 1
s therefore grossy dsproportonate to the average gross Income ( 300,000) of
that cass for the years 1937, 1938, 1939, and 19 0. Such gross ncome for 19 1
s therefore sub|ect to the provsons of secton 721. ssumng that the tota
e pendtures propery appcabe to the 1938 contract amount to 5,000,000, of
whch the respectve sums of 500,000, 1,250,000, 1,500,000, and 1,750,000 are
aocabe to the years 1938, 1939, 19 0, and 19 1, then the tem of 800,000
attrbutabe to the 1938 contract s aocabe to those years In the respectve
amounts of 80,000, 200,000, 2 0,000, and 280,000. In ke manner the amount
of 200,000 representng the gross ncome derved from the 1939 contract sha
be aocated to the years 1939, 19 0, and 19 1 In proporton to the e pendtures
appcabe to that contract. For method of computaton of the e cess profts
ta for the year 19 1, see the e ampe n secton 30.721-2.
Sec. 30.721- . poraton, dscovery, prospectng, research, or deveopment.
The thrd cass of potentay abnorma ncome s ncome resutng from e -
poraton, dscovery, prospectng, research, or deveopment of tangbe property
(such as mnes, o-producng property, and tmber tracts), patents, formuae,
or processes, or any combnaton thereof, e tendng over a perod of more than
12 months. The e poraton, dscovery, prospectng, research, or deveopment
must be that of the ta payer. Income resutng from actvtes of such a char-
acter carred on by a predecessor s not entted to the treatment provded by
secton 721.
Ordnary, the tme when e poraton, dscovery, prospectng, research, or de-
veopment begns w be deemed to be when the frst e pendtures on account
thereof are Incurred. Such actvtes must be reated to the partcuar property
out of whch the ncome arses. Moreover, the Income sub|ect to the treatment
provded n secton 721 does not ncude proft resutng from manufacturng or
other actvtes not specfed n secton 721.
Income of the cass descrbed n ths secton, f found to be abnorma ether
n knd or n amount, s to be attrbuted to the ta abe years In the perod
commencng wth the begnnng of the e poraton, dscovery, prospectng, re-
search, or deveopment and endng wth the cose of the ta abe year. In mak-
ng such aocaton, due regard shoud be gven to e pendtures, progress of the
partcuar actvty, and a other factors tendng to estabsh the e tent to whch
the ncome subsequenty reazed Is attrbutabe to the actvtes for any porton
of the tota perod. owever, In any case the Income may be attrbuted rataby
to the months In the perod commencng wth the begnnng of the e poraton,
dscovery, prospectng, research, or deveopment and endng wth the cose of
the ta abe year. Ths method may be ustrated by the foowng e ampes:
ampe (1) : In anuary, 1938, the Corporaton began the deveopment
of a certan devce on whch t e pended consderabe sums. The corporaton
secures a patent on such devce In December, 19 0, and In the same month ses
such patent at a proft of 250,000. It dd not In any of the four mmedatey
precedng years derve Income of the cass specfed In (c) of secton 721. One-
thrd of the tem of 250,000 Is, therefore, attrbutabe to each of the years 1938,
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1939, and 19 0 for e cess profts ta purposes. For method of computaton of
the e cess profts ta for the year 19 0, see the e ampe n secton 30.721-2.
ampe (2): The Corporaton throughout the years 1937, 1938, and 1939
had been engaged n the deveopment of a chemca formua whch was per-
fected and censed for use n the Industry n 19 0, n whch year the Corpora-
ton derved royates for the use of the formua n the sum of 150,000. The
corporaton dd not n any of the four Immedatey precedng years derve any
ncome In the nature of royates. In such case the amount of 150,000 s,
for e cess profts ta purposes, attrbutabe rataby to the years 1937, 1938,
1939, and 19 0. ence, of the amount of 150,000 three-fourths thereof, or
112,500, s e cuded from gross Income for the year 19 0 n the computaton
of e cess profts ta for that year. For method of computaton of the e cess
profts ta for the year 19 0, see the e ampe In secton 30.721-2.
Sec. 30.721-5. Change n accountng perod or method of accountng. The
fourth cass of potentay abnorma Income s ncome whch s ncudbe n gross
Income for the ta abe year rather than for a dfferent ta abe year by reason of
a change n the ta payer s accountng perod or method of accountng. Ths cass
may Incude such tems of ncome as are ncudbe n gross ncome for the ta abe
year by reason of a change from the nstament method to the straght accrua
method of accountng, a change In nventory method, or a change from the reserve
method to the specfc charge-off method for the treatment of bad debts. Items
of abnorma ncome ncudbe n gross ncome for the ta abe year rather than
for a dfferent ta abe ye#r by reason of a change from the nstament method
to the straght accrua method of accountng sha be attrbuted to the year
or years such tems accrued. The method of aocatng tems of abnorma ncome
Incudbe n gross Income for the ta abe year rather than for a dfferent year
by reason of other changes n accountng method or changes n accountng perod
Is to be determned n each partcuar case upon consderaton of a the facts
n the case. (See secton 30.721-1 as to the statement requred to be fed where
the benefts of secton 721 are camed.)
Ths secton may be ustrated by the foowng e ampe:
ampe: The Y Corporaton, pror to the caendar year 19 0, reported ts
ncome on the nstament bass. For the year 19 0 t secures the consent of
the Commssoner to a change n the method of reportng Income to the straght
accrua bass.
The gross ncome for the year 19 0 computed under the straght accrua
method of accountng and wthout regard to secton 721 s as foows:
From nstament saes contracts made In 19 0 320, 000
From nstament coectons n 19 0 on saes contracts made pror
to 19 0 250,000
From nstament saes contracts made pror to 19 0 but not yet co-
ected 130,000
Tota 700,000
Under the provsons of secton 721, the 250,000 and 130,000 tems are at-
trbutabe for e cess profts ta purposes to years pror to 10 0, the amount
attrbutabe to each such year beng equa to the amount Incudbe n 19 0 wth-
out regard to secton 721 on account of contracts made n each such year. For
method of computaton of the e cess profts ta for the year 19 0, see the
e ampe In secton 30.721-2.
Sec. 30.721-6. Income derved by essor from termnaton of ease. The ffth
cass of potentay abnorma ncome Is amounts ncuded n gross ncome of a
essor for the ta abe year by reason of the termnaton of the ease. mounts
may be requred to be so ncuded by reason of the fact that Improvements
made by the essee upon the eased property come nto the possesson or contro
of the essor upon termnaton or forfeture of the ease. In such cases. If the
Income Incudbe s abnorma ether n knd or In amount, t sha be aocated
In accordance wth the foowng rues:
(a) If the ease has not been canceed or forfeted, but has merey e pred,
the ncome sha be spread over the fe of the ease.
(6) If the ease has been canceed or forfeted, but the remanng usefu
fe of the mprovement s not n e cess of what woud have been the remanng
fe of the ease had the canceaton or forfeture not occurred, the ncome
ba be spread over what woud have been the remanng fe of the ease.
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152
(c) If the ease has been canceed or forfeted and the remanng usefu
fe of the mprovement Is n e cess of what woud have been the remanng
fe of the ease had the canceaton or forfeture not occurred, then
(1) n amount whch bears the same rato to the tota Income Incudbe
as the perod whch woud have consttuted the remanng fe of the ease
bears to the remanng usefu fe of the Improvement sha be spread over
what woud have been the remanng fe of the ease; and
(2) The remanng porton of the ncome ncudbe sha be spread over
the fe of the ease, ncudng what woud have been ts remanng fe had
the canceaton or forfeture not occurred.
mounts attrbuted to each future ta abe year are to be Incuded n gross
ncome for such year for the purpose of computng the e cess profts ta . Ths
paragraph may be ustrated by the foowng e ampe:
ampe: On anuary 1, 1929, the Corporaton, whch makes ts Income
ta returns on the caendar year bass, eased to the Corporaton an unm-
proved ste, on whch the atter corporaton competed a budng on une 30,
1931. Such ease was for a perod of 20 years and by ts terms e pred on
December 31, 19 8. On uy 1, 19 0, the ease Is forfeted and the budng
comes nto the possesson and contro of the Corporaton. The vaue as
of such date of the budng s 100,000, and ts remanng usefu fe Is 16
years. The Corporaton dd not, pror to 19 0, derve gross ncome of ths
nature nor dd t report as gross ncome any amount wth respect to the
erecton of the budng. Snce the remanng usefu.fe of the mprovement
s 16 years but what woud have been the remanng fe of the ease s ony
o
8 years, - of 100,000, or 53,125, s to be spread over what woud have
o
been the remanng fe of the ease, . e., the ast haf of 19 0, and the caendar
years 19 1 to 19 8, both ncusve. Snce there are 17 haf years n such
perod, n of 53,125, or 3,125, s to be aocated to the ast haf of 19 0,
and 7 of 53,125, or 6,250, to each of the caendar years 19 1 to 19 8, both
ncusve. The remander of the 100,000 Income, or 6,875 ( 100,000 mnus
53,125), s to be spread over the years 1929 to 19 8, both ncusve, . c, o of
6,875, or 2,3 3.75, s to be aocated to each such year. The tota amount
aocabe to each year s as foows:
Years. mount per year.
1929-1939 2,3 3.75
19 0
Porton of 53,125 aocated to ast haf of year 3,125.00
Pus: Porton of 6,825 aocated to such year 2,3 3. 75
Tota 5, G 75
19 1-19 8
Porton of 53,125 aocated to each year 6, 250.00
Pus: Porton of 6,825 aocated to each year 2,3 3. 75
Tota 8,598.75
The amounts aocated to the years 1929 to 1939, both ncusve, w have
no effect upon the computaton of the e cess profts ta . The e cess profts
ta for the ta abe year 19 0 s to be determned by takng nto gross ncome
for such year ony 5, 68.75 of the 100,000 Item otherwse ncudbe. The
amounts attrbuted to future years must be ncuded n gross ncome for such
years for the purpose of computng the e cess profts ta .
Other Income sub|ect to the provsons of secton 721 attrbutabe to the
termnaton of the ease s to be aocated as between the ta abe year n whch
such ncome s reazed and pror or subsequent ta abe years In the ght
of the agreement underyng the reazaton of such ncome. If, for nstance,
the essee pays the essor a ump sum as consderaton for canceaton of a
ease, such ump sum, f found to be abnorma ether n knd or n amount,
sha be aocated rataby to the ta abe years ncuded In what woud have
been the remanng fe of the ease had such ease not been canceed.
Sbc. 30.721-7. Drdcnds on stock of foregn corporatons other than foregn
persona hodng companes. The s th and fna cass of potentay ab-
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153
norma) Income under secton 721 s dvdends on stock of foregn corpora-
ton s-e cept foregn persona hodng commues. Ths secton s appcabe
ony to corporatons eectng the e cess profts credt based on ncome, snce
secton 711(a) (2) ( ) gves corporatons eectng the e cess profts credt based
on nvested capta a dvdends receved credt of 100 per cent of dvdends of
ths cass. In determnng whether the recept of such dvdends Is abnorma
or whether the amount thereof s grossy dsproportonate to the ncome of such
cass receved n the four precedng ta abe years, ony dvdends receved from
foregn corporatons are to be taken nto account. The e cepton reatve to
dvdends from foregn persona hodng companes appes bot to dstrbutons
actuay receved from foregn persona hodng companes and to constructve
dvdends deemed to have been receved pursuant to secton 837.
Income of ths cass whch Is abnorma ether n knd or n amount s to be
attrbuted to the years n whch were accumuated the earnngs and profts
out of whch such dstrbutons were made, f accumuhted nfer the acqu-
ston by the dstrbutee of the stock of the dstrbutng corporaton. If the
earnngs and profts out of whch the dstrbuton Is made were accumuated
pror to such acquston, the ncome arsng out of the dstrbuton s to bo
attrbuted to the ta abe year n whch the stock was acqured. The earnngs
and profts out of whch any dstrbuton s made are, as provded n secton
115, the most recenty accumuated earnngs and profts.
Ths secton may be ustrated by the foowng e ampe:
ampe: The Corporaton, a domestc corporaton, computng ts e cess
profts credt on the ncome bass, acqured n 1938 a of the stock of the
Y Company, Ltd., a foregn corporaton, whch s not a f( rc n rersoua hodng
company. The Y Company, Ltd., pad n uy, 19 0, a dvdend to the Cor-
poraton n the amount of 100,000. The Corporaton dd not prevousy receve
dvdends from any foregn corporaton. The Y Company, Ltd., had earnngs
and profts of 75,000 n 19 0 and 125.00 ) n 19: , . Foowng prncpes of
e stng aw wth respect to the source from whch dvdends are deemed to have
been psd, the dvdends receved by the Corporaton n 19 0 sha be aocated
as between the years 19 0 and 1939 n the respectve sums of 75,( ) and 25,000.
8ee secton 115(b) and correspondng provsons of pror revenue aws. For
method of computaton of the e cess profts ta for the year 19 0, see the
e ampe n secton 20.721-2.
Sec 722. d|ustment of bnormates n Income and Capta by
tm Commssoner.
For the purposes of ths subchapter, the Commssoner sha aso
have authorty to make such ad|ustments as may bo necessary to ad|ust
abnormates affectng ncome or capta, and hs decson sha be
snfe|eet-to revew by the Unted States oard of Ta ppeas.
Sbbs 30.722-1. d|ustment of abnormates n ncome or capta. Undem the
provsons of secton 722 the Commssoner Is authorzed to make such ad|ust-
ment ; as may be found necessary by reason of abnormates affectng ncome
or capta. d|ustments for more than one abnormaty may be necessary n
a partcuar case. bnormates may requre ad|ustments for the ta abe year,
or fo one or more of the ta abe years n the base perod, or both. What
ad|ustments are proper can be determned ony upon consderaton of a the
facts n the partcuar case.
No genera rue can be stated as to what consttutes an abnormaty In ether
ncome or capta. The mere fact that the ta payer derved an unusuay hgh
rate of proft on ts nvested capta s not suffcent to |ustfy an ad|ustment.
ta payer camng the benefts of secton 722 sha, n makng ts e cess
profts ta return, compute and pay ts e cess profts ta wthout regard to
secton 722. In such case, the ta payer shoud as prompty as possbe fe an
appcaton wth the Commssoner of Interna Revenue, Washngton, D. C,
attenton of the Income Ta Unt, Records Dvson, for reef under ths secton,
showng the nature and e tent of the aeged abnormates n ncome or capta,
the ad|ustments sought, and a the facts upon whch t rees.
Sec. 723. quty Invested Capta n Speca Cases.
Where the Commssoner determnes that the equty nvested capta
as of the begnnng of the ta payer s frst ta abe year under tb|s sub-
chapter cannot be determned In accordance wth secton 718, the equty
Invested capta as of the begnnng of such year sha be an amount
0 3 1 1 6
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equa to the sum of (a) the money pus (b) the aggregate of the ad-
|usted bass of the assets of the ta payer hed by the ta payer at such;
tme, such sum beng reduced by the ndebtedness outstandng at such
tme. The amount of the money, assets, and ndebtedness at such tme
sha be determned n accordance wth rues and reguatons prescrbed
by the Commssoner wth the approva of the Secretary. In such case,
the equty nvested capta for each day after the begnnng of the ta -
payer s frst ta abe year under ths subchapter sha be determned,
n accordance wth rues and reguatons prescrbed by the Commssoner
wth the approva of the Secretary, usng as the basc fgure th.e equty
Invested capta as so determned.
Sec. 30.723-1. Rues where equty Invested capta can not he determned under
secton 7 S. In cases n whch the Commssoner determnes that the equty
nvested capta of a corporaton as of the begnnng of ts frst e cess profts
ta ta abe year can not be determned n accordance wth secton 718, such
equty nvested capta sha be an amount equa to the sum of (a) the money,
pus (6) the aggregate of the ad|usted bass of the assets other than money,
hod by the corporaton as of the begnnng of such ta abe year, such sum
beng reduced by the ndebtedness of the corporaton outstandng at such tme.
The ad|usted bass of the assets sha be the ad|usted bass for determnng
oss upon a sae or e change for Federa ncome ta purposes. See, n genera,
secton 113 and the reguatons prescrbed thereunder. For the purposes of
secton 723 the term ndebtedness means any abty of the corporaton,
absoute and not contngent, and ncudes abtes assumed by the corporaton,
whether or not n connecton wth property hed by the ta payer, and any
abtes to whch property hed by the corporaton s sub|ect, but does not
ncude the obgaton of the corporaton on ts capta stock.
The equty nvested capta under secton 723 for each day after the frst day
of the frst e cess profts ta ta abe year of the corporaton sha be the basc
fgure determned under the frst paragraph of ths secton ncreased or decreased
as provded n secton 718 and the reguatons prescrbed thereunder wth respect
to changes n the equty nvested capta occurrng after the begnnng of such
frst ta abe year. For such purpose the term accumuated earnngs and
profts means the earnngs and profts accumuated snce the begnnng of the
frst e cess profts ta ta abe year of the corporaton, computed wthout regard
to any defct n accumuated earnngs and profts e stng at the begnnng of
such year. Smary, the term earnngs and profts refers ony to such
accumuated earnngs and profts and earnngs and profts of an e cess profts
ta ta abe year. In a cases comng under secton 723 the ta payer sha be
treated as a corporaton newy organzed mmedatey pror to the begnnng of
Its frst e cess profts ta ta abe year wth an equty nvested capta, consstng
of money pad n for stock, equa to the basc fgure determned under secton 723.
In any case In whch a ta payer fnds t mpossbe to determne ts equty
nvested capta as of the begnnng of ts frst e cess profts ta ta abe year n
accordance wth secton 718, t may compute ts equty nvested capta n accord-
ance wth secton 723, provded t submts wth ts return a schedue showng such
computaton, and a statement of the facts upon whch t bases ts concuson that
t can not compute ts equty nvested capta under secton 718, so that the Com-
mssoner may determne whether ts equty nvested capta can be computed
n accordance wth that secton.
Sec. 72 . Foregn Corporatons and Corporatons ntted to ene-
fts of Secton 251 Invested Capta
Notwthstandng secton 715, n the case of a foregn corporaton
engaged n trade or busness wthn the Unted States or havng an
offce or pace of busness theren, and n the case of a corporaton
entted to the benefts of secton 251, the Invested capta for any ta -
abe year sha be determned n accordance wth rues and reguatons
prescrbed by the Commssoner wth the approva of the Secretary,
under whch
(a) Genera Rue. The day nvested capta for any day of the
ta abe year sha be the aggregate of the ad|usted bass of each Unted
States asset hed by the ta payer on the begnnng of such day. In the
appcaton of secton 720 n reducton of the average nvested capta
(determned on the bass of such day nvested capta), the terms
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admssbe assets and Inadmssbe assets sha Incude ony Unted
States assets; or
(b) cepton. If the Commssoner determnes that the Unted
States assets of the ta payer cannot satsfactory be segregated from
Its other assets, the nvested capta for the ta abe year sha be an
amount whch s the same percentage of the aggregate of the ad|usted
bass of a assets hed by the ta payer as of the end of the ast day
of the ta abe year whch the net Income for the ta abe year from
sources wthn the Unted States Is of the tota net ncome of the
ta payer for such year.
(c) Defnton of Unted States sset. s used In ths subsec-
ton, the term Unted States asset means an asset hed by the ta -
payer n the Unted States, determned u accordance wth rues and
reguatons prescrbed by the Commssoner wth the approva of the
Secretary.
Sec. 30.72 -1. Invested capta of certan foregn corporatons and corpora,
tons entted to benefts of secton 251. In the case of a foregn corporaton
engaged n trade or busness wthn the Unted States or havng an off -e or
pace of busness theren, and In the case of a corporaton entted to the bene-
fts of secton 251 (on account of dervng a arge porton of ts gross ncome
from possessons of the Unted States), the nvested capta for any ta abe
year sha be nvested capta as provded n sectons 715, 716, 717, and 720, wth
the foowng e ceptons:
(a) The day Invested capta for each day n the ta abe year sha he the
aggregate of the ad|usted bass of each Unted States asset as defned n d)
beow hed by the ta payer on the begnnng of such day. The ad|usted bass
of each such asset sha be the ad|usted bass for determnng oss upon a
sae or e change for Federa ncome ta purposes. The amount of Unted
States assets hed at the begnnng of each day of the ta abe year sha be
determned n the same manner as the amount of admssbe and nadmssbe
assets s determned under secton 30.720-1. The day nvested capta com-
puted under ths secton s not affected by the ndebtedness of the corporaton,
and does not ncude borrowed capta as defned n secton 719.
(b) In the appcaton of secton 720 n reducton of the nveragp nvested
capta (determned on the bass of the day nvested capta as provded In
(a) above), the terms admssbe assets and nadmssbe assets sha
ncude ony Unted States assets. The amount of such admssbe assets and
nadmssbe assets sha be determned n the same manner as provded n
secton 30.720-1.
(c) In cases n whch the Commssoner determnes that the Unted States
asset of a corporaton can not satsfactory be segregated from Its other assets,
the Invested capta of the corporaton for the ta abe year sh be an amount
whch Is the same percentage of the aggregate ad|usted bass (for determnng
oss) of a assets hed by the ta payer as of the end of the ast day of the
ta abe year whch the net ncome for the ta abe year from sources wthn
the Unted States s of the tota net ncome of the ta payer for such year.
For the purposes of ths paragraph the net Income of the corporaton from
sources wthn the Unted States sha he determned as provded n secton
119 and the reguatons prescrbed thereunder. The provsons of sectons
715 and 720 reatng to ad|ustment for nadmssbe assets have no appca-
ton In determnng nvested capta under secton 72 (b).
(d) For the purposes of secton 72 the term Unted States asset means
an asset ether (1) empoyed by the ta payer n the Unted States n carryng
on ts trade or busness theren, or (2) of a knd the ncome from whch s
ncome from sources wthn the Unted States under secton 119 and the regu-
atons prescrbed thereunder rrespectve of where the evdence of the prop-
erty rght n such asset s hed.
Sec, 725. Persona Servce Corporatons.
(a) Defnton. s used n ths subchapter, the term persona
servce corporaton means a corporaton whose ncome s to be ascrbed
prmary to the actvtes of sharehoders who are reguary engaged
n the actve conduct of the affars of the corporaton and are the owners
at a tmes durng the ta abe year of at east 70 per centum n vaue
of each cass of stock of the corporaton, nnd n whch capta Is not a
matera Income-producng factor; but does not ncude any foregn
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156
corporaton, nor any corporaton 50 per centum or more of whose gross
Income conssts of gans, profts, or ncome derved from tradng as a
prncpa. For the purposes of ths subsecton, an ndvdua sha be
consdered as ownng, at any tme, the stock owned at such tme by hs
spouse or mnor chd or by any guardan or trustee representng them.
(b) .ecton as to Ta abty. If a persona servce corporaton
sgnfes, n ts return under Chapter 1 for any ta abe year, ts desre
not to be sub|ect to the ta mposed under ths subchapter for such
ta abe year, t sha be e empt from such ta for such year, and the
provsons of Suppement S of Chapter 1 sha appy to the sharehoders
n such corporaton who were such sharehoders on the ast day of such
ta abe year of the corporaton.
Sec. 30.725-1. Ta aton of pergona servce corporatons. persona servce
corporaton s sub|ect to the e cess profts ta mposed under Subchapter of
Chapter 2 the same as any other domestc corporaton uness t eects as to any
ta abe year not to be sub|ect to such ta . If the corporaton eects not to be
sub|ect to the e cess profts ta , the provsons of Suppement S (sectons 391
to 396, ncusve, as added by secton 502 of the Second Revenue ct of 19 0)
sha appy to the sharehoders n such corporaton who were such sharehoders
on the ast day of the ta abe year of the corporaton. See secton 19.39 -1 of
Reguatons 103. In such case, the amount of the undstrbuted Suppement S
net ncome sha be consdered as pad n to the corporaton as of the cose of the
ta abe year as pad-n surpus or as a contrbuton to capta, and the amount of
accumuated earnngs and profts as of the cose of such year sha be corre-
spondngy reduced. See secton 39 (d).
Sec. 30.725-2. Defnton of persona servce corporaton. (a) In genera.
The term persona servce corporaton means a domestc corporaton n whch
capta s not a matera Income-producng factor and the ncome of whch s to
be ascrbed prmary to the actvtes of sharehoders who (1) are reguary
engaged n the actve conduct of the affars of the corporaton, and (2) are the
owners, throughout the entre ta abe year, of at east 70 per cent n vaue of
each cass of stock of the corporaton.
If 50 per cent or more of the gross Income of a corporaton conssts of gans,
profts, or ncome derved from tradng as a prncpa, such corporaton can not
be consdered to be a persona servce corporaton. s to corporatons n whch
ess than 50 per cent of the gross ncome s derved from tradng as a prncpa,
see (e) beow.
(6) Stock nterest of sharehoders. Sharehoders reguary engaged n the
actve conduct of the affars of the corporaton and to whom the Income of the
corporaton s prmary to be ascrbed must own at a tmes durng the ta abe
year at east 70 per cent n vaue of each cass of stock of the corporaton. II
stock s owned by the spouse or mnor chd of an ndvdua, or owned by the
guardan or trustee of such spouse or chd, such stock s treated as beng owned
by such ndvdua.
corporaton can not be consdered to be a persona servce corporaton for
any ta abe year f another corporaton owns more than 30 per cent In vaue
of any cass of ts stock at any tme durng such year. corporaton s an
artfca entty and can not tsef be reguary engaged n the actve conduct of
the affars of another corporaton wthn the meanng of secton 725.
The fact that the ownershp of shares n the corporaton may change durng
the course of the ta abe year does not take the corporaton whch s otherwse
a persona servce corporaton out of that cass uness at some tme durng the
ta abe year the ownershp of more than 30 per cent n vaue of the shares of
any cass of stock passes nto the hands of persons not reguary engaged In the
actve conduct of the affars of the corporaton.
(c) Income to be ascrbed prmary to the actvtes of sharehoders. If em-
poyees oher than sharehoders contrbute substantay to the servces rendered
by a corporaton, such corporaton s not a persona servce corporaton uness,
n every case n whch servces are so rendered, the vaue of and the compen-
saton charged for such servces are to be attrbuted prmary to the e perence
or sk of the sharehoders and such fact Is evdenced n some defnte manner
n the norma course of the busness or professon. The fact that the share-
hoders gve persona attenton or render vauabe servces to the corporaton as
a resut of whch ts earnngs are greater than those of a corporaton engaged
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157
In a ke or smar busness or professon, the sharehoders of whch are not
reguary engaged n the actvtes of the corporaton, does not of tsef consttute
the corporaton a persona servce corporaton.
Income of a corporaton from merchandsng or tradng as a prncpa, drecty
or ndrecty, n commodtes or n the servces of others Is not to be ascrbed
prmary to the actvtes of ts sharehoders. Income of a corporaton from
the conduct of an aucton, agency, brokerage, or commsson busness strcty
on the bass of a fee or commsson may be so ascrbed. If. however, ether
as a matter of busness pocy or by contract, the corporaton assumes any
such rsks as those of market fuctuatons, bad debts, or faure to accept shp-
ments, or f t guarantees the accounts of the purchaser or s In any way
accountabe to the seer for the payment of the purchase prce, the transacton
s one of merchandsng or tradng, and ths s true even though the goods are
shpped drecty from the producer to the consumer and are never actuay
n the possesson of the corporaton. The fact that earnngs of the corpora-
ton are termed commssons or fees s not controng. The fact that a com-
msson or fee n a transacton s based on a dfference n the prces at whch
the seer ses and the buyer buys rases a presumpton that the transacton
s one of merchandsng or tradng, and t w be so consdered n the absence
of satsfactory evdence to the contrary.
It may happen that a corporaton s engaged n two or more busnesses or
professons whch are more or ess reated. Tms, an engneerng concern may
aso engage n contractng, whch amounts to tradng n materas and abor,
or a brokerage concern may guarantee some of Its accounts, or a photographc
concern may se pctures, frames, art goods, and suppes. In such cases, the
corporaton Is not a persona servce corporaton uness the actvtes of the
corporaton consstng of tradng or guaranteeng of accounts or seng are
neggbe or merey ncdenta, and uness no apprecabe part of the earnngs
s to be ascrbed to such actvtes. See aso (c) beow reatng to the empoy-
ment of capta.
(d) Sharehoders reguary engaged n the actve conduct of the affars of
the corporaton. corporaton s not a persona servce corporaton uness
sharehoders who own at a tmes durng the ta abe year at east 70 per
cent n vaue of each cass of stock are reguary engaged n the actve
conduct of the affars of the corporaton. That such sharehoders devote some
of ther tme to the affars of the corporaton s not suffcent; they must wth
reguarty devote substanta tme and energy to the conduct of ts affars.
(e) Capta as a matera ncome-prodmng factor. In a persona servce
corporaton capta must not be a matera ncome-producng factor. Whether
capta s a matera Income-producng factor Is to be determned by reference
to (1) the e tent to whch capta Is requred to carry on the busness or pro-
fesson, and (2) the e tent to whch capta Is actuay used n the producton
of ncome though not requred by the prmary actvtes of the corporaton.
If the use of capta s necessary to the producton of the ncome of the cor-
poraton and s more than ncdenta, capta Is a matera Income-producng
factor and the corporaton s not a persona servce corporaton. If a sub-
stanta porton of the ncome s attrbutabe to a use of capta, whether or
not connected wth the prmary actvtes of the corporaton, capta s a matera
Income-producng factor even though such use of capta s not necessary to
such prmary actvtes. The term capta as used n secton 725 and n
ths secton means not ony capta actuay Invested by the sharehoders but
aso capta obtaned n other ways. Thus, capta may be borrowed ether
drecty as shown by bonds, debentures, certfcates of ndebtedness, notes, bs
payabe, or other paper, or ndrecty as shown by accounts payabe or other
forms of credt, or the busness of the corporaton may be fnanced n some
other manner by ts sharehoders. If a substanta amount of capta s used
to fnance or carry the accounts of cents or customers. It w be nferred that
because of competton or for other reasons such use of capta s necessary
and more than ncdenta n order to secure or hod busness whch woud
otherwse be ost If a corporaton engaged In an agency, brokerage, or com-
msson busness reguary empoys n substanta amount of capta to end to
Its prncpas, to buy and carry goods on ts own account, or to buy and carry
odd ots n order that t may render more satsfactory servce to ts prncpas or
customers, such corporaton s not a persona servce corporaton. In genera,
the arger the amount of capta actuay used the stronger s the evdence
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158
that capta s necessary and more than ncdenta and s a matera ncome-
producng factor.
The term ncome as used n secton 725 and n ths secton means gross
ncome. Capta s a matera Income-producng factor f ts use resuts In a
substanta amount of gross ncome, rrespectve of the amount of net ncome,
f any, such use produces.
(f) ppcaton of reguatons; returns. No defnte and concusve tests
can be prescrbed by whch t can be fnay determned n advance of an
e amnaton of the corporaton s ncome ta return whether t s or s not a
persona servce corporaton. In the precedng subsectons are set forth the
genera prncpes under whch such determnaton w be made.
If a corporaton camng to be a persona servce corporaton sgnfes n
ts return under Chapter 1 for any ta abe year ts desre not to be sub|ect
to the e cess profts ta under Subchapter of Chapter 2 for such ta abe
year, t sha attach Form 1121PS, n dupcate, to ts ncome ta return on
Form 1120. In Form 1121PS there sha be stated (1) such facts as tend
to show whether or not the corporaton s a persona servce corporaton, n-
cudng () the nature of ts busness, () the character, preferences, dvdend
rates, and other essenta features of the varous casses of Its stock outstandng
for any tme durng the ta abe year, ( I) the names and addresses of ts sev-
era sharehoders and ther reatonshp to each other, (v) the number and
casses of shares owned at any tme durng the ta abe year by each share-
hoder and the porton of the year durng whch such shares were so owned,
(v) the nature of the actvtes of the severa sharehoders on behaf of the
corporaton, and (v) the e tent to whch capta n any form s used In the
busness, and (2) the computaton of the undstrbuted Suppement S net ncome
for the ta abe year, the names and addresses of a sharehoders of the cor-
poraton at the cose of the ta abe year, the number and casses of shares
hed by each, and such other nformaton as may be requred by the form and
the nstructons prnted on the form or ssued therewth.
Sec. 30.725-3. ecton as to ta abty. The eecton as to ta abty pro-
vded for n secton 725(b) and the resutng e empton from ta have ap-
pcaton ony to the e cess profts ta on domestc corporatons mposed under
Subchapter of Chapter 2 as added by secton 201 of the Second Revenue
ct of 19 0. The corporaton may make such an eecton by sgnfyng n ts
return under Chapter 1 ts desre not to be sub|ect to the e cess profts ta .
new eecton s requred for each ta abe year. n amended return fed
after the statutory perod for fng the return (or after the ast day of any
e tenson perod) s not a return wthn the meanng of secton 725(b).
domestc corporaton whch eects n ts ncome ta return for a ta abe
year to be e empt from the e cess profts ta for such year as a persona
servce corporaton may, notwthstandng such eecton, fe an e cess profts
ta return for such ta abe year on Form 1121. Such return sha be com-
pete n a respects e cept for the computaton of the ta , and there sha
be attached to t a statement that the corporaton desres to be cassfed as
a persona servce corporaton and not to be sub|ect to the e cess profts ta
for the ta abe year and that t has attached Form 1121FS n dupcate to ts
ncome ta return on Form 1120. n e cess profts ta return made n ths
manner wthn the tme prescrbed by aw w consttute a return wthn the
meanng of secton 712(a). In the case of a domestc corporaton whch fes
such a return eectng theren as provded In secton 712(a) or secton 7 1
to compute ts e cess profts credt for such ta abe year under secton 713
or secton 71 and whch s subsequenty determned not to be a persona serv-
ce corporaton, the amount of e cess profts ta for such year sha be deter-
mned by the Commssoner n accordance wth the eecton so made by the
corporaton wth respect to the computaton of ts e cess profts credt, and
the e cess profts ta so determned w consttute a defcency whch sha
be assessed and coected n the same manner as n the case of a defcency
n Income ta under Chapter 1. corporaton not fng an e cess profts ta
return for a ta abe year wthn the tme prescrbed by aw may not n any
case eect to have the e cess profts credt for such ta abe year computed
under secton 713. The aowance of a credt or refund of any ncome ta
overpad by the sharehoders of a corporaton dened persona servce cassfca-
ton s sub|ect to the mtatons provded n secton 322.
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Sec. 726. Corporatons Competng Contracts Undkr Merchant
Marne ct, 1936.
(a) If the Unted States Martme Commsson certfes to the
Commssoner that the ta payer has competed wthn the ta abe year
any contracts or subcontracts whch are sub|ect to the provsons of
secton 505(b) of the Merchant Marne ct of 1936, as amended, then
the ta Imposed by ths subchapter for such ta abe year sha be, n
eu of a ta computed under secton 710, a ta computed under sub-
secton (b) of ths secton, f, and ony f, the ta computed under
subsecton (b) s ess than the ta computed under secton 710.
(b) The ta computed under ths subsecton sha be the e cess
of
(1) tentatve ta computed under secton 710 wth the
norma-ta net Income Increased by the amount of any payments
made, or to be made, to the Unted States Martme Commsson
wth respect to such contracts or subcontracts; over
(2) The amount of such payments.
Sec 30.726-1. Corporatons competng contracts under Merchant Marne
ct of 1936. (o) Secton 726 provdes for an aternatve ta n the case of a
corporaton whch has been certfed by the Unted States Martme Com-
msson (herenafter referred to as the Commsson) to the Commssoner as
havng competed wthn the ta abe year any contracts or subcontracts
sub|ect to the provsons of secton 505(b) of the Merchant Marne ct of 1936,
as amended (herenafter referred to as secton 505(b)). Under secton 505(b)
a contractor or subcontractor Is requred to pay to the Commsson the amount
of proft, f any, n e cess of 10 per cent of the tota contract prces of such
contracts or subcontracts.
(6) The aternatve ta s n eu of the e cess profts ta computed under
secton 710 but ony If such aternatve ta s ess than the ta under such
secton. Such aternatve ta Is the e cess of (1) a tentatve ta computed
under secton 710 wth the norma-ta net Income ncreased by the amount of
any payments made, or to be made, to the Commsson wth respect to con-
tracts or subcontracts the competon of whc durng the ta abe year has
been certfed to the Commssoner by the Commsson, over (2) the amount
of such payments.
(c) For the purposes of secton 726, a certfcate by the Commsson that the
vesse or porton thereof covered by the contract or subcontract has been
devered durng the ta abe year sha be deemed to be the certfcate requred
by such secton.
(d) corporaton camng the beneft of secton 726 sha attach to Its e cess
profts ta return (1) a certfcate of the Commsson showng each contract
or subcontract sub|ect to the provsons of secton 505(b) whch the corpora-
ton has competed wthn the ta abe year and (2) a statement showng the
amount of payments made, or to be made, to the Commsson wth respect to
such contracts and subcontracts. If the amount of the payments made, or
to be made, to the Commsson wth respect to such contracts or subcontracts
has not been ascertaned at the tme of fng the e cess profts ta return
the coroporaton may estmate the amount of such payments for the purposes of
secton 726. In such cases, the Commssoner may requre a bond from the
corporaton as a condton precedent to the computaton of the ta under that
secton. If such a bond s requred t sha be on the form prescrbed by the
Commssoner and n such sum as the Commssoner may prescrbe, and t
sha be condtoned upon the payment by the corporaton of any amount of
ta found due upon redetermnaton of the ta made necessary by the
estmated amount under secton 726(b)(2) provng ncorrect, and upon such
further condtons as the Commssoner may requre. The bond sha be e e-
cuted by the corporaton as prncpa and by suretes satsfactory to the Com-
mssoner. (See aso secton 112(1 of the Revenue ct of 1926, as amended,
paragraph 63 of the ppend to Reguatons 103.)
(c) If the amount actuay pad, or to be pad, to the Commsson under sec-
ton 505(b) dffers from the amount used n determnng the ta under secton
726, the corporaton sha mmedatey notfy the Commssoner of the amount
actuay pad, or to be pad, wth respect to the partcuar contract. The Com-
mssoner w thereupon redetermne the amount of the e cess profts ta
under secton 726 nnd the amount of ta , If any, found to be due upon snch
redetermnaton sha be pad by the corporaton upon notce and demand from
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the coector. The amount of ta , f any, shown upon redetermnaton to have
been overpad sha be credted or refunded to the ta payer n accordance wth
the provsons of secton 322.
Sec. 727. empt Corpob.vtons.
The foowng corporatons sha be e empt from the ta mposed
by ths subchapter:
(a) Corporatons e empt under secton 101 from the ta mposed
by Chapter 1.
(b) Foregn persona-hodng companes, as defned n secton 331.
(c) Mutua nvestment companes, as defned n secton 301.
(d) Investment companes whch under the Investment Company
ct of 10 0 are regstered as dversfed companes at a tmes durng
the ta abe year. For the purposes of ths subsecton, f a company s
so regstered before uy 1, 19 1, t sha be consdered as so regstered
at a tmes pror to the date of such regstraton.
(e) Persona-hodng companes, as defned In secton 501.
(f) Foregn corporatons not engaged n trade or busness wthn
the Unted States and not havng an offce or pace of busness theren.
(g) Domestc corporatons satsfyng the foowng condtons:
(1) If 95 per centum or more of the gross ncome of such domes-
tc corporaton for the three-year perod mmedatey precedng the
cose of the ta abe year (or for such part of such perod durng
whch the corporaton was n e stence) was derved from sources
other than sources wthn the Unted States; and
(2) If 50 per centum or more of Its gross ncome for such pe-
rod or such part thereof was derved from the actve conduct of a
trnde or busness.
(h) ny corporaton sub|ect to the provsons of Tte I of the Cv
eronautcs ct of 1938, In the gross Income of whch for any ta abe
year begnnng after December 31, 1939, there s ncudbe compensa-
ton receved from the Unted States for the transportaton of ma
by arcraft f, after e cudng from ts gross ncome such compensa-
ton, ts ad|usted e cess profts net ncome for such year s zero or
ess.
Sec. 30.727-1. empt corporaton . (a) corporaton whch has estabshed
ts rght under secton 101 to e empton from Income ta need not agan
estabsh ts rght Tnder secton 727(a) to e empton from e cess profts ta .
corporaton whch has not estabshed ts rght to e empton under secton
101 and whch cams e empron under secton 727(a) s requred to estabsh
Its rght to e empton under secton 101 n the manner prescrbed In the
reguatons thereunder n order to be hed e empt under secton 727(a).
( ) corporaton whch cams e empton under the provsons of secton 727,
other than the provsons of secton 727 (a), (g), and (h), sha fe wth ts
ncome ta return a statement showng under what paragraph of secton 727
It cam e empton.
(e) corporaton whch cams e empton under secton 727(g) sha attach
to Its Income ta return a statement showng for the 3-year perod Immedatey
precedng the cose of the ta abe year (or for such part thereof durng whch
the corporaton was n e stence) (1) ts tota gross Income from a sources,
(2) the amount thereof derved from the actve conduct of a trade or busness,
(3) a descrpton of such trade or busness and the facts upon whch the
corporaton rees to estabsh that such trade or busness was actvey con-
ducted by t, and ( ) the amount of ts gross ncome from sources wthn
the Unted States. The gross ncome from sources wthn the Unted States
sha be determned as provded n secton 119 and the reguatons prescrbed
thereunder.
( f) corporaton whch cams e empton under secton 727(h) sha attach
to ts ncome ta return a statement showng (1) that t s sub|ect to the pro-
vsons of Tte I of the Cv eronautcs cts of 1938, (2) the amount of the
compensaton ncuded n the gross ncome of the corporaton as compensaton
receved from the Unted States for the transportaton of ma by arcraft, and
f3) the amount of ts gross Income, net ncome, e cess profts net Income, and
ad|usted e cess profts net ncome, after e cudng from ts gross ncome the
amount of such compensaton.
s to the statute of mtatons where no return s fed, see sectons 275(a)
and 276(a).
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Set. 728. Meanng of Terms Used.
The terms used n ths subchapter sha have the same meanng as
when used n Chapter 1.
Sec. 72f . Laws ppcabe.
(a) Gof L Rue. provsons of aw (ncudng penates)
appcabe n respect of the tu es mposed by Chapter 1, sha. Insofar
as not nconsstent wth ths subchapter, be appcabe n respect of the
ta mposed by ths subchapter.
(b) Returns. Notwthstandng subsecton (a), no return under
secton 52(a) sha be requred to be fed by any ta payer under ths
subchapter for any ta abe year for whch ts e cess profts net ncome,
computed wth the ad|ustments provded In secton 711(a)(2) and
paced on an annua bass as provded n secton 711(a)(3), s not
greater than 5,000.
(c) Foregn Ta es Pad. In the appcaton of secton 131 for the
pnrposes of ths subchapter the ta pad or accrued to any country sha
be deemed to be the amount of such ta reduced by the amount of the
credt aowed wth respect to such tu aganst the tu mposed by
Chapter 1.
(d) Lmtatons on mount of Foskon Ta Credt. The amount
of the credt taken under ths secton sha be sub|ect to each of the
foowng mtatons:
(1) The amount of the credt n respect of the ta pad or
accrued to any country sha not e ceed the same proporton of the
ta aganst whch such credt Is taken, whch the ta payer s e cess
profts net ncome from sources wthn such country bears to Its
entre e cess profts net ncome for the same ta abe year; and
(2) The tota amount, of the credt sha not e ceed the same
proporton of the ta aganst whch such credt s taken, whch the
ta payer s e cess profts net ncome from sources wthout the Unted
States bears to ts entre e cess profts net ncome for the same
ta abe year.
Sec. 30.729-1. Tme and pace for fng returns. cess profts ta returns
sha be fed at the same tme and pace as the tme nnd pace prescrbed n sec-
tons 53 and 35 and the ncome ta reguatons under such sectons for the fng
of ncome ta returns, e cept that such e cess profts ta returns for ta abe
years endng before December 31, 19 0, whch, f fed wthn the tme prescr ed
n such reguatons, woud be fed before March 15, 11) 1, sha be fed on or
before March 15, 10 1. The e cess profts ta return of a corporaton of Income
receved or accrued from the date of ts ncorporaton to the end of ts frst
accountng perod, where the perod between the date of Incorporaton nnd the
end of such perod s ess th n 12 months, sha be consdered as n return for a
fractona part of a year, and sha be fed wthn the tme prescrbed for fh.g
returns for ta abe years of ess than 12 months.
Sec. 30.729-2. Tme for payment of ta . The e cess profts ta sha be pad
at the same tme as the tme prescrbed n sectons 56 and 23(5 and the ncome
ta reguatons under such sectons for the payment of ncome ta , e cept
that such e cess profts ta for ta abe years endng before December 31, 19 0,
whch, If pad wthn the tme so prescrbed, woud be pad before March
15, 10 1, sha be pad on or before March 15, 10 1. In case an eecton s
made to pay In nstaments such e cess profs ta for a ta abe year endng
before December 31, 19 0, and the frst nstament, f pad wthn the tme
prescrbed n such reguatons, woud be pad before March 15, 19 1, then the
frst Instament of such ta sha be pad on March 15, 10 1, and the second,
thrd, and fourth nstaments thereof sha be pad on or before the 15th
day of the thrd, s th, and nnth month, respectvey, after March 15, 19 1.
Sec. 30.729-3. Foregn ta credt. The provsons of aw made appcabe to
the e cess profts ta by secton 729(a) ncude secton 131 reatng to the
credt for Income, war-profts and e cess-profts ta vs pad or accrued durng
the ta abe year to any foregn country or any possesson of the Unted States.
The ta payer Is aowed such a credt aganst the e cess profts ta f t
cams such credt In ts Federa ncome ta return and kewse cams such
credt In Its e cess profts ta return. The amount of such credt aowabe
aganst the e cess profts ta s (a) the amount of such Income, war-profts,
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162
and e cess-profts ta es reduced by (6) the amount of such ta es aowed as a
credt under secton 131 aganst the Income ta . Thus, for nstance, f a ta -
payer pays to a foregn country wth respect to the caendar year 19 0 ncome
ta n the amount of 25,000 upon ncome from sources theren an, due to
the operaton of the mtaton provsons contaned n secton 131(b), ony the
amount of #20,000 s aowed as a credt aganst the ncome ta for that year,
the remander, or 5,01)0, s avaabe as a credt aganst the e cess profts
ta for the year 19 0. The amount thus made avaabe as a credt aganst
the e cess prnfts ta s, however, sub|ect to the further mtatons provded
n secton 729(d). For the appcaton of the mtatons provded In secton
729(d) to the amount of ncome, war-profts or e cess-profts ta es thus made
avaabe as a credt aganst the e cess profts ta , see secton 131(b) and the
reguatons prescrbed thereunder.
Sec. 730. Consodated Returns.
(a) Prvege to Fe Consodated Returns. n affated group
of corporatons sha, sub|ect to the provsons of ths secton, have the
prvege of makng a consodated return for the ta abe year n eu of
separate returns. The makng of a consodated return sha be upon
the condton that a the corporatons whch have been members of
the affated group at any tme durng the ta abe year for whch
the return s made consent to a the reguatons under subsecton
(b) prescrbed pror to the ast day prescrbed by aw for the fng of
such return; and the makng of a consodated return sha be con-
sdered as such consent. In the case of a corporaton whch s a
member of the affated group for a fractona part of the year the
consodated return sha ncude the ncome of such corporaton for
such part of the year as t s a member of the affated group.
(b) Reguatons. The Commssoner, wth the approva of the
Secretary, sha prescrbe such reguatons as he may deem necessary
n order that the ta abty of any affated group of corporatons
makng a consodated return and of each corporaton n the group, both
durng and after the perod of affaton, may be returned determned,
computed, assessed, coected, and ad|usted, n such manner as
ceary to refect the e cess profts ta abty and the varous factors
necessary for the determnaton of such abty, and n order to pre-
vent avodance of such ta abty.
(c) Computaton and Payment of Ta . In any case n whch a
consodated return s made the ta sha be determned, computed,
assessed, coected, and ad|usted n accordance wth the reguatons under
subsecton (b) prescrbed pror to the ast day prescrbed by aw for
the fng of such return. Ony one specfc e empton of 5,000 pro-
vded n secton 710(b)(1) sha be aowed for the entre affated
group of corporatons.
(d) Defnton of ffated Gkoup . s used n ths secton,
an affated group means one or more chans of ncudbe corpora-
tons connected through stock ownershp wth a common parent cor-
poraton whch s an ncudbe corporaton If
(1) t east 95 per centum of each cass of the stock of each of
the ncudbe corporatons (e cept the common parent cor-
poraton) s owned drecty by one or more of the other ncudbe
corporatons; and
(2) The common parent corporaton owns drecty at east 95
per centum of each cass of the stock of at east one of the other
ncudbe corporatons.
s used n ths subsecton, the term stock does not ncude non-
votng stock whch Is mted and preferred to as to dvdends.
(e) Defnton of Incudbe Corporaton . s used n ths sec-
ton, the term ncudbe corporaton means any corporaton e cept
(1) Corporatons e empt from the ta mposed by ths sub-
chapter.
(2) Foregn corporatons.
(3) Corporatons organzed under the Chna Trade ct, 1922.
( ) Corporatons entted to the benefts of secton 251, by
reason of recevng a arge percentage of ther ncome from pos-
sessons of the Unted States.
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(5) Persona servce corporatons.
(6) Insurance companes sub|ect to ta aton under secton 201,
20 , or 207.
(f) Incudbe Insurance Companes. Despte the provsons of
paragraph (6) of subsecton (e), two or more domestc nsurance com-
Snes each of whch s sub|ect to ta aton under the same secton of
apter 1 sha be consdered as ncudbe corporatons for the pur-
pose of the appcaton of subsecton (d) to such nsurance companes
aone.
(g) Subsdary Formed to Compy Wth Foregn Law. In the
case of a domestc corporaton ownng or controng, drecty or nd-
recty, 100 per centum of the capta stock (e cusve of drectors
quafyng shares) of a corporaton organzed under the aws of a con-
tguous foregn country and mantaned soey for the purpose of com-
pyng wth the aws of such country as to tte and operaton of prop-
erty, such foregn corporaton may, at the opton of the domestc cor-
poraton, be treated for the purpose of ths subchapter as a domestc
corporaton.
(h) Suspenson of Runnno of Statute of Lmtatons. If a notce
under secton 272(a) n respect of a defcency for any ta abe year s
maed to a corporaton, the suspenson of the runnng of the statute of
mtatons, provded n secton 277, sha appy n the case of corporatons
wth whch such corporaton mude a consodated return for such ta abe
year.
Sec. 30.730-1. Consodated e cess profts ta returns of affated corpora-
tons. Reguatons prescrbed under secton 730(b) as a separate.Treasury de-
cson are appcabe to the makng of consodated e cess profts ta returns
by affated corporatons for ta abe years begnnng after December 31, 1939,
and to the determnaton, computaton, assessment, coecton, and ad|ustment
of ta abtes under consodated returns for such years. For defnton of
ta abe year, see secton 8.
Seo. 30.732-2. Formaton of and changes n affated group. n affated group
of corporatons, wthn the meanng of secton 730, s formed at the tme that
the common parent corporaton whch s an ncudbe corporaton becomes the
owner drecty of at east 95 per cent of each cass of the stock of another n-
cudbe corporaton. corporaton becomes a member of such an affated group
at the tme that one or more members of such group become the owners drecty
of at east 95 per cent of each cass of ts stock. corporaton ceases to be a
member of such an affated group at the tme that the aggregate of each cass
of ts stock owned drecty by the members of such group becomes ess than 05
per cent. The term stock as heren used does not Incude nonvotng stock
whch s mted and preferred as to dvdends.
Sec. 30.730-3. Corporatons to be ncuded n consodated e cess profts tar
returns. The prvege of fng consodated e cess profts ta returns Is mted
to corporatons consttutng an affated group as defned n secton 730(d).
consodated return must Incude every domestc corporaton whch s a member
of the affated group but sha not ncude n corporaton whch s not an
ncudbe corporaton as defned n secton 730(e). In no case may a con-
sodated return he fed by subsdary corporatons as an affated group uness
the common parent corporaton through whch the subsdares are connected
Is a member of the group. For nstance, there w not be recognzed as an
affated group two ndustra corporatons the common parent corporaton of
whch s an nsurance company or a persona hodng company. In addton,
no corporaton whch s connected by stock ownershp wth an affated group
of ncudbe corporatons through a uouncudbe corporaton may be Incuded
n a consodated return.
Whe nsurance companes are not ncudbe n an affated group of cor-
poratons whch are not nsurance companes, an Insurance company may be
affated wth other nsurance companes sub|ect to the ncome ta mposed by
the same secton. For e ampe, an nsurance company ta abe under secton
201 may be affated wth another nsurance company ta abe under secton
201 but not wth an nsurance company ta abe under secton 20 or secton 207.
Seo. 30.730- . Foregn corporatons whch may be treated as domestc corpo-
ratons. In the case of a domestc corporaton ownng or controng, drecty
or ndrecty, the entre capta stock (e cusve of drectors quafyng shares)
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of a corporaton organzed under the aws of Canada or of Me co and man-
taned soey for the purpose of compyng wth the aws of such country as to
tte and operaton of property, such foregn corporaton may, at the opton of the
domestc corporaton, be treated as a domestc corporaton. The opton to treat
such foregn corporaton as a domestc corporaton must be e ercsed at the tme
of makng the frst consodated e cess profts ta return, and can not be e er-
csed at any tme thereafter. If the eecton s e ercsed to treat such foregn
corporaton as a domestc corporaton t must be Incuded In the consodated
return of the affated group of whch t Is a member for each year for whch
such group makes or s requred to make a consodated return.
S ;. 731. Corporatons ngaged n Mnno of Strategc Metas.
In the case of any domestc corporaton engaged In the mnng of
tungsten, qucksver, manganese, patnum, antmony, chromte, or tn,
the porton of the ad|usted e cess profts net Income attrbutabe to such
mnng n the Unted States sha be e empt from the ta mposed by
ths subchapter. The ta on the remanng porton of such ad|usted
e cess profts net Income sha be an amount whch bears the same rato
to the ta computed wthout regard to ths secton as such remanng
porton bears to the entre ad|usted e cess profts net Income.
Sec. 30.731-1. Corporatons whch mne strategc metas. (a) If a domestc
corporaton Is engaged n mnng tungsten, qucksver, manganese, patnum,
antmony, chromte, or tn (herenafter referred to as strategc metas), wthn
the Unted States, the porton of ts ad|usted e cess profts net ncome attrbuta-
be to such mnng s e empt from the e cess profts ta . The e cess profts
ta on the remanng porton of such ad|usted e cess profts net ncome s an
amount whch bears the game rato to the e cess profts ta computed wthout
regard to secton 731 as such remanng porton bears to the entre ad|usted
e cess profts net ncome.
(6) The porton of the ad|usted e cess profts net Income attrbutabe to mn-
ng of strategc metas s an amount whch bears the same rato to the tota
ad|usted e cess profts net Income as the porton of the e cess profts net
ncome attrbutabe to such mnng bears to the tota e cess profts net ncome.
The porton of the e cess profts net ncome attrbutabe to such mnng s
the gross ncome derved from strategc metas and arsng out of operatons
whch gve rse to gross ncome from the property, as defned n secton
19.23 (m)-() (f) of Reguatons 103, ess the sum of (1) aowabe deductons
whch are drecty attrbutabe to such mnng, (2) any ad|ustments made under
secton 711 Invovng tems drecty attrbutabe to such mnng, and (3) an
aocabe porton of any deductons party attrbutabe to such mnng and of
any ad|ustments under secton 711 nvovng tems party attrbutabe to
such mnng.
(c) There sha be attached to and made a part of the return of any ta -
payer camng the benefts under secton 731 a schedue contanng the foowng
nformaton:
(1) The amount of gross Income from the mnng of strategc metas and from
each other actvty of the corporaton;
(2) The aowabe deductons and the ad|ustments under secton 711 drecty
attrbutabe to such mnng; and
(3) The porton of the aowabe deductons and of the ad|ustments under
secton 711 aocated to such mnng and the bass for such aocaton.
The foowng e ampe Iustrates the computaton of the ta n the case of a
corporaton entted to the benefts of secton 731:
ampe: The M Corporaton, a domestc corporaton, mnes both god and
patnum (a by-product of god) and reduces the ores contanng such metas.
The corporaton has an e cess profts credt of 0,000. The e cess profts net
ncome attrbutabe to patnum mnng s 20,000; that attrbutabe to other
actvtes s 05,000. The ta s 17,3 7.83, computed as foows:
(1) Tota e cess profts net ncome.
(2) Less:
Specfc e empton
cess profLs credt
5,000
0,000
115,000. 00
5, 000.00
t3) Tota ad|usted e cess profts net ncome.
70,000. 00
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( ) Less:
Porton attrbutabe to patnum mnng ( of 70,00o). 12,173.91
(5) Remanng porton of ad|usted e cess profts net ncome 57,820.09
(C) Ta on ad|usted e cess profts net ncome of 70,000 computed
wthout regard to secton 731 (see secton 710) 21,000.00
(7) Ta under secton 731 on Item (5), . e., porton of tem (6)
whch bears the same rato to 21,000 as porton of ad|usted
e cess profts net ncome not attrbutabe to patnum
mnng bears to tota ad|usted e cess profts net ncome
/ 57,S .00 f 21 0( 17 3 7 33
70,000
Part II Rues n Connecton Wth Certan changes.
Suppement cess Trofts Credt ased on Income.
Sec. 7 0. Defntons.
For the purposes of ths Suppement
(a) cqrnNa Corpcbatton. The term acqurng corporaton
means
(1) corporaton whch has acqured
( ) substantay a the propertes of another corporaton
and the whoe or a part of the consderaton for the transfer
cf suc propertes s the transfer to such other corporaton
of a the stock of a casses (e cept quafyng shares) of the
corporaton whch has acqured such propertes, or
( ) substantay a the propertes of another corporaton
and the soe consderaton for the transfer of such propertes
s the transfer to such other corporaton of votng stock of the
corporaton whch has acqured such propertes, or
(C) before October 1, 19 0, propertes of another corpora-
ton soey as pad-n surpus or a contrbuton to capta n
respect of votng stock owned by such other corporaton.
For the purposes of subparagraphs (15) and (C) In determnng
whether such votng stock or such pad-n surpus or contrbuton to
capta s the soe consderaton, the assumpton by the acqurng
corporaton of a abty of the other, or the fact that property
acqured s sub|ect to a abty, sha be dsregarded. Subpara-
graph ( ) or (C) sha appy ony f the corporaton transferrng
such propertes s forthwth competey qudated In pursuance of
the pan under whch the acquston s made, and the transacton of
whch the acquston s a part has the effect of a statutory merger
or consodaton.
(2) corporaton whch has acqured property from another
corporaton n a transacton wth respect to whch gan or oss was
not recognzed under secton 112(b) (0) of Chapter 1 or a corre-
spondng provson of a pror revenue aw;
(3) corporaton the resut of a statutory merger of two or
more corpora tons; or
( ) corporaton the resut of a statutory consodaton of two
or more corporatons.
(b) Component Corporaton. The term component corporaton
means
(1) In the case of a transacton descrbed n subsecton (a)(1),
the corporaton whch transferred the assets;
(2) In the case of a transacton descrbed n subsecton (a) (2),
(3) In the case of a statutory merger, a corporatons merged,
the corporaton the property of whch was acqured ;
e cept the corporaton resutng from the merger; or
( ) In the case of a statutory consodaton, a corporatons
consodated, e cept the corporaton resutng from the consodaton.
(c) uafed Component Corporaton. The term quafed com-
ponent corporaton means a component corporaton whch was In e -
stence on the date of the begnnng of the ta payer s base perod.
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166
(d) ase Perod. In the case of a ta payer whch s an acqurng
corporaton the base perod sha be:
(1) If the ta s beng computed for any ta abe year begnnng
n 1910, the forty-eght months precedng the begnnng of such
ta abe year; or
(2) If the ta s beng computed for any ta abe year begnnng
after December 31, 10 0, the forty-eght months precedng what
woud have been ts frst ta abe year begnnng n 19 0 f t had
had a ta abe year begnnng n 19 0 on the date on whch the ta -
abe year for whch the ta s beng computed began.
(e) ase Perod Years. In the case of a ta payer whch s an ac-
qurng corporaton ts base perod years sha be the four successve
tweve-month perods begnnng on the same date as the begnnng of
ts base perod.
(f) stence of cqurng Corporaton. For the purposes of sub-
secton (c) and secton 7 1, f any component corporaton was n e -
stence on the date of the begnnng of the ta payer s base perod (ether
actuay or by reason of ths subsecton), ts acqurng corporaton sha
be consdered to have been n e stence on such date.
(g) Component Corporatons of Component Corporatons. If a
corporaton s a component corporaton of an acqurng corporaton,
under subsecton (b) or under ths subsecton, t sha (e cept for the
purposes of secton 7 2(d) (1) and (2) and secton 7 3(a)) aso be a
component corporaton of the corporaton of whch such acqurng cor-
poraton s a component corporaton.
Sec. 30.7 0-1. Purpose and scope of Suppement . (a) The term Sup-
pement , when used n these reguatons, means sectons 7 0 to 7 . Suppe-
ment provdes rues governng the rght to eect the e cess profts credt based
on ncome and the method of computng such credt, n the case of certan ac-
qurng corporatons. n acqurng corporaton s a domestc corporaton whch
has absorbed one or more other domestc corporatons n a transacton meetng
the requrements set forth n secton 7 0(a). ach such absorbed corporaton
s desgnated a component corporaton of the acqurng corporaton. Further-
more, e cept for the purposes of secton 7 2(d) (1) and (2) and secton 7 3(a),
f an acqurng corporaton s ater absorbed by another acqurng corporaton,
a of the component corporatons of the frst acqurng corporaton become
component corporatons of the second acqurng corporaton. component cor-
poraton s desgnated a quafed component corporaton f t or one of ts com-
ponent corporatons was actuay n e stence at the begnnng of the acqur-
ng corporaton s base perod, . c, on the date n 1936 correspondng to the date
on whch begns the ta abe year for whch the e cess profts ta s beng com-
puted. foregn corporaton can be nether an acqurng corporaton nor a
component corporaton (see secton 7 ).
(6) The purpose of Suppement Is n genera to attrbute to an acqurng
corporaton the e stence of corporatons absorbed by t, together wth the base
perod e cess profts net ncome or net oss and the net capta changes of such
absorbed corporatons, n order (1) that a corporaton the corporate fe of whch
n substance, though not n form, ncudes the base perod may eect the e cess
profts credt based on ncome and (2) that a corporaton composed n whoe or
n part of quafed component corporatons may compute ts e cess profts credt
n the ght of the base perod e perence of the entre enterprse. ccordngy,
an acqurng corporaton whch was not actuay n e stence pror to anuary
1, 19 0, s, notwthstandng secton 712(a), nevertheess gven the rght to eect
the e cess profts credt based on ncome, provded that t has a quafed com-
ponent corporaton. Furthermore, every acqurng corporaton whch s entted
to and does eect the e cess profts credt based on ncome Is requred to take
the base perod e perence of a quafed component corporatons nto account
n computng ts average base perod net ncome. Fnay, an acqurng cor-
poraton s requred to add to ts day capta addton or reducton the net
capta addton or reducton of each component corporaton.
Sec. 30.7 0-2. Transactons whereby a corporaton becomes an acqurng cor-
poraton. (a) The types of transactons whereby a corporaton can become an
acqurng corporaton are specfcay descrbed n secton 7 0(a). In addton
to statutory mergers and consodatons and the acquston of property n
a compete qudaton n whch gan or oss s not recognzed because of the
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167
provsons of secton 112(b)(0) or the same secton as contaned n the Revenue
ct of 1936 or 1938, ony the foowng types of transactons are ncuded:
(1) The acquston by one corporaton, n e change n whoe or n part for
a of ts stock of a casses (e cept quafyng shares), of substantay a the
propertes of another corporaton. See secton 112(g)(1)(D).
(2) The acquston by one corporaton, n e change soey for a or a part
of ts votng stock, of substantay a the propertes of another corporaton,
bnt n determnng whether the e change s soey for votng stock the assump-
ton by the acqurng corporaton of a abty of the other, or the fact that
property acqured Is sub|ect to a abty, sha be dsregarded. See secton
112(g)(1)(C). In ths type of transacton It s aso requred that the trans-
feror corporaton be forthwth competey qudated pursuant to the pan under
whch the transfer of Its propertes was made and that the transacton of whch
the transfer s a part have the effect of a statutory merger or consodaton.
(3) The acquston before October 1, 19 0, by one corporaton of propertes
of another corporaton soey as pad-n surpus or a contrbuton to capta n
respect of votng stock of the acqurng corporaton owned by the transferor
corporaton, but n determnng whether the acquston s soey as pad-n sur-
pus or a contrbuton to capta the assumpton by the acqurng corporaton
of a abty of the other, or the fact that property acqured s sub|ect to a
abry, sha be dsregarded. s n the case of (2) above, t Is aso requred
that the transferor corporaton be forthwth competey qudated pmSuant to
the pan under whch the transfer of propertes was made and that the transac-
ton of whch the transfer s a part have the effect of a statutory merger or
consodaton.
(6) The types of transactons set forth n secton 7 0(a), other than those set
forth n secton 7 0(a)(1)(C), ether are embraced wthn the defnton of
a reorganzaton contaned n secton 112(g)(1) or are compete qudatons
wthn the meanng of secton 112(b)(6). Snce Suppement appes ony
to cases where there s a suffcent contnuty of nterest to ustfy treatng a
corporaton whch has acqured the assets of another as standng n the pace
of such other corporaton, such transactons must satsfy a the requrements
of the reguatons prescrbed under secton 112 wth respect to such transactons,
n order that the transferee corporaton may be treated as an acqurng corpo-
raton.
Sec. 30.7 0-3. wse perod and bate perod yeart of acqurng corporaton. The
base perod of an acqurng corporaton s the perod of 8 months begnnng on
the d;te n 1036 correspondng to the date on whch begns the acqurng corpora-
ton s ta abe year for whch the e cess profts ta s beng computed. For e am-
pe, f the ta abe year for whch the e cess profts ta of an acqurng corporaton
s beng computed begns on anuary 1, the base perod of such corporaton s the
perod anuary 1, 1936, to December 81, 1939, both dates ncusve. Such rue
appes even though the corporaton may have had a dfferent base perod n
connecton wth the computaton of the e cess profts ta for some prevous
ta abe year and even though the acqurng corporaton s not organzed unt
after 19 0.
The base perod years of an acqurng corporaton are four In number, beng
composed of the four successve 12-month perods begnnng on the same date
as the begnnng of ts base perod. Thus, f the base perod begns anuary 1,
1936, the four base perod years are the four caendar years 1936, 1937, 1938, and
1939.
Sec. 7 1. ecton of Income Credt.
In addton to the corporatons whch under secton 712(a) may
eect the e cess profts credt computed under secton 713 or the e cess
profts credt computed under secton 71 , a ta payer whch s an acqur-
ng corporaton whch was n e stence on the date of the begnnng of
ts base perod sha have such eecton.
Sec. 30.7 1-1. ecton of ncome credt. Lke any other domestc corpora-
ton, an acqurng corporaton s entted under secton 712(a) to eect the
e cess profts credt based on ncome f t was tsef actuay n e stence
pror to anuary 1, 19 0. Whether or not It was so In e stence, however,
t s entted under secton 7 1 to eect the e cess profts credt based on n-
come f t was constructvey n e stence at the begnnng of ts 8-month
base perod by vrtue of havng acqured a quafed component corporaton.
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168
very such eecton must be made wthn the tme and In the manner pro-
vded In secton 712(a) and the reguatons prescrbed thereunder.
Sec. 7 2. verage ase Perod Net Income.
In the case of a ta payer whch s an acqurng corporaton whch
was actuay n e stence on the date of the begnnng of ts base
perod, or whch s entted under secton 7 1 to eect the e cess profts
credt computed under secton 713, ts average base perod net ncome
(for the purpose of the credt computed under secton 713) sha be
computed as foows, n eu of the method provded In secton 713:
(a) y ascertanng wth respect to each of ts base perod years
(1) The amount of Its e cess profts net ncome for each of
Its ta abe years begnnng after December 81, 1935, and endng
wth or wthn such base perod year; or, n the case of each such
ta abe year n whch the deductons pus the credt for dv-
dends receved e ceeded the gross ncome, the amount of such
e cess;
(2) Wth respect to each of ts quafed component corpora-
tons, the amount of ts e cess profts net ncome for each of
ts ta abe years begnnng after December 31, 1935, and endng
wth or wthn such base perod year of the ta payer; or, n the case
of each such ta abe year n whch the deductons pus the credt
for dvdends receved e ceeded the gross ncome, the amount of
such e cess;
(3) ( ) The aggregate of the amounts of e cess profts net
ncome ascertaned under paragraphs (1) and (2) ; ( ) the aggre-
gate of the e cesses ascertaned under paragraphs (1) and (2) ;
and (C) the dfference between the aggregates found under cause
( ) and cause ( ). If the aggregate ascertaned under cause
( ) s greater than the aggregate found under cause ( ), the
dfference sha for the purposes of subsecton (b) be desgnated
a pus amount , and f the aggregate ascertaned under cause ( )
s greater than the aggregate found under cause ( ), the df-
ference sha for the purposes of subsecton (b) be desgnated a
mnus amount .
(b) y addng the pus amounts ascertaned under subsecton (a) (3)
for each year of the base perod; and by subtractng from such sum,
If for two or more years of the base perod there was a mnus amount,
the sum of such mnus amounts, e cudng the greatest.
(c) y dvdng the amount ascertaned under subsecton (b) by
four.
(d) In no case sha the average base perod net ncome be ess
than zero. In the case of a ta payer whch becomes an ncqurng
corporaton n any ta abe year begnnng after December 31, 1939,
f, on September 11, 19 0, and at a tmes unt the ta payer became
an acqurng corporaton
(1) the ta payer owned not ess than 75 per centum of each
cass of stock of each of the quafed component corporatons n-
voved n the transacton n whch the ta payer became an ac-
qurng corporaton; or
(2) one of the quafed component corporatons Invoved n
the transacton owned not ess than 75 per centum of each cass
of stock of the ta payer, and of each of the other quafed com-
ponent corporatons nvoved n the transacton,
the average base perod net ncome of the ta payer sha not be ess
than ( ) the average base perod net Income of that one of ts quafed
component corporatons nvoved In the transacton the average base
perod net ncome of whch s greatest, or ( ) the average base perod
net ncome of the ta payer computed wthout regard to the base
perod net ncome of any of ts quafed component corporatons n-
voved n the transacton.
(e) For the purposes of subsecton (a) (1) and (2) of ths secton
(1) There sha be e cuded, n the varous computatons, any
dvdends pad by the ta payer or any of ts quafed component
corporatons durng any of the ta abe years of the payor whch
are ncuded n the computaton of the ta payer s average base
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169
perod net Income. If the payor corporaton s a corporaton de-
scrbed n subsecton (f)(1) or (2) of ths secton, the dvdends
to be e cuded under ths paragraph sha be ony such as are
pad after such payor corporaton frst became an acqurng cor-
poraton ; and
(2) In determnng whether, for any ta abe year, the deduc-
tons pus the credt for dvdends receved e ceeded the gross
ncome, and n determnng the amount of such e cess, the ad|ust-
ments provded n secton 711(b) (1) sha be made.
(f) (1) In the case of a ta payer whch s an acqurng corporaton
and whch was not actuay In e stence on the date of the begnnng
of ts base perod, there sha be e cuded from the varous computa-
tons under subsectons (a)(1) of ths secton the porton of ts e cess
profts net ncome, or of the e cess over gross ncome theren referred
to, whch s attrbutabe to any perod before t frst became an acqurng
corporaton.
(2) In the case of a component corporaton whch became a quafed
component corporaton ony by reason of secton 7 0(f), there sha be
e cuded from the varous computatons under subsecton (a) (2) of ths
secton the porton of ts e cess profts net ncome, or of the e cess over
gross Income theren referred to, whch s attrbutabe to any perod
before t frst became an acqurng corporaton.
(3) In the case of a quafed component corporaton whch was
actuay n e stence on the date of the begnnng of the ta payer s base
perod, there sha be e cuded from the varous computatons under sub-
secton (a)(2) of ths secton the porton of ts e cess profts net ncome,
or of the e cess over gross ncome theren referred to, whch s attrb-
utabe to the perod before such date.
( ) If durng the ta abe year for whch ta s computed under ths
subchapter the ta payer acqures assets n a transacton whch const-
tutes t an acqurng corporaton, the amount ncudbe under subsecton
(a)(2), attrbutabe to such transacton, sha be mted to an amount
whch bears the same rato to the amount computed wthout regard to
ths paragraph as the number of days n the ta abe year after such
transacton bears to the tota number of days n such ta abe year.
Sec. 30.7 2-1. verage base perod net ncome. (a) Genera. very acqur-
ng corporaton eectng the e cess profts credt based on ncome whch was
tsef actuay n e stence at the begnnng of ts base perod or whch has a
quafed component corporaton s requred to compute ts average base perod
net ncome n accordance wth secton 7 2, n eu of the method provded by sec-
ton 713(b). Three steps are necessary n makng such computaton, as foows:
(1) The e cess profts net ncome or e cess of deductons pus the credt for
dvdends receved over gross ncome (herenafter referred to as net oss ) of
the acqurng corporaton and each quafed component corporaton for each
ta abe year begnnng after December 31, 1935, and endng wth or wthn a
base perod year of the acqurng corporaton must be determned.
(2) The group e cess profts net ncome or group net oss for each base perod
year of the acqurng corporaton, . e., the aggregate of the amounts determned
wth respect to each corporaton separatey for ta abe years endng wth or
wthn such base perod year, must be determned as provded In paragraph (c)
of ths secton.
(3) The ta payer s average base perod net Income s then ascertaned by
determnng the aggregate of the group e cess profts net Incomes and net osses
(e cept the greatest, whch s treated as zero) and dvdng by , as provded
n paragraph (d) of ths secton.
(6) Determnaton of e cess profts net ncome or net oss of acqurng cor-
poraton and each quafed component corporaton. The frst stop n computng
the average base perod net ncome of an acqurng corporaton s the determna-
ton of the e cess profts net ncome or net oss of the acqurng corporaton and
each quafed component corporaton for each ta abe year begnnng after
December 31, 1935, and endng wth or wthn a base perod year of the acqurng
corporaton. Such e cess profts net ncome or net oss sha be computed wth
the ad|ustments provded n secton 711(b).
(c) Determnaton of group e cess profts net ncome or net oss. (1) Gen-
era. The group e cess profts net ncome or net oss of an acqurng corporaton
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170
for each base perod year Is determned by addng together the e cess profts
net ncomes of the severa corporatons determned under paragraph ( ) of ths
secton for each ta abe year endng wth or wthn such base perod year and
subtractng from such sum the sum of the net osses so determned for each such
ta abe year, wth the e ceptons and mtatons set forth n (2) beow. If the
sum of the e cess profts net Incomes for such base perod year e ceeds the sum
of the net osses for such base perod year, the dfference s the group e cess
profts net ncome for such base perod year. If the sum of the net osses e ceeds
the sura of the e cess profts net ncomes, the dfference s the group net oss for
such base perod year. Ths paragraph may be ustrated by the foowng
e ampes:
ampe (1) : The Corporaton, whch was organzed pror to 1936, Is com-
putng ts e cess profts ta for the caendar year 19 0. In 1939 t became an
acqurng corporaton of the Y Corporaton and the Z Corporaton, both of whch
were n e stence on anuary 1, 1936. Durng the Corporaton s base perod
the Y Corporaton made ts Income ta returns on the bass of the fsca year
begnnng uy 1. Durng the same perod the Z Corporaton made ts ncome
ta returns on the caendar year bass. For the caendar year 1936 the
Corporaton had an e cess profts net Income of 50,000, and the Z Corporaton
had an e cess profts net Income of 20,000. For ts frst base perod year, . e.,
the caendar year 1936, the group e cess profts net Income of , the acqurng
corporaton, Is 70,000, computed as foows:
cess profts net ncome of the Corporaton for 1036 50, 000
Pus: cess profts net Income of the Z Corporaton for 1936 20,000
Group e cess profts net Income for 1936 70,000
The Y Corporaton s fsca year endng une 30, 1936, can not be taken Into
account snce t s a ta abe year begnnng pror to anuary 1, 1936.
ampe (2): If for the caendar year 1937 the Corporaton had an
e cess profts net ncome of 75,000 and the Z Corporaton had an e cess profts
net Income of 30,000 and f the Y Corporaton for the fsca year endng une 30,
1937, had a net oss of 5,000, the Corporaton woud have a group e cess profts
net ncome for ts second base perod year, I. e., the caendar year 1937, of 100,000,
computed as foows:
cess profts net ncome of the Corporaton for 1937 75,000
Pus: cess profts net ncome of the Z Corporaton for 1937 30,000
Tota 105,000
Less: Net oss of the Y Corporaton fsca year endng une 30, 1937 -5, 000
Group e cess profts net Income for 1937 100, 000
ampe (3) : If for the caendar year 1938 the Corporaton had an e cess
profts net Income of 0,000 and the Z Corporaton had a net oss of 50,000
and If the Y Corporaton for the fsca year endng une 30, 1938, had an e cess
profts net Income of 5,000, the Corporaton woud have a group net oss for ts
thrd base perod year, . e., the caendar year 1938, of 5,000, computed as foows:
Net oss of the Z Corporaton for 1938 50,000
Less:
cess profts net Income of the Corporaton for 1938 0,000
cess profts net ncome of the Y Corporaton for fsca vear
endng une 30, 1938 5,000
5,000
Group net oss for 1938 5, 000
(2) ceptons and mtatons. The amount of e cess profts net Income
or net oss of an acqurng corporaton or a quafed component corporaton for a
ta abe year begnnng after December 31, 1935, and endng wth or wthn a
base perod year whch may be ncuded n computng the group e cess profts
net ncome or net oss for such base perod year s to be determned n accordance
wth the foowng e ceptons and mtatons:
() n acqurng corporaton whch was not Itsef actuay n e stence at
the begnnng of ts base perod s not permtted to take nto account any of
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171
ts own e cess profts net ncome or net oss attrbutabe to any perod before
t frst became an acqurng corporaton (see secton 7 2(f)(1)). The same
rue s appcabe to the e cess profts net ncome or net oss of a quafed
component corporaton whch was not actuay n e stence at the begnnng
of the ta payer s base perod (see secton 7 2(f)(2)). Ths rue may be
ustrated by the foowng e ampe:
ampe: The Corporaton was organzed pror to 1036. The I Corpora-
ton was organzed anuary 1, 1938. On uy 1, 1939, the Corporaton ac-
qured the Corporaton n a transacton descrbed n secton 7 0(a). In
computng ts average base perod net ncome, the Corporaton may not
take nto account any porton of ts own e cess profts net ncome or net oss
attrbutabe to the perod precedng uy 1, 1939. It s requred, however, to
take nto account the e cess profts net ncome or net oss of the Corporaton
for such perod. If the Corporaton s subsequenty acqured by the C
Corporaton, the C Corporaton w kewse not be permtted to take nto
account the e cess profts net ncome or net oss of the Corporaton attrbu-
tabe to the perod precedng uy 1, 1939, n computng ts own average base
perod net ncome, but w be requred to take nto account wth respect to
such perod the e cess profts net ncome or net oss of the Corporaton.
Such rue s appcabe whether or not the C Corporaton was actuay n
e stence at the begnnng of ts base perod.
The e cess profts net ncome or net oss of such an acqurng or quafed
component corporaton for the entre perod foowng the (ate when t frst
becomes an acqurng corporaton s to be taken nto account, however, even
though when t frst becomes an acqurng corporaton t does not acqure a
quafed component corporaton but merey a component corporaton.
() If the frst ta abe year of a quafed component corporaton whch
ends wth or wthn the ta payer s frst base perod year began pror to the
begnnng of such base perod year (though after December 81, 1935), so much
of such quafed component corporaton s e cess profts net ncome or net oss
for such ta abe year must be e cuded as s attrbutabe to the perod before
the begnnng of such frst base perod year (see secton 7 2(f)(3)). For e -
ampe, If the acqurng corporaton s base perod begns on uy 1, 193(5, but
the ta abe year of one of ts quafed component corporatons s the caendar
year 1936, ony so much of such quafed component corporaton s e cess
profts net ncome or net oss for the caendar year 1936 may be ncuded n
computng the group e cess profts net Income or net oss for the 12-month
perod begnnng uy 1, 1936, as s attrbutabe to the perod begnnng uy 1,
1936, and endng December 31,1936.
() In case a corporaton becomes an acqurng corporaton n an e cess
profts ta ta abe year, ony a proportonate amount of the e cess profts net n-
come or net oss of any quafed component corporaton acqured upon such trans-
acton may be Incuded n computng the ta payer s average base perod net
ncome for purposes of the e cess profts credt for such ta abe year. The
amount thereof whch may be ncuded wth respect to each base perod year
s an amount whch bears the same rato to the tota amount of the e cess
profts net ncome or net oss of such quafed component con oraton otherwse
ncudbe In such base perod year as the number of the days n the ta abe
year after the acquston takes pace bears to the tota number of days n the
ta abe year. (See secton 7 2(f)( ).) In the computaton of the e cess
profts credt based on ncome for subsequent ta abe years, the average base
perod net Income sha refect the fu amount of the base perod e cess profts
net Income or net oss of such quafed component corporaton. Ths paragraph
may be ustrated by the foowng e ampe:
ampe: On uy 1, 19 0, the Corporaton acqures the Y Corporaton
In a transacton descrbed In secton 7 0(a). oth the Corporaton and the
Y Corporaton were n e stence on anuary 1, 1936, and both corporatons
have aways fed ther Income ta returns on the caendar year bass. The
Y Corporaton had an e cess profts net ncome of 100,000 for the caendar
year 1936, a net oss of 10,000 for the caendar year 1937, an e cess profts
net ncome of 70,000 for the caendar year 1938, and an e cess profts net
Income of 50,000 for the caendar year 1939. In computng Its average base
perod net ncome for purposes of the e cess profts credt for the caendar
year 18 0, the Corporaton may ncude ony one-haf of the above amounts,
. e., 50,000 for 1936, mnus 5,000 for 1937, 35,000 for 1938, and 25,000 for
1939. In computng the e cess profts credt for 19 1 and subsequent years,
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172
however, the Corporaton may ncude the fu amount of the base perod
e cess profts net ncomes and net oss of the Y Corporaton.
(v) No ad|ustment need be made under secton 7 2(e)(1) on account of
dvdends, snce the e cess profts net ncome w not ncude dvdends receved
from a domestc corporaton (see secton 711(a) (1) (F)).
(d) Determnaton of average base perod net ncome. The average base
perod net ncome of an acqurng corporaton s the sum of the group e cess
profts net Incomes for the base perod years for whch there were group
e cess profts net ncomes, reduced by the sum of the group net osses for the
base perod years for whch there were group net osses (e cept the year for
whch the greatest or ony group net oss was sustaned, whch s treated as
eero), the remander beng dvded by . In no case, however, sha the average
base perod not Income be ess than zero. Ths paragraph may he ustrated
by the foowng e ampe:
ampe: The group net ncome or group net oss of the P Corporaton for
each of ts base perod years Is as foows (a group net oss beng preceded by
a mnus sgn) :
Frst base perod year 100,000
Second base perod year 1- 50,000
Thrd base perod year 25,000
Fourth base perod year 75, 000
The average base perod net ncome of the P Corporaton s 37,500, com-
puted as foows:
Group e cess profts net Income for frst year 100. 000
Pus:
Group e cess profts net ncome for fourth year 75, 000
Tota 175, 000
Less:
Group net osses, e cudng greatest 25,0C0
Remander 150,000
verage base perod net ncome ( 150,000 dvded by ) 37, 500
Secton 7 2(d) provdes for a mnmum average base perod net ncome In
the case of a ta payer whch becomes an acqurng corporaton n a transacton
takng pace n a ta abe year begnnng after December 31, 1939, f, on Septem-
ber 11, 19-10, and at a tmes thereafter unt the transacton takes pace, ether
the ta payer owns at east 75 per cent of eac cass of stock of each qua-
fed component corporaton nvoved n the transacton, or one of such
quafed component corporatons owns at east 75 per cent of each cass of
Stock of the ta payer and each of the other quafed component corporatons.
In suc case the average base perod net ncome of the ta payer sha not be
ess than Its average base perod net Income computed as though the transac-
ton had not taken pace, or the argest average base perod net ncome among
such quafed component corporatons. For the purposes of ths paragraph
secton 7 0(g) s not appcabe.
Sec. 7 3. Net Capta Changes.
(a) For the purposes of secton 713(e), upon the date of the trans-
acton whch consttutes a corporaton an acqurng corporaton, there
sha be added to ts day capta addton or reducton for such day,
the net capta addton or reducton, as the case may be, of each of the
component corporatons nvoved In such transacton, but no other
capta addton or reducton sha be consdered as havng been made
by reason of such transacton.
(b) For the purposes of ths secton
(1) In computng the net capta addton of each such com-
ponent corporaton there sha be dsregarded property pad n to
such corporaton by the ta payer or by any of ts component cor-
poratons.
(2) In computng the net capta reducton of each such com-
ponent corporaton there sha be dsregarded dstrbutons mad
to the ta payer or to any of such component corporatons.
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Sec. 30.7 3-1. Net capta chanfca. No capta addton or reducton sha
resut to an acqurng corporaton from the acquston of a component corpora-
ton, e cept to the e tent such component corporaton has a net capta add-
ton or reducton upon the date the transacton takes pace. ny such net
capta addton or reducton sha be added to the day capta addton or
reducton of the acqurng corporaton for the day the transacton takes pace
and for each day thereafter. The net capta addton or reducton of a com-
ponent corporaton s the dfference between the day capta addton and the
day capta reducton of such component corporaton for the day the transac-
ton takes pace, but n determnng such day capta addton or reducton
money or other property pad n on such day and dstrbutons (other than out
of earnngs and profts) made on such day or pursuant to the pan under whch
the acquston s made sha be taken nto account e cept as provded n sec-
ton 7 3(b) and e cept dstrbutons of stock of the acqurng corporaton. For
the purposes of ths paragraph secton 7 0(g) Is not appcabe and, accord-
ngy, a corporaton Is a component corporaton of ony Its mmedate acqurng
corporaton. If ts acqurng corporaton Is subsequenty acqured by another
corporaton, Its net capta addton or reducton w be added to the day
capta addton or reducton of such other corporaton ony to the e tent that
t s refected In the net capta addton or reducton of ts mmedate acqurng
corporaton.
In determnng the net capta addton or reducton of a component cor-
poraton, money or other property pad In by and dstrbutons made to the
ta payer or any other component corporatons of the ta payer sha be dsre-
garded. For ths purpose the term component corporaton Incudes a com-
ponent corporaton of a component corporaton of the ta payer as provded n
secton 7 0(g).
Ths secton may be Iustrated by the foowng e ampe:
ampe: On March 1, 19 0, the Corporaton, n e change soey for ts
votng stock, acqures a the assets of the Y Corporaton, havng an ad|usted
bass for computng oss n the hnnds of the Y Corporaton of 100,000.
Immedatey after the e change the Y Corporaton dstrbutes the stock of
the Corporaton n compete qudaton. oth corporatons make ther
Income ta returns on a caendar year bass. The ony money or other prop-
erty pad n to and dstrbuton made by the Y Corporaton from anuary 1, 1 0,
to March 1, 19 0, were as foows:
anuary 15, ,000 pad n for stock by persons other than the Cor-
poraton or any component corporaton thereof.
February 1, dstrbuton to sharehoders of 10,000, of whch ony 7,n00
was out of earnngs and profts.
t no tme from anuary 1, 19 0, to March 1, 19 0, dd the Y Corporaton
have any e cuded capta.
The Y Corporaton has a net capta addton on March 1, 19 0, of 2,000,
computed as foows:
Capta addtons (money pad In for stock anuary 15) 5,000
Less:
Capta reductons (dstrbuton February 1, to the e tent not
chargeabe to earnngs and profts ( 10,000 mnus 7,000)) 3,000
Net capta addton 2,000
Such net capta addton of 2,000 Is added to the day capta addton
of the Corporaton for March 1, 19 0, and for each day thereafter, but no
porton of the 100,000 pad In for stock on March 1, 19 0, may be taken Into
account.
Sec. 7 . Foeeon Cobpobato b.
The term corporaton as used In ths Suppement does not ncude
a foregn corporaton.
Suppement ghest racket mount and Invested Capta.
Sec. 750. Defntons.
a used In ths Suppement
(a) change. The term e change means an e change, to whch
secton 112(b)( ) or (5) or so much of secton 112(c),(d), or (e) as
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refers to secton 112(b)( ) or (5), or to whch a correspondng pro-
vson of a pror revenue aw, s or was appcabe, by one corpora-
ton of ts property whoy or n part for stock or securtes of another
corporaton, or a transfer of property by one corporaton to another
corporaton after December 31, 1017, the bass of whch n the hands of
such other corporaton s or was determned under secton 113(a)
(8)( ), or woud have been so determned had such secton been n
effect.
(b) Transferor Upon an change. The term transferor upon
an e change means a corporaton whch upon an e change transfers
property to another corporaton n e change, whoy or n part, for stock
or securtes of such other corporaton, or transfers property to another
corporaton after December 31, 1917, the bass of whch n the hands of
such other corporaton s or was determned under secton 113(a) (8) ( ),
or woud have been so determned had such secton been n effect.
(c) Transferee Upon an change. The term transferee upon
an e change means a corporaton whch upon an e change acqures
property from another corporaton n e change, whoy or n part, for
Its stock or securtes, or whch acqures property from another cor-
poraton after December 31, 1017, the bass of whch n ts hands s or
was determned under secton 113(a)(8)( ), or woud have been so
determned had such secton been n effect.
(d) Contro. The term contro means the ownershp of stock
possessng at east 00 per centum of the tota combned votng power
of a casses of stock entted to vote and at east 00 per centum of
the tota vaue of shares of a casses of stock of the corporaton.
(e) ghest racket mount. The term hghest bracket amount
means 500,000 or the hghest bracket amount computed under secton
752, whchever Is the smaer.
Sec. 30.7C0-1. Purpose and scope of Suppement . The term Suppement ,
when used n these reguatons, means sectons 750 to 752. The purpose of
Suppement s twofod.
Suppement provdes rues reatve to the e tent to whch equty nvested
capta and borrowed capta are affected by the acquston of property n
an e change meetng the requrements of secton 750(a) (see secton 751).
Such rues are appcabe In the case of e changes occurrng pror to the begn-
nng of the acqurng corporaton s frst e cess profts ta ta abe year as
we as e changes occurrng thereafter. The purpose of secton 751 s n genera
to provde a rue for the determnaton of the e tent to whch property Is
pad n for stock In cases Invovng an assumpton of abtes and the payment
of boot, and to prevent a dupcaton n nvested capta n cases where bonds
as we as stock are ssued as consderaton for the transfer of the propertes
acqured.
Suppement aso provdes rues for the determnaton of the hghest
bracket amount of certan corporatons whch, after the begnnng of the
e cess profts ta perod, have been partes to an e change meetng the requre-
ments of secton 750(a) (see secton 752). The hghest bracket amount s a
fgure whch Is to be substtuted for the 500,000 fgure contaned n the
hghest ta bracket n secton 710(a) (1) and s aso used n ad|ustng the other
brackets n the rate schedue contaned n such secton. The purpose of secton
752 s n genera to prevent a owerng of the effectve rates of ta through
dvdng up the ncome of one enterprse among severa corporate enttes by
the organzaton of subsdares. For e ampe, secton 752, together wth
secton 710(a)(2), s desgned to make certan that, f the Corporaton
dvdes tsef nto the Corporaton and the Corporaton, the effectve rate of
ta appcabe to the Corporaton and the . Corporaton together w be
the same as the effectve rate of ta whch woud be appcabe to the
Corporaton n undvded form.
Sec. 30.750-2. change. s used n Suppement the term e change
means an e change, to whch secton 112(b)( ) or (5) or so much of secton
112(c).(d), or (e) as refers to secton 112(b)( ) or (5), or to whch a cor-
respondng provson of a pror revenue aw, s or was appcabe, by one
corporaton of ts property whoy or In part for stock or securtes of another
corporaton, or a transfer of property by one corporaton to another corporaton
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175
after December 81, 1917, the bass of whch In the hands of such other corpo-
raton s or was determned under secton 113(a)(8)( ), or woud have been
so determned bad such secton been n effect. s so defned the term e change
ncudes a statutory merger or consodaton. The fact that the property trans-
ferred conssts soey of cash w not prevent a transacton from quafyng as
an e change wthn the meanng of secton 750(a). Moreover, a transacton
whch woud not be wthn secton 112(b)( ) of the Interna Revenue Code
but was wthn the correspondng provson of the Revenue ct appcabe to
the ta abe year n whch t took pace, because of dfferences n the defnton
of the term reorganzaton contaned n such Revenue ct, s an e change
wthn the meanng of secton 750(a).
Sec. 30.750-3. Contro. In determnng whether contro, as that term s
defned n secton 750(d), e sts, Treasury stock s not to be taken nto account.
Snce the term contro means, In addton to the ownershp of stock possessng
at east 90 per cent of the tota combned votng power of a casses of stock
entted to vote, ownershp of at east .CO per cent of the tota vaue of shares
of a casses of stock (ncudng votng stock) of the corporaton, t w fre-
quenty be necessary to vaue each cass of stock separatey. For the purposes
of secton 750(d) the term vaue means far market vaue. If stock not
owned s a of a snge cass t w be necessary to make a separate vauaton
ony of such cass of stock and to compare such vaue wth the combned vaue
of a the stock, snce by so dong t w be possbe to determne whether the
stock not owned e ceeds 10 per cent of the tota vaue of shares of a casses
of stock of the corporaton. The eement of contro s of consequence ony n
connecton wth the appcaton of secton 752, whch docs not appy to an
e change takng pace pror to 19 0.
Sua 30.750- . ghest bracket amount. The hghest bracket amount of a
corporaton whch has not, after the begnnng of the e cess profts ta perod,
been a transferor or transferee upon an e change as defned n secton 750(b)
and (c) s 500,000. Whenever a corporaton becomes such a transferor or
transferee, such 500,000 amount s ad|usted as provded n secton 752 both
for the ta abe year the e change takes pace and for subsequent ta abe years.
The ad|usted fgure, whch can never e ceed but may be ess than 500,000, s
the corporaton s hghest bracket amount unt a subsequent e change, or a com-
pete qudaton, sub|ect to the provsons of secton 112(b)(0), of a subsdary
to whch property was transferred on a prevous e change sub|ect to secton
752, makes a further ad|ustment necessary.
Sec. 751. Determnaton of Property Pad In for Stock and of
orhowbd Capta n Connecton Wth Certan changes.
(a) Property Pad In for Stock. In the appcaton of secton
718(a) to a transferee upon an e change In determnng the amount
pad n for stock of the transferee, or as pad-n surpus or as a con-
trbuton to capta of the transferee, n connecton wth such e change,
ony an amount sha be deemed to have been so pad n equa to the
e cess of the bass In the hands of the transferee of the property of
the transferor receved by the transferee upon the e change over the
sum of
(1) ny abty of the transferor assumed upon such e change
and any abty sub|ect to whch the property was receved upon
such e change, pus
(2) The aggregate of the amount of money and the far market
vaue of any other property transferred to the transferor not per-
mtted to be receved by such transferor wthout the recognton
of gan.
(b) orrowed Capta. In the appcaton of secton 719(a) to a
transferee upon an e change, the term borrowed capta sha not In-
cude Indebtedness orgnay evdenced by securtes ssued by the
transferee upon such e change as consderaton for the property of
the transferor receved by the transferee upon such e change If (1)
such securtes were propery permtted to be receved by the person
to whom such securtes were ssued wthout the recognton of gan
and (2) the ndebtedness orgnay evdenced by such securtes dd
not arse out of ndebtedness of the transferor (other than ndebted-
ness whch n the transferor s hands was sub|ect to the mtatons
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176
of ths subsecton) assumed by the transferee n connecton wth such
e change.
Sec. 30.751-1. Property pad n for stork. The amount to be treated as prop-
erty pad n for stock, or ns pad-n surpus, or as a contrbuton to capta of
a transferee n connecton wth an e change s the unad|usted bass for deter-
mnng oss n the hands of the transferee of the property transferred (ad|usted
n the case of a substtuted bass, as provded n secton 113(b) (2)) reduced by
the sum of the foowng:
(a) ny abty of the transferor assumed upon such e change and
any abty sub|ect to whch the property was transferred, pus
(6) The aggregate of the amount of money and the far market vaue
of any other property receved by the transferor from the transferee upon
such e change, not permtted to be receved by such transferor wthout the
recognton of gan.
Ths secton may be ustrated by the foowng e ampe:
ampe: The Corporaton n 19 0 transfers a ts property to the T Cor-
poraton n e change for stock havng a far market vaue of 200,000 and con-
sttutng 80 per cent of each cass of stock of the Y Corporaton, 10,000 In
bonds of the Y Corporaton, 5,000 n cash, and the assumpton by the Y Corpo-
raton of the abtes of the Corporaton amountng to 5,000. None of
the consderaton receved was dstrbuted by the Corporaton to ts share-
hoders. The ad|usted bass for gan or oss In the hands of the Corporaton
of the assets transferred s 100,000 at the tme of the transfer. The amount
to be treated as property pad n for stock of the Y Corporaton Is 55,000,
computed as foows:
(1) d|usted bass of property n hands of the Corporaton 100,000
(2) Pus: Gan recognzed under secton 112(d)(2) 5,000
(3) ass under secton 113(a)(7) (ad|usted as provded In secton
113(b) (2)) n hands of the Y Corporaton 105,000
( ) Less the sum of:
Labtes of the Corporaton assumed by the Y
Corporaton 5,000
Money receved by the Corporaton 5,000
50,000
( ) Property pad n for stock of the Y Corporaton ((3) mnus ( ))__ 55,000

Seo. 30.751-2. Lmtaton on borroved capta. transferee may not treat
as borrowed capta any ndebtedness orgnay evdenced by Its securtes
ssued u| m an e change and permtted to be receved by the persons to whom
Issued wthout the recognton of gan, e cept and to the e tent that such se-
curtes were ssued n assumpton of ndebtedness of the transferor not e cuded
from the borrowed capta of the transferor by vrtue of ths secton.
Ths secton may be ustrated by the foowng e ampe:
ampe: The Corporaton, whch has never prevousy been a party to an
e change, transfers to the Y Corporaton a ts property n e change for a the
stock of the Y Corporaton and 50,000 of bonds of the Y Corporaton, 20,000
of whch are ssued to the bondhoders of the Corporaton n assumpton of
the abtes of the Corporaton. s a resut of such transacton the Y
Corporaton s entted to a borrowed capta of ony 20,000 (producng a
borrowed nvested capta of 10,000), snce the remanng 30,000 of bonds are
property permtted to be receved wthout the recognton of gan and are not
ssued n connecton wth the assumpton of abtes of the Corporaton.
Sec. 7 2. Computaton op ghest racket mount n Connecton
Wth changes.
(a) Speca ppcaton of Day Invested Capta of Trahsferob
Upon change. For the purposes of ths secton, the day nvested
capta of a transferor upon an e change for the day after the e -
change sha be the day nvested capta determned under secton
717 reduced by an amount equa to the amount by whch the equty
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.Invested capta of the transferee upon snch e change was Increased
by reason of the recept of property from such transferor upon such
e change.
(b) ohekt backet mount or Tbansfehor.
(1) Ta abe year of e change. In the case of a transferor
upon an e change after the begnnng of ts frst ta abe year
under ths subchapter, ts hghest bracket amount for the ta abe
year In whch the e change takes pace sha be the sum of
( ) Its hghest bracket amount mmedatey precedng the
e change mutped by the number of days n the ta abe
year up to and ncudng the day of the e change, pus
( ) Its hghest bracket amount for the ta abe year after
the e change, mutped by the number of days n the ta abe
year remanng after the day of the e change,
dvded by the number of days n the ta abe year.
(2) Ta abe tears afteb e change nvovng contro. In the
case of a transferor upon an e change after the begnnng of Its
frst ta abe year under ths subchapter, f mmedatey after the
e change the transferor or Its sharehoders, or both, are n contro
of the transferee, the transferor s hghest bracket amount for any
ta abe year after the ta abe year n whch the e change takes
pace sha be an amount whch s a percentage of ts hghest
bracket amount mmedatey precedng the e change equa to the
percentage whch s ts day nvested capta for the day after the
e change s of ts day nvested capta for the day of the e change.
(3) Ta abe tears after e chanoe not nvovng contko. In
the case of a transferor upon an e change (other than a transferor
descrbed n paragraph ( ) of ths subsecton) after the begnnng of
ts frst ta abe year under ths subchapter, f mmedatey after
the e change no transferor or Its sharehoders, or both, upon the
e change are n contro of the transferee, and f the sharehoders of
the transferee Immedatey precedng the e change are not n con-
tro of the transferee mmedatey after the e change, the trans-
feror s hghest bracket amount for any ta abe year after. the
e change sha be the e cess, f any, of the sum of the transferor s
hghest bracket amount mmedatey precedng the e change and
the transferee s hghest bracket amount mmedatey precedng
the e change, over 500,000.
( ) Ta abe years after certan e changes under secton
112(b)(5). In the case of an e change after the begnnng of the
frst ta abe year under ths subchapter of any transferor or trans-
feree upon such e change, nvovng two or more transferors, or one
or more transferors and one or more other persons, f Immedatey
after the e change no one of such transferors, or ts sharehoders,
or both, and no one or more of such other persons are n contro
of the transferee and f such e change s an e change descrbed
In secton 112(b)(5) or so much of secton 112(c) or 112(e) as
refers to secton 112(b) (5), the hghest bracket amount of any such
transferor for any ta abe year after the e change sha be an
amount equa to ts hghest bracket amount mmedatey precedng
the e change
( ) Mnus an amount whch bears the same rato to ts
hghest bracket amount mmedatey precedng the e change as
the e cess of ts day nvested capta for the day of the e -
change over ts day nvested capta for the day after the e -
change bears to Its day nvested capta for the day of the
e change, and
( ) Pus an amount whch bears the same rato to the
e cess over 500,000 of the sum of the amounts computed under
subparagraph ( ) wth respect to each transferor, as the
amount computed under subparagraph ( ) wth respect to
such transferor bears to the sum of the amounts computed
under such subparagraph wth respect to each transferor.
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(c) ghest racket mount of Transferee.
(1) Ta abe year of e change nvovng contro. In the case
of a transferee upon an e change after the begnnng of the frst
ta abe year under ths subchapter of a transferor upon such e -
change the transferee s hghest bracket amount for the ta abe year
In whch the e change takes pace sha be the sum of
( ) Its hghest bracket amount Immedatey precedng the
e change mutped by the number of days In the ta abe year
up to and Incudng the day of the e change, pus
( ) Its hghest bracket amount for the ta abe year after
the e change mutped by the number of days n the ta abe
year remanng after the day of the e change,
dvded by the number of days In the ta abe year. For the purposes
of ths paragraph and subsecton (d) of ths secton e change n-
cudes a qudaton descrbed n paragraph (5) of ths subsecton, and
Such e change sha be deemed to have taken pace on the day such
qudaton was competed.
(2) Ta abe years after e change nvovng contro. In the
case of a transferee upon an e change after the begnnng of the
frst ta abe year under ths subchapter of a transferor upon such
e change, If mmedatey after the e change any transferor upon
such e change or Its sharehoders, or both are In contro of the
transferee, the transferee s hghest bracket amount for any ta abe
year after the e change sha be an amount whch s a percentage
of such transferor s hghest bracket amount mmedatey precedng
the e change equa to the percentage whch the e cess of the trans-
feree s day nvested capta for the day after the e change over
ts day Invested capta for the day of the e change Is of such
transferor s day nvested capta for the day of the e change.
(3) Ta abe tears after e change not nvovng contro. In
the case of a transferee upon an e change (other than a transferee
descrbed n paragraph ( ) of ths subsecton) after the begnnng
of the frst ta abe year under ths subchapter of a transferor upon
such e change, If Immedatey after the e change no transferor
or ts sharehoders, or both, are n contro of the transferee, and f
the sharehoders of the transferee Immedatey precedng the e -
change are not n contro of the transferee Immedatey after the
e change, the transferee s hghest bracket amount for any ta abe
year after the e change sha be an amount equa to ( ) the sum of
the transferor s hghest bracket amount Immedatey precedng the
e change and the transferee s hghest bracket amount mmedatey
precedng the e change, or ( ) . 00,000, whchever s the smaer.
( ) Ta abe years after certan e changes under secon
112(b)(5). In the case of an e change descrbed n subsecton
(b) ( ) of ths secton, the hghest bracket amount of the trans-
feree upon such e change for any ta abe year after the e change
sha be an amount equa ( ) to the sum of the amounts com-
puted under subparagraph ( ) of such subsecton wth respect to
each transferor or ( ) 500,000, whchever Is the smaer.
(5) Ta are years after qudaton n case cf corporaton
kdcf|vtng property under secton 112(b) (6). Upon the recept by
a corporaton durng any ta abe year under ths subchapter of prop-
erty In compete qudaton of another corporaton, gan or oss upon
whch s not recognzed by reason of secton 112(b) (6), the hghest
bracket amount of the corporaton recevng such property for any
ta abe year after the qudaton s competed sha be an amount
equa to ts hghest bracket amount mmedatey precedng the com-
peton of the qudaton ncreased, but In no case to an amount
above . nOO.OOO, by an amount equa to the hghest bracket amount
of such other corporaton mmedatey precedng the competon of
such qudaton, f prevousy and after the begnnng of the frst
ta nbe year under ths subchapter of the corporaton recevng such
property such corporaton was a transferor upon an e change wth
respect to whch such other corporaton was a transferee.
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179
(d) ghest racket mount n Case of Two ob Mobe changes
IN Same Ta abe Year.-
(1) If a transferor upon an e change s n the same ta abe
year nvoved n more than one e change (ether as transferor
or transferee), ts hghest bracket amount for such ta abe year
sha be the amount determned under subsecton (b)(1) wth
respect to the ast e change n such ta abe year. Its hghest
bracket amount mmedatey precedng any e change n such ta -
abe year subsequent to the frst e change theren sha be the
amount computed under subsecton (b)(1) wth respect to the
mmedatey precedng e change as f the ta abe year cosed on
the day of such subsequent e change.
(2) If a transferee upon an e change s n the same ta abe
year nvoved n more than one e change (ether as transferee or
transferor), ts hghest bracket amount for such ta abe year 6ha
be the amount determned under subsecton (c) (1) wth respect to
the ast e change n such ta abe year. Its hghest bracket
amount mmedatey precedng any e change n such ta abe year
subsequent to the frst e change theren sha be the amount com-
puted under subsecton (c)(1) wth respect to the mmedatey
precedng e change as f the ta abe year cosed on the day of such
subsequent e change.
(3) If a transferor or transferee upon an e change s n the
same ta abe year nvoved n more than one e change (ether
as transferor or transferee), ts hghest bracket amount for any
ta abe year after the ta abe year n whch such e changes took
pace sha be the amount computed under subsecton (b)(2),(3),
or ( ), or (c)(2), (3), ( ), or (5), as the case may be, wth
respect to the ast such e change.
Sec. 30.752-1. Nature and functon of hytest bracket amount. The genera
rate schedue contaned n secton 710(a) (1) s composed of s brackets, the
dvdng nes between whch are e pressed n terms of f ed amounts of ad-
|usted e cess profts net ncome. Such brackets and the rates of ta appcabe
thereto are as foows:
The dvdng ne between the ast two brackets s 500,000. Ths amount s
desgnated as a corporaton s hghest bracket amount.
Snce the varous brackets are defned n terms of absoute amounts of
ncome, an enterprse wth 1,000,000 of ncome, for e ampe, woud have a
substantay ower ta f the ncome coud be spt between two separate
corporate enttes, for n such case no porton of the ncome woud be sub|ect
to the 50 per cent rate. The possbty of obtanng such an advantage through
the transfer of propertes n an e change after December 31, 1939, s avoded
by ad|ustng the brackets of both corporatons nvoved n such a transacton
so as to make the tota amount of ncome sub|ect to ta n each bracket the
same as woud have been the case f the enterprse had remaned n the form of
a snge corporate entty. Ths s accompshed n genera by reducng the
hghest bracket amount of the orgna corporaton In the same proporton as
the nvested capta of such corporaton s reduced as a resut of the e change.
Thus, f the Invested capta of the corporaton s cut In haf, the hghest
bracket amount s aso cut n haf, and becomes 250,000. The same propor-
tonate reducton s then made n each of the other brackets. The transferee
corporaton, n the case of such a corporate spt-up, s gven a hghest bracket
amount equa to the amount by whch the hghest bracket amount of the
transferor corporaton Is reduced, and each of the other brackets s kewse
proportonatey reduced. In the case of a corporaton dvdng tsef n haf
by the organzaton of a whoy owned subsdary, each corporaton woud be
Per cent.
Frst 20,000
Ne t 30,000.
Ne t 50,000-
25
;;o
35
0
._ 5
. 50
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180
sub|ect to the foowng rate schedue for the ta abe year foowng the
year n whch the transacton took pace:
Per cent.
Frst 10,000 25
Ne t 15,000 80
Ne t 25,000 35
Ne t 75,000 0
Ne t 125,000 5
Over 2 0,000 60
Secton 752 Is drected ony to the determnaton of the hghest bracket
amount of each corporaton nvoved n an e change descrbed n secton 750(a)
or n certan types of compete qudatons sub|ect to the provsons of secton
112(b)(6). The appcaton of such amount n reducton of the rate schedue
appcabe to such corporaton s to be found n secton 710(a) (2).
separate computaton under secton 752 must be made for the year n whch
the e change takes pace and for years foowng such year. Snce, n deter-
mnng the hghest bracket amount for the year of the e change, the hghest
bracket amount for the year foowng the e change must frst be determned,
these reguatons w frst set forth the rues governng such atter determ-
naton.
Sec. 30.752-2. Day nvested capta of transferor upon e change for purpose
of computng hghest bracket amount ppcaton of secton 752(a). In mak-
ng the varous computatons requred by secton 752(b), (c), and (d) the
day nvested capta of a transferor upon an e change for the cay after the
e change s the day nvested capta determned under secton 717 reduced by
an amount equa to the amount by whch the equty nvested capta of the
transferee upon such e change s Increased by reason of the recept of property
from the transferor. Such rue s appcabe ony for purposes of secton 752.
The nvested capta of a transferor upon an e change for purposes of computng
the e cess prots credt based on nvested capta s to be determned under
the genera rue contaned n secton 717. For purposes of secton 752, as n
the case of the genera rue, ndebtedness consttutng borrowed capta of the
transferor whch Is assumed by the transferee s not to be treated as borrowed
capta of the transferor for any day foowng the day the e change takes
pace.
Ths secton may be ustrated by the foowng e ampe:
ampe: On December 1, 19 0, the Corporaton, whch has a day In-
vested capta for such day of 100,000 consstng entrey of equty nvested
capta, transfers property wth an ad|usted bass (for determnng oss) of
30,000 to the Y Corporaton n e change for a the stock of the Y Corporaton.
Te day nvested capta of the Y Corporaton for December 2, 19 0, s therefore
30,000. Under secton 717 the day Invested capta of the Corporaton for
Decem er 2, 19 0, s not affected (though the Invested capta for the year w
be ad|usted on account of nadmssbes). For the purpose of computng the
hghest bracket amount of the Corporaton and the Y Corporaton, however,
the day Invested capta of the Corporaton for December 2, 19 0, w be
100,000 mnus 30,000, or 70,000.
Sec. 30.752-3. ghest orackct amount of transferor and transferee for year
fomrng e change where transferor n contro ppcaton of secton 752
(6) (2) and (c)(2). (a) Transferor. In the case of an e change as defned
n secton 750(a) after the begnnng of the frst e cess profts ta ta abe
year of the transferor upon such e change, f mmedatey after the e change
the transferor, or ts sharehoders, or both, are n contro of the transferee, the
transferor s hghest bracket amount for any ta abe year after that In whch
the e change takes pace sha be the same proporton of Its hghest bracket
amount mmedatey precedng the e change as ts day nvested capta for
the day after the e change Is of ts day nvested capta for the day of the
e change. Thus, f ts day nvested capta Is reduced by 25 per cent as a
resut of the e change, the hghest bracket amount w be reduced by 25 per
cent, . e., t w be reduced to 75 wr cent of what t was before the e change.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On December 1, 19 0, the Corporaton, whch makes ts Income
ta returns on the caendar year bass and whch has a day nvested capta
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181
for December 1 of 100,000, transfers to the T Corporaton property wth an
ad|usted bass (for determnng oss) of 30,000 n e change for a the stock
of the T Corporaton. The Corporaton has not prevousy n 19 0 been a
party to an e change and therefore has a hghest bracket amount mmedatey
precedng ths e change of 500,000. The day nvested capta of the Y Corpo-
raton for December 2, 19 0, s 30,000 and the day nvested capta of the
Corporaton for purposes of secton 752 for December 2, 19 0, s therefore
70,000. The hghest bracket amount of the Corporaton for the ta abe year
descrbed n paragraph (a) of ths secton for the ta abe year foowng that
n whch the e change takes pace s the amount by whch the transferor s hgh-
est bracket amount s reduced on account of such e change. Thus, the hghest
bracket amount of the Y Corporaton n the e ampe gven In paragraph (o) of
ths secton for the year foowng the year In whch the e change takes pace s
150,000, . e., 500,000 mnus 350,000.
Sec. 30.752- . ghest bracket amount of transferor and transferee for year
foowng e change chere transferor not In contro ppcaton of secton 752
(ft) (3) and (c)(3). (a) Transferor. In the case of an e change (e cept nn
e change descrbed n secton 752(b) ( )) after the begnnng of the frst e cess
profts ta ta abe year of the transferor, f Immedatey after the e change no
transferor or ts sharehoders, or both, are In contro of the transferee and the
sharehoders of the transferee mmedatey before the e change are not n contro
of the transferee mmedatey after the e change, the transferor s hghest
bracket amount for any ta abe year after that n whch the e change takes
pace s the e cess, f any, over 500,000 of the sum of the transferor s hghest
bracket amount mmedatey precedng the e change nnd the transferee s hghest
bracket amount mmedatey precedng the e change. Tms, so much of the
hghest bracket amount of the transferor Immedatey precedng the e change as
s not needed to rase the hghest bracket amount of the transferee to 500,000
s permtted to be reraned by the transferor.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On December 1, 19 0, the Corporaton, whch makes ts Income
ta returns on the caendar year bass, transfers a Its assets to the Y Corpora-
ton n e chnnge soey for 75 per cent of the votng stock of the Y Corporaton.
The Corporaton has not prevousy In 19 0 been a party to an e change and
therefore has a hghest bracket amount Immedatey precedng ths e change of
500,000. The Y Corporaton has, however, a hghest bracket, amount of ony
00,000 because of havng prevousy n an e cess protts ta ta abe year been a
party to an e change. The hghest bracket amount of the Corporaton for
the year 19 1 w be 00,000, computed as foows:
ghest bracket amount of the Corporaton mmedatey precedng
e change 500, 000
Pus: ghest bracket amount of the Y Corporaton mmedatey
precedng e change 00,000
(6) Transferee. The hghest bracket amount of the transferee In an e -
change descrbed n paragraph (a) of ths secton for the ta abe year foowng
that n whch the e change takes pace s (1) the sum of Its hghest bracket
amount mmedatey precedng the e change and the hghest bracket amount of
the transferor mmedatey precedng the e change, or (2) 500,000, whchever
s smaer. Thus, the hghest bracket amount of the Y Corporaton n the
e ampe gven In paragraph (a) of ths secton for the year foowng the year
n whch the e change takes pace s 500,000. The hghest bracket amount
Immedatey pror to an e change, of a transferee organzed upon such e change,
s 500,000.
Tota
Less: 500,000.
900,000
500,000
ghest bracket amount of the Corporaton for 19 1
00,000
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Sec. 30.752-5. ghest bracket amount of transferor and transferee for year
foowng certan e changes under secton 112(h)(5) ppcaton of secton
752(h)( ) and (c)( ). (a) Transferor. If an e change descrbed n secton
112(b)(5) or so much of secton 112(c) or (e) as refers to secton 112(b)(5)
takes pace n an e cess profts ta ta abe year of any party thereto and f,
upon such e change,
there are severa corporate transferors, or
n addton to one or more corporate transferors, one or more other
persons transfer property to the transferee upon the e change, and
mmedatey after the e change no one of the corporate transferors,
or ts sharehoders, or both, and no one or more of such other persons are
n contro of the transferee,
the hghest bracket amount of each corporate transferor for any ta abe year
after that n whch the e change takes pace s computed as foows:
(1) Its hghest bracket amount mmedatey precedng the e change Is
frst tentatvey reduced n the same proporton as ts day nvested capta
s reduced as a resut of the e change (see secton 30.752-3(o)).
(2) There must then be ascertaned the e cess, f any, over 500,000 of
the sum of the amounts by whch the hghest bracket amounts of a the
corporate transferors are tentatvey reduced under (1). The hghest
bracket amount as tentatvey reduced under (1) of each corporate trans-
feror s then ncreased by an amount whch bears the same rato to such
e cess as the tentatve reducton under (1) of such transferor bears to the
sum of the tentatve reductons under (1) of a the corporate transferors.
Thus, the hghest bracket amount of each corporate transferor s fnay
reduced by ony so much as s necessary, together wth the amounts by
whch the hghest bracket amounts of the other corporate transferors are
reduced, to confer upon the transferee a hghest bracket amount of 500,000.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On December 1, 19- 0, the Corporaton and the Y Corporaton,
both of whch make Ther ncome ta returns on the caendar year bass, have
a day nvested capta of 100,000 and 20 ),000, respectvey. Nether cor-
poraton has prevousy n 19 0 been a party to an e change. On such date they
organze the Z Corporaton to whch the Corporaton transfers property hav-
ng an ad|usted bass (for determnng oss) of ,000 for stock of the Z
Corporaton and the Y Corporaton transfers propery havng an ad|usted bass
(for determnng oss) of 132,000 for the remanng stock of the Z Corpora-
ton. the requrements of secton 112(b)(5) are satsfed. The hghest
bracket amount of the Corporaton for 10 1 s 300.0:k), computed as foows:
(1) Day nvested capta of the Corporaton December 1,19 0 100, 000
(2) Less: Day nvested capta of the Corporaton Decom er
2, 19 0 56, COO
(3) Dfference ,000
( ) Percentage tem (3) s of tem (1)
(5) Tentatve reducton n hghest bracket amount of the Corpora-
ton ( per cent of 500,000) 220,000
(6) Day nvested capta of the Y Corporaton December 1,19 0 200,000
(7) Less: Day nvested capta of the Y Corporaton December 2,
19 0 as, 000
(8) Dfference 132,000
9) Percentage tem (8) s of tem (0) 68
10) Tentatve reducton n hghest bracket amount of the Y Cor-
poraton (66) per cent of 500,000) 330. 000
s
(11) Rum of tems (5) and (10) 550,000
(12) Less: 500,000 500,000
(13) Dfference 50,000
(1 ) Percentage whch tem (5) Is of tem (11) 0
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183
(15) 0 per cent of 50,000 (Item 13) 20,000
(16) ghest bracket amount of tbe Corporaton pror to
e change 500,000
(17) Less: Item (5) 220,000
(18) Dfference 250,000
(19) Pus: Item (15) 20,000
(20) ghest bracket amount of the Corporaton for 10 1 300,000
The hghest bracket amount of the Y Corporaton for 19 1 s 200,000, com-
puted n the same manner.
(6) Transferee. In the case of an e change descrbed n paragraph (a) of
ths secton, the hghest bracket amount of the transferee s whchever of the
foowng amounts s the smaer: (1) 500,000, or (2) the sum of the amounts
by whch the hghest bracket amounts of a the corporate transferors are
tentatvey reduced under secton 752(b)( )( ) and paragraph (o) (1) of ths
secton. Thus, n the e ampe gven n paragraph (a) of ths secton, the
hghest bracket amount of the Z Corporaton for the ta abe year after the
e change takes pace s 500,000, that amount beng ess than 550,000, the
sum of the amounts by whch the hghest bracket amounts of the Corporaton
and the Y Corporaton are tentatvey reduced under paragraph (a)(1) of
ths secton ( 220,000 pus 330,000).
Seo. 30.752-6. yhest bracket amount of transferee for year foorno certan
112(b)(6) qudatons ppcaton of secton 752(c)(5). If a corporaton
whch prevousy n an e cess profts ta ta abe year has been a transferor
upon an e change subsequenty qudates under secton 112(b)(6) one of the
transferees upon such prevous e change, ts hghest bracket amount for any
ta abe year after that n whch the qudaton s competed s ts hghest
bracket amount mmedatey precedng the competon of the qudaton, n-
creased, but not to an amount e ceedng 500,000, by the hghest bracket amount
of the corporaton whch t qudates. In the case of any other qudaton
under secton 112(b)(6), the hghest bracket amount of the transferee s not
affected.
Ths secton may be ustrated by the foowng e ampe:
ampe: On December 1, 10 0, the Corporaton s a transferor upon an
e change wth respect to whch the Y Corporaton and the Z Corporaton are
transferees. s a resut of such e change the hghest bracket amounts of the
, Y, and Z Corporatons for 19 1 are 200,000, 175,000, and 125,000, respec-
tvey. - The Corporaton subsequenty qudates the Y Corporaton under
secton 112(b) (6). Its hghest bracket amount for the year after that n whch
such qudaton s competed s 375,000, computed as foows:
ghest bracket amount of the Corporaton mmedatey precedng
qudaton 200,000
Pus: ghest bracket amount of the Y Corporaton mmedatey pre-
cedng qudaton 175,000
ghest bracket amount of the Corporaton for ne t ta abe year 375,000
If the hghest bracket amount of the Corporaton had, because of some other
transacton, been Increased from 200,000 to 00,000 between the tme of the
19 0 e change and the competon of the qudaton of the Y Corporaton, ts
hghest bracket amount for the year after that n whch the qudaton s
competed woud be 500,000, notwthstandng the sum of ts hghest bracket
amount precedng the qudaton and that of the Y Corporaton s 575,000
( 00,000 pus 175,000), snce no corporaton s entted to a hghest bracket
amount n e cess of 500,000.
Seo. 30.752-7. ghest bracket amount for year after e change or qudaton
where more than one transacton n same ta abe year ppcaton of secton
752(d) (S). The hghest bracket amount of a transferor or transferee for any
ta abe year after that n whch severa e changes or qudatons take pace
s to be determned on the bass of the ast such e change or qudaton. If
such determnaton depends upon the hghest bracket amount mmedatey
precedng such ast e change, however, prevous transactons w have to be
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18
taken Into account, . e., the hghest bracket amount mmedatey precedng the
rst transacton s the hghest bracket amount for the ne t ta abe year deter-
mned on the bass of the ast precedng transacton, the hghest bracket amount
mmedatey precedng such ast precedng transacton s the hghest bracket
for the ne t ta abe year determned on the bass of the second precedng trans-
acton, whch process s contnued unt the pont s reached where the hghest
bracket amount for the ne t ta abe year can be determned wthout reference
to the hghest bracket amount precedng such transacton.
Ths secton may be ustrated by the foowng e ampe:
ampe: On pr 1, 19 0, the Corporaton, whch makes ts ncome ta
returns on a caendar year bass, transfers property to the Y Corporaton n an
e change as a resut of whch ts hghest bracket amount for 19 1 becomes
300,000. On une 1, 19 0, when ts day nvested capta s 250,000, t trans-
fers property wth an ad|usted bass of 100,000 to the Z Corporaton n e -
change for a the stock of the Z Corporaton. No other e changes take pace
durng the ta abe year 1(1 0. The hghest bracket amount of the Corpora-
ton for 19 1 s 180,000, computed as foows:
(1) Day nvested capta of the Corporaton for une 1, 19 0 250,000
(2) Less: Increase n day nvested capta of the Z Corporaton 100,000
(3) Day nvested capta of Corporaton une 2, 19 0 150,000
( ) Percentage whch tem (3) s of tem (1) 60
(5) ghest bracket amount of the Corporaton for 19 1, determned
n respect of pr 1 e change 300, 000
(6) ghest bracket amount of the Corporaton for 19 1 (60 per
cent of 300,000) 180,000

Sbc. 80.752-8. ghest bracket amount of transferor and transferee for ta -

abe pear of e change. (a) Genera rue ppcaton of secton 752 (b)(1)
and (c) (/). The hghest bracket amount both of a transferor and a transferee
for the ta abe year h whch an e change takes pace s the average bracket
amount for such year, computed by takng Into account the hghest bracket
amount mmedatey precedng such e change and the hghest bracket amount
computed for the ne t ta abe year wth respect to such e change. Such aver-
age s
(1) The hghest bracket amount mmedatey precedng the e change,
mutped by e number of days n the ta abe year up to and ncudng
the day of the change, pus
(2) The bghent bracket amount for the ne t ta abe year computed
wth respect to such e change, mutped by the number of fays n the
ta abe year remanng after the day of the e change,
dvded by the number of days n the ta abe year. For the purposes of ths
eef on. n the case of a transferee, the term e change ncudes a secton
112(b) (t) qudaton of the character descrbed n secton 752(c)(5) and s
deemed to have taken pace on the day the qudaton Is competed. The
hghest bracket amount mmedatey pror to an e change, of a transferee or-
ganzed upon such e change, s .r 00,000, and the ta abe year of such a trans-
feree s the perod from the date of ts organzaton to the end of ts frst
accountng perod for whch t fes ts return.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On uy 1, 19 0, the Corporaton, whch makes ts ncome ta
returns on the caendar year bass and has not prevousy n 19 0 been a party
to an e change, organzes the Y Corporaton, to whch t transfers property n
e change for a the stock of the Y Corporaton. Under secton 752(b) (2) and
secton :-10.752-3( ) the hghest bracket amount of the Corporaton for 19 1
Is 200,000. The hghest bracket amount of the Corporaton for 19 0 s
therefore 3r 0,000, computed as foows:
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1S5
(1) 500,000 (hghest bracket amount mmedatey precedng
e change) mutped by 183 (number of days n 19 0 up to
and ncudng uy 1) 91, 500,000
(2) Pus: 200,000 (hghest bracket amount for 19 1, computed n
respect of uy 1 e change), mutped by 183 (number of
days uy 2 to December 31, 19 0, both ncusve) 36, 600, 000
(3) Item (1) pus tem (2) 128,100,000
( ) ghest bracket amount for 19 0 ( 128,100,000 (tem (3)) d-
vded by 306 (number of days n 19 0) 300,000
(6) Where more than one e change n ta abe year ppcaton of aecton
152(d) (1) and (2). In the case of a transferor or a transferee whch has been
a party to more than one e change n the same ta abe year, ts hghest bracket
amount for such ta abe year s the amount computed under parngraph (a)
of ths secton n respect of the ast e change, but n computng such amount
prevous e changes must be taken nto account n order to determne the varous
factors whch enter Into such computaton. The hghest bracket amount pre-
cedng such ast e change (whch s the frst factor) s the hghest bracket
amount for such ta abe year computed under paragraph (a) of ths secton n
respect of the ne t to ast e change as though such ta abe year ended on the
date of the ast e change. Thus, n the case of a caendar year corporaton,
whch s a party to two e changes n 19 0, one on uy 1 and one on October
1, the ta payer must use as the hghest bracket amount mmedatey precedng
the October 1 e change the hghest bracket amount determned under para-
graph (a) of ths secton reatve to the uy 1 e change as though the ta abe
year ended October 1 rather than December 31. The hghest bracket amount
for the ne t ta abe year (whch s the second factor) Is the amount computed
under secton 30.752-7, whch takes nto account prevous e changes.
Ths secton may be ustrated by the foowng e ampe:
rampc: The Corporaton, whch m:kes ts ncome ta returns on a caen-
dar year bass, s ether a transferor or transferee n three e changes durng the
year 1910, the frst on March 1, the second on May 1, and the thrd on uy 1.
Precedng the frst e change ts hghest bracket amount s 500,000. Its hghest
bracket amount for the year 19 1, computed n respect of such frst e change,
s 00,000; computed n respect of the second e change, t s 300,000; and,
computed n respect of the ast e change, t s 150,000. (See secton 30.752-7.)
To compute the Corporaton s fna hghest bracket amount for 19 0 It s
necessary to begn wth the frst e change, as foows:
(1) 500,000 (hghest bracket amount precedng frst e change),
mutped by 01 (number of days anuary 1 to March 1) 30, 500, 000
(2) 00.00;) (hghest bracket amount for 19 1, computed n respect
of March 1 e change), mutped by 61 (number of days
March 2 to May 1) 2 , 00,000
(3) Item (1) pus tem (2) 5 ,900,000
( ) ghest bracket amount Immedatey precedng May 1 e -
change (tem (3) dvded by 122, number of days anuary
1 to May 1) 50,000
It Is ne t necessary to make the same computaton reatve to the second,
or May 1, e change, as foows:
(5) 50,000 (hghest bracket amount mmedatey precedng May 1
e change, t. e., tem ( )), mutped by 122 (number of
days anuary 1 to May 1) 5 , 900, 000
(6) 300,000 (hghest bracket amount for 19 1, computed n respect
of Mav 1 e change), mutped by 61 (number of days May
2 to uy 1) 18,300,000
(7) Item (5) pus tem (6) 73,200,000
(8) ghest bracket amount mmedatey precedng uy 1 e change
(tem (7) dvded bv 83, number of days anuary 1 to
uy) 00,000
0 3 1 1 7
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186
The hghest bracket amount mmedatey precedng the uy 1 e change
havng thus been determned, t s now possbe to make a fna determnaton
of the hghest bracket amount of the Corporaton for the year 19 0. Such
hghest bracket amount s 275,000, computed as foows:
(9) 100,000 (hghest bracket amount mmedatey precedng uy 1
e change, . e., tem (8)) mutped by 183 (number of days
anuary 1 to uy 1) 73,200,000
(10) 150,000 (hghest bracket amount for 19 1, computed n
respect of uy 1 e change), mutped by 183 (number of days
uy 2 to December 31) 27, 50,000
(11) Item (9) pus tem (10) 100,650,000
(12) ghest bracket amount of the Corporaton for 19 0 (tem
(11) dvded by 366, number of days n 19 0) 275,000

Gtty T. eveeng,
Commssoner of Interna Revenue.
pproved February 8, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster February 10, 19 1, 9.23 a. m.)
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INCOM T RULINGS. P RT I.
. INT RN L R NU COD ND R NU CTS OF 1939 ND 19 0.
C PT R 1. INCOM T .
SU C PT R . G N R L PRO ISIONS.
P T I. R T S OF T .
S CTION 13. T ON CORPOR TIONS
IN G N R L.
Secton 19.13-5: Ta on corporatons n genera 19 1-7-10607
Ta abe years begnnng after December 31, 1939. T. D. 5038
( so Sectons 19.13-6 and 19.13-7; Secton 1 ,
Secton 19.1 -2; Secton 15, Secton 19.15-1;
and Secton 362, Secton 19.362-1.)
TITI. 26 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
Reguatons 103 amended to conform to secton 101 of the Second
Revenue ct of 19 0.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. to secton 101 of the Second Revenue
ct of 19 0 (Pubc, No. 801, Seventy-s th Congress, thrd sesson),
approved October 8,19 0, such reguatons are amended as foows:
Paracraph 1. The foowng s nserted mmedatey precedng sec-
ton 19.13-1:
Sec. 101. Corporaton Income Ta . (Second Revenue ct of 19 0.)
(a) Ta on Corporatons n Genera. Secton 13(b) of the Interna
Revenue Code, as amended by secton 3 of the Revenue ct of 19 0, s
amended to read as foows:
(b) Imposton or Ta . There sha be eved, coected, and pad for
each ta abe year upon the norma-ta net ncome of every corporaton
the norma-ta net ncome of whch s more than 25,000 (e cept a cor-
poraton sub|ect to the ta mposed by secton 1 , secton 231(a), Suppe-
ment G, or Suppement ) whchever of the foowng ta es s the esser:
(1) Genera buk. ta of 22 o per centum of the norma-
ta net ncome; or
(2) r.T tN.vnv ta (corporatons wth norma-ta net n-
comk sghty more than 2o,ooo). ta of 3,775, pus 35 per
centum of the amount of the norma-ta net ncome n e cess of
25,000.

(e) Ta abe Years to Whch ppcabe. mendments made by tna
secton sha be appcabe ony wth respect to ta abe years begnnng
after December 31, 1939.
(187)
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19.13-5.1
188
Par. 2. Secton 19.13-5, as amended by Treasury Decson 5011, ap-
proved September 2 ,19 0 C. . 19 0-2, 15 , s amended by strkng
out n the ast paragraph 31,96 .30 wherever t appears, and by
nsertng n eu thereof 38,565.89.
Par. 3. Secton 19.13-6, as amended by Treasury Decson 5011, s
amended by strkng out 19 per cent, 31,96 .30, 17,385, and
17,385, wherever they appear, and by nsertng n eu thereof
22 o per cent, 38,565.89, 20,221.50, and 20,221.50, re-
spectvey.
Par. . Secton 19.13-7, as amended by Treasury Decson 5011, s
amended by strkng out 33 per cent, 31,96 .30, ,15 .50,
,15 .50, 19 per cent, and ,968.50, wherever thev appear, and by
nsertng n eu thereof 35 per cent, 38,565.89, ,177.50;
,177.50, 22/o Per cent, andt 5,779.15, respectvey.
Par. 5. The foowng s nserted mmedatey precedng secton
19.1 - 1:
Sec. 101. Corporaton Income Ta . (Second Revenue ct of 19 0.)

(b) Ta on Foregn Corporatons. Secton 1 (e) (1) of the Interna
Revenue Code, as amended by secton 3 of the Revenue ct of 19 0, s
amended to read as foows:
(c) Foregn Corporatons.
(1) In the case of a foregn corporaton engaged n trade or bus-
ness wthn the Unted States or havng on offce or pace of busness
theren, the ta sha be an amount equa to 22 o per centum of the
norma-ta net ncome, regardess of the amount thereof.

(e) Ta abe Years to Whch ppcabe. mendments made by
ths secton sha be appcabe ony wth respect to ta abe years begn-
nng after December 31, 1939.
Par. 6. Secton 19.1 -2, as amended by Treasury Decson 5011, s
amended by strkng out n the frst sentence of the ast paragraph 19
per cent and by nsertng n eu thereof 22 0 per cent.
Par. 7. The foowhg s nserted mmedatey precedng secton
19.15- 1, as amended by Treasury Decson 5011:
Sec. 101. Corporaton Income Ta . (Second Revenue ct of 19 0.)

(d) Defense Ta for Fve Years. The frst sentence of secton 15 of
the Interna Revenue Code, added to such Code by secton -01 of the
Revenue ct of 19 0, s amended to read as foows: In the case of any
ta payer, the amount of ta under ths chapter for any ta abe year be-
gnnng after December 31, 1939, and before anuary 1, 19 5, sha be the
ta computed wthout regnrd to ths secton, ncreased by 10 per centum;
e cept that n the case of a corporaton the ncrease sha be mted to
10 per centum of the ta computed wthout regard to the amendments
made by secton 101 (a), (b),and (c) of the Second Revenue ct of 19 0.
Par. 8. The frst paragraph of secton 19.15-1, as amended by Treas-
ury Decson 5011, s strcken out, and there s nserted n eu thereof
the foowng:
Sec. 19.15-1. Defense ta For ta abe years begnnng after December 31,1939,
and before anuary 1, 19 5, the ta computed n accordance wth Chapter 1 of
the Interna Revenue Code as amended wthout regard to secton 15 (added by
secton 201 of the Revenue ct of 19 0 and amended by secton 101(d) of the
1 Secton 201 of the Revenue ct of 1039 amended sectons 13, 1 , and I by enactng
new sectons 13 and 1 Imposng ta es on the Income of corporatons for ta abe years
begnnng after December 31 1939, and emnatng secton 15. new secton 15, provd-
ng for a defense ta , was added by secton 201 of the Revenue ct of 19 0.
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189
19.13-5.
Second Revenue ct of 19 0) s Increased by 10 per cent thereof. For the purpose
of ths 10 per cent ncrease, the ta whch a to be ncreased s computed before the
appcaton of the foregn ta credt and the credt for ta es wthhed at the
source. In the case of a corporaton, ths 10 per cent Increase sha be computed
uron the bass of the ta determned wthout regard to the amendments made by
secton 101 (a), (b), and (c) of the Second Revenue ct of 19 0.
ampe: The Corporaton, a domestc corporaton, has for the caendar yenr
19 0 a net ncome of 60,000, ncudng nterest on Unted States obgatons
(aowabe as a credt under secton 26(a)) n the amount of 3,000, and dvdends
receved (of the cass aowabe as a credt under secton 26(b)) n the amount
of 10,000. The tota ta upon the corporaton Is 11,0 0, computed as foows:
Net ncome 00,000. 00
Less nterest on Unted States obgatons 3, 000. 00
d|usted net Income 57, 000. 00
Less credt for dvdends receved (80 per cent of 10.000) 8, 500. 00
Norma-ta net ncome 8, TOO. 00
Ta under secton 13(b)(1) as amended by secton 101(a) of the
Second Revenue ct of 19 0 ( 22 per cent of 8.r(O0) 10,718.50
Defense ta under secton 15 (10 per cent of 9,215, ta computed
under secton 13(b) (1) wthout regard to the amendment by secton
101 (a) of the Second Revenue ct of 19 0 (19 per cent of S,500))- 921. 50
Tota ta 11,6 0.00
Secton 15 as amended by secton 101 of the Second Revenue ct of 19 0 pro-
vdes that the defense ta sha be based upon the norma tu computed at rates
provded by secton 13(b) pror to ts amendment by secton 101 of the Second
Revenue ct of 19 0. though, by reason of the aternatve ta provsons, the
norma-ta net ncome must amount to 38,565.89 before the new norma ta rate
of 22.1 per cent s appcabe, the od norma ta rate of 19 per cent was appcabe
If the norma-ta net ncome nmounted to 31,96 .30. Therefore, In the case of
norma-ta net ncomes between 31,96 .30 nnd 38,565.89, the defense ta w be
based on the 19 per cent rate though the permanent norma ta s based on the
graduated rates of the aternatve ta . The norma ta rates both before and
after the appcaton of the defense ta may be ustrated by the foowng tabe:
Perma-
nent rate.
Temporary
addtona
rate (de
fense ta ).
Tota nor-
ma-ta
rate.
Corporatons wth norm ta not Incomes not nc cessof 31,9f .30:
Fnt 5,000
Per cent.
13.60
Per cent.
1.35
1.50
1.70
3.30
Per cent.
1 . 8.1
16.50
18.70
38.30
Ne t 15.000
15 on
Ne t 5,000
17.00
35.00
Ne t 6,96 .30
Corporatons wth norma-ta npt Incomes In e cess of 31,96 .30
but not n e cess of 38,565.89:
Frst 5,000
13.50
15.00
17.00
35 I )
22.10
1.90
1.90
1.00
1.00
1.90
16. 0
16.90
18.90
Ne t 15,000
Ne t 5,000
Ne t 13,565.89
36.90
2 .00
Corporatons wth norma-ta net Incomes In e cess of 38,565.89
Par. 9. The foowng s nserted mmedatey precedng secton
19.362-1, as amended by Treasury Decson 5011:
Sec. 101. Corporaton Income Ta . (Second Revenue ct of 19 0.)

(c) Ta on Mutua Investment Companes. Secton 362(b) of the
Interna Revenue Code, as amended by secton 3 of the Revenue ct of
1910, s amended to read as foows:
(b) Imposton of Ta . There sha be eved, coected, and pad
for each ta abe year upon the Suppement net Income of every
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S 19.15-1.
190
mutua Investment company a ta equa to 22 t per centum of the
amount thereof.

(e) Ta abe Tears to Whch ppcabe. mendments made by
ths secton sha be appcabe ony wth respect to ta abe years begn-
nng after December 81, 1939.
Par. 10. Secton 19.362-1 as amended by Treasury Decson 5011,
s amended by strkng out m the frst sentence 19 per cent and by
nsertng n eu thereof 22 per cent.
(Ths Treasury decson s ssued under the authorty contaned n
secton 101 of the Second Revenue ct of 19 0 (Pubc, No. 801,
Seventy-s th Congress, thrd sesson) and secton 62 of the Interna
Revenue Code (53 Stat., 32).)
Guy T. everno,
Commssoner of Interna Revenue.
pproved February 8, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster February 11, 19 1, 11.50 a. m.)
Secton 19.13-6: Ta under genera rue Ta abe
years begnnng after December 31, 1939.
INT RN L revenue code.
Reguatons 103, amended. (See T. D. 5038, page 187.)
Secton 19.13-7: ternatve ta (corporatons
wth norma-ta net ncomes sghty more
than 25,000) Ta abe years begnnng after
December 31, 1939.
nterna revenue code.
Reguatons 103, amended. (See T. D. 5038, page 187.)
S CTION 1 . T ON SP CI L CL SS S
OF CORPOR TIONS.
Secton 19.1 -2: Ta on speca corporatons
Ta abe years begnnng after December 31, 1939.
nterna revenue code.
Reguatons 103, amended. (See T. D. 5038, page 187.)
S CTION 15. D F NS T FOR FI Y RS.
Secton 19.15-1: Defense ta .
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5038, page 187.)
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191
IS 19.22(a)- .
Secton 19.15-1: Defense ta . 19 1-17-10693
( so Secton 56, Secton 19.56-1.) I. T. 3 70
INT RN L R NU COD .
Where the foregn ta credt to whch a ta payer s entted
equas the tota amount of the norma ta , surta , and defense ta
abty, no defense ta s due. Ths rue s equay appcabe where
the amount of ta pad at the source equas or e ceeds the tota
norma ta , surta , and defense ta abty.
dvce s requested whether s abe for a defense ta amountng
to doars, notwthstandng the fact that her ncome ta return for
the year 19 0 shows that she s entted to a foregn ta credt equa
to the tota ta es norma ta , surta , and defense ta shown to be
due on her return.
The return fed by for the year 19 0 shows an ncome ta a-
bty of O doars (ne 31, page 1, on Form 10 0) based on ncome
derved entrey from sources wthn a possesson of the Unted
States. The defense ta abty s, therefore, doars, that s, 10 per
cent of 10a; doars, whch ta pus the ta abty of 10a; doars
shown on ne 31 of Form 10 0 does not e ceed the foregn ta credt
to whch s entted. It s contended that the foregn ta credt s
deductbe as a credt aganst the norma ta , surta , and defense ta ,
and, therefore, s not abe for the payment of any ta whatever for
the year 19 0.
Secton 201 of the Revenue ct of 19 0 amended the Interna Reve-
nue Code by the nserton after secton 1 of the Code of secton 15,
u Defense Ta for Fve Years, whch provdes n part that:
For the purposes of ths secton, the ta computed wthout regard
to ths secton sha be such ta before the appcaton of the credt provded In
secton 31 ( foregn ta credt ), and the credt provded n secton 32 (ta es
wthhed at the source).
It s hed that s not abe for the payment of the defense ta of
a doars snce the foregn ta credt to whch she s entted under
secton 131 of the Interna Revenue Code equas the tota amount of
the norma ta . surta , and defense ta abty shown on her return.
Ths rung s equay appcabe to those cases where the ta pad at
the source s n e cess of the tota amount of the norma ta , surta ,
and defense ta .
P RT II. COMPUT TION OF N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D FINITION.
Secton 19.22(a)-: What ncuded n gross 19 1-6-10588
ncome. I. T. 3 7
INT RN L R NU COD .
Insurance beneft payments made to ndvduas under secton
202 (a), (b), (c), (d), (e), (f), and (g), Tte II of the Soca Secu-
rty ct, as amended, are not sub|ect to the Federa ncome ta n
the hands of the recpents.
dvce s requested whether the monthy payments made under
the provsons of secton 202 of Tte II of the Soca Securty ct,
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S 19.22(a)-2.
192
as amended by the Soca Securty ct mendments of 1939 (53
Stat., 1360), under whch such payments are to begn n 19 0 nstead
of n 19 2 as orgnay provded are sub|ect to the Federa ncome
ta .
ffectve as of anuary 1, 19 0, there was created under secton
201(a) of Tte II, as amended, on the books of the Treasury of the
Unted States, a trust fund to be known as the Federa Od-
ge and Survvors Insurance Trust Fund, and a amounts credted
thereto are made avaabe for the payment of the nsurance benefts
specfed under secton 202 as amended.
The od-age and survvor s nsurance beneft payments thus pro-
vded for ncude the prmary nsurance benefts as set forth or
defned n secton 202(a); wfe s nsurance benefts, defned n sec-
ton 202(b); chd s nsurance benefts, defned n secton 202(c) ;
wdow s nsurance benefts, defned n secton 202(d); wdow s cur-
rent nsurance benefts, defned n secton 202(e); parent s nsurance
beneft, defned n secton 202(f); and the ump-sum death payments,
as stated m secton 202(g).
It s hed that the sundry nsurance beneft payments made to nd-
vduas under secton 202 (a), (b), (c), (d), (e), (f),and (g),TteII
of the Soca Securty ct, as amended by the Soca Securty ct
mendments of 1939, are not sub|ect to Federa ncome ta n
the hands of the recpents.
Secton 19.22(a)-2: Compensaton for persona 19 1-19-1070
servces. I. T. 3 73
INT RN L R NU COD .
The enstment aowance provded for In secton 9 of the basc
pay ct of une 10, 1922 ( 2 Stat., 625), pad to honoraby ds-
charged ensted men of the rmy and Marne Corps s a bonus or
addtona compensaton pad for reenstment and s sub|ect to
Federa ncome ta .
dvce s requested as to the ta abe status of the enstment aow-
ance pad upon reenstment to honoraby dscharged men of the
rmv and Marne Corps.
Secton 9 of the basc pay ct of une 10, 1922 ( 2 Stat., 625),
after specfyng the monthy base pay of the respectve casses and
grades of warrant offcers and ensted men of the rmy and Marne
Corps, provdes n part as foows:
On and after uy 1, 1922, an enstment aowance equa to nO,
mutped by the number of years served n the enstment perod from whch
he has ast been dscharged, sha be pad to every honoraby dscharged ensted
man of the frst three grades who reensts wthn a perod of three months from
the date of hs dscharge, and an enstment aowance of 2o, mutped by
the number of years served n the enstment perod from whch he has ast been
dscharged, sha be pad to every honoraby dscharged ensted man of the
other grades who reensts wthn a perod of three months from the date of hs
dscharge.
The enstment aowance s a bonus or addtona compensaton
pad for reenstment, the amount of such payment beng measured
by the ength of prevous servce. It s hed, therefore, that the en-
stment aowance n queston s sub|ect to Federa ncome ta .
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193
19.22(a)-1 .
Secton 19.22(a)-3: Compensaton pad other 19 1-10-10625
than n cash. I. T. 3 55
INT RN L R NU COD .
The aowance made by the Unted States under the ct of May 1 ,
19 0 (Pubc, No. 511, Seventy-s th Congress), to offcers of the
Offcers Reserve Corps of the rmy for unforms and equpment s
not sub|ect to Federa Income ta .
dvce s requested whether the aowance by the Unted States to
offcers of the Offcers Reserve Corps under the ct of May 1 , 19 0
(Pubc, No. 511, Seventy-s th Congress), for unforms and equp-
ment s ta abe ncome to the recpent.
The ct n queston s entted n ct to provde aowances for
unforms and equpment for certan offcers of the Offcers Reserve
Corps of the rmy, and reads as foows:
That offcers of the Offcers Reserve Corps of the rmy sha be entted to an
aowance for unforms and equpment of 50 per annum upon competon, n
separate fsca years, of each of ther frst three perods of actve-duty tranng of
three months or ess, foowng ther orgna appontment, durng whch perods
the unform s requred to be worn.
The War Department, Congress, and the courts have recognzed a
dstncton between pay and aowances. s a resut of the decson n
Cfford ones v. Unted States (60 Ct. Cs., 552, T. D. 372 , C. . I -2,
136 (1925)), aowances to rmy offcers for subsstence and quarters
are not sub|ect to Federa ncome ta . The aowance for unforms
and equpment n the nstant case fas wthn the same category as an
aowance for subsstence or quarters, nasmuch as t s furnshed not
as compensaton but to promote the due performance of the offcers
mtary duty.
It s hed, therefore, that the aowance n queston provded to
offcers of the Offcers Reserve Corps of the rmy for unforms and
equpment s not sub|ect to Federa ncome ta .
Secton 19.22 (a) -1 : Canceat on of ndebted- 19 1-8-10609
ness. G. CM. 22528
( so Secton 112(a), Secton 19.112(a)-.)
INT RN L R NU COD .
Method of determnng the amount of canceaton of ndebtedness,
wthn the purvew of secton 270 of the ankruptcy ct, as amended,
obtaned by the M Company as the resut of ts reorganzaton pur-
suant to the pan under whch new bonds pus frst preferred stock
were e changed for od bonds, new bonds pus second preferred
stock were e changed for notes, and new common stock was Issued In
payment of arrears of nterest on the od obgatons.
n opnon s requested as to the method of determnng the amount
of canceaton of ndebtedness, as contempated n secton 270 of the
ankruptcy ct, as amended, obtaned by the M Company as the
resut of ts reorganzaton under the crcumstances heren set forth.
Secton 270 of the ankruptcy ct, as added bv the Chander ct
of une 22, 1938 (52 Stat., 8 0), and amended by ct of uy 1, 19 0
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19.22(a) 1 .
19
(5 Stat., 709; Pubc, No. 699, Seventy-s th Congress, thrd sesson,
C. . 19 0-2, 598), provdes as foows:
Sec. 270. In determnng the bass of property for any purposes of any aw of
the Unted States or of a State mposng a ta upon ncome, the bass of the
debtor s property (other than money) or of such property (other than money)
as s transferred to any person requred to use the debtor s bass n whoe or n
part sha be decreased by an amount equa to the amount by whch the Indebt-
edness of the debtor, not ncudng accrued nterest unpad and not resutng n
a ta beneft on any ncome ta return, has been canceed or reduced n a pro-
ceedng under ths chapter, but the bass of any partcuar property sha not
be decreased to an amount ess than the far market vaue of such property as
of the date of entry of the order confrmng the pan. ny determnaton of
vaue n a proceedng under ths chapter sha not be deemed a determnaton
of far market vaue for the purposes of ths secton. The Commssoner of
Interna Revenue, wth the approva of the Secretary of the Treasury, sha
prescrbe such reguatons as he may deem necessary In order to refect such
decrease n bass for Federa ncome-ta purposes and otherwse carry nto effect
the purposes of ths secton.
That secton, t w be observed, provdes that the bass of the
debtor s property, or property transferred to one requred to use the
debtor s bass, sha be decreased by the amount by whch the ndebted-
ness of the debtor has been canceed or reduced n a corporate reor-
ganzaton n proceedngs under the ankruptcy ct. The queston
s presented as to what consttutes a canceaton of ndebtedness and,
specfcay, whether or not the recept by (1) an open account credtor,
(2) a note hoder, or (3) a bondhoder of a token n substtuton for
the debt aways consttutes an e change rather than a canceaton of
ndebtedness; aso, f such a recept ever consttutes a canceaton of
ndebtedness, the appro mate amount that shoud be consdered a
token payment.
The debt and capta structure of the M Company before reorgan-
zaton under secton 77 of the ankruptcy ct was:
(a) 6 per cent 15-year god bonds 1,000,003
(c) 19,000 shares 7 no par preferred stock.
(d) 115,000 shares no par common stock.
For each 1,000 of the god bonds ndcated n (a) above, the pan
of reorganzaton caed for the ssuance of one 700 per cent bond
and s shares of frst preferred no par stock entted to 50 a share on
qudaton. Ths transacton, n the opnon of ths offce, represents
an e change whch so far as the corporate debtor was concerned rep-
resented to the e tent of 700 of face amount of the 1,000 god bond a
substtuton of ndebtedness of an equa amount evdenced by the new
per cent bond. Wth respect to the remanng 300 of the face
amount of such a god bond, the transacton represented to the cor-
porate debtor the recept by way of an e change of an addton to ts
capta to the e tent of the far market vaue of the s shares of frst
preferred no par stock at the tme such shares became effectve stock
on the date of the entry of the order confrmng the pan of reor-
ganzaton. ny dfference between the remanng : ()0 of the face
amount of such god bond and such far market vaue of the s
shares of stock represents a canceaton of the ndebtedness of the
corporate debtor, and s the amount to be used n the reducton of
Unpad nterest
(6) 7 per cent 10-year god notes
Unpad nterest
00,000
300,000
125,000
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195
19.22(b) ( )- .
the bass of the debtor s property under secton 270 of the Chander
ct amendments to the ankruptcy ct, as further amended by the
ct of Congress approved uy 1, 19 0, supra, provded, however,
that ths ad|ustment sha not n any event reduce the bass of the
debtor s property beow ts far market vaue at the date of the
e change.
The pan of reorganzaton caed for the ssuance n respect of each
1,000 of the god notes descrbed n (b) above of 20 shares of second
preferred no par stock entted to 50 a share n qudaton after the
pror qudaton of the frst preferred stock. s aready ndcated n
the precedng paragraph, ths transacton s deemed by ths offce to
represent an e change whch to the corporate debtor represented a
recept by t as an addton to ts capta of an amount equa to the
far market vaue of the 20 shares of second preferred no par stock on
the date of the entry of the order of confrmaton of the pan of reor-
ganzaton. The dfference between the 1,000 face amount of each
such god note and such far market vaue of the 20 shares of stock
represents a canceaton of ndebtedness wthn the meanng of secton
270, supra. The reducton of bass on account of canceaton s
sub|ect to the mtaton ponted out at the end of the precedng
paragraph.
The pan aso caed for the ssuance of one share of new no par
common stock for each 100 of past due nterest n respect of both the
bonds and notes. The ssuance of the one share of stock n ths con-
necton s consdered to represent a payment of the past due nterest
to the e tent of the far market vaue of the stock (determned as
of the tme ndcated n the two precedng paragraphs), and a can-
ceaton of ndebtedness for the purposes of secton 270, supra, as
to the baance of such nterest. owever, no reducton of bass s,
under sad secton, to be made on account of accrued unpad nterest
whch dd not resut n a ta beneft to the corporate debtor on any
ncome ta return.
It does not appear that open account credtors are nvoved n ths
partcuar reorganzaton, but t s the opnon of ths offce that f
such a credtor partcpates n a pan of reorganzaton n a manner
smar to the hoders of the god bonds and the god notes here n-
voved, the concusons reached heren woud be appcabe.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 22(b). GROSS INCOM : CLUSIONS
FROM GROSS INCOM .
Secton 19.22(b) ( )- : Interest upon 19 1-10-10631
Unted States obgatons. T. D. 50 0
TITL - 28 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
mendng sectons 19.22(b) ( )- and 19.22(b) ( )-6 of Regua-
tons 103, reatng to e empton of Interest upon Unted States ob-
gatons.
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19.22(b) ( )- .
196
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. The foowng s nserted mmedatey precedng sec-
ton 19.22(b) ( )- of Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. :
Punuc Debt ct of 19 1 (approved February 19, 19 1).

Seo. . (a) Interest upon, and gan from the sae or other dsposton
of, obgatons Issued on or after the effectve date of ths ct by the
Unted States or any agency or Instrumentaty thereof sha not have
any e empton, as such, and oss from the sae or other dsposton of
such obgatons sha not have any speca treatment, as such, under
Federa ta cts now or hereafter enacted; e cept that any such obga-
tons whch the Unted States Martme Commsson or the Federa ous-
ng dmnstraton has, pror to the effectve date of ths ct, contracted
to ssue at a future date, sha when ssued bear such ta -e empton
prveges as were, at the tme of such contract, provded n the aw
authorzng ther ssuance. For the purposes of ths subsecton a Terr-
tory, a possesson of the Unted States, and the Dstrct of Coumba, and
any potca subdvson thereof, and any agency or nstrumentaty of
any one or more of the foregong, sha not be consdered as an agency
or nstrumentaty of the Unted States.
(b) The provsons of ths secton sha, wth respect to such obga-
tons, be consdered as amendatory of and suppementary to the respectve
cts or parts of cts authorzng the ssuance of such obgatons, as
amended and suppemented.
Sec. 5. Ths ct, e cept sectons 2 (b) and (c), sha become effectve
on the frst day of the month foowng the date of Its enactment.
Par. 2. Secton 19.22(b) ( )- of Reguatons 103 s amended
(1) by changng the capton thereof to read as foows: Interest
upon Unted States obgatons. (a) Issued pror to March 1, 19 .n
(2) by nsertng n the ast paragraph thereof after the word de-
posted the words pror to March 1,1911 .
(3) by nsertng at the end thereof the foowng:
(6) Issued on or after March 1, 19 1- y vrtue of the provsons of sectons
and 5 of the Pubc Debt ct of 19 1, the e empton prescrbed n subsecton (a)
of ths secton of these reguatons s mted to such bonds, notes, or certfcates
of ndebtedness as have been ssued pror to March 1, 19 1. Under such provsons
of the Pubc Debt ct of 19 1, nterest upon obgatons ssued on or after March
1, 19 1, by the Unted States, or any agency or nstrumentaty thereof, sha
not have any e empton, as such, from Federa ta now or hereafter mposed
e cept n respect of any such obgatons whch the Unted States Martme Com-
msson or the Federa ousng dmnstraton has, pror to March 1, 19 1,
contracted to ssue at a future date. The Interest on such obgatons so con-
tracted to be ssued sha bear such ta -e empton prveges as were at the tme of
such contract provded n the aw authorzng ther ssuance. For the purposes
hereof, under secton (a) of the Pubc Debt ct of 19 1, a Terrtory, a posses-
son of the Unted States, and the Dstrct of Coumba and any potca sub-
dvsons thereof, and any agency or nstrumentaty of any one or more of
the foregong, sha not be consdered as an agency or Instrumentaty of the
Unted States.
Par. 3. Secton 19.22(b) ( )-6 of Reguatons 103 s amended to
read as foows:
Sec. 10.22(b) ( )- . Interest upon Unted States obgatons n the ease of non-
resdent aens and foregn corporatons, not engaged n busness n the Unted
States. y vrtue of secton of the ctory Lberty Loan ct of March 8, 1919,
amendng secton 3 of the Fourth Lberty ond ct of uy 9, 1918, the Interest
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197
19.22(b) ( )- .
receved on and after March 3, 1919, on bonds, notes, and certfcates of ndebted-
ness of the Unted States whe benefcay owned by a nonresdent aen ndvd-
ua, or a foregn corporaton, partnershp, or assocaton, f such ndvdua,
corporaton, partnershp, or assocaton s not engaged n busness n the Unted
States, s e empt from ncome ta es. Such e empton appes ony to such
bonds, notes, or certfcates as have been ssued pror to March 1, 19 1. Interest
derved by a nonresdent aen ndvdua, or by a foregn corporaton, partnershp,
or assocaton on such bonds, notes, or certfcates ssued on or after March 1, 19 1,
s sub|ect to ta as n the case of ta payers generay as provded In secton
19.22(b) ( )- (b).
(Ths Treasury decson s ssued under the authorty contaned n
sectons and 5 of the Pubc Debt ct of 19 1 (Pubc Law 7, Seventy-
seventh Congress) and secton 62 of the Interna Revenue Code (53
Stat, 32 (26 U. S. C, Sup. ,62)).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved February 28, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 3, 19 1, 3.52 p. n.)
Secton 19.22(b) ( ) : Interest upon Unted 19 1-1 -10665
States obgatons. Mm. 518
Ta abe and e empt status under Federa ncome ta aws of
nterest on Unted States savngs bonds ssued (1) pror to March
1. 19 1, and (2) on and after March 1, 19 1.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 21, 19 1.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
INCR M NT IN LU S INT R ST.
1. The ssuance of Unted States savngs bonds s authorzed by
the Second Lberty ond ct of 1917, as amended. For the pur-
pose of determnng ta es and ta e empton, the aw provdes that
the ncrement n vaue represented by the dfference between the prce
pad for Unted States savngs bonds and the redempton vaue re-
ceved therefor (whether at or before maturty) sha be consdered
as nterest.
UNIT D ST T S S INGS ONDS ISSU D PRIOR TO M RC 1, 19 1.
2. Under e stng aw nterest on Unted States savngs bonds s-
sued pror to March 1, 19 1, s e empt from ncome or profts ta es
now or hereafter mposed by the Unted States e cept surta es, e cess
profts and war profts ta es; and s e empt from such e cepted ta es
to the e tent of nterest on a prncpa amount of bonds not n e cess
of 5,000 (ncudng other bonds owned by the ta payer whch were
ssued under the authorty of the Second Lberty ond ct, as
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19.22(b) ( )- .
198
amended). There s no war profts ta now mposed by the Unted
States to whch such nterest s sub|ect. The decared vaue e cess
profts ta and the e cess profts ta now mposed by the Unted
States and to whch such nterest s sub|ect are appcabe ony to
corporatons.
S L CTION OP ONDS.
3. Ta payers may seect each year the bonds ssued pror to March
1, 19 1, comprsng the prncpa amount of 5,000, the nterest from
whch they desre to treat as ta -e empt ncome for the year under
consderaton. The bonds seected may therefore consst of Unted
States savngs bonds and Treasury bonds ssued pror to March 1,
19 1, a of whch bonds were ssued under the authorty of the Sec-
ond Lberty ond ct, as amended.
. In determnng whether the sad prncpa amount of such bonds
ssued pror to March 1, 19 1, owned by a ta payer s wthn or n
e cess of 5,000, the ssue or purchase prce ony s consdered as
prncpa of Unted States savngs bonds and not the maturty vaue.
UNIT D ST T S S INGS ONDS ISSU D ON ND FT R M RC 1, 19 1.
5. Under the provsons of the Pubc Debt ct of 19 1, nterest on
Unted States savngs bonds ssued on and after March 1, 19 1, s not
e empt from ncome or profts ta es now or hereafter mposed by the
Unted States.
M T OD OF R PORTING INT R ST.
6. very person ownng Unted States savngs bonds s requred
by aw to submt n hs Federa ncome ta return a statement show-
ng the amount of such obgatons owned by hm and the ncome
receved therefrom.
7. Ta payers who reguary empoy the cash recepts and dsburse-
ments method of accountng shoud return the nterest (ncrement n
vaue) on Unted States savngs bonds as ncome (ta abe or e empt),
for Federa ncome or profts ta purposes, for the ta year n whch
payment of the redempton vaue of the bonds s receved (whether
before or at maturty); provded, however, that n the case of the
death of a ta payer the nterest (ncrement n vaue) earned up to
the date of hs death sha be returned as ncome for the ta abe
perod n whch fas the date of hs death.
8. Ta payers who reguary empoy the accrua method of account-
ng shoud return the nterest (ncrement n vaue) on Unted States
savngs bonds as ncome (ta abe or e empt), for Federa ncome or
profts ta purposes, for each ta year when and to the e tent that
t s earned durng the year accordng to the terms of the bonds and
n the amount ndcated n the tabe of redempton vaues shown
thereon.
9. Mmeograph 5166, dated February 1 , 19 1, s revoked. In-
qures regardng ths mmeograph shoud refer to the number thereof
and the symbos IT:TM.
Tmothy C. Moonet,
ctng Commssoner.
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199
19.22(b) t )- .
Secton 19.22(b) ( )- : Interest upon Unted
States obgatons.
( so Secton 19.22(b) ( )-6; Secton 2 ;
Secton 116.)
INT RN L R NU COD .
Status for Federa ncome ta purposes of nterest on and gan
or oss from the sae or other dsposton of Natona Defense
Seres Treasury bs and notes Issued under the Second Lberty
ond ct, as amended by the Revenue ct of 19 0.
Inqury has been made reatve to the status for Federa ncome ta
purposes of nterest on and gan or oss from the sae or other ds-
poston of Natona Defense Seres obgatons of the Unted States,
ssued under the authorty of secton 21 of the Second Lberty ond
ct, as amended by secton 302 of the Revenue ct of 19 0, approved
une 25,19 0.1 ( ct approved September 2 , 1917, ch. 56, secton 21,
as added February ,1935, ch. 5, secton 5, 9 Stat., 21; amended May
26,1938, ch. 285, secton 2,52 Stat., 7; further amended uy 20, 1939,
ch. 336, 53 Stat., 1071; U. S. C, Tte 31, secton 757b; further amended
une 25, 19 0, secton 302, Revenue ct of 19 0, 5 Stat., 526, C. .
19 0-2, 7.)
(1) Interest on and gan from the sae or other dsposton of Na-
tona Defense Seres Treasury bs are whoy e empt from a
ta es now or hereafter mposed upon ncome or profts by the Unted
States, any State, or any of the possessons of the Unted States, or
by any oca ta ng authorty thereof, and no oss from the sae or
other dsposton of such bs s aowabe as a deducton, or other-
wse recognzabe, for the purposes of any ta now or hereafter m-
posed by the Unted States or any of ts possessons. The amount of
the dscount at whch the bs are orgnay sod by the Unted States
s consdered to be nterest. (Secton 5 (b) and (d) of the Second
Lberty ond ct, as amended and here effectve;1 ct approved Sep-
tember 2 ,1917, ch. 56, secton 5, 0 Stat., 290; amended pr , 1918,
ch. , secton , 0 Stat., 50 ; further amended March 3,1919, ch. 100,
secton 3, 0 Stat., 1311; further amended une 17,1929, ch. 26, 6 Stat.,
19; further amended une 17, 1930, ch. 512, 6 Stat., 775; further
amended February ,1935, ch. 5, sectons 2 and 3, 9 Stat., 20; U. S. C,
Tte 31, secton 75 .)
(2) Interest on Natona Defense Seres Treasury notes whch
have been ssued s whoy e empt from a ta es now or hereafter
mposed upon ncome and profts by any State or any of the posses-
sons of the Unted States, or by any oca ta ng authorty thereof,
but, e cept as stated n paragraph (3) beow, s not whoy or partay
e empt from any ncome, e cess-profts, and war-profts ta es now or
hereafter mposed by the Unted States, ncudng norma ta es and
surta es. (Secton 18(b)( ) of the Second Lberty ond ct, as
amended and here effectve;1 ct approved September 2 , 1917, ch.
56, secton 18, as added March 3,1919, ch. 100, secton 1, 0 Stat., 1309;
amended November 23,1921, ch. 136, secton 1 01, 2 Stat., 321; further
amended anuary 30, 193 , ch. 6, secton 1 (a) (3), 8 Stat., 3 3; and
Further amended or suppemented, effectve March 1, 19 1, by the Puhc Debt ct of
19 1, approved February 19. 1 M1 (pnsre 5 6, ths Ruetn) : but such amendments or suppe-
ments are not appcabe to the Natona Defense Seres obgatons here Invoved,
whch were ssued pror to March 1, 19 1.
19 1-20-10715
I. T. 3 75
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19.22(c)-8.
200
further amended February , 1935, ch. 5, secton , 9 Stat, 20; U. S.
C, Tte 31, secton 753.) Gan or oss from the sae or other dspos-
ton of the notes s recognzed and s ncudbe n or deductbe from
gross ncome under and sub|ect to the appcabe provsons of the
Interna Revenue Code, as amended.
(3) Interest on such Natona Defense Seres Treasury notes
whe benefcay owned by a nonresdent aen ndvdua, or a for-
egn corporaton, partnershp, or assocaton, f such ndvdua, cor-
poraton, partnershp, or assocaton s not engaged n busness n the
Unted States, s whoy e empt from a ta es now or hereafter m-
posed upon ncome or profts by the Unted States, any State, or any
of the possessons of the Unted States, or by any oca ta ng authorty
thereof. (Secton 3 of the Fourth Lberty ond ct, as amended by
secton of the ctory Lberty Loan ct, approved March 3, 1919,
and here effectve;1 ct approved uy 9, 1918, ch. 1 2, secton 3, 0
Stat., 8 5; amended March 3, 1919, ch. 100, secton , 0 Stat., 1311;
U. S. C, Tte 31, secton 750.) (See secton 19.22(b) ( )-6 of Regua-
tons 103, as amended bv Treasury Decson 50 0, approved February
28,19 1 (page 195, ths uetn).)
Secton 19.22(b) ( )-6: Interest upon Unted States
obgatons n the case of nonresdent aens and
certan foregn organzatons.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 50 0, page 195.)
Secton 19.22(b) ( )-6: Interest upon Unted States
obgatons n the case of nonresdent aens and
certan foregn organzatons.
INT RN L R NU COD .
Interest on Natona Defense Seres obgatons. (See I. T. 3 75,
page 199.)
S CTION 22(c). GROSS INCOM : IN NTORI S.
Secton 19.22(c)-8: Inventores of reta 19 1-23-107 0
merchants. T. D. 50 8
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RTS 3, 9. ND
19. INCOM T .
Reguatons 103, O, 1M, and 86, amended. Inventores of reta
merchants.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngtan, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.22(c)-8 of Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. , artce 22(c)-8 of Reguatons 101
1 ee footnote on page 199.
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201
19.22(d)- .
Part 9, Tte 26, Code of Federa Reguatons, 1939 Sup. , artce
22(c)-8 of Reguatons 9 Part 3, Tte 26, Code of Federa Regua-
tons , and artce 22(c)-8 of Reguatons 86, are amended by addng
at the end thereof the foowng:
ta payer who prevousy has determned nventores n accordance wth the
foregong, e cept that, to obtan a bass of appro mate cost or market, whchever
Is ower, the practce has been foowed, consstenty and unformy, of ad|ustng
the reta seng prces of the goods ncuded n the openng nventory and pur-
chased durng the year for mark-ups but not for mark-downs, may contnue such
practce sub|ect to the condtons heren prescrbed. The ad|ustments must be
bona fde and consstent and unform. Where mark-downs are not ncuded n
the ad|ustments, mark-ups made to cance or correct mark-downs sha not be
ncuded; and the mark-ups ncuded must be reduced by the mark-downs made
to cance or correct such mark-ups.
In no event sha mark-downs not based on actua reducton of reta saes
prces, such as mark-downs based on deprecaton and obsoescence, be recognzed
n determnng the reta seng prces of the goods on hand at the end of the
year.
Secton 19.22(c)-8 of Reguatons 103 s further amended by nsert-
ng, mmedatey foowng the concudng paragraph of the amenda-
tory matter above set forth, an addtona paragraph readng as
foows:.
ta payer who prevousy has determned nventores wthout foowng the
practce of emnatng mark-downs n makng ad|ustments to reta seng
prces, may adopt such practce, provded permsson to do so s obtaned n
accordance wth, and sub|ect to the terms provded by, secton 19. 1-2. ta -
payer fng a frst return of ncome may adopt such practce sub|ect to approva
by the Commssoner upon e amnaton of the return.
(Ths Treasury decson s prescrbed pursuant to sectons 22(c)
and 62 of the Interna Revenue Code (53 Stat., 11, 32), and sectons
22(e) and 62 of the Revenue cts of 1938, 1936, and 193 (52 Stat.,
59, 80, 9 Stat., 1658, 1673, 8 Stat., 688, 700; 26 U. S. C, 22. 62,
and Sup.).)
Gut T. evkrno,
Commssoner of Interna Revenue.
pproved une 2, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 2, 19 1, 12.08 p. m.)
S CTION 22(d). GROSS INCOM : IN NTORI S-
L CTI M T OD.
Secton 19.22 (d)-: Inventores under 19 1-10-10626
eectve method. I. T. 3 56
INT RN L revenue code.
panaton of severa provsons of the Income ta reguatons
wth respect to the use of the ast n, frst out method of vaung
nventores for Federa ncome ta purposes permssbe In certan
ndustres under secton 22(d) of the Interna Revenue Code.
dvce s requested wth respect to a number of questons reatng
to the so-caed ast n, frst out method of vaung nventores for
Federa ncome ta purposes as permtted n certan ndustres by
secton 22(d) of the Interna Revenue Code, reference beng made to
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19.22(d)- .
202
severa provsons of the ncome ta reguatons whch are stated to
requre carfcaton.
In order more ceary to understand the provsons prescrbed by
the reguatons, t s mportant that the genera purpose or egsatve
scheme of the ct be borne n mnd and that the reguatons be gven
ther natura meanng wthn the scope of such statutory purpose.
The frst two questons reate to the provsons of secton 19.22(d)-2
of Reguatons 103, concernng the requrements ncdent to adopton
and use of the so-caed eectve nventory method.
It s to be observed that the ncome ta reguatons ssued under
the Interna Revenue Code recognze varous methods of computng
ncome for ncome ta purposes, and that even under the accrua
method of computng ncome the reguatons promugated wth re-
spect to secton 22(c) of the Code recognze nventores at cost, at
cost or market, whchever s ower, at market vaue, by the farm
prce method, by the reta method, etc., and secton 22(d) makes
avaabe to tanners and to producers and processors of certan non-
ferrous metas an eectve method of nventoryng raw materas whch
because of ntermngng coud not be dentfed wth specfc nvoces.
It s aso to be observed that secton 22(d) of the Code, pror to ts
amendment by secton 219 of the Revenue ct of 1939, requred a
nventores of such materas to be taken at cost, ncudng the n-
ventory as of the cose of the precedng ta abe year even though such
precedng ta abe year began pror to anuary 1; 1939; that the change
to such method shoud be made n accordance wth such reguatons as
were propery prescrbed as necessary to prevent the avodance of
ta ; and that the reguatons n queston (artce 22(d)-3, Regua-
tons 101) requred of the ta payer an agreement to make such ad-
|ustments and to pay such ta es wth respect to such ad|ustments n
the nventores of pror ta abe years or otherwse, as the Commssoner
deems necessary to prevent the change n method from resutng n
avodance of ta . The obvous purpose of the ct pror to ts amend-
ment was to requre the use of nventores under the condtons de-
scrbed n secton 22(c) of the Code and to requre such nventores
to be vaued n accordance wth the provsons contaned n artces
22(c)- to 22(c)-8 of Reguatons 101 (as made appcabe to the Code
by Treasury Decson 885 (C. . 1939-1 (Part 1), 396)), but to grant
a ta payer of the partcuar cass descrbed n secton 22(d) the rght
of eectng to use a fuy descrbed method of vauaton wth respect
to a ceary defned porton of hs nventory. In other words, the
eecton granted by secton 22(d) was n substance the prvege of
ftng a porton of the nventory from the contro of secton 22(c)
and the reguatons thereunder wthout n-any way affectng the re-
mander of the nventory.
Secton 219 of the Revenue ct of 1939 not ony amended secton
22(d) of the Code and made such amendment appcabe to ta abe
years begnnng after December 31, 1938, but t aso amended secton
22 (d) of the Revenue ct of 1938 to read as foows:
(d) If the Inventory method descrbed n secton 22(d)(1), as amended, of
the Interna Revenue Code s used for the frst ta abe year begnnng after
December 31, 1038, then, n determnng ncome for the precedng ta abe year,
the cosng nventory of such year of the goods specfed n the appcaton under
secton 22(d) (2). as amended, of such Code sha be nt cost.
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203
19.22(d)- .
The amendment of secton 22(d) of the Code refects no change n
the genera purpose of the aw other than to e tend the rght of eec-
ton to a ta payers requred by secton 22(c) to make nventores
and to make the eecton appcabe to a or any porton of such n-
ventores.
On the bass of the foregong, the foowng e panatons are made:
(1) ta payer who adopts the ast n, frst out method for
a specfed porton of hs nventory may contnue to take the remander
of hs nventory for ta purposes on a cost or market bass, or on any
other bass whch has been propery adopted for pror years and ap-
proved by the Commssoner: sub|ect, however, to the requrement of
secton 19.22(d)-3 whch reads as foows:
s a condton to the ta payer s use of the eectve nventory method, the
Commssoner may requre that the method e uspd wth respect to goods other
than those specfed n the ta payer s statement of eecton f, n the opnon of
the Commssoner, the use of such method wth respect to such other goods
s essenta to a cear refecton of ncome.
Furthermore, attenton s drected to the foowng anguage of
secton 19.22 (c)-2:
In respect of norma goods, whchever bass s adopted must be apped wth
reasonabe consstency to the entre nventory e cept as to those poods nventored
under the eectve method authorzed by secton 22(d). Itacs supped.
(2) If a ta payer s manufacturng processes and accountng records
are such as to permt a cear refecton of ncome by the use of n-
ventores consstng of raw materas vaued at cost by the ast n,
frst out method and goods n process and fnshed goods vaued at
cost or market whchever s ower hy the frst n, frst out method,
then there s nothng n the aw or reguatons whch woud prohbt
the use of the so-caed eectve nventory method n ths manner.
(3) ta payer s not aowed to use as hs openng nventory for
goods under the ast n, frst out method the vauaton used at
the cose of the precedng year wthout any ad|ustment, uness such
cosng nventory was propery taken at cost under the provsons
of secton 19.22(c)-3 of Reguatons 103 and the correspondng artce
of pror reguatons. Where the cosng nventory of the precedng
year was taken on any other bass (as, for nstance, the bass of cost
or market, whchever s ower, under secton 19.22(c)- ), the openng
nventory for goods under the ast n, frst out method must be
ad|usted to cost, and n addton the cosng nventory of the precedng
year must kewse be ad|usted to cost n accordance wt the rue
prescrbed by secton 219(c) of the Revenue ct of 1939.
The agreement requred by secton 19.22(d)- of Reguatons 103,
as set forth by the appcaton (Form 970 (revsed)) for the adopton
of the eectve method, s as foows:
The ta payer hereby agrees to such ad|ustments ncdent to the change to
the eectve method, or to the use of such method, or to any ater change from
uch method, n the nventores of pror ta abe years or otherwse, as the
Commssoner of Interna Revenue upon e amnaton of the ta payer s returns
for the years nvoved may deem necessary n order that the true ncome of
the ta payer w be ceary refected .
s to ts genera appcaton, the reguatory provson n queston,
suppemented by the agreement tsef, woud seem to requre no
carfcaton.
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19.22(d)-5.
20
s to whether ad|ustments may be made ony wth respect to perods
after the adopton of the eectve method or wth respect to pror
ta abe perods, a perods are covered by the reguatons, whether
before or after the adopton of the eectve method. No stuaton
s envsaged at present whch woud requre ad|ustments of a perod
pror to the adopton of the eectve method, other than the ad|ustment
of the nventory of the ast precedng year to actua cost. s to years
for whch assessment of addtona ta es s barred by the statute of
mtatons, there s no requrement that the ta payer wave the
statute. owever, f a correct refecton of ncome requres an
ad|ustment to be made n a year for whch assessment s barred,
approva of the change to the eectve method may be wthhed and
not granted e cept for a subsequent year.
( ) One of the nqures refers to that porton of secton 19.22
(d)- reatng to the proper treatment of so-caed frm purchase and
saes contracts, and t s suggested that secton 19.22 (d)- seems to
contempate the prcng of frm purchase and saes contracts on the
same bass as the remander of the eectve nventory, rrespectve of
ther frm character. owever, the reguatons as to the treatment of
frm purchase and saes contracts are cear. They provde that:
If the eectve nventory method s used by a ta payer who reguary and con-
sstenty, n a manner smar to hedgng on a futures market, matches purchases
wth saes, then frm purchase and saes contracts (. e., those not egay sub|ect
to canceaton by ether party) entered nto at f ed prces on or before the date
of the nventory may be ncuded n purchases or saes, as the case may be, for
the purpose of determnng the cost of goods sod and the resutng proft or oss,
provded that ths practce s reguary and consstenty adhered to by the ta -
payer and that, n the opnon of the Commssoner, ncome s ceary refected
thereby.
If the condtons theren stated are comped wth, the purchase and
saes contracts may be ncuded as a part of the nventory.
Secton 19.22(d)-5: Revocaton of eecton. 19 1-20-10716
I. T. 3 76
INT RN L R NU COD .
The M Company s not precuded from adoptng the eectve
method of nventory, provded n secton 22(d) of the Interna
Revenue Code, for the caendar year 19 0 by reason of havng sub-
mtted a fnanca report to a credtor coverng the fsca year ended
May 31, MO, n whch report the eectve method of nventory
was not used.
dvce s requested whether the M Company s precuded from
adoptng the eectve method of nventory for Federa ncome ta
purposes for the caendar year 19 0 by reason of havng submtted a
fnanca report to a credtor coverng the fsca year ended May 31,
19 0, n whch report the eectve method of nventory was not used.
Secton 22(d)2( ) of the Interna Revenue Code, as amended by
secton 219 of the Revenue ct of 1939, reads as foows:
(2) The eectve method descrbed n paragraph (1) may be used
( ) Ony f the ta payer estabshes to the satsfacton of the Commssoner
that the ta payer has used no procedure other than that specfed In subpara-
graphs ( ) and (C) of paragraph (1) n Inventoryng (to ascertan ncome,
proft, or oss, for credt purposes, or for the purpose of reports to sharehoders,
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205
15 19.23(a)- .
partners, or other propretors, or to benefcares) such goods for any perod
begnnng wth or durng the frst ta abe year for whch the method descrbed
n paragraph (1) s to be used.
Secton 19.22(d)-2(5), Reguatons 103, reads as foows:
The ta payer sha estabsh to the satsfacton of the Commssoner that the
ta payer has not, n the ta abe year for whch the eectve nventory method
Is frst used or n any subsequent ta abe year, used n determnng ncome, proft,
or oss, for credt purposes, or for the purpose of reports to sharehoders, part-
ners, or other propretors, or to benefcares, any nventory method other than
that referred to n secton 19.22(d)-1 or at varance wth the requrement referred
to n paragraph (3) of ths secton, the ta payer s use of market vaue n eu
of cost not beng consdered at varance wth ths requrement;
The term ta abe year s defned n secton 8 of the Interna
Revenue Code as foows:
Sec 8. Defntons.
When used n ths chapter
(a) Ta abe Year. Ta abe year means the caendar year, or the fsca
year endng durng such caendar year, upon the bass of whch the net ncome s
computed under ths Part. Ta abe year ncudes, n the case of a return
made for a fractona part of a year under the provsons of ths chapter or under
reguatons prescrbed by the Commssoner wth the approva of the Secretary,
the perod for whch such return s made.
Inasmuch as the perod for whch the fnanca report n queston
was made dd not begn wth or durng the caendar year 19 0, the use
of such report does not precude the adopton of the eectve method
of nventory for the caendar year 19 0.
S CTION 23(a). D DUCTIONS FROM GROSS
INCOM : P NS S.
Secton 19.23(a)-: usness e penses. 19 1-8-10616
I. T. 3 52
INT RN L R NU COD ND PRIOR R NU L WS.
Uness a ta payer s actvtes resutng n the producton of
ta abe ncome consttute the carryng on of a trade or busness,
the ordnary and necessary e penses pertanng thereto are not de-
ductbe from gross ncome for Federa ncome ta purposes.
I. T. 2751 (C. . III-1, 3 (193 )), I. T. 2579 (C. . -2, 129
(1931)), and O. D. 877 (C. . , 123 (1921)) revoked.
Inqury has been made reatve to the aowance under secton 23(a)
of the Interna Revenue Code of e penses ncurred n the producton
of ta abe ncome from sources other than the ta payer s trade or
busness.
On February 3, 19 1, the Supreme Court of the Unted States n
ffgns v. Commssoner (61 S. Ct., 75, page 339, ths uetn)
affrmed the |udgment of the Crcut Court of ppeas for the Second
Crcut n that case (111 Fed. (2d), 795), and hed that the ta payer,
who had e tensve nvestments n rea estate and ncome-producng
securtes, was not carryng on a trade or busness wthn the meanng
of secton 23(a) of the Revenue cf of 1932 so far as hs nvestments
n stocks and bonds were concerned, and, therefore, was not entted
to deduct e penses ncurred n connecton wth ther handng. It was
conceded that the ta payer was engaged n busness wth respect to the
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19.23(a)-2. 206
rea estate whch he owned. The Court hed further that the e -
penses of the ta payer s offce whch handed both hs rea estate and
nvestment matters were capabe of apportonment.
I. T. 2751 (C. . III-1, 3 (193 )) hods (syabus) :
The ordnary and necessary e penses pad or Incurred durng the ta abe
year wth respect to the management, protecton, and conservaton of propertes
producng ta abe ncome are deductbe from gross ncome.
I. T. 2579 (C. . -2,129 (1931)) reads as foows:
If a safety depost bo s used prmary n connecton wth the safeguardng
of ncome-producng securtes the rent pad therefor woud consttute a de-
ductbe busness e pense.
O. D. 877 (C. . ,123 (1921)) reads as foows:
ta payer whose ncome s derved prncpay from nvestments n stocks
and bonds may deduct as a busness e pense the rent of an offce and the cost
of cerca hep f he can show n hs return that such e pense s ordnary and
necessary wthn the meanng of secton 21 (a) 1 of the Revenue ct of 1918.
The foregong rungs are nconsstent wth the decson n ggna
v. Commssoner, supra, and they are hereby revoked. Uness a ta -
payer s actvtes resutng n the producton of ta abe ncome con-
sttute the carryng on of a trade or busness, the ordnary and neces-
sary e penses pertanng thereto are not deductbe from gross n-
come for Federa ncome ta purposes.
Secton 19.23(a)-: usness e penses. 19 1-6-10589
( so Secton 19.23(a)-2; Secton 23(1), I. T. 3 8
Secton 19.23 (1)-1.)
INT RN L R NU COD .
Deductbty for Federa ncome ta purposes of varous e -
penses ncurred by teachers n connecton wth ther empoyment.
dvce s requested as to the deductbty for Federa ncome ta
purposes of varous e penses ncurred by teachers n connecton wth
ther empoyment.
The dues pad by teachers to professona socetes, the prce of
ther subscrptons for educatona |ournas connected wth ther
professon, and the e penses of traveng and meas and odgng
ncurred n attendng teachers conventons n ths country, f they
are not rembursed for such e penses, are consdered ordnary and
necessary busness e penses and are deductbe from ther compensa-
tons as teachers n determnng net ncome for Federa ncome ta
purposes. Records of such e pendtures must be kept to substantate
the deductons camed.
The cost of technca books requred by and purchased by teachers
specfcay for use n connecton wth ther professona work s a
capta e pendture whch may be e tngushed through annua deduc-
tons for deprecaton.
Secton 19.23(a)-2: Traveng e penses.
INT RN L R NU CODa
Teachers. (See I. T. 3 8, above.)
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19.23(b)- .
Secton 19.23(a)-2: Traveng e penses. 19 1-19-10705
I. T. 3 7
INT RN L R NU COD ND R NU CT OF 1021.
nava offcer who s on permanent duty afoat and who mantans
a home esewhere may deduct as a busness e pense ony that porton
of the amount e pended by hm for subsstence as e ceeds hs money
subsstence aowance, such aowance not beng ncuded In gross
ncome. Such nava offcer who does not muntau a home esewhere
s not entted to a deducton for any part of the amount e pended
by hm for subsstence.
L T. 1 97 (C. . 1-2, 89 (1922)) modfed.
Reconsderaton of the frst ssue presented n I. T. 1 97 (C. . 1-2,
89 (1922)) has been requested.
In that rung t was ned n part that f a nava offcer on permanent
duty afoat s away from home he may deduct as a busness e pense
the entre amount e pended by hm for subsstence.
Commssoned offcers of the Navy on the actve st are entted at a
tmes, n addton to pay, to a money aowance for subsstence. nava
offcer on permanent duty afoat s not regarded by hs department as
beng n a trave status and receves ony a money subsstence aow-
ance. ddtona per dem or subsstence aowances are receved when
the offcer s n a trave status.
Upon reconsderaton of I. T. 1 97, supra, t s hed that a nava off-
cer who s on permanent duty afoat (not a trave status) and who man-
tans a home esewhere may deduct as a busness e pense ony that por-
ton of the amount e pended by hm for subsstence as e ceeds hs
money subsstence aowance, such aowance not beng ncuded n
gross ncome. Such an offcer who does not mantan a home esewhere
s not entted to a deducton for any part of the amount e pended by
hm for subsstence.
I. T. 1 97, supra, s modfed accordngy.
S CTION 23(b). D DUCTIONS FROM GROSS
INCOM : INT R ST.
Secton 19.23(b)-: Interest. 1911-25-10750
I. T. 3 8
INT RN L R NU COD .
Deductbty of nterest charged by a broker n connecton wth
a oan on a margna account where the ta payer s (customer s)
books are kept on the cash recepts and dsbursements bass.
dvce s requested whether a ta payer who keeps hs books and
fes hs Federa ncome ta returns on the cash recepts and dsburse-
ments bass s entted to a deducton for nterest charged by a stock
broker for a oan on a margna stock purchase where the dvdends
and other credts due hm were not used to cover the nterest charges
but were pad to the ta payer.
In the nstant case, nterest was charged each month to the ta -
payer on the books of the broker and the ncrease n the debt baance
of the ta payer s margna brokerage account at the end of the year
was the amount of the nterest charged to the account. The queston
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19.23(c)- .
20S
nvoved s whether the reducton of the ta payer s equty n the secur-
tes hed by the broker occasoned by the nterest charges consttutes
constructve payment of the nterest.
Secton 23(b) of the Interna Revenue Code reads as foows:
In computng net Income there sha be aowed as deductons:

(b) Intebest. Interest pad or accrued wthn the ta abe year on n-
debtedness, e cept on Indebtedness ncurred or contnued to purchase or carry
obgatons (other than obgatons of the Unted States ssued after September
2 , 1017, and orgnay subscrbed for by the ta payer) the nterest upon whch
s whoy e empt from the ta es mposed by ths chapter.
Ordnary, nterest charged by a broker on a oan to a customer
reduces any credt the customer may have whch s otherwse avaabe
for wthdrawa by hm on the date on whch the nterest charge s
made. When a customer s wthdrawabe credt s thus reduced at any
tme wthn the ta abe year, payment of nterest has been effected. If
the wthdrawabe credt of the customer-ta payer reportng ncome on
the cash recepts and dsbursements bass s nsuffcent to cover the
entre nterest charge, he s entted to a deducton ony to the e tent
that such credt offsets the nterest charge. No deducton may be
aowed for nterest charges whch have not been thus offset by wth-
drawabe credt, regardess of the fact that on the date on whch the
nterest charge s made, or at the end of the customer s ta abe year,
the then market vaue of coatera hed by the broker may be suffcent
to cover the amount of the oan owng to the broker pus the accrued
nterest thereon. The mere reducton n the ta payer s equty n the
securtes hed by the broker does not consttute constructve payment
of the nterest.
S CTION 23(c). D DUCTIONS FROM GROSS
INCOM : T S G N R LLY.
Secton 19.23 (c) -1: Ta es. 19 1-3-1056
L T. 3 1
INT RN L R NU COD .
The M Company, whch faed to add to ts saes prces durng
1935, 1936, and 1937 and to coect from ts vendees certan New
York Cty saes ta es under the beef that such ta es were not due
on the partcuar saes, may take the amounts thereof as deductons,
for Federa ncome ta purposes, as busness e penses, but not as
ta es, n the year 1939, the year n whch abty of the company
was defntey determned and the ta es pad. (I. T. 2902 (C. .
I -2, 67 (1935)) hed that New York Cty saes ta es are deduct-
be as such ony by the vendee.)
dvce s requested as to the deductbty, for Federa ncome ta
purposes, of certan addtona New York Cty saes ta es for 1935,
1936, and 1937, assessed aganst the M Company n 1939 and pad by
t n that year. The crcumstances are set forth beow.
The greater porton of the addtona ta es was due to the fact that
the M Company had not added any saes ta on matera nstaed
under ump-sum contracts. It consdered the nstaatons as beng
aff ed to reaty and the saes not sub|ect to ta because made for the
mprovement of rea property. The ta authortes rued otherwse
and n 1939 the company was assessed accordngy. so, a sma
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209
5 19.23(c)- .
porton of the addtona assessment covered ta es on saes of matera
shpped from wthout the State nto New York Cty whch the com-
pany consdered nterstate commerce and the saes not sub|ect to
the ta . The ta authortes aso rued that such saes were ta abe
and that rung has snce been uphed bv the Unted States Supreme
Court.
The ureau hed n I. T. 2902 (C. . I 2, G7 (1935)) that New
York Cty saes ta es are deductbe by the purchaser or vendee for
Federa ncome ta purposes. though the vendor s abe for
coecton and payment of the saes ta es, t s abe ony as coectng
agent for New ork Cty and such abty, even f accrued on the
vendor s books at the tme of sae, woud not have been an aowabe
deducton for Federa ncome ta purposes.
Inasmuch as the addtona saes ta es were assessed aganst the
M Company n 1939 and that company was requred n that year to
pay out of ts own funds the amounts whch t shoud have coected
from ts vendees n earer years, t s hed that, whe the addtona
payment of ta for the respectve years s an aowabe deducton n
determnng net ncome for 1939, t s deductbe not as a ta but as
a busness e pense under secton 23(a) of the Interna Revenue Code.
Secton 19.23(c)-: Ta es. 19 1-1,3-10058
I. T. 3 60
INT RN L R NU COD .
The accrua date for Federa ncome ta purposes of the Mch-
gan ntangbe persona property ta s Decenher 31 of the ca-
endar year 19 0 and subsequent years for those ta payers on a
caendar year bass or, for those ta payers who report on a fsca
year bass n eu of the caendar year, the ast day of such fsca
year.
dvce s requested as to the date of accrua of the Mchgan n-
tangbe persona property ta for Federa ncome ta purposes.
The ta n queston was mposed under the provsons of ct No.
301, Pubc cts of 1939, effectve September 29, 1939, whch s re-
stated as secton 7.556 n voume 6 of the Mchgan Statutes nno-
tated. Secton 7.556(1) reates to defntons and subparagraphs (b)
and (e) read as foows:
(b) The term ntangbe persona property means accounts recevabe,
moneys on hand or on depost or n transt, nterest bearng obgatons for
the payment of money, ncudng bonds, certfcates of ndebtedness, debentures,
notes, and certfcates of depost, ether secured or unsecured, annutes, roya-
tes, shares of stock n corporatons, assocatons, and |ont stock companes,
certfcates of ownershp n enterprses conducted for proft (not, however, n-
cudng partnershp agreements), equtabe Interests n any of the foregong
casses of ntangbe property, and any and a other credts and evdences of
ndebtedness.

(e) The term ta year or ta abe year means the caendar year, or
the ta payer s fsca year when permsson s obtaned by hm from the com-
msson to use hs fsca year as the ta perod n eu thereof.
Other provsons of the aw pertnent to the queston are as foows:
Sec. 7.556(2). Ta on ownershp of ntangbe persona property; rate, ncome
producng property, non-ncome producng property; computaton of vaue;
reducton of ta .
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19.23(c)-2.
210
Sec. 2. For the caendar year 19 0, and for each year thereafter there s hereby
eved upon each owner of Intangbe persona property not herenafter e empted
havng a stus wthn ths State, and there sha be coected from- such owner an
annua specfc ta on each tem of such, property owned by hm. The ta on
ncome producng ntangbe persona property sha be 6 per cent of the ncome
but n no event ess than one-tenth of 1 per cent, nor more than three-tenths of
1 per cent of the face or par vaue of each tem (or n the case of corporate stock
or other evdence of corporate ownershp havng no par or face vaue, of the
average per share contrbuton to capta, surpus and other funds n consdera-
ton of whch a of the then outstandng shares of stock of the same cass of such
corporaton sha have been ssued). The ta on non-Income producng ntangbe
persona property sha be one-tenth of 1 per cent of sad face, par or contrbuted
vaue. The vaue, for the purpose of ths secton, of any tem of property the
vaue of whch changes durng the year sha be the average vaue to be computed
under such rues and reguatons as the commsson may adopt. If any tem of
Intangbe persona property sub|ect to ta under ths subsecton s owned by the
ta payer for ony a porton of the caendar year the ta eved hereunder sha
be reduced n proporton.
Intangbe persona property sub|ect to ta under ths act sha be e empt from
a genera property ta es under the aws of ths State.

Sue. 7.556( ). nnua return; payment of ta , e tenson of tme.
Sec. . On or before 60 days after the end of the ta year each person ownng
ntangbe persona property sub|ect to ta under ths act sha make a return n
form and content as prescrbed by the commsson, showng the persona property
sub|ect to ta aton hereunder for the precedng ta year and showng the face,
par, or contrbuton vaue of each tem of such property.
In vew of the fact that the ntangbe persona property ta mposed
by the State of Mchgan for the caendar year 19 0 and subsequent
years s measured by factors or condtons reatve to ownershp whch
may e st, cease, or arse at any tme wthn the perod of the ta year,
t s hed that the accrua date of the Mchgan ntangbe persona
property ta s December 31 of the caendar year 19 0 and subsequent
years for those ta payers on a caendar year bass, or, for those ta -
payers who report on a fsca year bass n eu of the caendar year, the
ast day of such fsca year.
Mchgan corporaton franchse fees. (See I. T. 3 68, page 231.)
d|ustment to refect the ncrease, by reason of secton 205 of
the Revenue ct of 19 0, n the capta stock ta deducton accrung,
for Federa ncome ta purposes, on uy 1, 1030, shoud be requred
wth respect to ta abe years ended on pr 30, 19 0, or May 31,
19 0. Wth respect to ta abe years ended on March 31, 19 0, or
pror thereto, t can not be sad that the Revenue ct of 19 0,
approved une 25, 19 0, was passed n ampe tme to make the ad-
|ustment, for whch reason the ncrease n the aowabe deducton
may be taken n the succeedng ta abe year.
Secton 19.23(c)- : Ta es.
INT RN L R NU COD .
19 1- -10575
G. C. M. 22366
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19.23(c)-2.
n opnon s requested as to the appcaton of G. C. M. 173 0
(C. . -2, 81 (1936)) to the accrua, for Federa ncome ta pur-
poses, of the deducton for capta stock ta for ncome-ta ta abe
years endng n 19 0.
In G. C. M. 173 0, supra, t was hed (syabus) :
The accrua date for capta stock ta es for each of the years endng une 30,
1935, une 30, 1936, and une 30, 1937, Is the begnnng of such capta stock
ta year (that s, uy 1, 193 , uy 1, 1935, and uy 1, 1936, respectvey),
f the corporaton was engaged n busness on those dates.
It was stated n that rung that where the ta ng pocy of a
State or government s contnuous, a new aw whch merey ncreases
the rate of ta aton and whch s retroactve n effect shoud not be
used as a bass for shftng the otherwse recognzed accrua date.
The present queston has arsen by reason of the ncreased capta
stock ta mposed by secton 205 of the Revenue ct of 19 0, ap-
proved une 25, 19 0, for the capta stock ta year whch began on
uy 1, 1939, and ended on une 30, 19 0, the capta stock ta for
such year havng accrued on uy 1, 1939, for Federa ncome ta
purposes. The queston s whether, for ta abe years ended before
the passage of the Revenue ct of 19 0 mposng the addtona ta ,
G. C. M. 173 0, supra, must be strcty apped and ad|ustment made
n ncome ta returns whch have aready been fed n order to refect,
the ncreased capta stock ta deducton, or whether the ncrease n
such deducton may be taken n the succeedng ta abe year n accord-
ance wth the prncpe recognzed n I. T. 2827 (C. . III-2, 130
(193 )). In I. T. 2827 t was hed that n the case of a corporaton
whch fes ts ncome ta return on the caendar year bass the capta
stock ta mposed by secton 215 of the Natona Industra Recovery
ct for the perod ended une 30, 193 , whch accrued uy 1, 1933,
shoud be camed as a deducton n the caendar year 1933 and shoud
be ncuded n gross ncome for the caendar year 193 , the Revenue
ct of 193 havng amended the Natona Industra Recovery ct by
provdng that the capta stock ta mposed by the atter shoud not
appy to any ta paver n respect of any year e cept the year ended
une 30, 1933.
In the opnon of the Supreme Court of the Unted States n Fawew
Machne Co. v. Unted States (282 U. S., 375, Ct. D. 278, C. . -,
2 (1931)), cted n G. C. M. 173 0, supra, the foowng statement
s made:
The ct was passed n ampe tme to aow the ta payer to read|ust
ts accounts for that year by ncudng these ta es .
It s the opnon of ths offce that G. C. M. 173 0, supra, shoud be
apped so as to requre ad|ustment ony n those returns whch are due
subsequent to the date of enactment of the amendng egsaton, for
ony n such cases may t be sad that the egsaton was passed n
ampe tme to aow ta payers to read|ust ther accounts. The Reve-
nue ct of 19 0 was approved on une 25, 19 0. ccordngy, those
ta payers who fed ther returns on a fsca year bass ended pr
30, 19 0, or May 31, 19 0, shoud be requred to ad|ust the uy
1, 1939, accrua of capta stock ta es. Wth respect to ta abe years
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19.23(e)- .
212
ended on March 31, 19 0, or pror thereto, t can not be sad that the
Revenue ct of 19 0 was passed n ampe tme to permt an ad|ustment.
. P. Wenchf,
Chef Counse, ureau of Interna Revenue.
S CTION 23(e). D DUCTIONS FROM GROSS INCOM :
LOSS S Y INDI IDU LS.
G. C. M. 21503 (C. . 1930-2, 205), n whch t was hed that
where a contract to se stock on a stock e change for ess than the
bass thereof was entered nto on the ast day of a ta abe year
and devery of the stock was made n the reguar way on anuary 2
of the foowng year, the oss on the transacton was ncurred
n the earer year and consttutes a proper deducton for that
year, s aso appcabe to stock e change saes of bearer bonds
on whch nterest s computed to date of devery.
dvce s requested whether G. C. M. 21503 (C. . 1939-2, 205) s
appcabe to the sae of bearer bonds as we as to the sae of stock.
It s stated that the nqury arses by reason of the fact that where
bearer bonds are sod on a stock e change nterest s computed to the
date of devery, whch, accordng to stock e change rues, s two
In G. C. M. 21503, supra, t was hed that where a contract to se
stock on a stock e change for ess than the bass thereof was entered
nto on December 31, 1930, and devery of the stock was made n the
reguar way on anuary 2, 1931, the oss on the transacton was n-
curred n the year 1930 and consttutes a proper deducton for that
year.
It s hed that the rue ad down n G. C. M. 21503, supra, wth
respect to a sae of stock appes equay to a smar transacton
nvovng a sae of bearer bonds on whch nterest s computed to the
date of devery. The oss s deductbe for Federa ncome ta
purposes for the year n whch the transacton was consummated
e cept for devery of the bonds.
Secton 19.23 (e)-: Losses by ndvduas. 19 1-23-10730
( so Secton 23(g), Secton 19.23(g)-.) I.T.3 79
INT RN L R NU COD ND R NU CT OF 1938.
Losses sustaned by n ta payer, who keeps hs books on the cash
recepts and dsbursements bass, wth respect to payments requred
to be made n 1038 and 1930 on stock purchased n 1932 on the de-
ferred payment pan, whch stock became worthess n 1935, are not
sub|ect to the mtaton provsons of secton 23(g)2 of the
Revenue ct of 1938 and the Interna Revenue Code, reatng to
capta osses.
dvce s requested reatve to the deductbty for Federa ncome
ta purposes of osses sustaned by , who fes hs returns on the
bass of cash recepts and dsbursements, on account of deferred pay-
Secton 19.23(e)- : Losses by ndvduas.
19 1-3-10565
I. T. 3 2
INT RN L R NU COD .
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213
19.23(1)- .
ments for stock n the years 1938 and 1939, whch stock was purchased
n 1932 and became worthess n 1935.
In 1932 subscrbed for certan shares of stock of the M Corpora-
ton and sgned a contract obgatng hmsef to pay 5a; doars over
a perod of years. The corporaton was dssoved by order of court
n 1935, at whch tme t was defntey determned that the stock-
hoders woud receve nothng n fna qudaton. though the
stock became worthess n 1935, contnued to make parta pay-
ments durng the years 1935 to 1939, ncusve, n dscharge of hs
abty under the stock purchase agreement.
The queston presented s whether the payments made n the years
1938 and 1939 are osses to whch secton 23(e) of the Revenue ct
of 1938 and the Interna Revenue Code appes, or whether such osses
are wthn the purvew of secton 23(g) 2 of the Revenue ct of 1938
and the Interna Revenue Code, whch provdes as foows:
Securtes ecomng Worthess. If any securtes (as defned n paragraph
(3) of ths subsecton) become worthess durng the ta abe year and are capta
assets, the oss resutng therefrom sha, for the purposes of ths chapter, be
consdered as a oss from the sae or e change, on the ast cay of such ta abe
year, of capta assets.
In accordance wth the rung pubshed as I. T. 3252 (C. . 1939-1
(Part 1), 182;, the osses sustaned by , who fes hs returns on the
cash recepts and dsbursements bass, are deductbe n the year or
years n whch payments are made on the contractua obgaton.
Inasmuch as the stock n the nstant case became worthess n the year
1935 and not durng the ta abe year (1938 and 1939) t s hed
that the osses, represented by parta payments n 1938 and 1939, are
not sub|ect to the mtaton provsons of secton 23(g)2 of the Reve-
nue ct of 1938 and the Interna Revenue Code, reatng to capta
osses, but are ordnary osses deductbe n ther entrety under the
provsons of secton 23(e) of the Revenue ct of 1938 and the Interna
Revenue Code for the years 1938 and 1939, respectvey.
S CTION 23(g). D DUCTIONS FROM GROSS
INCOM : C PIT L LOSS S.
Secton 19.23(g)-: Capta osses.
INT RN L R NU COD .
Losses on account of payments for stock after stock becomes worth-
ess. (See I.T. 3 79, page 212.)
S CTION 23(1). D DUCTIONS FROM GROSS
INCOM : D PR CI TION.
Secton 19.23(1)-1: Deprecaton.
INT RN L R NU COD .
Teachers brares. (See I. T. 3 8, page 206.)
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19.23(m)-.
21
S CTION 23(m). D DUCTIONS FROM GROSS
INCOM : D PL TION.
Secton 19.23 (m)-: Depeton of mnes, o 19 1-26-10755
and gas wes, other natura deposts, and G. C. M. 22730
tmber; deprecaton of mprovements.
INT RN L R NU COD ND PRIOR R NU L WS.
Status of o and gas easng transactons for Federa ncome ta
purposes, ncudng revew of controng cases and dscusson of
ssues reatng to acquston and assgnment of Interests n o and
mnera propertes, the dvson of ncome derved from the sae of
the product among the partes entted to share theren, and the
depeton aowances granted such Dartes.
n opnon s requested wth respect to the status of o and gaa
easng transactons for Federa ncome ta purposes, the acquston
and assgnment of nterests n o and mnera propertes, the dv-
son of ncome derved from the sae of the product among the partes
entted to share theren, and the depeton aowances granted such
partes.
The foowng supposttous case presentng the questons nvoved
may be stated for convenent consderaton. , as a fee owner of
o ands, eased the ands to n consderaton of a cash payment
of 100,000, an addtona 100,000 payabe out of one-s teenth of
the o and gas f, as, and when produced, and a one-eghth royaty
nterest. then assgned hs easehod nterest to C n consderaton
of a cash payment of 200,000, and an addtona 100,000, payabe
ony out of one-s teenth of the o and gas f, as, and when produced.
C assgned one-haf of the essee nterest to D, who agreed to deveop
and operate the property, to advance C s share of the funds necessary
for deveopment costs and operatng e penses, to se a the o pro-
duced and saved and credt C wth one-haf of the proceeds unt a
advances were fuy recouped, and thereafter to operate the property
and pay one-haf of the proceeds from the sae of a o produced,
ess one-haf of the operatng e penses, to C, who was not personay
abe for any costs or e penses ncurred or advances made. dred
an o we under an agreement wth D enttng to have devered
to hs credt one-eghth of a the frst o and/or gas f, as, and ony
when the same s produced, saved, and marketed from the and unt
he receved the sum of 25,000. so, F pad D the sum of 15,000,
whch D covenanted to use n deveopng the property, and D agreed
to pay F the sum of 25,000, payabe out of one-eghth of the o
and/or gas f, as, and ony when the same s produced, saved, and
marketed from the eased and.
In Lynch v. worth-Stepheng Co. (267 U. S., 36 , T. D. 3690, C. .
I -1, 162 (1925)) and cases theren cted, the Unted States Supreme
Court, though t e pressy recognzed the hardshp nvoved n treatng
a proceeds from tne e tracton and sae of ore as ordnary ncome n
vew of the fact that mnng operatons reduce the vaue of property
nterests n mnera deposts, made t cear that such reducton n vaue
s not deprecaton but depeton, and that the capta nvestments n
mneras of both the essor and the essee are returnabe to them ta -
free ony through depeton deductons e pressy granted by statute.
(See aso everng v. Mountan Producers Corporaton, 303 U. S., 876,
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215
19.23(m)-.
Ct. D. 1321, C. . 1938-1, 3 3, wheren the Court stated that the depe-
ton aowance rests upon egsatve grace.)
Though the Revenue ct of 1916 dd not e pressy provde for the
aocaton of depeton between the partes n nterest, the Court n the
worth-Stephens case regarded both the essor and the essee of
mnng property as ownng vauabe property rghts n the mnera n
pace whch were reduced n vaue through the e tracton of ore, and t
hed the tota depeton aowabe was aocabe between the essor and
the essee n proporton to the nterests of each severay consdered.
Subsequent decsons hod that the ncdenta e hauston of natura
deposts through the producton and sae of o or mneras s not a sae
or converson of capta assets aowng cost or basc vaue to be recov-
ered ta -free. Further, a sae of capta assets s not nvoved n a ease
agreement n whch the essor, n consderaton of a bonus or ump sum
cash payment made at the tme the ease was e ecuted (herenafter
referred to as a bonus ) and stpuated royates measured ether
by a percentage of producton under the ease or by a stated sum per
unt e tractedand sod (herenafter referred to as royates ) whch
are payabe over the entre ease fe, grants a essee the rght to enter
upon and use the and for purposes of e potaton. (See ankers
Pocahontas Coa Co. v. urnet, 287 U. S., 308, Ct. D. 618, C. . II-1,
272 (1933), and urnet v. arme, 287 U. S., 103, Ct. D. 611, C. .
I-2, 210 (1932), nvovng ordnary royates pad a essor of coa
ands on the bass of a f ed amount per ton mned, and a bonus pad
the essor of o ands, respectvey.) The Court thus not ony recog-
nzed that royaty payments ke renta payments are ordnary ncome
to the essor, but drew an anaogy between cash bonus payments made
upon the e ecuton of an o and gas or mnng ease and a substanta
payment receved n the frst year by a essor n any other type of
ease for purposes of cassfyng such bonus payments as ordnary
ncome rather than proceeds from the sae of capta assets.
Such cassfcaton of bonus payments does not depend upon whether
the oca aw regards the agreement between essor and essee as a
ease or a sae of natura resources n pace. In Pamer v. ender
(287 U. S., 551, Ct. D. 6 1, C. . II-1, 235 (1933)) the Court
refused to dstngush between essors and subessors or assgnors of
easehod nterests who, by stpuaton for royaty payments, reserve
an nterest n producton coe tensve wth the easehod fe. The
ta payer theren was a member of severa partnershps, each of whch
had acqured an o ease, had dscovered o, and had then assgned
the ease to a thrd party n consderaton of a bonus payment, a
frst o produced and saved (whch type of payment w herenafter
be referred to as an o payment ), an nterest whch does not by
ts terms e tend throughout the ease fe, and an addtona e cess
royaty of one-eghth of a of the o produced and saved. The
Court hed that the bonus payment, the o payments, and the royaty
payments were ordnary ncome to the subessor or assgnor sub|ect
to the depeton aowance, rather than proceeds from the sae of
capta assets. The Court refused to dstngush between eases gov-
erned by varyng State aws whch appy dfferent rues as to when
technca tte to o and gas passes to the essee, on the ground that
the economc consequences to the essor are the same n a cases . e.,
future payment of a stated sum
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19.23(m)-.
216
the vaue of hs nterest s essened by the e tracton of o. The
Court stressed the genera vew that a persons havng a rght to
share n the o produced or the proceeds from ts sae, rrespectve
of the ega form of ther nterest n the property, have an economc
nterest n the o and gas n pace to whch the depeton provsons
are appcabe, the anguage of the statute, provdng that the de-
peton aowance sha be aocated between essor and essee, beng
hed to be broad enough to provde, at east, for every case n whch
the ta payer has acqured by nvestment any nterest n the o n
pace, or has secured, by any form of ega reaton, ncome derved
from the e tracton of o to whch he must ook for a return of hs
capta. The opnon states that a essor, or subessor or assgnor,
who stpuated for the payment of future royates n knd from the
o produced and saved, had retaned an economc nterest n the
o and gas n pace enttng hm to depeton deductons aganst
cash bonus payments as we as proceeds from hs share of the o.
The opnon mpes that the proceeds from the sae of any share n
the o produced are ncome sub|ect to depeton n the hands of
the one entted to such share. Further, the Court speaks of the
o and gas n pace as a reservor of the capta nvestments of the
severa partes entted by agreement to share n the o and gas
produced under the ease.
Such anguage ndcates that the Court regarded the contracts
between the nterested partes as dvdng the property rghts n o
and gas n pace n accordance wth ther respectve shares upon
producton. That s, the essor, by ease terms reservng royates,
merey grants to the essee e cusve e potaton prveges, retanng
as hs share of the o and gas n pace that porton thereof whch,
freed of the burdens of deveopment and operatng costs, has a vaue
equvaent to the vaue of the entre nterest sub|ect to such burdens,
and, therefore, ke the essor of an ordnary ease reservng rent, s
regarded as not havng dsposed of a capta asset. The remanng
fractona nterest n o and gas n pace becomes the share of the
essee s workng or operatng nterest whch carres the rsks and
burdens attendng e potaton. If the essee n turn subeases or
assgns the workng nterest, reservng a royaty share, he acqures
a status comparabe to that of a essor wth respect to the share
retaned, any further burden of e potaton beng passed on to the
subessee or assgnee wth an agreed share n the oand gas produced.
So consdered, the vew that a essor, or a subessor or assgnor,
parts wth no capta nterest, though the essee| or subessee or
assgnee, acqures a capta nterest upon the e ecuton or assgnment
of a ease, presents no ogca dffcutes, as the essee nterest, though
t may have great potenta vaue, ordnary becomes vauabe ony
upon nvestment by the essee n e potaton or by reason of ds-
covery. Under ths theory, the essee does not pay rent to the essor
by royaty payments but, nstead, dvdes the product or the proceeds
reazed therefrom wth hm. Thus, n the cassfcaton of royaty
payments as rent to the essor, the term s empoyed as denotng
a sharng by the essor for the use of hs and rather than as an
amount owng and pad by the essee. cash bonus, though termed
an advance royaty payment, pad to a essor wthout regard to pro-
ducton and often n a year when there s no producton, s not a
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19.23(m)-.
dvson of products or proceeds therefrom. Nor, as aready noted,
does t represent proceeds from the sae of a capta asset to a essor
reservng a royaty nterest. The essor does not se an nterest to
the essee. Instead, the essee acqures an nterest by assumng the
obgaton to deveop and operate the property.
The anaogy between the bonus payment accompanyng a mnera
ease and a arge payment made n the frst year of any ordnary
ease, to whch the Court resorted to characterze the bonus payment
as ordnary ncome as dstngushed from capta gan to the essor,
does not estabsh an dentty of character n the two types of pay-
ments for Federa ncome ta purposes. n o or mnera ease
dffers from an ordnary and ease n that t contempates severance
and dsposton of vauabe mnera deposts that normay represent
a arge percentage of and vaues. Further, the aowance of depe-
ton deductons to the essor, whch serve to offset hs bonus ncome
and reduce the bass of hs nterest, estabshes the dstncton between
such payments by treatng the bonus payment upon an o or mnera
ease as, n part, a ta -free return of the essor s capta nvestment
n mnera n pace. s the mnera n pace s a reservor of the
capta nvestments of the partes returnabe through the depeton
aowance, and as the bonus payment resuts n a reducton n the
essor s capta nvestment to the e tent of the depeton aowabe
thereon, t foows that such payment s a contrbuton by the essee
to such reservor of capta nvestments whch s substtuted for the
capta thereby wthdrawn by the essor. Such shftng of capta
nvestment s attended by a correspondng shft n the vaue of the
respectve capta nterests or share rghts of the partes. That s,
a bonus payment dmnshes the vaue of the essor s mnera nterest
by reducng hs royaty share n future producton. The depeton
aowance on hs bonus ncome s desgned to compensate hm for
such dmnuton n vaue of hs nterest thereby sustaned. Corre-
spondngy, the bonus payment enhances the vaue of the essee s n-
terest by gvng hm a arger share of the mneras produced, or the
proceeds therefrom, by reason of hs bonus nvestment.
It w be noted that the anaogy between a bonus payment made
upon the e ecuton of an o or mnera ease and a arge renta
payment made n the frst year of any ordnary ease, upon whch
the Supreme Court based ts concuson that such bonus payment
was ordnary ncome n the nature of an advance royaty payment
sub|ect to the depeton aowance rather than proceeds from the
sae of a capta asset, s not avaabe to permt of ke treatment
of a cash payment made where no royaty rght s reserved by the
payee. Royaty rghts represent a share n a of the o or mnera
m pace, and a bonus payment whch reduces the royaty and, there-
fore, the essor s capta nterest n every unt of o or mnera
content may propery be termed an advance royaty. Unke ord-
nary rghts to rent or royaty, o payment rghts represent share
rghts n ony a porton of the o or mnera content of the and.
When the stpuated payments are made, the payee s nterest n o
or mnera e pres. cash payment made upon the e ecuton of
an nstrument stpuatng ony for o payments s, therefore,
regarded not as an advance royaty payment but as proceeds from
0 3 1 1- 8
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19.23(m)-.
218
a sae n whch the payee dsposed of hs economc nterest n o
or mnera n pace, ess the fracton thereof represented by the
o payment rghts reserved by hm. (See Commssoner v. Femng,
82 Fed. (2d), 32 .)
It thus appears that (1) agreements to pay royates measured
by a fracton of the mnera product or the proceeds therefrom,
or by a stated sum per unt e tracted and sod, n effect dvde the
proceeds from producton, and (2) cash bonus payments representng
advance royaty payments effect a substtuton n the reservor of
capta nvestments of essee nvested capta for nvested capta
wthdrawn by the essor n the amount of depeton sustaned by
hm, thereby gvng the essee a arger share upon producton and,
consequenty, a greater nterest n natura deposts n pace than
he woud have had f there had been no cash bonus payment. cash
payment representng proceeds from the sae of an economc nterest
aso accompshes a substtuton of payor nvested capta for payee
nvested capta. The payee n such a case reazes capta gan
or oss measured by the dfference between cost aocabe to the
nterest sod and the proceeds receved.
The stated basc concepts of ncome and the attendng depeton
aowances appy to depeton provsons basng aowances on per-
centages of gross ncome from the propertes as we as to the pro-
vsons of the earer cts grantng aowances based upon cost or
vaue at March 1, 1913, or upon dscovery vaue. In Unted States
v. Dakota-Montana O Co. (288 U. S., 59. Ct. D. 655, C. . II-1,
2 3 (1933)), treatng captazed ntangbe costs of deveopment as
returnabe through the depeton aowance, the Court ponted out
that there s no ground for supposng that Congress, by provdng
a new method for computng the aowance for depeton ntended to
break wth the past and narrow the functon of that aowance.
The Court sad that the reasonabe nference s that t dd not and
that depeton ncudes under the 1926 ct precsey what t ncuded
under the earer cts. In errng v. Commssoner (293 U. S.,
322, Ct. D. 90 , C. . I -1, 303 (1935)) the Court stated that the
nature and purpose of the aowance based on a percentage of ncome
are the same as n the case of the aowance based on cost, and aowed
a essor recevng an advance royaty or bonus payment upon the
e ecuton of an o and gas ease a percentage depeton aowance
thereon. The fact that such an aowance s m antcpaton of pro-
due on was stated to be no more persuasve under the percentage
depeton provsons than t was under the depeton provsons of
the earer cts.
sde from such bonus payment to a essor or assgnor, the term
gross ncome, as used n the phrase gross ncome from the prop-
erty n the percentage depeton provsons, means the same as
gross ncome n the provsons generay defnng ncome, wth the
quafcaton that the phrase gross ncome from the property n
the depeton provsons s confned to the gross ncome from the e -
tracton of o rather than gross ncome from the tract of and n a
ts uses. (See everng v. Twn e O Syndcate, 293 U. S-, 312,
Ct. D. 905, C. . I -1, 253 (1935), nvovng an assgnee of an o
and gas ease whch was obgated to pay royates n cash or n knd
totang one-fourth of the o e tracted.) The ta payer-assgnee n
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219
19.23(m)-.
everng v. Twn e O Syndcate, supra, contended that the
entre gross ncome from producton of o and gas was ts gross
ncome from the property and camed the deducton of 27y2 per cent
thereof as ts aowance for depeton. The Court hed that the n-
come from producton and sae of the products and the depeton
aowance thereon, however measured, must be apportoned between
essor and essee. Thus the Court confrmed the mpcatons of the
earer cases nvovng essors and subessors or assgnors by appyng
the basc concepts as to (1) gross ncome from producton, and (2)
depeton aowances and ther dvson between the respectve partes
nterested.
In the ast-cted case the Court, n effect, ponted out that an
agreement to pay royates represents a sharng arrangement between
the partes by e pressng the vew that the provson of a ater ct,
secton 11 (b)3, Revenue ct of 1932, whch e pressy e cudes roy-
ates pad or ncurred n respect to the property from the essee s
gross ncome from the property, was merey decaratory of e stng
aw. Ths mpcaton as to dvson between the partes by means
of royaty payments was confrmed and e tended to ncude dvsons
effected by agreements to make o payments n Thomas v. . .
Perkns et a. (301 U. S., 655, Ct. D. 1237, C. . 1937-1, 162), wheren
proceeds from the share of o reserved by an assgnor were hed
not to be ncome to the assgnee. In that case, essees of o and gas
eases assgned the eases for 395,000, payabe out of one-fourth of
the o produced free of any share of deveopment e pense or any
other burden. The Pamer case, supra, was cted as supportng the
vew that the o payment nterest retaned by the assgnors gave
them ownershp of the stpuated share of the o and entted ten
to the ncome therefrom and the depeton aowance thereon. The
Twn e O case, supra, was cted as hodng that t s mmatera
whether the essor, or subessor or assgnor, s to receve the royaty
n o or the proceeds from the sae of hs share of such o by the
essee.
The cted cases show that the stated basc prncpes appy equay
to mnera deposts and to o and gas. Lke ssues arse n the o
and mnera cases whch are cted nterchangeaby n the evouton of
the appcabe rues. The partes entted to share n o or mnera
e tracted, or the gross proceeds therefrom (ncudng the partes to
a ease provdng for royaty payments of stated amounts per unt
mned), have economc nterests n the o or mneras n pace. That
s, they, as owners of the rghts n o or other mnera n pace,
share the ncome from producton, and the depeton aowances
thereon are regarded as desgned to permt ta -free recovery of at
east ther capta nvestments n such property rghts. (See aso
the Mountan Producers case, supra, wheren the royaty payabe
by the producer was measured by a per unt prce based on current
gasone prces.)
It w be noted that the persons entted to o payments or royaty
payments, whch the above-cted cases have characterzed as the
owners of economc nterests n o or mnera n pace, by the terms
of the agreements from whch these rghts arse, are assured of a
share f there s producton of o or mnera. Steve nderson et
a. v. everng (310 U. S., 0 , Ct. D. 1 56, C. . 19 0-1, 108) con-
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5 19.23(m)-.
220
frms ths vew. The obgaton there nvoved was not an ordnary
o payment rght, as t was payabe out of proceeds from o pro-
duced or proceeds from resae of the propertes. Payment out of
proceeds from resae woud qudate the obgaton and termnate
the rght to share n producton ncome.
ssurance of a share upon producton marks ownershp of an eco-
nomc nterest n o and gas n pace. Dvson of producton ncome
and the attendng depeton aowances between owners of economc
nterests necessary e cude a others. The rght to share n produc-
ton or gross ncome therefrom shoud not be confused wth a con-
tractua rght to purchase and process a product of the mne or we,
even though such processng ncdentay ads producton and s done
under a sharng of the processed product wth the producers. In
evcrng v. ankne O Co. (303 U. S., 362, Ct. D. 1323, C. . 1938-1,
306) the ta payer contracted wth producers of o and gas for the
treatment of wet gas to produce gasone. The ta payer agreed to
nsta and mantan necessary ppe nes and connectons from casng-
heads or traps at the mouth of the we to ts pant, and the producers
agreed to dever the natura gas from whch the ta payer was to
e tract the gasone and return part of the dry gas to the we to be
used theren for pressure purposes. The ta payer agreed to dever
one-thrd of the gasone e tracted or the gross proceeds from the sae
of such share. The Court hed that the ta payer was a mere purchaser
of the gas produced from the we and not a producer of gas havng a
depetabe economc nterest n mnera n pace. It shoud be noted
that the ta payer s capta nvestment was n equpment factatng
devery of the gas produced rather than n equpment for producton
of gas, and that ts functon was not producton of gas but the process-
ng of gas. The Mountan Producers case, supra, s dstngushabe n
that the refnng company purchaser theren was a producer and was
requred to make the capta nvestments nt assary to producton that
gave the producer an economc nterest n o and gas n pace.
Smary, a rght to share n producton, or the gross ncome there-
from, s very dfferent from the rght to share n the net ncome of the
producer (a rght measured not by producton of mnera, as such, but
by the degree of success n operaton of such a rght owned by another).
(See dverng v. be O Land Deveopment Co., 303 U. S., 372, Ct.
D. 1322. C. . 1938-1, 293. as nterpreted by the nderson case, supra,
and everng v. O Donne, 303 U. S., 370, Ct. D. 132 , C. . 1938-1,
837.) In the be case, supra, the rghts n o propertes and equp-
ment were transferred for a stated consderaton payabe n annua n-
staments, rrespectve of producton from the propertes transferred,
pus one-thrd of the net profts derved from operaton of the proper-
tes by the purchaser after t had been rembursed from o and gas pro-
ceeds for a e pendtures made by t n the acquston, deveopment,
and operaton of the propertes. The nterest of the seer was thus
mted to a rght to share n net ncome after recoupment of capta
e pendtures rather than gross proceeds from producton. In the
O Donne case, supra, stock of a corporaton ownng o property
rghts was sod to another corporaton (whch was to take over n
qudaton the o propertes of the frst corporaton and operate them)
for a one-thrd share of the net profts derved from the operaton of
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19.23(m)-.
the o propertes. In both cases, the Court hed the transfers to be
saes, and that n nether case dd the transferor have a depetabe
economc nterest n the mnera n pace after the transacton had been
competed.
It seems cear that the rght to share n producton, or the gross
proceeds therefrom, whch dstngushes ownershp of depetabe eco-
nomc nterests n o or mnera n pace from nondepeabe economc
advantages, ncudng contractua rghts to purchase the product or
to share n net ncome, does not depend upon ega tte to the o
and gas or mnera deposts. ( urnet v. arme, supra, and Pamer
v. ender, supra.) so, as noted above, n the Pamer case, tech-
nca ega descrpton or characterzaton of the rght was treated
as mmatera, the Court sayng that the owner of a depetabe eco-
nomc nterest ncudes any ta payer who has acqured, by nvest-
ment, any nterest n the o n pace, and secures, by any form of
ega reatonshp, ncome derved from the e tracton of the o, to
whch he must ook for a return of hs capta. In the nderson
case, supra, the Court n dscussng the Perkns case, supra, nvovng
an o payment rght reserved upon .assgnment, sad the decson
dd not turn upon the partcuar nstrument nvoved, or upon the
formates of the conveyancer s art, but rested upon the practca
consequences of the provson for payments of that type.
Such anguage seems as appcabe to grants as to reservatons of
economc nterests, as the formates ot the conveyancer s art are
qute as e actng n the reservaton of nterests as n the grant of
nterests. If, as the Court ndcates, the mere stpuaton for o
payments to a person havng an nvestment or capta nterest n
o propertes amounts, n effect, to a retenton of a depetabe eco-
nomc nterest n o n pace to the e tent of such o payments, then
t woud seem to foow that an agreement enttng one makng an
nvestment (thereby acqurng a capta nterest) n such propertes
to such payments woud gve hm a correspondng depetabe eco-
nomc nterest theren. The pont assumes mportance n vew of
the many contracts entered nto by owners of essee nterests wth
we drers to dr wes, equpment deaers to furnsh equpment,
and nvestors to furnsh money for use n deveopng the eased prop-
erty n return for agreements to make stated payments out of a share
of the o. y such arrangements, a essee commony essens hs own
nvestment and the rsks and burdens attendng deveopment by
agreements to share the nvestment obgaton and the proceeds of
producton. The essee or assgnee, ke the essor or assgnor who
retaned a share nterest n producton havng a vaue equvaent to
that of the essor s pror nterest but passed on to the essee the nvest-
ment obgatons and rsks that attend deveopment for a share n
producton, has parted wth no capta nterest but has merey n
turn g|ven another a rght to share n producton n consderaton
of an nvestment made by such other person. If the drer cr equp-
ment deaer s makng an nvestment by whch he acqures an eco-
nomc nterest n o and gas n pace, e pendtures made by hm
represent capta e pendtures returnabe ta -free through the de-
peton aowance rather than by way of e pense deducton, and the
c payment rghts acqured do not represent payment n property
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19.23(m)-.
222
for servces rendered or suppes furnshed. Smary, one who, n
return for an o payment rght, furnshes money whch the essee
s pedged to use n deveopng the property woud be regarded as
makng an nvestment representng an addton to the reservor of
capta nvestments n o and gas n pace (as dstngushed from the
purchase of an o payment rght from the essee wheren there s
no such pedge to nvest the proceeds n deveopment and the buyer s
capta nvestment woud repace the essee s capta nvestment a-
ocabe to the nterest sod). Such a transacton, nvovng a pedge
to use the money furnshed n deveopng the property, s dstngush-
abe from a sae the proceeds of whch are unquafedy receved by
the seer. Ths vew seems to accord wth the reates of such trans-
actons. In none of such cases has the essee parted wth a capta
asset, and the nvestments nvoved are not hs nvestments.
The stated prncpes seem appcabe rrespectve of whether there
are words purportng to convey an nterest n the o n pace n-
voved n the o payment rghts. oth the practca and economc
consequences of provsons for payments of ths type are dentca
n ether case. It seems generay agreed that, rrespectve of con-
veyancng formates, a rght to a share of the o produced carres
wth t a correspondng nterest n the o n pace. That rghts to
share n the o produced are anaogous to rghts to share n gross
proceeds derved from the sae of o produced has been repeatedy
stated by the hghest Court. It woud seem to foow that a rght
to a share of the proceeds from the sae of o produced woud gve
the payee ownershp of a correspondng depetabe economc nterest
wthout regard to conveyancng formates.
It thus appears that the controng cases regard captazed deve-
opment costs as representng nvestments returnabe through the
depeton aowances, whether the tota deveopment nvestment s
made by a andowner who eects to deveop the property hmsef
and take a the o or mnera or s shared by a number of nvestors
who, by contractua arrangements between themseves, agree to d-
vde the resutng o or mnera product or the proceeds from the
sae of such product. If the atter, the dvson of o, or the gross
ncome therefrom, determnes the economc ownershp of o or mn-
era n pace as we as the gross ncome and attendng depeton
aowances. Under ths test, the form of the contracts dvdng the
product or the gross ncome therefrom, or the ega phraseoogy or
devces utzed to accompsh the dvson, are mmatera. For
e ampe, an nstrument purportng to be a ease of o or mn-
era ands, whch gave a essee a rght to e pore for and produce
a the o or mnera found thereon and requred the essee to
pay the essor ony a share of the net profts derved from the
operaton (as dstngushed from a share of the product or the
proceeds from the sae of the product), woud eave the essor
wthout a depetabe economc nterest n the o or mnera n pace,
and a bonus payment, f any, made upon the e ecuton of such
nstrument woud represent proceeds from the sae of a capta asset.
Such resuts accord wth the reates of the test supped. Under
such an agreement, the essee may e haust a substanta o or mnera
content wth tte or no reazaton of net profts, n whch event
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19.23(m)-.
the essor w receve tte or nothng under the contract. That
beng true, the essor n effect has not retaned an nterest n the
o or mnera content.
Smary, the Federa ncome ta status of a carred nterest
depends upon the e tent to whch such nterest n effect represents
a rght to share n gross ncome as dstngushed from net ncome
derved from the operaton. In Reynods v. McMurray (60 Fed.
(2d), 8 3, certorar dened 287 U. S., 66 , Ct. D. 616, C. . II-1,
198 (1933)), McMurray was the owner of an undvded nterest n
o eases, sub|ect to a contract wth the Oho O Co., whch aso
the partes agreed that the Oho O Co. was to manage, contro,
deveop, and operate such eases and pay a costs ncdent thereto
and charge McMurray s undvded nterest wth ts proportonate
part thereof; that t shoud market the o and gas produced and
account to McMurray for hs proportonate part thereof; that t
shoud be rembursed by McMurray from the proceeds derved from
the sae of hs proportonate part of the o and gas, to be effected
by credtng McMurray s account wth the Oho O Co., on the
1st of each month, wth the proceeds derved from the saes durng
the month precedng of hs proportonate part of the o and gas;
and that t shoud make monthy remttances to hm of hs pro-
portonate share of any proceeds remanng after deductng the
amounts due t for e pendtures made by t for hm.
The economc or practca effect of such contract was to turn
over the easehod estate to the Oho O Co. for deveopment and
the e tracton and sae of the product. Though McMurray retaned
ega tte to hs undvded nterest under the ease, he contracted
away the ony rght granted thereby . e., to e tract and se the
o content of the eased and. Thereafter, the deveopment and
operaton of the property were carred on by the o company on ts
own behaf and not as a |ont operaton by co-owners. Proceeds
from the sae of o were not dvded between the partes. Charges
and credts n the account between the partes dd not refect, actua
obgatons between them. Rather, they were merey factors n
computng the net ncome payments whch were a McMurray coud
ever become entted to under the agreement, regardess of how
much o was e tracted and sod from the eased premses. McMur-
ray s nterest was converted nto a mere contractua rght to share
n any net ncome derved from the sae after recoupment of a
capta nvested by the o company. The o company was ob-
gated to make a of the nvestment necessary to deveop the property
and to pay a the costs of operaton, and t coud ook ony to the
proceeds from the sae of the essee share of o and gas produced
for rembursement of ts capta e pendtures and operatng e penses.
The o company assumed a the rsks and burdens attendng deveop-
ment and operaton, and t was entted under the contract to the
entre essee share of producton whch was the ony source from
whch ts capta and e penses coud be recouped. ccordngy,
such nvestment was n an economc nterest n o and gas n pace
measured by the essee share of producton. It s, therefore, the
opnon of ths offce that the decson n that case, hodng that the
owned
Under the contract,
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19.23(m)-.
22
proportonate share of the proceeds from the sae of o ostensby
credted to McMurray was constructve ncome to hm, s out of
harmony wth the above-descrbed test of ownershp of ncome
from producton, and t shoud no onger be foowed. In cases
where, after recoupment of such charges or so-caed advances to
the carred nterest, the nterest ceases to be a carred nterest
and the owner thereof becomes entted to a share n the o, or the
gross ncome therefrom, and abe for hs share of costs and e penses,
he shoud be regarded as retanng under the contract an economc
nterest n o n pace, consstng of hs undvded nterest n the
ease ess the rght of recoupment, whch s comparabe to an o
payment rght, carved out of hs fractona workng nterest.
The questons presented by the supposttous case stated heren
are answered generay by the above dscusson. Specfcay, , the
fee owner, reazed 100,000 bonus ncome when the ease was e ecuted.
e aso reazes as ncome one-s teenth of the proceeds from produc-
ton unt that fracton produces 100,000, and one-eghth of such
producton as royaty ncome so ong as producton contnues. of
such ncome s ordnary ncome. e s entted to correspondng
depeton aowances, and suffers reductons n the bases of hs o pay-
ment and royaty nterests resutng from such depeton deductons.
essee who subeased or assgned ns nterest for ke consderaton
woud occupy a comparabe poston. The 200,000 whch C pad to
was consderaton for the sae of s nterest, ess the retaned o
payment of one-s teenth nterest unt 100,000 s produced. s not
entted to depeton on the 200,000 cash payment, but he s entted
to depeton on such retaned nterest. y the carred nterest
arrangement between C and D, the former converts a depetabe econ-
mc nterest n o n pace nto a nondepetabe contractua rght to
share n D s net ncome after recoupment by D of a deveopment
costs and e penses. ad C receved a cash payment, t woud have
represented proceeds reazed upon the sae of a capta asset by hm.
, rrespectve of words purportng to convey ownershp of o n pace,
acqured a depetabe economc nterest to the e tent of hs o pay-
ment rght for a capta nvestment measured by the e pendture made
by hm n drng and equppng the we. F acqured a ke nterest
for the 15,000 furnshed by hm to D for deveopment purposes. s
nterest woud have been the same had D not been pedged to e pend
the 15,000 for deveopment. In that event, however, the transacton
woud not have been ony an nvestment of the stated sum by F but
a sae of an o payment mterest by D, and the atter woud have been
requred to aocate thereto a part of hs bass and compute gan or
oss. D, of course, acqured an economc nterest consstng of the seven-
eghths workng nterest, ess the o payment rghts agreed upon by
hm or hs predecessors and hed by , , , and F. s nvested
capta account does not ncude the nvestment sums contrbuted by
or F under ther contracts wth hm, but t does ncude the amount
advanced by hm for C s share of captazed deveopment cost.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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19.23(m)- .
Secton 19.23(m)- : Computaton of depeton 19 1-25-10751
based on a percent age of ncome n the case of G. C. M. 22689
o and gas wes.
INT RN L R NU COD .
Costs ncurred n the busness of e potng a natura resource (n-
cudng mantenance of geoogca and and departments), f propery
deductbe n computng net ncome, are aso deductbe n computng
net ncome from the property for the purpose of determnng the net
ncome mtaton on percentage depeton. penses whch are not
attrbutabe to a partcuar producng property must be fary ao-
cated to the severa producng propertes. Where such costs have
been propery captazed, any oss deducton resutng therefrom,
taken n computng net ncome, must aso be ncuded as a deducton
n computng net ncome from the property for the purpose of the
net ncome mtaton.
n opnon s requested n connecton wth the determnaton of the
net ncome mtaton on percentage depeton under secton 11 (b)
(3) and ( ) of the Interna Revenue Code whether, n the ght of
recent decsons of the oard of Ta ppeas subsequent to the
decson n evernr/ v. Wtshre O Co., Inc. (308 U. S., 90, Ct. D.
1 2 , C. . 1939-2, 213), the cost of mantanng geoogca and and
departments and the saares of offcers and empoyees engaged n
smar actvtes shoud be captazed to the e tent that ther etforts
resut n the acquston of new propertes, whether such costs shoud
be consdered as overhead e penses appcabe to the genera busness
of producng o and gas, or whether such departments shoud be con-
sdered a dstnct actvty not necessary supported by producton.
Secton 11 (b) (3) and ( ) of the Code provdes n part as foows:
(3) Percentage depeton for o and gas wes. In the case of o and
gas wes the aowance for depeton under secton 23(m) sha be 27 per centum
of the gross ncome from the property durng the ta abe year, e cudng from
such gross ncome an amount equa to any rents or royates pad or ncurred by
the ta payer n respect of the property. Such aowance sha not e ceed O per
centum of the net Income of the ta payer (computed wthout aowance for de-
peton) from the property, e cept that n no case sha the depeton nownnce
under secton 23(m) be ess than t woud be f computed wthout reference to
ths paragraph.
( ) Percentage depeton for coa and meta mnes and suphur. The
aowance for depeton under secton 23(m) sha be, n the case of coa mnes,
5 per centum, n the case of meta mnes, 15 per centum, and, n the case of suphur
mnes or deposts, 23 per centum, of the gross Income from the property durng the
ta abe year, e cudng from such gross ncome an amount equa to any rents or
royates pad or ncurred by the ta payer In respect of the property. Such aow-
ance sha not e ceed 50 per centum of the net ncome of the ta payer (computed
wthout aowance for depeton) from the property.
s stated by the Unted States Supreme Court n ts opnon n the
Wshre case, the queston presented was whether the ta payer n
computng ts net ncome for the purpose of appyng the
50 per cent mtaton on depeton aowance may refuse to
take as deductons certan deveopment e pendtures, where t has
deducted those deveopment e pendtures n computng ts ta abe net
ncome . The ta payer had e ercsed ts opton to treat
such deveopment e penses as tems deductbe from gross ncome.
fter paraphrasng the pertnent provsons of the appcabe regua-
tons (smar to secton 19.23(m)-(p1) of Reguatons 103), the
Court hed that such reguatons requred the ta payer to deduct such
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19.23(m)- .
226
deveopment e penses n computng ts net ncome for purposes of the
mtaton on the percentage depeton aowance.
It appears that the oard of Ta ppeas regards that decson
as controng the treatment of a e penses ncurred by a ta payer
n the busness of producng natura resources. In Mrabe uck-
sver Co. v. Commssoner ( 1 . T. ., 01), where the queston for
determnaton was whether nterest and capta stock ta es shoud
be deducted from gross ncome n computng net ncome for depeton
purposes pursuant to secton 11 (b) of the Revenue ct of 1936, the
oard stated n part as foows:
The pettoner s engaged soey In the mnng of cnnabar, the chef
ore producng mercury or qucksver. The money borrowed was used to deveop
ts mnes and to provde pant and equpment for the producton therefrom.
The ta es were pad as a necessary condton to the pettoner s contnuance n
busness. oth e pendtures bear a drect reaton to the pettoner s operatons
and the producton from ts property for the ta abe year and must be deducted
n computng Us net ncome for depeton purposes under the statute. Itacs
supped.
In Montrea Mnng Co. v. Commssoner ( 1 . T. ., 399), where
the pettoner contended that scoss cams were not deductbe from
ts gross ncome n computng percentage depeton under the pro-
vsons of secton 11 (b) of the Revenue ct of 193 , the oard
stated:
The pettoner s poston here s smar to that of the respondent n evcrng
v. TYshrc O Co. (.308 U. S., 90) In that case the ta payer, consstent wth a
prevousy made eecton, took as deductons n the ta abe year deveopment
e penses whch were ncurred n pror years. Such e penses had no drect
reaton to the producton of o from the ta payer s property durng the ta abe
years. So here, the settement of scoss cams was, under the requrements
of the Wsconsn Workmen s Compensaton ct, a norma Incdent n the opera-
ton of pettoner s ron mnes. Whe the contracton of the dsease had no
drect reaton to the current year s output, the dsease tsef drecty grew from
and bad an mmedate reaton to the pettoner s mnng operatons. The pay-
ment of scoss cams must be paced n the same category as the deveopment
e penses whch the Supreme Court hed n the Wshre O Co. case are requred
to be deducted from gross ncome n computng net ncome for depeton pur-
poses. In ne wth and upon the authorty of the decson n the Wshre O
Co. case, we sustan the respondent s acton.
Smary, n Grson O Corporaton v. Commssoner ( 2 . T. .,
1117), where the queston was whether ncome ta es pad by the pet-
toner to the State of Okahoma shoud be deducted from gross ncome
n computng net ncome for depeton purposes, the oard sad:
In everng v. Wshre O Co. (308 . S., 90), the Supreme Court approved
cspondent s reguatons under the 1928 Revenue ct, whch requred that deve-
opment e pense deducted In computng ta abe net ncome shoud aso be de-
ducted n computng net ncome from the property for the purpose of appyng
the 50 per cent mtaton on percentage depeton. The Okahoma ncome ta
here nvoved comes wthn the cass of deductons from gross ncome aowabe
n determnng ta abe net ncome under the Federa Revenue cts, and s no
ess attrbutabe to the o property upon whch the depeton Is camed than
deveopment e pense. Under generay recognzed rues, both tems are prop-
ery to be taken Into account n computng the net operatng profts, as we as
the ta abe net ncome, derved from the property by pettoner. ny other
concuson, we thnk, woud be ncompatbe wth the ratonae of the Supreme
Court s opnon n the Wshre case. Whether a State ncome ta based ony
In part upon ncome from the mnera property upon whch depeton s camed
shoud be aocated n proportonate part to such property In computng the
mtaton on the depeton aowance, we need not here decde, snce under the
facts adduced such queston docs not arse.
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227
5 19.23(m)-9.
Subsequent to the Wshre ease and n addton to those cases re-
ferred to above, other cases have been decded by the oard of Ta
ppeas hodng varous e penses deductbe from gross ncome n
computng net ncome for purposes of the mtaton on the percentage
depeton aowance. (See St. Marys O cf Gas Co. v. Commssoner,
2 . T. ., 270; Lumach Coa Co. v. Commssoner, memo, opnon,
dated une 15, 19 0, Docket No. 93650; and Sherdan-W yarnng Coa
Co., Inc., v. Commssoner, memo, opnon, dated une 2 ,19 0, Docket
No. 96906.) pparenty, the theory of those cases s that such tems
are attrbutabe to the ta payer s genera operatons ncdent to the
producton of natura resources. It foows that the nstant costs, f
they represent e penses rather than capta tems, shoud be deducted
from gross ncome for the purpose of computng the percentage de-
peton aowance. Under such crcumstances, t seems apparent that
the geoogca and and departments are not to be consdered as a
dstnct actvty not necessary supported by the producton of natura
resources.
In vew of the foregong, t s the opnon of ths offce that a de-
ductbe tems of a busness of e potng a natura resource must be
attrbuted to that actvty. If not drecty attrbutabe to a partcu-
ar producng property, they must be fary aocated to the severa
producng propertes. In the case of a ta payer engaged n e pot-
ng natura resources and n other ncome producng actvtes, deduct-
be tems reatng to the severa actvtes must be fary apportoned
between the producton of natura resources and the addtona actv-
tes, as provded n secton 19.23(m)-1(g) of Reguatons 103. In
short, any deductons used n computng ta abe net ncome, f prop-
ery attrbutabe to the genera producton of natura resources, must
be used n computng net ncome from the property for the purpose
of the percentage depeton aowance. In the event that any e pend-
tures whch are propery attrbutabe to the producton of natura
resources are captazed, any oss deducton resutng therefrom,
taken n computng ta abe net ncome, must aso be ncuded as a
deducton n computng net ncome from the property for the purpose
of the mtaton on the percentage depeton aowance.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
Secton 19.23(m)-9: Determnaton of mnera 19 1-26-10759
contents of mnes and of o or gas wes. T. D. 505
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RTS 3, 9,
ND 19. INCOM T .
mendng secton 19.23(m)-9 of Reguatons 103 and the cor-
respondng provsons of Reguatons 101, 9 , 8G, and 77 reatve to
revsed estmates of mnera contents of mnes and of o or gas
wes.
Treasukt Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The ast paragraph of secton 23(m)-9 of Reguatons 103 Part
19, Tte 26, Code of Federa Reguatons, 19 0 Sup. , of artce
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19.23(m)-16.
228
23(m)-9 of Reguatons 101 secton 9.23(m)-9, Tte 26, Code of
Federa Reguatons, 1939 Sup. , of artce 23(m)-9 of Reguatons
9 secton 3.23(m)-9, Tte 26, Code of Federa Reguatons , of
artce 23(m)-9 of Reguatons 86, and of artce 229 of Reguatons 77
s amended to read as foows:
If the number of recoverabe nnts of mnera In the property has been prevousy
estmated for the pror year or years, and f there has been no known change n
the facts upon whch the pror estmate was based, the number of recoverabe
unts of mnera n the property as of the ta abe year w be the number reman-
ng from the pror estmate, but n any case In whch t s ascertaned ether by
the ta payer or the Commssoner as the resut of operatons or deveopment
work pror to the cose of the ta abe year that the remanng recoverabe mnera
unts as of the ta abe year are materay greater or ess than the number
remanng from the pror estmate, then the estmate of the remanng recoverabe
unts sha be revsed and ,he annua depeton aowance wth respect to the
property for the ta abe year and for subsequent ta abe years w be based upon
the revsed estmate uness a change n the facts requres another revson. Such
revsed estmate w not, however, affect the bass for depeton.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 23(m) and 62 of the Interna Revenue Code (53 Stat., 1 , 32,
26 U. S. C, Sup. , 23(m), 62), sectons 23(m) and 62 of the Revenue
cts of 1938, 1936, and 193 (52 Stat., 62, 80, 26 U. S. C, Sup. I ,
23(m), 62; 9 Stat.. 1660. 1673, 26 U. S. C, Sup. II, 23(m), 62; 8
Stat.. 689, 700. 26 U. S. C, 23(m), 62), and sectons 23(1) and 62 of
the Revenue ct of 1932 ( 7 Stat., 181, 191).)
Gut T. everng.
Commssoner of Interna Revenue.
pproved une 21, 19 1.
erbert . Gaston,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 2 , 19 1, 11.29 a. m.)
Secton 19.23(m)-16: Charges to capta and 19 1-5-10577
to e pense n the case of o and gas wes. G. C. M. 22332
INT RN L R NU COD .
Costs ncurred by a drer n drng an o we on the property
of another for cash and an o payment rght or an undvded share
In the operatng rghts shoud be aocated between the cash and
such rghts. That part of the costs aocabe to the cash s deduct-
be n the year ncurred as a busness e pense. That part of (he
costs aocabe to the o payment rght Is returnabe ony by depe-
ton aowances. That part of the costs aocated to the undvded
share n (he operatng rghts shoud further be aocated between
depetabe and deprecabe e pendtures, and s recoverabe by depe-
ton and deprecaton aowances. The o payment rght and the
undvded share n the operatng rghts so acqured are separate
propertes.
n opnon s requested whether for Federa ncome ta purposes
the cost of drng an o we shoud be aocated between the cash
and property receved as consderaton for the drng, or whether
the cash shoud be frst offset aganst the cost and any e cess be con-
sdered proft and any defct be consdered the cost of the property
acqured.
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229
19.23(n)-16.
The frst stuaton concernng whch an opnon s desred s as
foows:
ta payer contracts to dr a we for another party, usuay a
essee, n consderaton of whch he s to receve 20,000 n cash and
an o payment n the sum of 20,000, whch has a far market vaue
of 10,000. The cost to the ta payer of drng the we s 30,000.
y aocatng the cost of drng between the cash and the o payment
receved, based on ts far market vaue at the tme of the contract,
two-thrds of the cost, or 20,000, s attrbutabe to the cash receved
and s deductbe as a busness e pense, and one-thrd thereof, or
10,000, s attrbutabe to the o payment as the cost thereof and s re-
turnabe ony through depeton. The foowng are the resuts for
ncome ta purposes:
Frst year:
Income (cash receved) 20,000
usness e pense 20, 000
Proft None
Second year:
Income (from o payment) 20, 0C0
Cost 10,000
Percentage depeton 5, 500
Deductbe 10, 000
Proft 10,000
ased on nderson v. everng (310 U. S., 0 , Ct. D. 1 56,
C. . 19 0-1, 108), ths offce s of the opnon that n the ustraton
above the ta payer, by vrtue of hs recept of the o payment rght,
became the hoder of an economc nterest n the o and gas and
s entted to depeton aowances on hs share of the gross ncome
from producton represented by the payments to hm. To the e tent
that the ta payer contrbutes the servces performed and the cost
of materas furnshed to the deveopment pro|ect n return for the
o payment rght, he may be regarded as havng made an nvest-
ment toward e poraton and deveopment costs for an agreed share
of the producton. In determnng the e tent to whch the cost of
the drng represents an nvestment n the o payment rght, ths
offce s of the opnon that the aocaton method, such as outned
above, s proper.
The second stuaton concernng whch an opnon s desred s
smar, e cept that nstead of acqurng an o payment rght, the
ta payer acqures an undvded one-haf nterest n the ease havng
a then vaue of 20,000 n addton to the cash consderaton of
20,000. In G. C. M. 2222 (C. . 19 0-2, 216 ths offce hed that
a of the drng e pendtures made by a drer-assgnee of an
nterest n a ease or tee property n consderaton for such nterest
shoud be captazed, regardess of whether the assgnment of the
nterest was made to the assgnee pror to or after the drng of
the wes. That concuson was based on the theory that such as-
sgnee by hs drng e pendtures made a capta nvestment n
the nterest acqured. Thus, the same prncpe apped n the frst
stuaton governs here, and t s proper to aocate the cost of drng
between the cash and the nterest n the ease acqured by the
ta payer.
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19.23(m)-16.
230
further probem, not present n the case of the o payment,
s presented where the ta payer (drer) acqures an undvded n-
terest n the ease. In ths case the tota cost of drng was 30,000,
of whch 1 ,000 represents depetabe capta e pendtures and
16,000, cost of deprecabe equpment. y aocatng the cost of
drng between the cash and the nterest n the ease receved, t s
determned that 15,000 s aocabe to the ease nterest. owever,
unke an o payment hoder, the ease nterest hoder owns part of
the deprecabe equpment on the property. It becomes necessary,
therefore, to determne what part of the 15,000 aocated to the
ease nterest s attrbutabe to the depetabe capta account and
what part to the deprecabe capta account. The method empoyed
s to aocate the entre capta base of the ease nterest ( 15,000)
between the depetabe and deprecabe capta accounts n the rato
that the depetabe and deprecabe e pendtures bear to the tota
cost of drng. Thus, 1 /30 of 15,000, or 7,000, s aocated to
the depetabe capta account, whe 16/30 of 15,000, or 8,000, s
aocated to the deprecabe capta account. Ths offce s of the
opnon that such method of aocaton s proper n determnng
the depetabe and deprecabe bases n such cases.
The thrd stuaton concernng whch an opnon s requested n-
voves a case smar to both the frst and second stuatons, e cept that
the ta payer receves both an o payment rght and an nterest n
the ease n addton to cash. ocaton of the tota cost of drng
s made between these three acqustons on the bass of ther pro-
portonate vaues at the tme of the contract n the same manner as
outned n the frst two stuatons. Thus, assumng that the cost of
drng amounted to 0,000, the amount of cash receved was 20,000,
and the vaues of the nterest n the ease and o payment were
10,000 each, the aocaton of the tota cost of drng woud be as
foows:
One-haf (the rato of 20,000 cash to 0,000, tota vaue of cash,
o payment, and ease nterest) of the tota cost of drng ( 0,000),
or 20,000, shoud be aocated to the cash and s deductbe from
gross ncome as a busness e pense.
One-fourth (the rato of 10,000, the vaue of the nterest n the
ease, to 0,000, tota vaue of cash, o payment, and ease n-
terest) of the tota cost of drng ( 0,000), or 10,000, shoud be
aocated to the ease nterest as ts capta bass| whch n turn
shoud be aocated between depetabe and deprecabe capta ac-
counts n accordance wth the method empoyed n the second
stuaton.
One-fourth (the rato of 10,000, the vaue of the o payment, to
0,000, tota vaue of cash, o payment, and ease nterest) of the
tota cost of drng ( 0,000), or 10,000, shoud be aocated to the
o payment as ts capta bass.
further probem s aso presented here, that s, whether the o
payment rght and ease nterest acqured shoud be treated as two
separate propertes or as one. Ths offce s of the opnon that the
two rghts acqured shoud be treated as separate propertes, as was
done n the thrd stuaton presented above. ere not ony are the
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231
19.2 -2.
o payment rght and the ease nterest depetabe nterests n the
property, but they are dssmar and adverse nterests. n o pay-
ment rght burdens the workng nterest out of whch t s carved
and e pres when t yeds the stated amount of o or o proceeds.
The ease nterest does not e pre unt the termnaton of the ease
tsef. Ths offce, therefore, s of the opnon that the o payment
rght and the nterest n the ease are separate propertes. The fact
that both nterests are acqured at the same tme s mmatera.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 2 . IT MS NOT D DUCTI L .
INT RN L R NU COD .
Loss on sae of Natona Defense Seres obgatons. (See I. T.
3 75, page 199.)
Secton 19.2 -2: Capta e pendtures. 19 1-16-1068
( so Secton 23(c), Secton 19.23(c)-.) I. T. 3 68
INT RN L revenue code.
Fng fees requred to be pad by corporatons under secton
21.201 of tbe Mchgan Statutes nnotated for fng, e amnng,
and certfyng artces of ncorporaton consttute capta e pend-
tures and are not deductbe from gross ncome for Federa ncome
ta purposes.
Franchse fees requred to be pad under secton 21.203 of the
Mchgan Statutes nnotated upon ncorporaton of Mchgan cor-
poratons, or upon appcaton for admsson by foregn corporatons,
for the prvege of e ercsng ther corporate franchses wthn
the State, are deductbe from gross ncome as ta es under secton
23(c) of the Interna Revenue Code.
dvce s requested as to the treatment for Federa ncome ta pur-
poses of (1) fng fees, and (2) franchse fees requred to be pad
under the Mchgan statutes by domestc and foregn corporatons
for the prvege of e ercsng ther corporate franchses wthn that
State.
Secton 10136 of the 1929 Comped Statutes of Mchgan corre-
sponds to secton 21.201, voume 15, of the Mchgan Statutes nno-
tated, whch provdes as foows:
Sec. 21.201. Fng and msceaneous fees; dsposton.
Secton 1. ereafter the fees to be pad to the secretary of state by or n
behaf of corporatons, for the purposes heren specfed sha be as foows:
For fng, e amnng and certfyng artces of domestc corporatons fve (5)
doars; for fng and e amnng artces or certfcates of ncorporaton, and
other papers connected wth the appcaton of a foregn corporaton for adms-
son to do busness n Mchgan, ten (10) doars: a of whch fees
sha be pad by the corporaton at the tme of fng or when the servce s
rendered by the secretary of state. such fees sha be n addton to the
franchse fees prescrbed n ths act, and sha, when coected, bp covered nto
the treasury of the State, and there be credted to the genera fund.
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5 19.25-2.
232
Secton 10138 of the 1929 Comped Statutes corresponds to secton
21.203, voume 15, of the Mchgan Statutes nnotated, whch pro-
vdes that:
Sec. 21.203. Franchse fee of proft corporaton; amount; ncrease n capta
stock, foregn corporatons; budng and oan corporatons; corporaton defned.
Sec. 3. very domestc corporaton hereafter organzed for proft, and every
foregn corporaton for proft hereafter appyng for admsson to do busness
wthn ths State, sha at the tme of fng ts artces or appyng for adms-
son, as the case may be, pay to the secretary of State, as an organzaton fee
and for the prvege of e ercsng ts franchses wthn ths State, a sum equa
to one-haf ( ) m upon the doar for each doar of the authorzed capta
stock of such corporaton; and each corporaton heretofore or hereafter ncor-
porated under the aws of or admtted to do busness n ths State, sha pay a
proportonate fee upon each and any ncrease n ts authorzed capta stock
made subsequent to the passage of ths act; corporatons whose
terms of corporate e stence sha have e pred, or sha be about to e pre by
mtaton, and who sha seek to e tend or renew such corporate e stence, n
accordance wth aw, sha be regarded as new corporatons for the purpose of
the payment of the fees provded by ths act, and sha be requred to pay such
fees before the e tenson or renewa of such corporate e stence.
The fng fees requred under secton 21.201, supra, to be pad by
corporatons to the secretary of state of Mchgan for fng, e amn-
ng, and certfyng ther artces of ncorporaton are organzaton
e penses and, therefore, consttute capta e pendtures whch are not
deductbe from gross ncome for Federa ncome ta purposes. (Sec-
ton 19.2 -2 of eguatons 103.)
Franchse fees provded for under secton 21.203, supra, and pad
by domestc corporatons to the secretary of state of Mchgan at the
tme of ncorporaton, or pad by foregn corporatons upon appyng
for admsson, as the case may be, for the prvege of e ercsng ther
corporate franchses wthn the State of Mchgan, are aowabe de-
ductons as ta es under secton 23(c) of the Interna Revenue Code.
S CTION 25. CR DITS OF INDI IDU L
G INST N T INCOM .
Secton 19.25-2: arned ncome credt. 19 1-12-10651
I. T. 3 58
INT RN L R NU COD .
I. computng the earned ncome credt for Federa ncome ta
purposes the tu of 1 per cent mposed by the cty of Phadepha
upon saares, wages, or other compensaton s not propery ao-
cabe to or chargeabe aganst the saary receved by n 19 0.
dvce s requested whether the per cent ta mposed by the
cty of Phadepha upon saares, wages, and other compensaton
s propery aocabe to or chargeabe aganst the saary receved
by n 19 0 n the amount of doars for the purpose of com-
putng hs earned ncome credt. In addton to hs saary of .b
doars, had nvestment ncome n e cess of the ta mposed upon
hs saary, whch ta was the ony deducton camed.
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233
19.27(c)-.
The ta n queston s mposed under an ncome ta ordnance
approved by the mayor December 13, 1939. Secton 2 of the ord-
nance provdes n part as foows:
n annua ta for genera revenue purposes of 1 per centum Is hereby
mposed on (a) saares, wages, commssons and other compensaton earned
after anuary 1, 19 0, by resdents of Phadepha; and on (6) saares, wages,
commssons and other compensaton earned after anuary 1, 19 0, by nonres-
dents of Phadepha for work done or servces performed or rendered n Pha-
depha ; and on (c) the net profts earned after anuary 1, 1989, of busnesses,
professons or actvtes conducted by such resdents, and on ( ) the net profts
earned after anuary 1, 1939, of busnesses, professons or other actvtes con-
ducted n Phadepha by nonresdents.
Secton 3 of the ordnance provdes for the fng of a return wth
the recever of ta es by each person whose earnngs or profts are
sub|ect to the ta . Secton of the ordnance provdes for the
wthhodng of the ta , makng t the duty of the empoyer to deduct
monthy the ta of 1 per cent on the saary, wage, or other com-
pensaton due from the empoyer to the empoyee.
The ta mposed by the cty of Phadepha under the above-
mentoned ordnance s an ncome ta . Secton 23(c) of the Interna
Revenue Code provdes for the deducton n computng net ncome
of Ta es pad or accrued wthn the ta abe year wth certan
e ceptons not here matera. Consequenty, the ncome ta mposed
by tne cty of Phadepha s an aowabe deducton for Federa
ncome ta purposes. (I. T. 3370, C. . 19 0-1, 32; I. T. 3382. C. .
19 0-1, 12.) arned net ncome s defned n secton 25(a) (C)
of the Code to mean the e cess of the amount of the earned ncome
over the sum of the earned ncome deductons, and the term arned
ncome deductons s defned n secton 25(a) ( ) to mean such
deductons as are aowed by secton 23 for the purpose of computng
net ncome, and are propery aocabe to or chargeabe aganst earned
ncome Itacs supped.
The ta here n queston s not propery aocabe to or charge-
abe aganst the earned ncome n the sense that t s ncurred n
earnng the ncome. (Cf. Mmeograph 3283, C. . I -1, 1 (1025).)
The earned net ncome on whch the earned ncome credt s based s
s saary of doars not reduced by the amount of the ta mposed
by the cty of Phadepha.
S CTION 27(c). CORPOR TION DI ID NDS P ID
CR DIT: DI ID ND C RRY-O R.
Secton 19.27 (c)-: Dvdend carry-over. 19 1-2 -107 7
( so Secton 50 , Secton 19.50- -1 | Secton T. D. 5052
506. Secton 19.506-6.)
TITL 2 INT RN L R NU . C PT R I. SU C PT R . P RT 19.
INCOM T .
Reguatons 103 amended to conform to provsons of Pubc
Law 18 (Seventy-seventh Congress), whch amended the Interna
Revenue Code so as to correct certan msceaneous errors.
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19.27(c)- .
23
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and others concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. to the provsons of Pubc Law 18
(Seventy-seventh Congress), approved March 17, 19 1, whch cor-
rected certan msceaneous errors of a cerca nature n the Interna
Revenue Code, such reguatons are amended as foows:
Paragraph 1. The foowng s nserted mmedatey precedng
secton 19.27 (c)-:
Pub|o Law 18 ( ppboved March 17, 19 1).
Resoved That the Interna Revenue Code, as amended,
be amended as foows:
In secton 27(c), Insert 1936 or before 1937 .

Sec. 2. The sectons of the Interna Revenue Code amended by ths
|ont resouton sha have effect as f such sectons, as so amended,
had been enacted n the Interna Revenue Code on February 10, 1939.
Par. 2. The words 1936 or are nserted n the second paragraph
of secton 19.27(c)- mmedatey precedng 1937 .
Par. 3. The foowng s nserted mmedatey precedng secton
19.113(a) ()-:
Pubc Law 18 ( pproved Mabch 17, 19 1).
Resoved That the Interna Revenue Code, as amended,
be amended as foows:

In secton 113(a) (11), nsert or the Revenue ct of 1938, 52 Stat.
50S, after 9 Stat. 1G98, .
In secton 113(a) (11), nsert or the Revenue ct of 1938 at the
end of the thrd sentence nnd after the Revenue ct of 1936
wherever t appears n the ast sentence.

Sec. 2. The sectons of the Interna Revenue Code amended by ths
ont resouton sha have effect as f such sectons, as so amended,
had been enacted n the Interna Revenue Code on February 10, 1939.
Par. . The foowng s nserted mmedatey precedng secton
19.50 -1:
Pubc Law 18 ( pproved March 17, 19 1).
Resoved That the Interna Revenue Code, as amended,
be amended as foows:

In secton 50 (a), nsert or of secton 05 of the Revenue ct of
1938 after subsecton (c) of ths secton
In secton 50 (a), nsert or under Tte I of the Revenue ct of
1938 after under ths subchapter .
In secton 50 (a), nsert begnnng after December 31, 1937 after
any precedng ta abe year .
In secton 50 (b), strke out the perod at the end of the subsecton
and nsert n eu thereof a semcoon.
In secton 50 (c)(3)( ), nsert before the cosng mark of paren-
thess the foowng: or, n the case of a ta abe year begnnng In
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235
5 19.27(c)- .
1939, by the amount aowed under secton 05(c) of the Revenue ct
of 1938 n the computaton of the ta under Tte I of such ct for
a ta abe year begnnng pror to anuary 1, 1939 .

Seo. 2. The sectons of the Interna Revenue Code amended by ths
|ont resouton sha have effect as f such sectons, as so amended, had
been enacted n the Interna Revenue Code on February 10, 1939.
Par. 5. The second sentence of secton 19.50 -1 s amended to read
as foows:
In computng the dvdends pad credt for the purposes of subchapter of
chapter 2, the amount aowed under secton 50 (c) of the Interna Revenue
Code, as amended, or secton 05(c) of the Revenue ct of 1938 n the com-
putaton of the ta under subchapter of chapter 2 or under Tte I of the
Revenue ct of 1938 for any precedng ta abe year begnnng after December
31, 1937, s consdered a dvdend pad In such precedng ta abe year and not
n the year of dstrbuton.
Par. 6. The foowng s nserted mmedatey precedng secton
19.506-1:
Pubc Law 18 ( pproved March 17,19 1).
Resoved That the Interna Revenue Code, as amended,
be amended as foows:

In secton 506(c) (2) ( ), nsert after , or both, the foowng: of
ths secton or secton 07 of the Revenue ct of 1938, .
In secton 506(c)(2)( ), nsert after , or both, the foowng:
, of ths secton or secton 07 of the Revenue ct of 1938, .

Seo. 2. The sectons of the Interna Revenue Code amended by ths
ont resouton sha have effect as f such sectons, as so amended,
had been enacted n the Interna Revenue Code on February 10, 1939.
Par. 7. The ast sentence of secton 19.50G-6 s amended to read as
foows:
If a corporaton cams and receves the beneft of the provsons of secton 506
of the Interna Revenue Code or secton 07 of the Revenue ct of 1938 based
upon a dstrbuton of defcency dvdends, that dstrbuton does not become
a part of the basc surta credt for the purposes of subchapter of chapter 2;
nor s t made the bass of the 21/2-month carry-back credt provded for n
secton 50 (c) of the Interna Revenue Code or n secton 05(c) of the Revenue
ct of 1938.
(Ths Treasury decson s ssued under the authorty contaned n
Pubc Law 18 (Seventy-seventh Congress) and secton 02 of the
Interna Revenue Code.)
Guy T. everng,
Commssoner of Interna Revenue.
pproved une 10, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 12- 19 1, 11.26 a. m.)
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19. 1-1. 236
P RT I . CCOUNTING P RIODS ND M T ODS OF CCOUNTING.
S CTION 1. G N R L RUL .
Secton 19. 1-1: Computaton of net ncome.
INT RN L R NU COD .
19 1- -10572
I. T. 3
The foowng rates of e change are accepted by the ureau of In-
terna Revenue as the current market rates of e change prevang as
of December 31,19 0:
Country or cty.
rgentna
ustraa
egum
raz- __
rtsh Inda
ugara
Canada
Che
Chna (Shangha)
Coomba
Cuba
Denmark
ngand
Fnand
France
Germany
Greece
ong ong
ungary.
Itay
Monetary
unt.
Peso
Pound
ega
Mrcs
Rupee
Lev
Doar
Peso
Yuan
Peso
Peso
rone
Pound
Markka
Franc
Recusmark
Drachma...
Doar
PenRO
Lra
aue n
terms of
Unted
States
money.
307733
22 1100
( )
msn
30178.1
( )
909090
051660
05 100
572350
910000
( )
035000
020116
( )
:;;s)s2n
( )
236187
197700
050 S3
Country or cty.
apan _.
Me co
Netherands
New Zeaand
Norway
Panama
Peru
Phppne Isands.
Poand
Portuga-
Rumana.
South frca
Span
Strats Settements
Sweden
Swtzerand
Uruguay
enezuea
Yugosava
Monetary
unt.
Yen....
Peso...
Guder.
Pound-
rone..
aboa.
So
Peso
Zoty.-
scudo.
Leu
Pound.
Peseta
Doar..
rona..
Franc...
Peso...
ovar.
Dnar ..
aue In
terms of
Unted
States
money
0. 23 3R7
.20 750
m
3.227500
( )
L 000000
.150000
.500000
( )
.039990
( )
3.9SOOOO
.091300
. 71000
.238235
.23206
658300
.310000
. 022 00
1 Offca rate.
1 No rate avaabe.
Controed rate.
Secton 19. 1-1: Computaton of net ncome. 19 1-11-10636
I. T. 3 57
INT RN L R NU COD .
The rate of e change accepted by the ureau of Interna Revenue
for the French franc as of December 31, 19 0, s 0.0228.
Secton 19. 1-1: Computaton of net ncome. 19 1-12-10652
( so Secton 19. 2- .) I. T. 3 59
INT RN L R NU COD .
Where under the terms of a f ed-fee Government contract fre-
quent payments are to be made to the contractor to cover costs of
constructon ncurred by the contractor pus an amount computed
on such costs on account of the f ed fee, and as such payments are
made the parts constructed and materas on account of whch such
payments are made mmedatey become the soe property of the
Unted States, the ncome to the contractor from the contract accrues
n the ta abe years n whch the ncome Is earned and the rght of
the ta payer to payment therefor s f ed. In order ceary to refect
the net ncome, the gross ncome from the contract and from other
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237
19. 1-1.
contracts of ths type, Incudng the so-caed rembursements of cost,
shoud be reported by the ta payer (reportng on the accrua bass) n
the returns for the ta abe years n whch the ncome accrues, and
there shoud be aowed as deductons therefrom the costs or e penses
whch are reated to such gross ncome. Ths concuson does not
affect the ta payer s present method of reportng the ncome from
ong-term contracts whch may propery be reported on the competed
contract bass.
dvce s requested by the M Company reatve to the proper method
of reportng ncome from a certan type of Government contract for
the purpose of Federa ncome ta aton.
The ta payer keeps ts accounts and fes ts returns on the accrua
bass and reguary reports ts ncome from ong term contracts for
the ta abe year n whch each such contract s competed. It be-
eves, however, that the competed contract bass w not be sats-
factory under the terms of the partcuar Government contract here
under consderaton.
The contract n queston specfes an amount of estmated aggregate
cost upon the bass of whch a specfed f ed fee for ts proft s to
be pad to the M Company, the contractor. It provdes for sem-
monthy pa|nnents (or more frequenty, f |ustfed) as earned to
cover costs of constructon ncurred by the contractor, pus an amount
computed on such costs on account of the f ed fee. The payments on
account of the f ed fee are to be contnued unt the tota amount
pad equas a desgnated fgure. The remander of the f ed fee, ess
a desgnated reserve, s to be pad upon premnary acceptance of
the artce constructed, and such reserve s to be pad upon fna ac-
ceptance. n ncrease of the f ed fee s provded for n event that the
Government ncreases the cost, and a bonus s provded for acceerated
devery and for savng n cost, the sum of a bonuses not to e ceed
a desgnated amount. s payments of cost and f ed fee are made
by the Government, a parts constructed and materas on account of
whch such payments have been made mmedatey become the soe
property of the Unted States, but ths provson s not construed
as reevng the contractor from the responsbty for the care and
protecton of materas and work upon whch payments have been
made or as a waver of the rght of the Government to requre fu-
fment of a the terms of the contract. The actua cost of correctng
a defects and defcences for whch the contractor s hed respon-
sbe s to be deducted from the payment n fna settement.
Upon consderaton of the terms of the contract n queston, the
ureau s of the opnon that the ncome from the contract accrues n
the ta abe years n whch the ncome s earned and the rght of the
ta payer to payment therefor s f ed. Therefore, t s hed, n order
ceary to refect the net ncome, that the gross ncome from the con-
tract and from other contracts of ths type, ncudng the so-caed
rembursements of cost, shoud be reported by the ta payer (report-
ng on the accrua bass) n the returns for the ta abe years n whch
the ncome accrues, and there shoud be aowed as deductons there-
from the costs or e penses whch are propery aowabe as deductons
under the appcabe ncome or e cess profts ta aw and whch are
reated to such gross ncome. (See sectons 1 and 3 of the Interna
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1 9. 1- .
238
Revenue Code and sectons 19. 1-1 and 19. 3-1 of Reguatons 103.)
In regard to the mantenance and the preservaton of adequate ac-
countng records, see sectons 1 and 5 of the Interna Revenue Code
and sectons 19. 1-3 and 19.5 -1 of Reguatons 103.
Ths rung s wthout effect upon the ta payer s present method of
reportng the ncome from ong term contracts whch may propery be
reported on the competed contract bass.
Secton 19. 1- : ccountng perod. 19 1-15-10672
I. T. 3 66
INT RN L R NU COD .
The M Company, ncorporated under the aws of Oho, on Novem-
ber 3, 1939, s not entted to fe ts Federa ncome ta return
on the bass of a fsca year ended November 30, 19 0, as t dd
not fe a frst return for the perod ended November 30, 1939, and a
fsca year has not been estabshed n accordance wth the regua-
tons. The corporaton must fe ts returns on a caendar year
bass unt a fsca year has been propery estabshed.
dvce s requested whether the M Company may fe ts Federa
ncome ta returns on the bass of fsca years endng November 30,
under the crcumstances heren set forth.
The artces of ncorporaton of the M Company (an Oho corpora-
ton), dated November 1, 1939, were fed on November 3, 1939.
It dd not perfect ts organzaton unt December 18, 1939, when
the by-aws of the corporaton were adopted, the offcers and drectors
of the corporaton eected, and, pursuant to the artces of ncorpora-
ton, the amount of 500 deposted n a bank, representng the capta
wth whch the corporaton commenced busness, as requred by sec-
ton 8623-13 of the Genera Corporaton ct of the State of Oho.
On the foowng day the corporaton ssued ts stock. It appears that
pror to December 18, 1939, the corporaton transacted no busness
and had no ncome.
t a speca meetng of the board of drectors of the corporaton hed
on May 1, 19 0, counse for the corporaton advsed the board that,
uness otherwse f ed by the board, the corporaton s fsca year woud
automatcay be the caendar | ear, after whch the foowng resouton
was adopted:
Resoved, that the fsca year of ths corporaton be and the same s hereby
f ed from December the 1st to November the 30th of each year.
It s contended that the corporaton shoud be permtted to fe ts
frst return for the fsca year ended November 30, 19 0, snce the
estabshment on May 1, 19 0, of the corporaton s fsca year ended
November 30, 19 0, was made durng the corporaton s frst year of
busness, even though ts artces of ncorporaton were fed more than
one year pror to November 30, 19 0.
The frst queston for determnaton s whether the corporaton s
e stence began (1) on the date of fng the artces of ncorporaton,
vz, November 3, 1939, or (2) when t had perfected ts organzaton
and frst transacted busness, vz, on December 18, 1939. If the cor-
poraton s e stence can be sad to date from the tme t perfected ts
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239
19. 1- .
organzaton and frst transacted busness, then the corporaton s frst
fsca year coud propery be consdered as endng on November 30,
19 0, for whch year a return woud be due on February 15, 19 1.
owever, f the corporaton s e stence began on November 3, 1939,
the date of fng ts artces of ncorporaton, then a return for the
perod ended November 30,19 0, woud cover a perod of more than 12
months, no return havng been fed for the perod November 3, 1939,
to November 30, 1939. return coverng a perod of more than 12
months s e pressy prohbted by secton 19. 7-1 of Reguatons 103,
whch provdes that No return can be made for a perod of more
than 12 months.
Secton 8623- of the Genera Corporaton ct of the State of Oho
provdes for the ncorporaton of corporatons wthn that State.
Secton 8623-7 of that act reads as foows:
When corporate e stence begns. Upon the fng of the artces the ncorpo-
rators and ther assocates, successors and assgns by the name stated heren,
sha, from the date of such fng, be and consttute a body corporate, wth
perpetua successon.
Such secton ceary f es the date upon whch the corporaton be-
comes a body corporate, even though t s not authorzed to commence
busness unt the amount of capta stated n the artces of ncorpora-
ton as that wth whch t w begn busness has been pad n.
It s provded n secton 19.52-1 of Reguatons 103 that (1) a
corporaton havng an e stence durng any porton of a ta abe year
s requred to make a return; (2) that a corporaton whch has receved
a charter, but has never perfected ts organzaton, whch has transacted
no busness and had no ncome from any source, may upon presenta-
ton of the facts to the coector be reeved from the necessty of makng
a return as ong as t remans n an unorganzed condton; and (3)
that n the absence of a proper showng to the coector, such a corpo-
raton w be requred to make a return. Secton 19. 1- of such regu-
atons states that No fsca year w, however, be recognzed uness
before ts cose t was defntev estabshed as an accountng perod
by the ta payer and the books of such ta payer were kept n accordance
therewth, and that person havng no such fsca year must make
hs return on the bass of the caendar year.
In vew of the foregong, t s hed that the corporaton s frst ta abe
year began on November 3, 1939, the date upon whch the artces
of ncorporaton were fed, and that n order to estabsh the corpora-
ton s fsca year as endng November the 30th of each year the
necessary acton was requred, under secton 19. 1- , supra, to be taken
on or before November 30, 1939. Snce such acton was not taken,
nor was a fsca year endng wthn the frst 12 months of the corpora-
ton s e stence estabshed durng such perod, t s hed that the cor-
poraton must make and fe ts Federa ncome ta returns on the
caendar year bass unt such tme as t makes a tmey appcaton
for a change of accountng perod under the provsons of secton 6
of the Interna Revenue Code. Consequenty, a return for the
perod November 3, 1939, to December 31, 1939, s requred to be
fed, even though the corporaton had no ncome for such perod.
(Cf. O. D. 1120, C. . 5, 233 (1921).)
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19. 2-1.
2 0
S CTION 2 P RIOD IN W IC IT MS OF
GROSS INCOM INCLUD D.
Secton 19. 2-1: When ncuded n gross ncome. 19 1-26-10756
I. T. 3 85
INT RN L R ND COD .
Where a ta payer keepng hs books and fng hs returns on
the cash recepts and dsbursements bass enters nto a contract
on December 31 to se stock on a stock e change for more than the
bass thereof, the gan derved s not returnabe for Federa ncome
ta purposes unt the ta payer has actuay or constructvey re-
ceved cash or ts equvaent under the contract of sae.
I. T. 3323 (C. . 1939-2, 90) modfed.
dvce s requested wth respect to the appcabty of I. T.
3323 (C. . 1939-2, 90) to a ta payer keepng hs accounts on the
cash recepts and dsbursements bass who derves a gan from
securtes sod on December 31, where devery s not made, nor pay-
ment of the sae prce receved, unt the foowng year.
I. T. 3323, supra, was based on G. C. M. 21503 (C. . 1939-2, 205),
n whch t was hed that where a contract to se stock on a stock
e change for ess than the bass thereof was entered nto on December
31, 1930, and devery of the stock was made n the reguar way on
anuary 2, 1931, the oss on the transacton was ncurred n the year
1930 and consttutes a proper deducton for that year. In I. T.
3323, supra, t was hed that the rue ad down n G. C. M. 21503,
supra, wth respect to a oss appes equay to a smar transacton
n whch gan s reazed, and that, therefore, such gan s returnabe
for Federa ncome ta purposes for the year n whch the trans-
acton was consummated e cept for devery of the stock.
Further consderaton has been gven to the queston covered by
I. T. 3323, supra, n connecton wth the decson of the oard of
Ta ppeas (nvovng a smar stuaton) n arden F. Tayor
et u . v. Commssoner ( 3 . T. ., 563, acquescence n ths ssue
page 10, ths uetn ), wheren the oard hed (syabus) Where
saes of securtes were made on ast two days of 1936 but deveres,
settement, and payment of the sae prce were made n 1937, the gan
s not reazed n 1936 by one on a cash bass.
though wth respect to a ta payer reportng on the accrua
bass t appears correct to say that such a gan s returnabe n the
year n whch the contract of sae was entered nto and, therefore,
the purchaser s ega obgaton to make payment to the ta payer
became reasonaby certan n fact and ascertanabe n amount
Sprng Cty Foundry Co. v. Commssoner, 292 U. S., 182, Ct. D.
829, C. . III-1, 281 (193 ); Lucas v. North Te as Lumber Co.,
281 U. S., 11, Ct. D. 169, C. . I -1, 29 (1930)), nevertheess, as to a
ta payer reportng on the cash recepts and dsbursements bass,
the gan woud appear to be returnabe ony n the year n whch
the seer has actuay or constructvey receved cash or an equvaent
under the contract of sae. (Secton 2, Interna Revenue Code.)
ccordngy, I. T. 3323, supra, s modfed by substtutng the
foowng for the ast paragraph thereof:
It s hed that as to a ta payer reportng on the accrua bass the rue ad
down In G. C. M. 21503, supra, wth respect to a oss appes equay to a
smar stuaton n whch gan s reazed. (See Sprng Cty Foundry Co. y.
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2 1
19. 3-2.
Commssoner, 292 U. S., 182, Ct. D. 829, C. . III-1, 281 (193 ) ; Lucas v.
North Te as Lumber Co., 281 U. S., 11, Ct. D. 1(59, C. . I -1, 29 (1930).)
s to a ta payer reportng on the cash recepts and dsbursements bass,
however, the gan s not returnabe unt he has actuay or constructvey
receved cash or an equvaent under the contract of sae. (See secton 2,
Interna evenue Code.)
Secton 19. 2- : Long-term contracts.
INT RN L R NU COD .
F ed-fee Government contract. (See I. T. 3 59, page 236.)
S CTION 3. P RIOD FOR W IC D DUCTIONS
ND CR DITS T N.
Secton 19. 3-2: When charges deductbe. 19 1-7-10597
I. T. 3 50
INT RN L R NU COD .
Where a property owner sustans a oss by reason of faure to
redeem and sod to the State of Mchgan for denquent ta es, hs
oss s deductbe for Federa ncome ta purposes n the ta abe year
durng whch the 18-month perod for redempton e pres, regardess
of the fact that the property was subsequenty redeemed by the
muncpaty for the beneft of the owner under ct No. 155 of the
Pubc cts of Mchgan, as amended.
dvce s requested reatve to the effect of the decson of the Su-
preme Court of Mchgan n the case of Sparks v. udtor Genera
(292 Mch., 58, 290 N. W., 327) on the appcaton of the genera rue
that acquston of a ta payer s property by the State of Mchgan
under a ta sae does not gve rse to a oss for Federa ncome ta
purposes unt the e praton of the redempton perod.
In the Sparks case, supra, the owner of and whch was sod for
denquent ta es on May 3, 1938, made no effort to pay the denquent
ta es durng the foowng 18-month redempton perod. Upon the
e praton of that perod, November 3, 1939, tte became vested n the
State of Mchgan, and ordnary under the provsons of the Mch-
gan statutes ths and woud have been sod oy the State at aucton
durng the foowng February. owever, ct No. 155 of the Pubc
cts of Mchgan, 1937, as amended by ct No. 2 , Pubc cts, 1039,
provdes n part that:
Sec. 5. ny muncpaty may at any tme pror to the sae provded for n
secton 7 of ths act make appcaton to the State and offce board for the wth-
hodng of the ands In sad appcaton from the sad sae, for a perod of one
year from the date the tte vests n the State, and the sad State and offce board
sha wthhod such ands from sad sae, whch ands sha be hed sub|ect to the
en of the cty for denquent ta es and speca assessments. In the event the
ta es on sad ands ncuded n sad appcaton are not redeemed or pad by
pad muncpaty, such ands sha be offered for sae at the ne t succeedng sae
hed the foowng year .
( Muncpaty s defned to ncude any county, cty, vage,
townshp, or schoo dstrct.)
On December 7, 1939, the owner pad to the townshp treasurer the
amount of money for whch the and had been sod to the State. That
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19. 6-1.
2 2
offcer setted wth the county treasurer (Mr. Sparks) for the ta tem,
and the atter tendered the proporton thereof due the State to the
audtor genera, who refused to accept t, whereupon acton was
brought to requre the audtor genera to accept the money tendered
for the redempton of the and. In ts decson, the Supreme Court
of Mchgan stated that the secton of the amended ct No. 155, supra,
does not gve the owner an e tenson of tme wthn whch to pay ta es
and redeem property after tte has become vested n the State, but
that f gven at a t s gven to the muncpaty and not the owner,
and the court coud not by constructon e tend the tme or vary the
terms of a statute under whch the rght of redempton from a ta sae
may be e ercsed. The court hed, however, that the muncpaty s
rght to pay the ta es and redeem the and coud be e ercsed for the
beneft of the former owner of the and, and the court stated that
where a redempton s made wth money pad by the property owner
n satsfacton of denquent ta es, the State shoud deed the and
drecty to such former owner.
The State of Mchgan becomes the absoute owner of and sod for
ta es upon the e praton of the 18-month perod for redempton, and
the former owner s dvested of a rght and tte thereto on that date.
though a muncpaty may secure a rght to redeem after that date,
and athough the court hed that the muncpaty s rght may be e er-
csed for the beneft of the former property owner, the court aso stated
that ths rght to redeem s the soe rght of the muncpaty, and t
does not appear that the former owner can compe the muncpaty to
redeem for hs beneft.
It s, therefore, the opnon of the ureau that n cases n whch a
property owner sustans a oss by reason of faure to redeem and sod
to the State of Mchgan for denquent ta es, hs oss s deductbe for
Federa ncome ta purposes n the ta abe year durng whch the
18-month perod for redempton e pres; and that the year n whch
such oss s aowabe s not postponed by the Mchgan aw (as nter-
preted n the case of Sparks v. udtor Genera, supra), whch aows
a muncpaty to redeem the and for the beneft of the property owner
subsequent to the e praton of the property owner s 18-month perod
for redempton. ( s to the genera rue see G. C. M. 19367, C. .
1937-2, 115.)
S CTION f . C NG OF CCOUNTING P RIOD.
Secton 19. 6-1: Change of accountng perod. 19 1-26-10760
T. D.5055
TITL 28 INT RN L R NU . C TT R I. SU CTI PT U , P RT 19.
INCOM T .
Reguatons 103, amended. Change of accountng perod.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 19. 6-1 of Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. s amended by strkng out the
frst sentence thereof readng as foows:
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2 3
19.101(6)- .
If a ta payer changes hs accountng perod he sha, pror to the e praton
of 30 days from the cose of the proposed perod for whch a return woud be
requred to effect the change, furnsh to the coector, for transmsson to the
Commssoner, the nformaton requred on Form 1128.
and by substtutng n eu thereof the foowng two sentences:
If a ta payer (other than a subsdary corporaton requred to change ts
accountng perod by reason of the provsons of secton 33.1 of Reguatons
110) changes hs accountng perod he sha, pror to the e praton of 30 days
from the cose of the proposed perod for whch a return woud be requred
to effect the change, furnsh to the coector, for transmsson to the Comms-
soner, the Informaton requred on Form 1128. If a change of accountng
perod of a subsdary s requred for e cess profts ta purposes under secton
83.1 of Reguatons 110, the nformaton requred on Form 1128 sha be fur-
nshed by the subsdary at or before the tme of fng the consodated e cess
profts ta return.
(Ths Treasury decson s prescrbed pursuant to sectons 6
and 62 of the Interna Revenue Code (53 Stat., 26, 32).)
Guy T. everno,
Commssoner of Interna Revenue.
pproved une 21, 19 1.
erbert . Gaston,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 2 , 19 1, 11.20 a. m.)
P RT . R TURNS ND P YM NT OF T .
S CTION 56. P YM NT OF T .
Secton 19.56-1: Date on whch ta sha be pad.
INT RN L R NU COD .
Defense ta where credts aganst ta equa or e ceed tota ta
abty. (See I. T. 3 70, page 191.)
SU C PT R C SUPPL M NT L PRO ISIONS.
SUPPL M NT R T S OF T .
S CTION 101. MPTIONS FROM T
ON CORPOR TIONS.
Secton 19.101 (6)-: Regous, chartabe, 19 1-18-10699
scentfc, terary, and educatona or- G. C. M. 2255
ganzatons and communty chests.
INT RN L R NU COD .
The N ssocaton, a corporaton organzed to provde meden care
and hosptazaton for ts members consstng of cv empoyees of
the e ecutve branch of the Unted States Government, and de-
rvng ts ncome from membershp fees and monthy dues, s not
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19.101(6)- .
2
organzed and operated for chartabe purposes wthn the |ur-
vew of secton 101(6) of the Interna Revenue Code. owever, the
assocaton s e empt from Federa ncome ta under secton 101(19)
of the Code.
n opnon s requested whether the N ssocaton s e empt from
Federa ncome ta under secton 101(6) or secton 101(19) of the
Interna Revenue Code, the atter secton havng been added by secton
217 of the Revenue ct of 1939.
The N ssocaton, a corporaton, was organzed to provde medca
care and hosptazaton for ts members by makng the necessary
arrangements wth physcans, hosptas, etc. The assocaton has no
capta stock, was not organzed for proft, and ts membershp s re-
strcted to and composed soey of cv empoyees of the e ecutve
branch of the Unted States Government. Its ncome s derved from
membershp fees and monthy dues pad by ts members. No part of
ts net earnngs nures to the beneft of any prvate sharehoder or
ndvdua, and no substanta part of ts actvtes conssts of attempt-
ng to nfuence egsaton by propaganda or otherwse.
The assocaton, pursuant to contracts wth ts members, has pro-
cured for them the servces of severa doctors who devote ther fu
tme to the members and ther dependents, and one doctor who devotes
appro matey one-haf of hs tme to ths purpose. These doctors
are pad by the assocaton n b-monthy nstaments for ther fu or
haf-tme servces n accordance wth the terms of ther contracts wth
the assocaton. Certan other doctors whose servces vary from about
haf-tme to an occasona consutaton are aso retaned by the asso-
caton, and they are pad on a fee bass. The assocaton mantans
and operates cncs at two ocatons wth a fu-tme staff of regstered
nurses, techncans, pharmacsts, and other empoyees. n offce s
mantaned for each doctor on the reguar staff. These doctors dvde
ther tme between consutatons n ther offces and cas upon patents
at ther homes or n the hosptas. The assocaton does not own and
operate a hospta nor does t ntend to undertake the constructon
and operaton of one.
Secton 101(6) of the Interna Revenue Code provdes n part as
foows:
Sec. 101. The foowng organzatons sha be e empt from ta aton
under ths chapter
Corporatons organzed and operated e cusvey for regous,
scentfc, terary, or educatona purposes, no part of the net
earnngs of whch nures to the beneft of any prvate sharehoder or nd-
vdua, and no substanta part of the actvtes of whch s carryng on
propaganda, or otherwse attemptng, to nfuence egsaton .
ased on the above-outned facts, ths offce s of the opnon that
the N ssocaton s not organzed and operated for chartabe pur-
poses wthn the purvew of secton 101(6), supra.
The queston remans whether the assocaton meets the tests pre-
scrbed by secton 101(19), supra. That secton provdes as foows:
Sbo. 101. The foowng organzatons sha be e empt from ta aton
under ths chapter
ountary empoyees benefcary assocatons provdng for the payment
of fe, sck, accdent, or other benefts to the members of such assocaton
or ther dependents or ther desgnated benefcares, f ( ) admsson to
membershp n such assocaton s mted to ndvduas who are offcers
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2 5
11 . rt 11 -1.
or empoyees of the Unted States Government, and ( ) no part of the
net earnngs of such assocaton nures (other than through such payments)
to the beneft of any prvate sharehoder or ndvdua.
It s cear from the evdence presented that the assocaton meets
the requrements of the foregong secton uness ts method of opera-
ton n provdng medca and cnca servces as heretofore descrbed
does not consttute the payment of fe, sck, accdent, or other
benefts. Stated otherwse, the ssue s whether secton 101(19) s
to be construed to brng wthn ts scope cases n whch an assocaton
makes drect money payments to ts members, or contracts wth others
to make such payments, and to e cude cases n whch an assocaton
furnshes benefts to members n the form of medca, cnca, or
hospta servces. The former type of case s admttedy wthn the
statute.
It s the opnon of ths offce that where, as here, the assocaton s
otherwse wthn the terms of the statute, e empton shoud not be
dened merey because the benefts to members are n the form of
medca, cnca, and hospta servces rather than n the form of
money payments. It foows that the N ssocaton s e empt from
Federa ncome ta under secton 101(19) of the Interna Revenue
Code.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
SUPPL M NT . COMPUT TION OP N T INCOM .
S CTION 112(a). R COGNITION OF G IN OR
LOSS: G N R L RUL .
Secton 19.112(a)-: Saes or e changes.
INT RN L R NU COD .
changes n reorganzaton under the ankruptcy ct nvovng
canceaton of ndebtedness. (See G. C. M. 22528, page 193.)
S CTION 11 . SIS FOR D PR CI TION
ND D PL TION.
rtce 11 -1: ass for aowance of depre- 19 1-9-10618
caton and depeton. G. C. M. 22106
( so Secton 23(m), rtce 23(m)-.)
R NU CTS OF 193 , 193G, 193S. ND INT RN L R NU COD .
The term property, as used n the provsons of the Revenue ct
of 193 and correspondng provsons of subsequent Revenue cts
and of the Interna Revenue Code provdng for the aowance of
depeton and f ng a bass for the computaton of such aowance,
means each separate nterest owned by the ta payer n each separate
tract or parce of and, whether separated geographcay or by con-
veyancng. If a ta payer hods severa dfferent nterests n the
same tract, each Interest s a separate property. The rght of eec-
ton as to method of depeton must be e ercsed wth respect to
each property n accordance wth these genera prncpes.
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S 11 . rt 11 -1.
2 6
n opnon s requested regardng the defnton of the term prop-
erty and a ta payer s rghts as to eecton of the method of deter-
mnng depeton wth respect to a property under secton
11 (b) of the Revenue ct of 193 , reatng to percentage depeton,
n certan cases nvovng mneras. Specfc probems are set forth
n deta n the atter part of ths memorandum.
Secton 23 (m) of the Revenue ct of 193 provdes n part as
foows:
Sbo. 23. Deductons fbom Gross Income.
In computng net ncome there sha be aowed as deductons:

(m) Depeton. In the case of mnes, o and gas weUs, other natura de-
posts, and tmber, a reasonabe aowance for depeton and for deprecaton of
mprovements, accordng to the pecuar condtons n each case; such reasonabe
aowance n a cases to be made under rues and reguatons to be prescrbed
by the Commssoner, wth the approva of the Secretary.
Secton 23(n) of the ct provdes as foows:
(n) ass fob Deprecaton and Depeton. The bass upon whch depeton,
e hauston, wear and tear, and obsoescence are to be aowed n respect of any
property sha be as provded n secton 11 . Itacs supped.
The term a property s used n a smar manner n other sectons
of the ct reatng to depeton and n varous provsons of Regua-
tons 86, prescrbed pursuant to the Revenue ct of 193 .
rtce 23(m)-(;) of Reguatons 86 provdes as foows:
The property, as used n secton 11 (b) (2). (3), and ( ) and artces
23(m)- to 23(m)-19, ncusve, means the nterest owned oy the ta payer,
freehod or easehod, In any mnera property. The ta payer s nterest n each
separate mnera property s a separate property ; but, where two or more
mnera propertes are ncuded n a snge tract or parce of and, the ta payer s
nterest n such mnera propertes may be consdered to be a snge property.
provded such treatment s consstenty foowed. Itacs supped.
rtce 23(m)-(6) of Reguatons 86 provdes:
mnera property s the mnera depost, the deveopment and pant
necessary for ts e tracton, and so much of the surface of the and ony as Is
necessary for purposes of mnera e tracton.
The e act meanng of the term property as used n the Revenue
ct and the appcabe artces of the reguatons has been consdered
few tmes by the courts, and n consderng ths queston they have
argey reed upon the wordng of the reguatons. The case of
nton Petroeum Co. of Te as v. Commssoner (71 Fed. (2d), 20,
certorar dened October 15,193 ,293 U. S., 601, petton for rehearng
dened December 17,193 ,293 U. S., 633) concerned a stuaton wheren
the ta payer produced o from wes ocated on eght dfferent but
neghborng tracts of and acqured at dfferent tmes, some n fee
smpe, some under eases. The court hed that the deducton for
depeton was to be estmated separatey on the gross ncome from
each tract of and and not on the aggregate from a.
(See aso e M. Turbeve v. Commssoner, 31 . T. ., 283,
affrmed on other grounds, 8 Fed. (2d), 307, certorar dened, 299
U. S., 581; and /. T. Snsed, r., v. Commssoner, 0 . T. ., 1136.)
The anguage, In genera the property as the term s used n
secton 20 (c)2 and ths artce refers to the separate tracts or eases
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8 11 . rt. 11 -1
of the ta payer, whch appeared n artce 221 of Reguatons 69
reatng to the Revenue ct of 1926 (the same anguage appeared n
artce 2 1 of Reguatons 7 , e cept that secton 11 (b)3 of the Rev-
enue ct of 1928 was used n eu of secton 20 (c)2 of the Revenue
ct of 1926), does not appear n Reguatons 77 and 86. It s aso true
that ths anguage as used n Reguatons 69 and 7 referred ony to
o and gas propertes. owever, the court n consderng the nton
case construed artce 221 (|) of Reguatons 77 (whch reads the same
as artce 23(m)-( ) of Reguatons 86) as havng the same effect as
the earer artces contaned n Reguatons 69 and 7 , and the subse-
quent artces refer aso to mnng propertes. The decson, then, must
be regarded as authortatve n consderng the appcabe artces of
Reguatons 77 and 86 and as controng not ony wth respect to o
and gas propertes but aso wth respect to coa, meta, and suphur
propertes.
The ta payer s nterest, then, n each dfferent tract or parce of
and s a separate property. The term tract or parce of
and s used here n the same sense n whch t s ordnary used.
Separate tracts or parces of and not ony e st when two areas
or peces of and are separated geographcay, but a snge tract or
parce of and may be dvded nto two or more separate tracts
or parces by means of the e ecuton of conveyances or eases carv-
ng up the orgna tract or parce. If a ta payer hods severa
nterests n the same tract or parce, each nterest s a property
wthn the comprehenson of that term as used n the provsons of
the Revenue cts f ng a bass for the computaton of depeton. s
the bass f ed aso governs the computaton of gan or oss, t foows
that a depetabe property s aso an asset sub|ect to sae or other
dsposton gvng rse to gan or oss. ccordngy, each such nterest
must be treated as a separate property for ncome ta purposes.
Faure to treat each such separate nterest as a separate property
woud dsregard or unduy confuse the admnstraton of the pro-
vsons of the Revenue cts requrng the computaton of gan or oss
upon the sae of an asset and the provsons dstngushng between
ordnary gan or oss and capta gan or oss, ta abe at dfferent
rates, dependng upon the ength of tme the asset was hed.
ccordngy, the term property may be defned as each separate
nterest owned by the ta payer n each separate tract or parce of and.
Secton 11 (b) of the Revenue ct of 193 provdes n part as
foows:
Percentage depeton fob coa and meta mtnes and suphur.
ta payer makng hs frst return, under ths tte n respect of a property
sha state whether he eects to have the depeton aowance for such property
for the ta abe year for whch the return s mode computed wth or wthout
regard to percentage depeton, and the depeton aowance n respect of such
property for snch year sha be computed accordng to the eecton thus made. If
the ta payer fas to make such statement n the return, the depeton aowance
for such property for such year sha be computed wthout reference to percentage
depeton. The method, determned as above, of computng the depeton aowance
sha be apped n the case of the property for a ta abe years n whch t s
n the hands of such ta payer, or of any other person If the bass of the property
(for determnng gan) n hs hands s, under secton 113, determned by reference
to the bass n the hands of such ta payer, ether drecty or through one or more
substtuted bases, as defned n that secton. Itacs supped.
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11 , rt. 11 -1.
2 8
uestons regardng the rght of eecton arsng out of the above-
quoted secton are purey ncdenta to the genera prncpes govern-
ng the grantng of depeton aowances, and such questons are con-
troed by the same genera rues of constructon. ccordngy, t s
the opnon of ths offce that the term property possesses the same
meanng for purposes of eecton that t possesses for purposes of the
computaton of the depeton aowance.
Snce the dscusson n the foregong paragraphs sets forth the gen-
era vews of ths offce wth reference to the meanng of the term
property, the specfc questons presented n the severa e ampes
(wth the e cepton of ampe III) w not be dscussed n so far
as they reate to ths partcuar probem, but w be answered ony.
ampe I. In 193 owned a certan tract of mnera and, the
east haf of whch he operated and the west haf he had eased to .
consdered the entre tract to be one property and made one eec-
ton on hs 193 return regardng the method of depeton desred.
In computng statutory gross and net ncome from the property,
he combned hs own saes wth royates receved from .
ueston: (a) Dd have one property or two
(6) Is hs eecton bndng for both propertes (f t s rued there
are two)
nswer: (a) had two propertes.
(b) In hs 193 return ncorrecty treated the two propertes
as one. Despte the fact that hs return was defectve n ths respect,
t was hs frst return wth respect to both propertes, and the eec-
ton that he made theren s bndng wth respect to such propertes.
(See G. C. M. 13627. C. . III-2, 6 (193 ), and G. C. M. 15790,
C. . I -2,127 (1935).)
ampe II. In 193 owned a certan tract of mnera and and
operated a mne upon t, eectng a certan method of depeton. In
1935 eased the west haf to and made a new eecton wth regard
to depeton to be taken on the ease.
ueston: Can have ony one property for the purpose of
eectng depeton, and two propertes for the purposes of comput-
ng depeton
nswer: has two propertes both for purposes of eecton and
for purposes of depeton computaton, and he s accordngy entted
to a new eecton wth respect to each of these propertes.
ampe III. The ease n ampe I s egay termnated n any
gven year. resumes fu possesson of the mnera tract under
dscusson.
ueston,: If t s hed that there were two propertes wth two
eectons aowabe n 193 , does the eecton whch was made wth
respect to the ease contnue as to that haf of the tract of and Does
hs eecton as made n 193 for the east haf become automatcay
appcabe to the entre tract
nswer: The termnaton of the ease operates to revest n the
fu ownershp of the tract n queston, and hs nterest theren s a
new property wth respect to whch he s entted to a new eecton.
ampe I . Some tme after ampe III grants a new ease
to C on the smth haf of the tract n queston.
ueston: What new rghts of epfton. f any, are aowabe What
od rghts of eecton, f any, are bndng
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2 9
11 , rt. 11 -1.
nswer: s entted to a new eecton not ony wth respect to hs
property n the south haf of the tract but aso wth respect to hs
property n the north haf.
ampe : In any gven year acqures from a snge owner n
a snge deed three noncontguous tracts of mnera and for a snge
consderaton.
ueston: For purposes of eectng and computng depeton, dd
acqure one property or three propertes Does a property
requre one contnuous boundary
nswer: acqured three separate propertes. property
requres one contnuous boundary. ,
ampe I: In any gven year smutaneousy acqures two
ad|acent tracts of mnera and, from two separate owners. Com-
bned, they are operated as one mne by .
ueston: Is ths one property or two n the hands of for
eecton and computaton of depeton
nswer: The nterest owned by n each of these tracts s a
separate property.
ampe II: Subsequenty ses a of the and he acqured n
ampe I to , the descrpton n ths deed beng coped from
the od records n whch the two orgna tracts may be dentfed.
ueston: ow many propertes does have for depeton
purposes
wncer: though acqured the two ad|acent tracts as two sep-
arate tracts under separate conveyances, acqured the two tracts
as one under one conveyance. s nterest n ths tract s ony one
property.
ampe III: buys a tract of and contanng a known ore
body whch he entrey mnes out, havng made an eecton for depe-
ton n accordance wth secton 11 . Subsequenty he dscovers an
entrey separate ore body on the same tract whch requres an en-
trey new and dfferent system of operaton.
ueston: Can the new operaton be construed to be a dfferent
property for the eecton of depeton
nswer: s was noted n an earer paragraph, artce 23 (m)-
1 (|) of Reguatons 86 provdes n part as foows:
The ta payer s Interest In each separate mnera property Is a sep-
arate property ; but, where two or more mnera propertes are Incuded n
a snge tract or parce of and, the ta payer s nterest n such mnera prop-
ertes may be consdered to be a snge property, provded such treatment
Is consstenty foowed.
.Paragraph (b) of the same artce defnes a mnera property
as the mnera depost, the deveopment and pant necessar| for ts
e tracton, and so much of the surface of the and ony as s neces-
sary for purposes of mnera e tracton.
Under the reguatons, then, the ta payer s nterest n each sep-
arate mnera property wthn a snge tract or parce of and s
a separate property. It s provded, however, that he may treat
such propertes as one property, f he consstenty foows such
a procedure. ccordngy, n the foregong e ampe, s entted
to treat the separate ore body subsequenty dscovered as a dfferent
M property and make a new eecton wth respect thereto.
0 3 1 - 1-
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S 19.115-5.
250
The concusons reached heren under the Revenue ct of 193 are
S CTION 115. DISTRI UTIONS Y CORPOR TIONS.
INT RN L R NU COD ND ND CT OF 1938.
The orgna pan of qudaton adopted by the M Company on
anuary , 1938, provded for competon of ts qudaton on or
before December 31, 19 0, whch s one year short of the tme whch
coud have been adopted under secton 115(c) of the Revenue ct of
1938. ed, the ta payer may by amendment to the mnutes coverng
the orgna pan e tend the tme for competon of the qudaton
to December 31, 19 1.
dvce s requested whether the M Company may e tend the tme
set for de competon of ts pan of qudaton, adopted n accordance
wth secton 115(c) of the Revenue ct of 1938, under the crcum-
stances heren set forth.
When the pan of qudaton of the M Company was adopted on
anuary , 1938, t was provded n the mnutes that the qudaton
was to be competed by December 31, 19 0, whch s one year short of
the tme whch the company coud have adopted under the provsons
of secton 115(c) of the Revenue ct of 1938. It now appears that
the baance of the dstrbutabe assets of the company conssts of cash,
mortgage notes due over a perod of severa more years, and a pant
ste for whch no mmedate market e sts. The queston presented,
therefore, s whether the company may by amendment to the mnutes
coverng the orgna pan e tend the fna qudaton date to Decerh-
ber 31. 19 1, whch woud st be wthn the 3-year perod specfed
n the statute, or whether the company s bound by the pan as org-
nay adopted so that t woud be necessary to compete qudaton
by December 31, 19 0.
It s the opnon of ths offce that, n accordance wth the provsons
of secton 19.1 8-2 of Reguatons 103, the company may amend the
orgna pan of qudaton, provded t has comped wth secton
115(c) of the Interna Revenue Code.
Secton 19.115-5(b) of Reguatons 103 provdes n part that
For ths purpose the term compete qudaton ncudes any one
of a seres of dstrbutons made by a corporaton n compete canceaton or
redempton of a of ts stock n accordance wth a bona fde pan of qudaton
and under whch the transfer of the property under the qudaton s to be
competed wthn a tme specfed n the pan, not e ceedng, from the cose of
the ta abe pear durng whch s made the frst of the seres of dstrbutons under
the pan, (1) three years f the frst of such seres of dstrbutons s made n
a ta abe year begnnng after December 31, 1937, or (2) two years, f the frst
of such seres of dstrbutons was made n a ta abe year begnnng pror to
anuary 1, 1938. Itacs supped.
Secton 19.115-5: Dstrbutons n qudaton.
19 1- -10573
I. T. 3 5
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251
116.
Snce the pan of qudaton was not adopted un|t 1938, t s hed
that a compete qudaton wthn the meanng of secton 115(c) of the
Interna Revenue Code w be effected, provded the pan s fuy
consummated on or before December 31, 19 1.
The company must compy wth the provsons of secton 19.1 8-2
of Reguatons 103, reatng to the fng of nformaton forms.
S CTION 116. CLUSIONS FROM GROSS INCOM .
19 1-13-10659
I. T. 3 61
INT RN L R NU COD ND PRIO R NU L WS.
The term coastwse, as used In G. C. M. 22383 (C. . 19 0-2,
227), the appcaton of whch s mted to cases nvovng wages
earned by seamen whe engaged n coastwse trade, reates to a
vesses engaged n traffc between the varous ports of the Unted
States, as that term s defned n secton 3797(a)9 of the Interna
Revenue Code and smar provsons of pror revenue aws.
dvce s requested as to the scope of the term coastwse, as used
n G. C. M. 22383 (C. . 19 0-2, 227), and, n partcuar, (a) whether
t s mted to vesses pyng between ports of contnenta Unted States
ony; (b) whether t appes to vesses sang between contnenta
Unted States and the Terrtores of awa and aska; and (e)
whether t appes to vesses sang between contnenta Unted States
and the possessons of the Unted States.
In G. C. M. 22383, supra, t was hed that wages earned by any seaman
(ctzen or aen) whe engaged n coastwse trade between mercan
ports shoud be regarded as from sources wthn the Unted States.
That opnon s mted n ts appcaton to the wages of seamen en-
gaged n coastwse trade, and t s not appcabe to passengers aboard
ocean-gong vesses. (See I. T. 3 62, page 268, ths uetn.)
It s hed that the term coastwse, as used n G. C. M. 22383, supra,
the appcaton of whch s pertnent ony n cases nvovng wages
earned by seamen whe engaged n coastwse trade, shoud be nter-
preted as reatng to a vesses engaged n traffc between the varous
ports of the Unted States, as that term s defned by secton
8797(a)9 of the Interna Revenue Code and smar provsons of pror
revenue aws. Secton 3797(a)9 of the Interna Revenue Code reads as
foows:
Unted States. The term Unted States when used n a geographca sense
Incudes ony the States, the Terrtores of aska and awa, and the Dstrct
of Coumba.
It foows that vesses engaged n traffc between ports of contnenta
Unted States and ports of the Terrtores of the Unted States are
engaged n coastwse trade, as that term s used n G. C. M. 22383,
and that vesses engaged n trade between ports of contnenta Unted
States and ports of the possessons of the Unted States, such as Puerto
Rco and the Phppnes, are not to be treated as engaged n coast-
wse trade.
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116.
252
19 1-15-10673
I. T. 3 67
INT RN L R NU COD ND R NU CTS OF 1028, 1932, 193 , 1936, ND
1938.
Pursuant to authorty contaned n secton 3791(b) of the Inter-
na Revenue Code, G. O. M. 22383 ( 0. . 19 0-2, 227), reatng to
wages of seamen empoyed on vesses engaged n coastwse trade,
w not be apped retroactvey, but w be apped ony to the ta -
abe year 19 0 and subsequent ta abe years.
dvce s requested reatve to the retroactve appcaton of G. C. M.
22383 (C. . 19 0-2, 227), n whch t was hed that wages earned by
any seaman (ctzen or aen) whe engaged n coastwse trade be-
tween mercan ports shoud be regarded as from sources wthn the
Unted States.
In the nqury presented; reference s made to G. C. M. 12167 (C. .
II-2,126 (1933)), n whch t was hed that the ta payer, master of
a steamshp engaged n trade between certan Unted States ports,
was a bona fde nonresdent ctzen of the Unted States for more than
s months of the ta abe year wthn the meanng of secton 116(a)
of the evenue ct of 1928, by vrtue of the fact that he was absent
from the Unted States and ts terrtora waters for 23 days durng
the year n queston. It s ponted out that n reance upon the prov-
sons of G. C. M. 12167, supra, whch was revoked by G. C. M. 22383,
supra, seamen empoyed on vesses engaged n coastwse trade con-
sdered ther wages to be e empt from Federa ncome ta . Under
such crcumstances, the request s made that G. C. M. 22383, supra, be
not apped to wages earned pror to the ta abe year 19 0 and durng
the tme that G. C. M. 12167, supra, was n effect.
In vew of the apparent hardshp whch w resut f G. C. M. 22383,
supra, s apped retroactvey, t s the opnon of the ureau that t
shoud not be apped to ta abe years pror to the ta abe year 19 0.
ccordngy, pursuant to the authorty contaned n secton 3791(b)
of the Interna evenue Code, G. C. M. 22383, supra, w not be apped
retroactvey, but w be apped ony to the ta abe year 19 0 and
subsequent ta abe years.
Gut T. everno,
Commssoner of Interna Revenue.
pproved March 25, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
19 1-18-10700
I. T. 3 72
INT RN L R NU COD .
penson receved n 1939 by , who retred durng that year,
n whch he was entted to the benefts of secton 110(a) of the
Interna Revenue Code as a tona fde nonresdent ctzen of the
Unted States for more than s months durng the ta abe year,
and who, durng the perod of hs empoyment, had rendered servces
both wthn and wthout the Unted States, represents ta abe n-
come to the e tent that It s based upon servces rendered wthn
the Unted States. The entre amount of the penson, however, s
ta abe to for a years wth respect to whch he may be cass-
fed as a resdent of the Unted States.
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253
8 U6.
dvce s requested wth respect to the treatment for Federa n-
come ta purposes of penson payments receved by , who retred
durng the year 1939, n whch he was entted to the benefts of
secton 116(a) of the Interna Revenue Code as a bona fde nonresdent
ctzen of the Unted States for more than s months durng the
ta abe year, and who, durng the perod of hs empoyment, had
rendered servces both wthn and wthout the Unted States.
, a ctzen of the Unted States, began hs servce wth the M
Company n uy, 1920, and contnued to be actvey empoyed by
that company unt September 30, 1939, at whch tme he was retred
on a penson. From October 1,1939, to December 31,1939, he receved
penson payments aggregatng doars. Of the 19 years coverng the
ta payer s servce, appro matey 12 years were spent abroad n con-
necton wth hs empoyer s foregn operatons. Durng 1939, the
ta payer was n the Unted States from anuary 1 to pr 1 return-
ng to and remanng at hs foregn post of duty the remander of
the year. e contends that the penson payments receved n 1939
shoud be e cuded from hs ta abe ncome for that year because
of secton 116(a) of the Interna Revenue Code, whch provdes n
part as foows:
Sec. 116. cusons From Gross Income.
In addton to the tems specfed In secton . (b), the foowng tems sha not
be ncuded In gross ncome and sha be e empt from ta aton under ths chapter:
(a) arned Income From Sources Wthout Unted States. In the case of
an ndvdua ctzen of the Unted States, a bona fde nonresdent of the Unted
States for more than s months durng the ta abe year, amounts receved from
sources wthout the Unted States f such amounts woud consttute
earned ncome as defned n secton 25(a) f receved from sources wthn the
Unted States;
In Mm. 3283 (C. . I -1, 1 (1925)) t s stated that the term
earned ncome means wages, saares, professona fees, and other
amounts receved as compensaton for persona servces actuay
rendered by the ta payer, and that retred pay and pensons whch
are ta abe consttute earned ncome. For the purpose of de-
termnng whether earned ncome s from sources wthn or wthout
the Unted States, the pace where the servces are performed and not
where the compensaton s pad s the controng factor. (See I. T.
In the nstant case, the penson payments receved by n 1939
represent compensaton for servces rendered durng hs entre perod
of empoyment. That proporton whch the number of years of
hs servce rendered n the Unted States (7) bears to the entre perod
of servce (19) consttutes that part of the penson whch s ta abe
ncome. In other words, the penson s ta abe to the e tent that t
s pad for servces rendered n the Unted States.
In the case of a resdent of the Unted States, however, earnngs
from a sources must be ncuded n gross ncome uness e cuded by
a specfc statutory e cepton to the genera rue, such as secton 116(h)
of the Interna Revenue Code, reatng to compensaton of empoyees
of foregn governments. Ths poston s n harmony wth the de-
cson n uus . . Stryker v. Commssoner (29 . T. ., 1025).
There the ta payer, who was not a bona -fde nonrefdent of the Unted
ceved n that year commssons whch were attrbutabe to servces
2286, C. . -f, 52 (1926).)
States for more than s months
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S 19.117- .1
25
performed durng the year 1927 wth respect to whch year he was a
bona fde nonresdent for more than s months. The oard of Ta
ppeas hed that the compensaton receved n 1928 for the servces
rendered n 1927 was not e empt from ta aton.
In the ght of the foregong, t s hed that for the ta abe year
1939, durng whch was a bona fde nonresdent of the Unted
States for more than s months, the penson payments receved
by hm represent ta abe ncome to the e tent that such payments
are based upon servces rendered wthn the Unted States. The ta -
payer w, however, be requred to return as ta abe ncome the
entre amount of the penson receved n years as to whch he may be
cassfed as a resdent of the Unted States.
Gan on sae of Natona Defense Seres obgatons. (See I. T.
3 75, page 199.)
S CTION 117. C PIT L G INS ND LOSS S.
Where property was acqured by gft after December 31, 1920,
the far market vaue of the property at the tma of the gft beng
ower than the bass of such property In the hands of the donor
or the ast precedng owner by whom t was not acqured by gft,
and the property s sod or otherwse dsposed of by the donee for
au amount ess than such far market vaue, the donee w be
consdered as havng hed the property from the date of the gft
for the purposes of secton 117 of the Interna Revenue Code.
dvce s requested whether n determnng, under secton 117
of the Interna Revenue Code, the perod for whch property ac-
qured by gft subsequent to December 31, 1920, was hed, where
the vaue of the property at the tme of the gft s used for the
purpose of determnng oss n accordance wth the provsons of
secton 113(a)2 of the Interna Revenue Code, such perod shoud
be computed from the date of the gft or whether there shoud
be ncuded the perod pror thereto for whch the property was
hed by the donor or the ast precedng owner by whom t was not
acqured by gft.
Secton 113 (a)2 of the Interna Revenue Code provdes n part
as foows:
Guts after December 31, 1920. If the property was acqured by gft after
December 31, 1920, the bass sha be the same as It woud be n the hands
of the donor or the Inst precedng owner by whom t was not acqured by
gft, e cept that for the purpose of determnng oss the bass sha be the
bass so determned or the far market vaue of the property at the tme
of the gft, whchever s ower.
Secton 117(h)2 of the Code provdes:
In determnng the perod for whch the ta payer has hed property however
acqured there sha be ncuded the perod for whch such property was hed
INT RN L R NU COD .
Secton 19.117- : Determnaton of perod
for whch capta assets are hed.
19 1-9-10619
I. T. 3 53
INT RN L R NU COD .
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255
( 19.12 -1.
by any other person, If under the provsons of secton 113, such property has,
for the purpose of determnng gan or oss from a sae or e change, the same
bass n whoe or n part n hs hands as t woud have n the hands of such
other person.
It w be observed that under secton 113(a)2 of the Code, supra,
where the far market vaue of property at the tme of the gft
must be used by the donee as the bass for determnng the Toss
sustaned from a sae or e change thereof, the donee does not use
the donor s bass of the property under secton 113 of the Code,
ether n whoe or n part, and hence, n determnng the perod
for whch the property was hed by the donee, the perod for whch
such property was hed by the donor or such other person shoud
not be ncuded.
It s, accordngy, hed that where property was acqured by gft
after December 31. 1920, the far market vaue of the property at
the tme of the gft beng ower than the bass of such property n
the hands of the donor or the ast precedng owner by whom t was
not acqured by gft, and the property s sod or otherwse dsposed
of by the donee for an amount ess than such far market vaue
at the tme of the gft, the donee w be consdered as havng hed
the property from the date of the gft for the purposes of secton 117
of the Interna Revenue Code.
S CTION 12 . MORTIZ TION D DUCTION.
Secton 19.12 -1: Defntons. 19 1-23-107 1
( so Secton 19.12 -9.) T. D. 50 9
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 19.
INCOM T .
Reguatons 103, as amended by Treasury Decson 5016 C. .
19 0-2,119 , amended to conform to Pubc Law 3 (Seventy-seventh
Congress), e tendng tme for certfcaton of natona-defense
factes and contracts for amortzaton purposes.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. , as amended by Treasury Decson
5016, approved October 23,19 0 (C. . 19 0-2, 119), to the provsons
of Pubc Law 3 (Seventy-seventh Congress), approved anuary 81,
19 1, e tendng the tme for certfcaton of natona-defense factes
and contracts for amortzaton purposes, such reguatons are amended
as foows:
Paragraph 1. The foowng s nserted mmedatey precedng
secton 19.12 -1:
Pubc Law 8, pproved anuabt 81, 19 1.
Resoved by the Senate and ouse of Representatves of the Unted
States of merca n Congress assembed, That secton 12 (f)(1) of
the Interna Revenue Code s amended by strkng out , wthn the tme
specfed n paragraph (3) of ths subsecton, and.
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5 19.12 -1.
256
Seo. 2. Secton 12 (f) (8) of the Interna Revenue Code s amended
to read as foows:
The certfcate provded for n paragraph (1) sha have no
effect uness an appcaton therefor s fed before the e praton of
s ty days after the begnnng of such constructon, reconstructon,
erecton, or nstaaton or the date of such acquston, or before
February 6, 19 1, whchever s ater: Provded, That n no event
and notwthstandng any of the other provsons of ths secton,
no amortzaton deducton sha be aowed n respect of any emer-
gency facty for any ta abe year uness a certfcate n respect
thereof under paragraph (1) of ths subsecton sha have been
made pror to the makng of the eecton, pursuant to subsecton (b)
and (d) ( ) of ths secton, to take the amortzaton deducton and
begn the s ty-month perod n or wth such ta abe year, or before
February 6, 19 1, whchever s ater.
Seo. 3. Secton 12 () of the Interna Revenue Code s amended
(a) y strkng out from the frst sentence thereof , before the
e praton of nnety days after the makng of such contract or one
hundred and twenty days after the date of the enactment of the Second
Revenue ct of 19 0, whchever of such perods e pres the ater, ;
(b) y strkng out from the second sentence thereof , before the
e praton of nnety days after the makng of a contract or one hundred
and twenty days after the date of the enactment of the Second Revenue
ct of 19 0, whchever of such perods e pres the ater, ; and
(c) y addng after the second sentence thereof a new sentence to
read as foows: The certfcates provded for under ths subsecton
sha have no effect uness an appcaton therefor s fed before the
e praton of s ty days after the makng of such contract, or before
February 6, 19 1, whchever s ater.
Seo. . The amendments made by ths ont resouton to secton 12
of the Interna Revenue Code sha be appcabe as f they were a part
of such secton on the date of the enactment of the Second Revenue
ct of 19 0.
Par. 2. Secton 19.12 -1 (c) s amended to read as foows:
(c) mergency facty means any facty, and, budng, machnery, or
equpment, or any part thereof,
(1) the acquston of whch occurred after une 10, 19 0, or the con-
structon, reconstructon, erecton, or nstaaton of whch was competed
after such date, and
(2) any part of the constructon, reconstructon, erecton, nstaaton,
or acquston of whch has been certfed by the dvsory Commsson
and the Secretary of the department concerned as necessary n the nterest
of natona defense durng the emergency perod (such certfcate to have
no effect uness an appcaton therefore s fed ( ) before the e praton
of 60 days after the begnnng of such constructon, reconstructon, erecton,
or nstaaton, or the date of such acquston, or ( ) before February C,
19 1, whchever date s the ater).
The term emergency facty, as so defned, may Incude, among other thngs,
Improvements of and, such as the constructon of arports and the dredgng
of channes.
Par. 3. Secton 19.12 -9 s amended to read as foows:
Seo. 19.12 -9. Rembursement by Unted States for cost of facty. If the
ta payer has been or w be rembursed by the Unted States for a or a part of
the cost of any emergency facty pursuant to any contract wth the Unted
States, no amortzaton deductons w be aowed wth respect to such facty
for any month after the end of the month In whch such contract s made,
uness the dvsory Commsson and the Secretary of the department concerned
have certfed to the Commssoner that the contract contans provsons ade-
quatey protectng the Unted States wth reference to the future use and
dsposton of such facty. For treatment of rembursements, see secton
19.12 -6. If the dvsory Commsson and the Secretary of the department
concerned have certfed to the Commssoner that under such contract no
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257
19.131-1.
rembursement Is provded for wthn the meanng of secton 12 (1), such
certfcate sha be concusve of such fact. The certfcates referred to n ths
secton sha have no effect uness an appcaton therefor s fed (1) before
the e praton of 60 days after the makng of such a contract, or (2) before
February 6, 19 1, whchever date s the ater.
(Ths Treasury decson s ssued under the authorty contaned
n sectons 1 to , ncusve, of Pubc Law 3 (Seventy-seventh Con-
gress) and secton 62 of the Interna Revenue Code, 53 Stat., 32
(26 U. S. C, Sup. , 62).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved May 29, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 3, 19 1, 9.58 a. m.)
Secton 19.12 -9: Rembursement by Unted States for
cost of facty.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 50 9, page 255.)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S OF FOR IGN COUNTRI S ND
POSS SSIONS OF UNIT D ST T S.
Secton 19.131-1: nayss of credt for ta es. 19 1-1 -10666
I. T. 3 6
INT RN L R NU COD .
The 2 per cent natona defense ta eved by Canada under Part
of the Income War Ta ct enacted at the frst sesson, Nne-
teenth Parament, George I, 19 0, s an ncome ta and s aow-
abe as a credt aganst the Federa ncome ta of a ctzen of the
Unted States under the provsons of secton 131 (a) 1 of the In-
terna Revenue Code, as amended, sub|ect to the mtatons con-
taned n secton 131(b), as amended.
dvce s requested whether the 2 per cent natona defense ta
eved by Canada on the tota net ncome of resdents, ncudng ct-
zens of the Unted States, s aowabe as a credt aganst the Federa
ncome ta of a ctzen of the Unted States under secton 131(a) of
the Interna Revenue Code, as amended, reatng to credts for n-
come, war profts, and e cess profts ta es pad or accrued to foregn
countres.
It s provded n Part of the Income War Ta ct, as enacted
at the frst sesson, Nneteenth Parament, George I, 19 0, that n
addton to any other ta mposed by the act there sha be eved
and pad upon the tota ncome of persons abe to ncome ta , wth
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19.1 3-1.
258
the e cepton of certan offcers and empoyees of the Government of
Canada, a ta to be known as the natona defense ta at the rate
(a) n the case of a marred person, of 2 per centum f the ncome
e ceeds 1,200 per year; and n the case of a husband and wfe havng
each a separate ncome, of 2 per centum f the ncome of each s n.
e cess of 600 per year;
(b) n the case of a snge person, of 2 per centum f the ncome
e ceeds 600 per year and does not e ceed 1,200 per year; or of 3
per centum f the ncome e ceeds 1,200 per year .
s the Canadan natona defense ta n queston s eved upon
ncome, t s an ncome ta wthn the meanng of secton 131 (a) 1 of
the Interna Revenue Code, as amended, and s aowabe as a credt
aganst Federa ncome ta n the case of a ctzen of the Unted
States. owever, the amount of the credt aowabe s sub|ect to
the mtatons contaned n secton 131 (b), as amended.
SUPPL M NT D. R TURNS ND P YM NT OF T .
S CTION 1 3. WIT OLDING OF T
T SOURC .
Secton 19.1 3-1: Wthhodng ta at source. 19 1-6-10590
( so Secton 1 , Secton 19.1 -1.) I. T. 3 9
INT RN L R NU COD .
The obgaton of corporatons and payng agents to wthhod
ta from Interest, dvdends, and ke tems under the provsons of
sectons 1 3 and 1 of the Interna Revenue Code and those sec-
tons as amended by the Revenue ct of 19 0 s unaffected by the
decree of May 2 , 19 0, of the Roya Netherands Government now
e ercsng ts functons n London, ngand, vestng technca tte to
the property nvoved n that Government.
Ta shoud aso be wthhed under the foregong provsons of aw
from the ncome on sezed enemy property n the hands of the aen
property custodans of the rtsh Government.
dvce s requested as to the possbe effect of a decree of the Roya
Netherands Government, temporary resdng and e ercsng ts func-
tons n London, ngand, dated May 2 ,19 0, on the obgaton of cor-
poratons and payng agents under sectons 1 3 and 1 of the Interna
Revenue Code to wthhod ta on nterest, dvdends, and ke tems,
pad or credted to a nonresdent aen.
dvce s aso requested whether securtes whch have been sezed
by the rtsh en Property Custodan, presumaby the property
of Germans or natonas of other countres at war wth Great rtan,
shoud be consdered as the property of the rtsh Government, or
shoud be treated as hed n custody for the former owners and ta
wthhed on the ncome derved from such securtes.
The Government of the Unted States contnues to recognze the
Roya Netherands Government temporary resdng n London, ng-
and, and the Department of State has taken offca cognzance of the
decree of May 2 ,19 0.
The decree n queston provdes n part as foows:
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259
5 19.1 3-1.
rtce 1.
1. Tte to cams aganst persons, partnershps, companes, corporatons,
frms. Insttutons and pubc bodes, whch cams beong to natura or ega
persons domced n the ngdom of the Netherands, as we as to a cams
of the aforesad persons for the devery of god deposted, n so far as these
cams are n any form whatsoever capabe of beng encumbered, pedged,
transferred or sod or the fke, outsde of the ream n urope, s hereby
Tested n the State of the Netherands, as represented by the Roya Netherands
Government, temporary resdent n London and e ercsng ts functons there,
sub|ect aways to the provsons of artce 5.
2. The foregong s aso appcabe to a cams resutng from confrmed
credts, partcpaton In the cnpta of and oans to companes, corporatons
and frms (regardess of whether these cams are evdenced by stock cer-
tfcates, bonds or other securtes or commerca paper) n so far as the
aforementoned cams beong to natura or ega persons wthn the ngdom
of the Netherands and, n so far as these cams are In any form whatsoever
capabe of beng encumbered, pedged, transferred or sod, or the ke, outsde
of the ream In urope.
3. The propretary rghts vested n the State of the Netherands, by vrtue
of the provsons of the precedng paragraphs, sha ony be e ercsed for the
conservaton of the rghts of the former owners.

rtce 5.
1. Three months after the present emergency condtons sha In our udg-
ment have ceased to e st, resttuton sha be made of the cams mentoned
n artce 1 to the former owners.
2. In devaton from the provsons n the prevous paragraph our Mnsters
of ustce and of Coones are |onty empowered to make resttuton n advance
of the tme mentoned n the prevous paragraph to the former owners, pro-
vded t be proven to ther satsfacton that drect or ndrect use of these
cams n behaf of the enemy s e cuded.
It w be observed from the quoted provsons and other terms
of the decree that whe technca tte to the property nvoved
has been transferred to the Netherands Government, the rghts thus
vested n that Government are to be e ercsed ony for the conserva-
ton of the rghts of the former owners. Under certan condtons
the property rghts may be fuy restored to the former owners
pror to the cessaton of the present emergency. The basc reason
or the decree s to prevent the property nvoved from beng apped
aganst the nterest of the Netherands, and to that end such property
s entrusted n the Government of the Netherands.
It s the vew of ths offce that the benefca ownershp of the
property n queston remans n the former owners; that the decree
contempates that technca tte aso w utmatey be restored
to such owners; and that n the meantme the Netherands Govern-
ment s merey hodng the property for the beneft of such owners.
ccordngy, the obgaton of corporatons and payng agents n
the Unted States to wthhod ta from nterest, dvdends, and ke
tems, under the provsons of sectons 1 3 and 1 of the Interna
Revenue Code and those sectons as amended by the Revenue ct
of 19 0, s unaffected by the promugaton of the Netherands decree
of May 2 , 19 0.
Wth respect to property n the hands of the rtsh aen prop-
erty custodans, the rtsh Tradng wth the nemy ct, 1939 (2
and 3 Geo. 6, Ch. 89), contans provsons reatng to the preventon
of the payment of money to an enemy, and for the preservaton of
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19.1 3-1.
260
enemy property n contempaton of arrangements to be made at the
concuson of peace. (Paragraph 7,1.) It does not appear from that
ct that consderaton has been gven to the dsposton of any n-
come whch mght become due and payabe upon the property whe
t s n the custody of the rtsh aen property custodans. There
s nothng to ndcate that the rtsh Government hods tsef out
to be the owner of the sezed property. For that reason ths offce s
of the opnon that the rtsh Government shoud be consdered, for
ncome ta purposes, the custodan and not the owner of the property
whch has come nto the possesson of the aen property custodans.
The ta shoud, therefore, be wthhed from the ncome on such
property n the custody of the rtsh Government, n accordance
wth the provsons of sectons 1 3 and 1 of the Interna Revenue
Code and those sectons as amended by the Revenue ct of 19 0.
Secton 19.1 3-1: Wthhodng ta at source. 19 1-19-10713
( so Secton 19.1 3-7; Secton 1 , Sectons T. D. 50 6
19.1 -1,19.1 -2; Secton 262, Secton 19.262- .)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RTS 1 ND
19. INCOM T .
Wthhodng under sectons 1 3 and 1 of the Interna Revenue
Code, as amended by the Revenue ct of 19 0 Reguatons 103
amended Treasury Decson 883 C. . 1939-1 (Part 1), 1 7
revoked.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Paragraph 1. The Canadan Government has advsed the Govern-
ment of the Unted States that, effectve pr 30, 19 1, the rate of
5 per cent ncome ta theretofore mposed upon ncome derved from
sources wthn Canada by nonresdents thereof, ncudng Unted
States resdents, has been ncreased to 15 per cent and that the
Government of the Unted States as of such date s reeased from the
obgatons of the recproca ta conventon between the Unted
States and Canada whch was ratfed ugust 13, 1937. In conform-
ty thereto, Reguatons 103 Part 19, Tte 26, Code of Federa Reg-
uatons, 19 0 Sup. are amended as foows:
( ) Secton 19.1 3-1, as amended by Treasury Decson 979, ap-
proved uy 1, 19 0 C. . 19 0-2,138 s further amended as foows:
(a) y addng mmedatey precedng the ast sentence of the frst
paragraph thereof the foowng:
Such reduced rate s, however, not appcabe to ncome pad on or after
pr 30, 19 1.
(b) y nsertng n paragraph (c) after Canada the words
pror to pr 30, 19 1.v
( ) Secton 19.1 3-7, as amended by Treasury Decson 979, s
further amended by strkng out the thrd sentence of the second
paragraph thereof and substtutng therefor the foowng sentence:
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261
19.1 3-1.
very Unted States wthhodng agent sha make and fe wth the coector, In
dupcate, an Informaton return on Form 10 2 , for the caendar year 1939,
the caendar year 19 0, and for the perod anuary 1, 19 1, to pr 29, 19 1,
both dates Incusve, In addton to the wthhodng return on Form 10 2 wth
respect to the Items of ncome from whch a ta of ony 5 per cent was wth-
hed from Canadan addressees.
(C) Secton 19.1 -1, as amended by Treasury Decson 979, s
further amended
(a) by nsertng n the thrd paragraph thereof after (See para-
graph 106 of the ppend to these Reguatons.) :
On or after pr 30,19 1, no such treaty s n effect.
(6) by strkng out the ast paragraph thereof and substtutng
therefor the foowng paragraph:
Wth respect to ncome pad on or after une 26, 19 0, and pror to anuary
1, 19 5, the rate of wthhodng (e cept wth respect to dvdends pad pror to
pr 30, 19 1, to corporatons organzed under the aws of Canada and dvdends
pad to corporatons or other enttes created or organzed under the aws of
Sweden) Is 16 per cent nstead of 15 per cent.
(D) Secton 19.1 -2, as amended by Treasury Decson 979, s
further amended
(a) by strkng out footnote 2 n the second tabe appearng theren
and substtutng therefor:
2. In the case of dvdends pad to a corporaton organzed under the aws
of Canada, the rate s 5 per cent wth respect to dvdends pad pror to pr
80, 19 1.
(6) y addng beow footnote n the second tabe appearng
theren the foowng:
Note. The rate of 5 per cent appearng In ne 5 s appcabe ony wth
respect to Income pad pror to pr 30, 19 1. Income pad on r after such
date s sub|ect to wthhodng at the rate of 16 per cent.
( ) Secton 19.262- , as amended by Treasury Decson 979, s
further amended by strkng out the ast paragraph thereof and sub-
sttutng therefor the foowng paragraph:
Wth respect to ncome pad on or after une 26, 19 0, and pror to anuary
1, 19 5, the rate of wthhodng (e cept wth respect to dvdends pad pror
to pr 30, 19 1, to resdents of, or corporatons organzed under the aws of,
Canada or dvdends pad to resdents of, or to corporatons or other enttes
created or organzed under the aws of, Sweden) s 16 per cent nstead of
15 per cent.
Par. 2. y vrtue of the amendments made by ths Treasury dec-
son, f ed or determnabe annua or perodca ncome pad on or
after pr 30, 19 1, to nonresdent aen ndvduas, resdents of
Canada, or to corporatons organzed under the aws of Canada s
sub|ect to the rates of wthhodng at the source appcabe generay
to nonresdent aens and foregn corporatons. See secton 19.1 -2,
Reguatons 103, as amended by Treasury Decson 979, approved
uy 1, 19 0.
In the case of ncome pad subsequent to pr 29, 19 1, and pror
to May 15, 19 1, the wthhodng of the ta n the case of nonres-
dent aen ndvduas, resdents of Canada, or corporatons organ-
zed under the aws of Canada at the rates appcabe under Regu-
atons 103 pror to ther amendment by ths Treasury decson sha
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S 19.1 3-3.
2G2
be consdered as suffcent compance wth the provsons of aw and
reguatons reatng to wthhodng of the ta at the source.
Par. 3. Treasury Decson 883, approved anuary 16, 1939 LPart
1 , Tte 26, Code of Federa Reguatons, 1939 Sup. , and that
Treasury decson as made appcabe to the Interna Revenue Code
by Treasury Decson 885, approved February 11,1939 C. . 1939-1
(Part 1), 396 Part 65, Subpart , of such Tte 26, 1939 Sup.|
are revoked effectve pr 30, 19 1, n so far as concerns ncome
pad on or after such atter date to persons whose addresses are n
Canada.
(Ths Treasury decson s ssued under the authorty contaned
n secton 62 of the Interna Revenue Code (53 Stat., 32, 26 U. S. C,
Sup. , 62) .and the recproca ta conventon between the Untea
States and Canada (50 Stat., 1399).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved May 8, 19 1,
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster May 9, 19 1, 2 p. m.)
Secton 19.1 3-3: empton from wthhodng. 19 1-23-10731
I. T. 3 80
INT RN L R NU COD .
No wthhodng s requred wth respect to annuty Income pay-
abe to Frenc ctzens resdng In France. owever, wthhodng
s requred wth respect to such ncome payabe to ctzens of
France temporary n the Unted States who are nonresdent
aens. The ta conventon and protoco between Unted States
and France s st n effect
dvce s requested whether the conventon and protoco on
doube ta aton between the Unted States and the Repubc of
France, effectve anuary 1, 1936, s st n force and effect, and
whether annuty ncome payabe to French ctzens s e empt from
the wthhodng provsons of secton 1 3 of the Interna Revenue
Code.
rtce of the conventon on doube ta aton between the Unted
States and France provdes that the agreement sha become effec-
tve on the 1st day of anuary foowng the e change of ratfca-
tons and sha reman effectve for a perod of 5 years, and there-
after unt 12 months from the date on whch ether contractng
party gves notce of ts termnaton.
The conventon was procamed by the Presdent of the Unted
States on pr 16, 1935, and became effectve anuary 1, 1936. The
steps contempated by rtce as essenta to the termnaton of
the conventon have not been taken by ether contractng party and
the conventon s st n fu force and effect.
Under rtce I of the conventon, fe annutes pad n one
of the contractng States to a ctzen of the other State resdng
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2G3
19.1 -2.
there are e empt from ta n the former State. It was hed n
G. C. M. 21187 (C. . 1989-1 (Part 1), 1 1) that an annuty pad
by a domestc nsurance company perodcay durng fe, or a
specfed number of years, under an obgaton contaned n an
nsurance contract consttuted an annuty wthn the meanng of
rtce I (c) of the conventon.
rtce 3(b) of Part II of Treasury Decson 880 (C. . 1939-1
(Part 1), 85) provdes that the e empton appyng to tems of
ncome specfcay enumerated n rtce I of the conventon sha
not e tend to French ctzens resdng esewhere than n France
nor to ndvduas resdng n France who are not ctzens of France.
ccordngy, wthhodng s not requred wth respect to annuty
payments made to ctzens of France resdng n France, but s
requred wth respect to such payments made to ctzens of France
Temporary resdng n the Unted States who are nonresdent aens.
It s to be noted that under ecutve Order No. 8389, as amended,
the transfer of funds from the Unted States to persons n France
s restrcted. (See Mm. 5075, C. . 19 0-2, 1 1.)
Secton 19.1 3-7: Return and payment of ta wthhed.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 50 6, page 260.)
S CTION 1 . P YM NT OF CORPOR TION
INCOM T T SOURC .
Secton 19.1 -1: Wthhodng n the case of non-
resdent foregn corporatons.
INT RN L R NU COD .
Interest, dvdends, and ke tems arsng from property nvoved
n the decree of the Roya Netherands Government and property n
the custody of the aen property custodans of Great rtan. (See
I. T. 3 9, page 258.)
Secton 19.1 -1: Wthhodng n the case of non-
resdent foregn corporatons.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 50 6, page 260.)
Secton 19.1 -2: ds to wthhodng agents n de-
termnng abty for wthhodng of ta .
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 50 6, page 260.)
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19.203(a)(2)- .
26
SUPPL M NT G. INSUR NC COMP NI S.
S CTION 203(a). N T INCOM OF LIF INSUR NC
COMP NI S: G N R L RUL .
Secton 19.203 (a) (2)-: Reserve funds. 19 1-3-10566
L T. 3 3
INT RN L R NU COD .
Where durng Its ta abe year a arge part of the fe Insurance
In force wth the M Lfe Insurance Co. and the reserves thereon
were assumed by the N Lfe Insurance Co., the ta payer (the M Lfe
Insurance Co.) must use an average of Its reserve funds requred
by aw at the begnnng and end of ts ta abe year In determnng
the percentage of the mean reserve deductbe under secton
203(a)2 of the Interna Revenue Code. The use of the arthmet-
ca mean of the reserve funds at the begnnng of the year and
the end of each month thereafter Is not permssbe.
dvce s requested whether the M Lfe Insurance Co. (the ta -
payer) must use an average of ts reserve funds requred by aw
at the begnnng and end of ts ta abe year n determnng the
percentage of the mean reserve deductbe under secton 203(a)2
of the Interna Revenue Code, or whether n makng such deter-
mnaton the use of the arthmetca mean of the reserve funds at
the begnnng of ts ta abe year and the end of each month thereafter
s permssbe.
ffectve ugust , 19 0, a arge part of the fe nsurance n
force wth the M Lfe Insurance Co. (the ta payer) and the re-
serves thereon were assumed by the N Lfe Insurance Co. The ta -
payer states that due to the rensurance durng the year a deduc-
ton of a certan percentage of the mean of the reserve funds hed
at the begnnng and the end of the ta abe year 19 0 w not be
on the same bass as that on whch ts gross ncome s reported, snce
such computaton w not refect an ncrease n the reserve funds
for the perod anuary 1 to ugust , 19 0. The ta payer desres
to use the arthmetca mean of the reserve funds at the begnnng
of the year and the end of each month durng the year 19 0 nstead o
the mean of the reserve funds at the begnnng and end of the year.
Secton 203 (a)2 of the Interna Revenue Code provdes n part as
foows:
Sec. 203. Net Income of Lfe Insurance Companes.
(a) Genera Rue. In the case of a fe Insurance company the term net
ncome means the gross ncome ess

(2) Reserve funds. n amount equa to per centum of the mean of
the reserve funds requred by aw and hed at the begnnng and end of the
ta abe year, e cept that n the case of any such reserve fund whch s com-
puted at a ower Interest assumpton rate, the rate of 3 per centum sha
be substtuted for per centum.
In Western Southern Lfe Insurance Co. v. uwe, decded by
the Unted States Dstrct Court for the Southern Dstrct of Oho,
Western Dvson, on ugust 1 , 1939 (unreported), nvovng a
smar ssue, the court sad:
The anguage empoyed by Congress n the secton under consderaton sec-
ton 2 5(a)2 of the Revenue ct of 1926 s cear and unambguous. It specf-
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265
19.20 (b)- .
Icay provdes that the deducton granted sha be measured by the mean of the
reserve funds of a fe Insurance company requred by aw whch are hed at the
begnnng and end of the ta abe year not at some other perods.
The word mean s defned In Webster s New Internatona Dc-
tonary (1933) as foows: Math. verage; havng an Intermedate vaue between
two e tremes, or between the severa successve vaues of a varabe quantty
durng one cyce of varaton such that, were they a equa, the mean woud
be ther common vaue; as, mean dstance; mean moton; mean soar day.

The court s of opnon that under the statute ony those reserves hed by
pantff at anuary 1, 1927, and December 31, 1927, coud be ncuded, n the
determnaton of the mean of pantffs reserve funds requred by aw and hed
at the begnnng and end of the ta abe year 1927.
(Secton 2 5(a)2 of the evenue ct of 1926 corresponds to secton
203(a)2 of the Interna Revenue Code.)
The computaton of the mean reserve was aso nvoved n Great
Southern Lfe Insurance Co. v. Commssoner (89 Fed. (2d), 5 ,
certorar dened, 302 U. S., 698). In that case a arge ncrease n
the reserves of the ta payer occurred durng the ta abe year under
consderaton due to rensurance and acquston by purchase agree-
ments of a of the outstandng poces of other fe nsurance com-
panes. The ureau took the poston that the ta payer was entted
to a deducton based on the reserves at the begnnng and end of the
ta abe year, and that nether the reserves at the begnnng of the year
of the companes whose poces were acqured nor the reserves of such
companes at the date of assgnment of the poces coud be taken
nto consderaton n the computaton of the mean reserve. The
ureau s poston was sustaned by the Unted States oard of Ta
ppeas Great Southern Lfe Insurance Co. v. Commssoner, 33
. T. ., 512), and the decson of the oard was affrmed by the
Unted States Crcut Court of ppeas for the Ffth Crcut (cted
supra).
In the ght of the foregong, t s hed that the M Lfe Insurance
Co. must use an average of ts reserve funds requred by aw at the
begnnng and end of ts ta abe year n determnng the percentage
of the mean reserve deductbe under secton 203(a)2 of the Interna
Revenue Code. The use of the arthmetca mean of the reserve
funds at the begnnng of the year and the end of each month
thereafter s not permssbe.
S CTION 20 (b). INSUR NC COMP NI S OT R T N
LIF OR MUTU L: D FINITION OF INCOM , TC.
Secton 19.20 (b)-: Gross ncome of nsur- 19 1-5-10578
ance companes other than fe or mutua. G. C. M. 22503
R NU CT OF 1921. SU S U NT R NU CTS. ND INT RN L
R NU COD .
n nsurance company, other than fe or mutua, s entted In
computng the premum earned, as used n secton 2 6(b)5 of
the Revenue ct of 1921, correspondng provsons of subsequent
Revenue cts, and the Interna Revenue Code, to e cude therefrom
the net addton made durng the ta abe year to the addtona
reserve for noncanceabe heath and accdent poces requred
by State aw.
O. C. M. 18975 (C. . 1937-2, 355) revoked.
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19.211-7.
266
n opnon s requested whether G. C. M. 18975 (C. . 1937-2,
855) shoud be foowed, n vew of the decson n Massachusetts
Protectve ssocaton, Inc., v. Unted States (11 Fed. (2d), 30 ).
In G. C. M. 18975, supra, t was hed that n the case of an nsur-
ance company, other than fe or mutua, an amount set asde pur-
suant to nstructons from the nsurance department of a State to
cover ts estmated future abty on noncanceabe heath and acc-
dent poces s not deductbe under the provsons of the Revenue
ct of 1921 and subsequent Revenue cts. The poston was there
taken that the term unearned premums, as used n secton
2 6(b) 5 of the Revenue ct of 1926, means advance premums co-
ected whch the company has not yet had tme to earn, and t was
hed, n effect, that such term does not ncude amounts set asde to
cover the company s estmated future abty on noncanceabe
heath and accdent poces.
In Massachusetts Protectve ssocaton, Inc., v. Unted States,
supra, t was hed that the ta payer was entted n computng ts
premums earned for the year 1926, under secton 2 6(b) 5 of the
Revenue ct of 1926, to e cude therefrom the net addton made
durng that year to the addtona reserve for noncanceabe heath
and accdent poces requred by State aws, or, n other words, that
ths addton to the reserve fund was a part of unearned premums
wthn the meanng of the Revenue ct. The court stated n part aa
foows:
s ong as these reserve funds must be hed to provde for e pected Insurance
abtes n the future on these noncanceabe heath and accdent poces and
are not to be used for the genera purposes of the company, they are not earned
premums wthn the meanng of Congress and not ncudbe In gross Income.
The test s not whether the part of the premum set asde n the reserve for
noncanceabe heath and accdent nsurance beongs to the company In the
event of canceaton or apsng of the pocy, but whether that amount s such a
part of the company s gross Income as Congress consdered shoud be treated aa
net ncome for the purposes of ta aton. (McCoach v. Insurance Co. of North
merca, supra.) We hod that t s not.
Snce G. C. M. 18975, supra, s nconsstent wth the decson n the
Massachusetts Protectve ssocaton, Inc., case, t s hereby revoked.
owever, the appcaton of that court decson shoud be mted to
cases nvovng noncanceabe heath and accdent nsurance.
Ths rung appes to such cases arsng under the Revenue ct of
1921, subsequent Revenue cts, and the Interna Revenue Code.
. P. Wenche,
Chef Counse, ureau of Interna Revenue,
SUPPL M NT . NONR SID NT LI N INDI IDU LS.
S CTION 211. T ON NONR SID NT
LI N INDI IDU LS.
Secton 19.211-7: Ta aton of nonresdent 19 1-22-10725
aen ndvduas. I. T. 3 78
INT RN L R NU COD .
, a ctzen of the country of R, who s empoyed In New York
Cty by the purchasng commsson of that country, s a nonresdent
aen Indvdua engaged n a trade or busness In the Unted States
even though hs saary s e empt from the Federa ncome ta .
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267
19.212-2.
dvce s requested as to the Federa ncome ta abty of ,
a ctzen of the country of R and a saared e ecutve of the Country
of R Purchasng Commsson n New York, under the crcumstances
heren set forth.
who s a ctzen of the country of R, entered the Unted States
n September, 1939, accompaned by hs wfe and son, on temporary
vsa. Due to war condtons they remaned n the Unted States,
ther vstors permts beng renewed from tme to tme. In No-
vember, 19 0, accepted an appontment wth the Country of R
Purchasng Commsson n New York Cty, an organzaton created
by the Government of the country of R. s gross ncome for 19 0,
e cusve of the compensaton receved by hm for servces performed
as an empoyee of the Country of R Purchasng Commsson, con-
ssted of dvdends and nterest from securtes of whch he s the
owner and the M Trust Co. of New York the custodan.
s status, by vrtue of hs performance of persona servces wthn
the Unted States durng the year 19 0 as a member of the Country
of R Purchasng Commsson, s hed to be that of a nonresdent
aen engaged n trade or busness wthn the Unted States (secton
211(b) of the Interna Revenue Code and secton 19.211-7 (c) of
Reguatons 103), even though the saary receved for such servces
s e empt from the Federa ncome ta under secton 116(h) of the
Interna Revenue Code as compensaton of an empoyee of a foregn
government.
Form 10 0 s the form of return requred to be fed by for
the year 19 0. In computng hs Federa ncome ta abty on ths
return, he s entted, n accordance wth the provsons of secton
213 of the Code, to the statutory deductons from tota gross ncome
from sources wthn the Unted States provded by secton 23 of
the Code, as amended. Under secton 21 of the Code, as amended,
s entted to a persona e empton of ony 800 for the year
19 0 notwthstandng the fact that he was marred and vng
wth hs wfe. e s not entted to a credt for hs dependent son
even though the son receved hs chef support from hm for the
vear 19 0. (Secton 21 of the Code and secton 19.21 -1 of Regu-
atons 103.) The rates of ta appcabe are the norma ta at
per cent mposed by secton 11 of the Code, and the graduated
surta mposed by secton 12(b) of the Code, as amended, f
hs surta net ncome e ceeded ,000. In addton, he s abe to
the 10 per cent defense ta (10 per cent of the amount representng
the tota of the norma ta and the surta ) mposed by secton 15
of the Code, whch was added by secton 201 of the Revenue ct of
19 0.
S CTION 212. GROSS INCOM .
Secton 19.212-2: cuson of earnngs of
foregn shps from gross ncome.
( so Secton 19.231-3.)
19 1-1-10550
I. T. 3 39
INT RN L R NU COD .
F| does not satsfy the equvaent e empton provsons of sec-
tons 212(b) and 231(d) of the Interna Revenue Code.
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I 19.251-1.
268
Secton 19.212-2: cuson of earnngs of 19 1-15-1067
foregn shps from gross ncome. I. T. 3 65
( so Secton 231, Secton 231-3.)
INT RN L R NU COD .
Panama satsfes the equvaent e empton provsons of sectons
212(b) and 231(d) of the Interna Revenue Code and the Revenue
cts of 1936 and 1938.
SUPPL M NT I. FOR IGN CORPOR TIONS.
S CTION 231. T ON FOR IGN CORPOR TIONS.
Secton 19.231-3: cuson of earnngs of foregn
shps from gross ncome.
INT RN L R NU COD .
F|, equvaent e empton provsons of sectons 212(b) and 231(d)
of the Interna Revenue Code. (See I. T. 3 39, page 267.)
Secton 19.231-3: cuson of earnngs of foregn
shps from gross ncome.
INT RN L R NU COD .
Panama, equvaent e empton provsons of sectons 212(b) and
231(d) of the Interna Revenue Code. (See I. T. 3 65, above.)
SUPPL M NT . POSS SSIONS OF T UNIT D ST T S.
S CTION 251. INCOM FROM SOURC S WIT IN
POSS SSIONS OF UNIT D ST T S.
Secton 19.251-1: Ctzens of the Unted 19 1-13-10660
States and domestc corporatons derv- I. T. 3 62
ng ncome from sources wthn a pos-
sesson of the Unted States.
INT RN L R NU COD .
ppcaton of secton 251 of the Interna Revenue Code to the com-
pensaton accrung to a ta payer traveng from contnenta Unted
States to the Phppne Isands.
dvce s requested as to the appcaton of secton 251 of the Interna
Revenue Code to the compensaton accrung to a ta payer traveng
from contnenta Unted States to the Phppne Isands under the
crcumstances herenafter descrbed.
, a ctzen of the Unted States n the servce of the Unted States
Government, s ordered to the Phppne Isands for duty there. e
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269
5 19.251-1.
eaves New York Cty on a Government transport and, n the course of
the voyage, the vesse stops at the Panama Cana, San Francsco,
onouu, and Guam. The entre trp asts from 0 to 5 days. The
queston presented s how much, f any, of s saary whch accrues
to hm whe he s en route to the Phppnes s to be regarded as
ncome from sources wthn the Unted States.
Secton 251 of the Interna Revenue Code reads n part as foows:
(a) Genera Rue. In the case of ctzens of the Unted States or domestc
corporatons, satsfyng the foowng condtons, gross ncome means ony gross
Income from sources wthn the Unted States
(1) If 80 per centum or more of the gross Income of such ctzen or domestc
corporaton (computed wthout the beneft of ths secton), for the 3-year
perod mmedatey precedng the cose of the ta abe year (or for such part
of such perod Immedatey precedng the cose of such ta abe year as may be
appcabe) was derved from sources wthn a possesson of the Unted States |
and

(3) If, n the case of such ctzen, 50 per centum or more of hs gross Income
(computed wthout the beneft of ths secton) for such perod or such part
thereof was derved from the actve conduct of a trade or busness wthn a
possesson of the Unted States ether on hs own account or as an empoyee or
agent of another.
(b) mounts Receved n Unted States. Notwthstandng the provsons of
subsecton (a) there sha be ncuded n gross ncome a amounts receved by such
ctzens or corporatons wthn the Unted States, whether derved from sources
wthn or wthout the Unted States.
Secton 3797(a)9 of the Interna Revenue Code reads as foows:
Unted States. The term Unted States when used n a geographca sense
ncudes ony the States, the Terrtores of aska and awa, and the Dstrct of
Coumba.
G. C. M. 22383 (C. . 19 0-2, 227), whch has been cted n connec-
ton wth the present nqury and whch hods that wages earned by any
seaman (ctzen or aen) whe engaged n coastwse trade between
mercan ports shoud be regarded as from sources wthn the Unted
States, s mted n ts appcaton to the wages of neamen whe engaged
n coastwse trade, and t s not appcabe to passengers aboard ocean-
gong vesses.
For the purposes of secton 251(b) of the Interna Revenue Code,
supra, t s hed that such compensaton as accrues to , a passenger
and the ta payer n the nstant case, after eavng New York Cty
shoud not be regarded as ncome receved n the Unted Sates,
provded no stop-over s made at San Francsco or onouu, both
of whch are n the Unted States, as that term s defned by sec-
ton 3797(a)9 of the Interna Revenue Code, supra. In the event
that such stop-over or stop-overs are made, the ocaton of the ast
stop-over whch occurs n contnenta Unted States or n the Terr-
tores of the Unted States woud consttute the pont of departure
from the Unted States, and compensaton accrung to the ta payer
thereafter shoud not be consdered as ncome receved n the Unted
States. ta payer shoud not be deemed to have made a stop-over,
as that term s used heren, merey by vrtue of the fact that hs
shp stops for a day or two at another port wthn contnenta Unted
States or the Terrtores.
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19.262-2.
270
SUPPL M NT . C IN TR D CT CORPOR TIONS.
S CTION 262. CR DIT G INST N T INCOM .
Secton 19.262-2: Credts aowed Chna 19 1-20-10717
Trade ct corporatons. L T. 9 77
INT RN L R NU COD .
The speca dvdend credt provded by secton 262 of the Interna
Revenue Code w be aowed to corporatons organzed under the
Chna Trade ct (1922) whch have merey credted such dvdends
on ther books to the accounts of sharehoders wthn the tme re-
qured by aw for dstrbuton of such dvdends n order to obtan the
speca dvdend credt, where, under the certfcaton of the Secretary
of Commerce, t s shown that such dvdends are unquafedy sub-
|ect to the demand of the sharehoders.
dvce s requested whether corporatons organzed under the Chna
Trade ct (1922 are entted to the speca dvdend credt provded
by secton 262(b) of the Interna Revenue Code merey by credtng
such dvdends to stockhoders accounts on the corporaton s books.
Secton 19.262-3 of Reguatons 103, nterpretng secton 262 of the
Interna Revenue Code, defnes the term speca dvdend as the
amount whch durng the year endng on March 15 succeedng the
cose of the corporaton s ta abe year s dstrbuted as a speca dv-
dend to or for the beneft of such persons as on the ast day of the
ta abe year were resdent n Chna, the Unted States, or possessons
of the Unted States, or were ndvdua ctzens of the Unted States
or Chna, and owned shares of stock of the corporaton.
The tems of gross ncome to be ncuded n the return of a corpora-
ton organzed under the Chna Trade ct and the deductons aow-
abe are the same as n the case of other domestc corporatons. (Sec-
ton 19.262-1, Reguatons 103.)
Wth respect to the dvdends pad credt aowed domestc cor-
poratons under secton 27(b) of the Interna Revenue Code, the
ureau consders a dvdend as pad when t s receved by the
sharehoder. (See secton 19.27(b)-2, Reguatons 103.) Secton
19.27(b)-2 aso provdes that where a corporaton, nstead of
payng the dvdend drecty to the sharehoder, credts the
account of the sharehoder on the books of the corporaton wth the
amount of the dvdend, the aowance for a dvdend pad
w not be permtted uness t be shown to the satsfacton of the
Commssoner that such credtng consttuted payment of the dvdend
to the sharehoder wthn the ta abe year. In the case of Socager
v. Commssoner (8 Fed. (2d), 23, Ct. D. 1186, C. . 1937-1, 206)
the court emphaszed the ureau s poston that such credtng w
consttute payment where the dvdends are unquafedy made sub-
|ect to the demand of the sharehoders.
Secton 262(b) 1 of the Interna Revenue Code provdes that the
speca dvdend credt sha not be aowed Chna Trade ct corpo-
ratons uness the Secretary of Commerce has certfed to the Com-
mssoner the amount whch durng the year endng on the date f ed
by aw for fng the return the corporaton has dstrbuted as a speca
dvdend for the beneft of the persons named n such secton.
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271
19.272-2.
ppyng the rue above stated, t s hed that the speca dvdend
credt w be aowed to corporatons organzed under the Chna
Trade ct (1922) whch have merey credted such dvdends on ther
books to the accounts of sharehoders wthn the tme requred by
aw for dstrbuton of such dvdends n order to obtan the speca
dvdend credt, where, under the certfcaton of the Secretary of
Commerce, t s shown that such dvdends are unquafedy sub|ect to
the demand of the sharehoders.
Secton 19.262- : Wthhodng by a Chna Trade ct
corporaton.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 50 6, page 260.)
SUPPL M NT L. SS SSM NT ND COLL CTION OF D FICI NCI S.
S CTION 272. PROC DUR IN G N R L.
Secton 19.272-2: Coecton of a defcency. 19 1-17-1069
I. T. 3 71
INT RN L R NU COD .
The Soders and Saors Cv Reef ct of 19 0, deferrng coec-
ton darng mtary servce of Income ta due from persons n
mtary servce, s not appcabe wth respect to ta es owed by the
wfe of any such person even though t s shown that the wfe s
abty to pay s materay mpared by reason of the servce of
the husband.
dvce s requested whether the wfe of an offcer n the mtary
servce, as we as the offcer, may be reeved from mmedate payment
of ncome ta under secton 513 of the Soders and Saors Cv
Reef ct of 19 0 (Pubc, No. 861, Seventy-s th Congress, Chapter
.888, thrd sesson).
Secton 101(1) and secton 513 of the Soders and Saors Cv
Reef ct of 19 0, whch s entted n ct To promote and
strengthen the natona defense by suspendng enforcement of certan
cv abtes of certan persons servng n the Mtary and Nava
stabshments, ncudng the Coast Guard, provde n part:
Seo. 101. (1) The term persons n mtary servce and the term persons
In the mtary servce of the Unted States, as used n ths ct, sha ncude
the foowng persons and no others: members of the rmy of the Unted
States, the Unted States Navy, the Marne Corps, the Coast Guard, and a
offcers of the Pubc eath Servce detaed by proper authorty for duty ether
wth the rmy or the Navy. The term mtary servce, as used In ths ct,
sha sgnfy Federa servce on actve duty wth any branch of servce heretofore
referred to or mentoned as we as tranng or educaton under the supervson
of the Unted States premnary to Inducton nto the mtary servce.
Itacs supped.

Skc. 513. The coecton from any person n the mtary servce of any ta
oh the ncome of such person, whether fang due pror to or durng hs perod
of mtary servce, sha be deferred for a perod e tendng not more than s
months after the termnaton of hs perod of mtary servce f such person s
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19.27 -1.
272
abty to pay such ta s materay mpared by reason of such servce. No
nterest on any amount of ta , coecton of whch s deferred for any perod
under ths secton, and no penaty for nonpayment of such amount durng such
perod, sha accrue for such perod of deferment by reason of such nonpayment.
The runnng of any statute of mtatons aganst the coecton of such ta
by dstrant or otherwse sha be suspended for the perod of mtary servce
of any ndvdua the coecton of whose ta s deferred under ths secton, and
for an addtona perod of nne months begnnng wth the day foowng the
perod of mtary servce. The provsons of ths secton sha not appy to
the ncome ta on empoyees mposed by secton 1 00 of the Federa Insurance
Contrbutons ct.
In vew of the provsons of the ct, as quoted above, the ureau
may not defer the coecton of unpad ncome ta es assessed aganst
the wfe of any ndvdua n the mtary servce, even though t
can be shown that the wfe s abty to pay the ta s materay
mpared by reason of the servce of the husband.
S CTION 27 . N RUPTCY ND R C I RS IPS.
Prorty rghts of the Government wth respect to ncome ta es
In recevershp cases.
n opnon s requested reatve to the prorty rghts of the
Government wth respect to ncome ta es n recevershp cases.
The frst queston presented s whether the ta due on the ncome
receved durng the recevershp has prorty over admnstratve
e penses such as recever s fees, attorney s fees, etc.
Secton 3 C6 of the Revsed Statutes provdes as foows:
Sec. 3 66. Whenever any person ndebted to the Unted States s nsovent,
or whenever the estate of any deceased debtor, n the hands of the e ecutors
or admnstrators, s nsuffcent to pay a the debts due from the deceased, the
debts due to the Unted States sha be frst satsfed; and the prorty hereby
estabshed sha e tend as we to cases n whch a debtor, not havng suffcent
property to pay a hs debts, makes a vountary assgnment thereof, or n
whch the estate and effects of an abscondng, conceaed, or absent debtor are
attached by process of aw, as to cases n whch an act of bankruptcy Is
commtted.
In the case of Mchgan v. Mchgan Trust Co., Recever (286 U S.,
33 ), Mr. ustce Cardozo stated (at page 3 ) we thnk
the annua ta es accrung whe the recever was n charge must be
deemed e penses of admnstraton . In the case of Wre
Whee Corporaton of merca et a. v. Fayette ank Trust Co. of
Connersv/e, Ind., et a. (30 Fed. (2d), 318), the court aowed the
payment of the fu amount due the Unted States as e cse ta es on
automobes manufactured by the recever pror to the payment of
(1) State of Indana persona property ta es ncurred durng re-
cevershp, (2) merchandse credtors of the recever, (3) recever s
certfcates, and ( ) other msceaneous recevershp credtors. In
that case fees of the recevers and attorneys were pad n fu. In
Parks v. Centra Door Lumber Co. et a. (102 Pac. (2d), 706),
Secton 19.27 -1: ankruptcy and recever-
shp proceedngs.
INT RN L R NU COD .
19 1-8-10610
G. C. M. 22 99
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273
19.275-1.
cams aganst the recever for soca securty ta es were hed entted
to payment pror to the payment of wage cams ncurred by the
recever durng recevershp.
In vew of the foregong, t s the opnon of ths offce that Federa
ncome ta es, abty for whch was ncurred durng recevershp,
are not entted to prorty n payment over court costs, to wt, fng
fees, reasonabe compensaton for the recever, and a reasonabe
attorney s fee, but that they are, generay speakng, entted to
prorty n payment over other admnstratve or operatng e penses
by vrtue of secton 3 66 of the Revsed Statutes.
The second queston presented s whether the Government s cams
for ta es ncurred pror to recevershp woud be equa or pror to
the cam of a bondng company whch, pror to the recevershp,
ssued ts bond as surety to cover a st earer ta cam and was
forced to pay the Unted States on the bond because of ta payer s
defaut.
Secton 8 68 of the Revsed Statutes s as foows:
Sec. 3 68. Whenever the prncpa In any bond gven to the Unted States Is
Insovent, or whenever, such prncpa beng deceased, hs estate and effects
whch come to the hands of hs e ecutor, admnstrator, or assgnee, are n-
suffcent for the payment of hs debts, and, n ether of such cases, any surety
on the bond, or the e ecutor, admnstrator, or assgnee of such surety pays
to the Unted States the money due upon such bond, such surety, hs e ecutor,
admnstrator, or assgnee, sha have the ke prorty for the recovery and
recept of the moneys out of the estate and effects of such nsovent or do-
ceased prncpa as s secured to the Unted States; and may brng and man-
tan a sut upon the bond, n aw or equty, n hs own name, for the recovery
of a moneys pad thereon.
In the case of Unted States v. Natona Surety Co. (25 U. S., 73)
t was hed that secton 3 68 of the Revsed Statutes, whch gves a
surety who pays the Unted States the amount due on a bond of
an nsovent debtor the prorty en|oyed by the Unted States over
other credtors under secton 3 66 of the Revsed Statutes, docs not
entte the surety to share equay wth the Unted States when the
estate s nsuffcent to satsfy the unpad cam of the Unted States.
It s, therefore, the opnon of ths offce that the surety s entted
to satsfacton of ts cam ony after the cams of the Unted States
are frst satsfed.
. P. Wenched,
Chef Counse, ureau of Interna Revenue.
S CTION 275. P RIOD OF LIMIT TION UPON
SS SSM NT ND COLL CTION.
Secton 19.275-1: Perod of mtaton upon
assessment of ta .
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5036, page 276.)
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Regs. 109, 30.719-1. 27
SUPPL M NT . MUTU L IN STM NT COMP NI S.
S CTION 362. T ON MUTU L IN STM NT
COMP NI S.
Secton 19.362-1: Ta on mutua nvestment companes.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5038, page 187.)
S CTIONS 391-396.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5036, page 276.)
C PT R 2. DDITION L INCOM T S.
SU C PT R . P RSON L OLDING COMP NI S.
S CTION 50 . UNDISTRI UT D SU C PT R
N T INCOM .
Secton 19.50 -1: Undstrbuted Subchapter net ncome,
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5052, page 233.)
S CTION 506. D FICI NCY DI ID NDS CR DIT3
ND R FUNDS.
Secton 19.506-6: ffect of defcency dvdends on
dvdends pad credt.
INT RN L R NU COD .
Reguatons 103, amended. (See T. D. 5052, page 233.)
C PT R 2. DDITION L INCOM T S.
SU C PT R . C SS PROFITS T .
S CTION 719. ORROW D IN ST D C PIT L.
Reguatons 109, Secton 30.719-1: orrowed 19 1-23-10732
nvested capta. I. T. 3 81
nterna revenue code.
The trade acceptances drawn by the N Company to the order of
Itsef on, and accepted by the M Company on account of goods
purchased by It from the N Company are bs of e change wthn
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275
Regs. 109, 30.719-1.
the purvew of secton 719 of the cess Profts Ta ct of 19 0.
ccordngy, any ndebtedness evdenced thereby whch was out-
standng as of the begnnng of a certan day s ncudbe, under
secton 719(a), n that day s borrowed capta of the M Company for
the purpose of determnng, under secton 719(b), ts borrowed n-
vested capta for that day.
dvce s requested whether certan trade acceptances drawn by the
N Company to the order of tsef on and accepted by the M Company
n stated amounts and payabe on certan future dates are evdence of
outstandng ndebtedness and ncudbe n the borrowed capta of
the M Company under secton 719 of the cess Profts Ta ct of
19 0 (Subchapter added to Chapter 2 of the Interna Revenue Code
by secton 201 of the Second Revenue ct of 19 0, approved October 8,
19 0). The foowng statement s prnted on the face of each trade
acceptance: The transacton whch gves rse to ths nstrument s
the purchase of goods by the acceptor from the drawer.
Secton 719(a) 1 of the ct provdes that the borrowed capta for
any day of any ta abe year sha be determned as of the begnnng
of such day and ncude the amount of outstandng ndebtedness
(not ncudng nterest, and not ncudng ndebtedness descrbed n
secton 751 (b) reatng to certan e changes) evdenced by a bond,
note, b of e change, debenture, certfcate of ndebtedness, mortgage,
or deed of trust.
The queston s rased as to whether the trade acceptances n
queston quafy as bs of e change. In ones v. Revere Preservng
Co. (2 7 Mass., 225, 1 2 N. ., 70) t was stated that me She
nstrument decared on s sometmes coed a trade acceptance, t
has a the eements requste to a b of e change as defned n the
Negotabe Instruments ct , and s to be so consdered.
In Stafford v. (53 Caf. pp., 337, 200 Pac, 33) t was hed
that there s nothng n the Federa Reserve ct (secton 13), or
n the reguatons made thereunder, changng the character of trade
acceptances, conformng therewth, as bs of e change. In Wnd-
sor Cement Co, v. Thompson (86 Conn., 511, 86 t., 1) t was hed
that the Negotabe Instruments ct, defnng a b of e change
as an order whch, nter aa, s payabe to order or bearer, reates
to negotabe bs ony; and does not prevent an order not so payabe,
but merey to the pantff, from operatng as a nonnegotabe b
of e change. trade acceptance as a b of e change wthn the
meanng of secton 719(a) 1, supra, must evdence outstandng n-
debtedness. ence, t must be n wrtng and have been so accepted
by the drawee and be a defnte and uncondtona obgaton to pay
on demand or at a f ed or determnabe future tme a sum certan
n money to, or to the order of, a specfed person, or to bearer.
(See generay oyt v. Lynch, N. Y. Super, 328; Sheets v. Coast
Coa Co., 7 Wash., 327, 133 Pac, 33; Perce, etc., Mfg. Corf. v.
Dane Russe oer Works, Inc., 262 Mass., 2 2, 159 N. ., 625;
Camp v. Oakand Mtge. Fnance Co., 128 Ca. pp., 238, 17 Pac.
(2d), 151.)
In vew of the foregong, t s hed that the trade acceptances sub-
mtted are bs of e change wthn the purvew of secton 719 of the
cess Profts Ta ct of 19 0. ccordngy, any ndebtedness ev-
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I 725.
276
denced thereby whch was outstandng as of the begnnng of a cer-
tan day s ncudbe, under secton 719(a), n that day s borrowed
capta of the M Company for the purpose of determnng, under
secton 719(b), ts borrowed nvested capta for that day.
S CTION 725. P RSON L S R IC CORPOR TIONS.
( so Secton 275, Secton 19.275-1; Sec- 19 1-6-1059
tons 391-396.) T. D. 5036
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RTS 10, 30.
INCOM T ND C SS PROFITS T .
Reguatons prescrbed under the Second Revenue ct of 19 0 wth
respect to persona servce corporatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
y reason of the enactment of the Second Revenue ct of 19 0
(Pubc, No. 801, Seventy-s th Congress, thrd sesson), approved
October 8, 19 0
Paragraph 1. The foowng reguatons wth respect to persona
servce corporatons are prescrbed under Tte II of such ct, re-
atng to the e cess profts ta :
Sec. 725. Persona Servce Corporatons. (Second Revenue ct of
19 0.)
(a) Defnton. s used n ths subchapter, the term persona
servce corporaton means a corporaton whose ncome s to be as-
crbed prmary to the actvtes of sharehoders who are reguary
engaged n the actve conduct of the affars of the corporaton and
are the owners at a tmes durng the ta abe year of at east 70 per
centum n vaue of each cass of stock of the corporaton, and n whch
capta s not a matera ncome-producng factor; but does not ncude
any foregn corporaton, nor any corporaton 50 per centum or more
of whose gross ncome conssts of gans, profts, or ncome derved
from tradng as a prncpa. For the purposes of ths subsecton, an
ndvdua sha be consdered as ownng, at any tme, the stock owned
at such tme by hs spouse or mnor chd or by any guardan or
trustee representng them.
(b) ecton as to Ta abty. If a persona servce corporaton
sgnfes, n ts return under Chapter 1 for any ta abe year, ts desre
not to be sub|ect to the ta mposed under ths subchapter for such
ta abe year, t sha be e empt from such ta for such year, and the
provsons of Suppement S of Chapter 1 sha appy to the share-
hoders n such corporaton who were such sharehoders on the ast
day of such ta abe year of the corporaton.
Secton 30.725-1. Ta aton of persona servce corporatons. persona servce
corporaton s sub|ect to the e cess profts ta mposed under Subchapter of
Chapter 2 the same as any other domestc corporaton uness t eects as to any
ta abe year not to bo sub|ect to such ta . If the corporaton eects not to be
sub|ect to the e cess-profts ta , the provsons of Suppement S (sectons 391 to
396, ncusve, as added by secton 502 of the Second Revenue ct of 19 0) sha
appy to the sharehoders n such corporaton who were such sharehoders on the
ast day of the ta abe year of the corporaton. See secton 19.39 -1 of Regua-
tons 103. In such case, the amount of the undstrbuted Suppement S net ncome
sha be consdered as pad n to the corporaton as of the cose of the ta abe year
as pad-n surpus or as a contrbuton to capta, and the amount of accumuated
earnngs and profts as of the cose of such year sha be correspondngy reduced.
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277
5 725.
See secton 39 (d). (Secton 62, 53 Stat., 32, 26 U. S. C, Sup., 62; sectons 725,
729, Pubc, No. 801, Seventy-s th Congress, thrd sesson.)
Sec. 30.725-2. Defnton of persona servce corporaton. (a) In genera. The
term persona servce corporaton means a domestc corporaton n whch cap-
ta s not a matera ncome-producng factor and the ncome of whch s to be
ascrbed prmary to the actvtes of sharehoders who (1) are reguary engaged
n the actve conduct of the affars of the corporaton, and (2) are the owners,
throughout the entre ta abe year, of at east 70 per cent n vaue of each cass
of stock of the corporaton.
If 50 per cent or more of the gross Income of a corporaton conssts of gans,
profts, or ncome derved from tradng as a prncpa, such corporaton can not
be consdered to be a persona servce corporaton. s to corporatons n whch
ess than 50 per cent of the gross Income s derved from tradng as a prncpa,
see (c) beow.
(6) Stock nterest of sharehoders. Sharehoders reguary engaged n the
actve conduct of the affars of the corporaton and to whom the ncome of the
corporaton Is prmary to be ascrbed must own at a tmes durng the ta abe
year at east 70 per cent n vaue of each cass of stock of the corporaton. If
stock s owned by the spouse or mnor chd of an ndvdua, or owned by the
guardan or trustee of such spouse or chd, such stock s treated as beng owned
by such ndvdua.
corporaton can not be consdered to be a persona servce corporaton for
any ta abe year f another corporaton owns more than 30 per cent n vaue of
any cass of ts stock at any tme durng such year. corporaton s an artfca
entty and can not tsef be reguary engaged n the actve conduct of the affars
of another corporaton wthn the meanng of secton 725.
The fact that the ownershp of shares n the corporaton may change durng the
course of the ta abe year dues not take the corporaton whch s otherwse a er-
6ona servce corporaton out of that cass uness at some tme durng the ta abe
year the ownershp of more than 0 per cent n vaue of the shares of any cass of
stock passes nto the hands of persons not reguary engaged n the actve conduct
of the affars of the corpora on.
(c) Income to be ascrbed prmary to the actvtes of sharehoders. If em-
poyees other than sharehoders contrbute substantay to the servces rendered
by a corporaton, such corporaton s not a ersoa servce corporaton uness, n
every case n whch servces are so rendered, the vaue of and the compensaton
charged for such servces are to e attrbuted prmary to the e eronce or sk
of the sharehoders and such fact s evdenced n some defnte manner n the
norma course of the busness or professon. The fact that the sharehoders gve
persona attenton or render vauabe servces to the corporaton as a resut of
whch ts earnngs are greater than those of a corporaton engaged n a ke or
smar busness or professon, the sharehoders of whch are not reguary
engaged n the actvtes of the corporaton, does not of tsef consttute the
corporaton a persona servce corporaton.
Income of a corporaton from merchandsng or tradng as a prncpa, drect-
y or Indrecty, n commodtes or n the servces of the others s not to be
ascrbed prmary to the actvtes of Its sharehoders. Income of a corpora-
ton from the conduct of an aucton, agency, brokerage, or commsson busness
strcty on the bass of a fee or commsson may be so ascrbed. If, however,
ether as a matter of busness pocy or by contract, the corporaton assumes any
such rsks as those of market fuctuatons, bad debts, or faure to accept shp-
ments, or f It guarantees the accounts of the purchaser or s n any way
accountabe to the seer for the payment of the purchase prce, the transacton
Is one of merchandsng or tradng, and ths s true even though the goods are
shpped drecty from the producer to the consumer and are never actuay n
the possesson of the corporaton. The fact that earnngs of the corporaton
are termed commssons or fees s not controng. The fact that a commsson
or fee In a transacton s based on a dfference n the prces at whch the seer
ses and the buyer buys rases a presumpton that the transacton s one of
merchandsng or tradng, and t w be so consdered n the absence of sats-
factory evdence to the contrary.
It may happen that a corporaton s engaged n two or more busnesses or
professons whch are more or ess reated. Thus, an engneerng concern
may aso engage n contractng, whch amounts to tradng n materas and
abor, or a brokerage concern may guarantee some of ts accounts, or a photo-
graphc concern may se pctures, frames, art goods, and suppes. In such
cases, the corporaton s not a persona servce corporaton uness the actvtes
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725.
278
of the corporaton consstng of tradng or guaranteeng of accounts or seng
are neggbe or merey ncdenta, and uness no apprecabe part of the
earnngs s to be ascrbed to such actvtes. See aso (e) beow reatng to
the empoyment of capta.
( f) Sharehoders reguary engaged n the actve conduct of the affars of
the corporaton. corporaton s not a persona servce corporaton uness share-
hoders who own at a tmes durng the ta abe year at east 70 per cent n
vaue of each cass of stock are reguary engaged n the actve conduct of the
affare of the corporaton. That such sharehoders devote some of ther tme to
the affars of the corporaton s not suffcent; they must wth reguarty devote
substanta tme and energy to the conduct of ts affars.
(e) Capta as a matera ncome-producng factor. In a persona servce
corporaton capta must not be a matera ncome-producng factor. Whether
capta s a matera ncome-producng factor s to be determned by reference
to (a) the e tent to whch capta s requred to carry on the busness or
professon, and (6) the e tent to whch capta Is actuay used n the produc-
ton of ncome though not requred by the prmary actvtes of the corporaton.
If the use of capta s necessary to the producton of the Income of the corpora-
ton and s more than ncdenta, capta s a matera ncome-producng factor
and the corporaton s not a persona servce corporaton. If a substanta
porton of the ncome s attrbutabe to a use of capta, whether or not con-
nected wth the prmary actvtes of the corporaton, capta s a matera
ncome-producng factor even though such use of capta Is not necessary to
such prmary actvtes. The term capta as used n secton 725 and n ths
secton means not ony capta actuay nvested by the sharehoders but aso
capta obtaned n other ways. Thus, capta may be borrowed ether drecty
as shown by bonds, debentures, certfcates of ndebtedness, notes, bs payabe,
or other paper, or ndrecty as shown by accounts payabe or other forms of
credt, or the busness of the corporaton may be fnanced n some other manner
by ts sharehoders. If a substanta amount of capta s used to fnance or
carry the accounts of cents or customers, t w be nferred that because of
competton or for other reasons such use of capta s necessary and more than
ncdenta n order to secure or hod busness whch woud otherwse be ost.
If a corporaton engaged n an agency, brokerage, or commsson busness
reguary empoys a substanta amount of capta to end to ts prncpas, to
buy and carry goods on ts own account, or to buy and carry odd ots n order
that t may render more satsfactory servce to ts prncpas or customers, such
corporaton s not a persona servce corporaton. In genera, the arger the
amount of capta actuay used the stronger s the evdence that capta s
necessary and more than ncdenta and s a matera ncome-producng factor.
The term Income as used n secton 725 and n ths secton means gross
ncome. Capta s a matera ncome-producng factor f ts use resuts n a
substanta amount of gross Income, Irrespectve of the amount of net ncome,
f any, such use produces.
(/) ppcaton of reguatons; returns. No defnte and concusve tests can
be prescrbed by whch It can be fnay determned n advance of an e amna-
ton of - the corporaton s ncome ta return whether t s or s not a persona
servce corporaton. In the precedng subsectons are set forth the genera
prncpes under whch such determnaton w be made.
If a corporaton camng to be a persona servce corporaton sgnfes In ts
return under Chapter 1 for any ta abe year ts desre not to be sub|ect to the
e cess profts ta under Subchapter of Chapter 2 for such ta abe year, t
sha attach Form 1121PS, n dupcate, to Its ncome ta return on Form 1120.
In Form 1121PS there sha be stated (a) such facts as tend to show whether
or not the corporaton s a persona servce corporaton, ncudng (1) the
nature of ts busness, (2) the character, preferences, dvdend rates, and other
essenta features of the varous casses of ts stock outstandng for any tme
durng the ta abe year, (3) the names and addresses of ts severa sharehoders
and ther reatonshp to each other, ( ) the number and casses of shares
owned at any tme durng the ta abe year by each sharehoder and the porton
of the year durng whch such shares were so owned, (5) the nature of the
actvtes of the severa sharehoders on behaf of the corporaton, and (6) the
e tent to whch capta n any form Is used n the busness, and (6) the com-
putaton of the undstrbuted Suppement S net Income for the ta abe year, the
names and addresses of a sharehoders of the corporaton at the cose of the
ta abe year, the number and casses of shares hed by each, and such other
nformaton as may be requred by the form and the nstructons prnted on
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279
725.
the form or ssued therewth. (Secton 62, 63 Stat., 82, 26 U. S. C, Sup., 02;
sectons 725, 729, Pubc, No. 801, Seventy-s th Congress, thrd sesson.)
Seo. 30.725-3. ecton as to ta abty. The eecton ns to ta abty pro-
Tded for n secton 725(b) and the resutng e empton from ta have appca-
ton ony to the e cess profts ta on domestc corporatons mposed under
Subchapter of Chapter 2 as added by secton 201 of the Second Revenue ct
of 19 0. The corporaton may make such an eecton by sgnfyng n ts return
under Chapter 1 ts desre not to be sub|ect to the e cess prots ta . new
eecton s requred for each ta abe year. n amended return fed after the
statutory perod for fng the return (or after the ast day of any e tenson
perod) Is not a return wthn the meanng of secton 725 (b).
domestc corporaton whch eects In ts ncome ta return for a ta abe
year to be e empt from the e cess profts ta for such year as n persona servce
corporaton may, notwthstandng such eecton, fe an e cess profts ta return
for such ta abe year on Form 1121. Such return sha be compete n a re-
spects e cept for the computaton of the ta , and there sha be attached to It
a statement that the corporaton desres to be cassfed as a persona servce
corporaton and not to be sub|ect to the e cess profts ta for the ta abe year
and that t has attached Form 1121PS n dupcate to Its Income ta return on
Form 1120. n e cess profts ta return made n ths manner wthn the tme
prescrbed by aw w consttute a return wthn the meanng of secton 712(a).
In the case of a domestc corporaton whch fes such a return eectng theren
as provded n secton 712(a) or secton 7 1 to compute ts e cess profts credt
for such ta abe year under secton 713 or secton 71 and whch s subsequenty
determned not to be a persona servce corporaton, the amount of e cess profts
ta for such year sha be determned by the Commssoner n accordance wth
the eecton so made by the corporaton wth respect to the computaton of ts
e cess profts credt, and the e cess profts ta so determned w consttute a
defcency whch sha be assessed and coected n the same manner as n the
case of a defcency In ncome ta under Chapter 1. corporaton not fng an
e cess profts ta return for a ta abe year wthn the tme prescrbed by aw
may not In any case eect to have the e cess profts credt for such ta abe year
computed under secton 718. The aowance of a credt or refund of any Income
ta overpad by the sharehoders of a corporaton dened persona servce
cassfcaton s sub|ect to the mtatons provded n secton 322. (Secton 62,
53 Stat, 32, 26 U. S. C, Sup., 62; sectons 725, 729, Pubc, No. 801, Seventy-
S th Congress, thrd sesson.)
Par. 2. Reguatons 103 Part 19, Tte 26, Code of Federa Regu-
atons, 19 0 Sup. are amended as foows:
( ) The foowng s nserted mmedatey after secton 19.373-1:
Sec. 502. Ta or Sharehoders of Persona Servce Corporatons.
(Second Revenue ct of 19 0.)
The Interna Revenue Code s amended by nsertng after secton 373
the foowng new Suppement:
Suppement S Ta of Sharehoders of Persona Servce Corpora-
tons.
Seo. 391. ppcabty of Suppement.
If a persona servce corporaton (as defned n secton 725) s
e empt under such secton for any ta abe year from the e cess profts
ta mposed by such subchapter, the provsons of ths Suppement sha
be appcabe wth respect to each sharehoder of such corporaton who
was a sharehoder n such corporaton on the ast day of such ta abe
year of the corporaton.
Seo. 19.391-1. ppcabty of Suppement S. If a persona servce corpora-
ton (as defned n secton 725 and the reguatons thereunder) eects not to be
sub|ect to the e cess profts ta for any ta abe year, then sectons 391 to 396,
as added by secton 502 of the Second Revenue ct of 19 0, sha be appcabe
wth respect to each person who was a sharehoder of such corporaton at the
cose of the ta abe year of the corporaton. (See secton 725(b).)
Seo. 392. Undstrbuted Suppement S Net Income.
; For the purposes of ths chapter, the term undstrbuted Suppe-
ment S net Income means the Suppement S net ncome (as defned
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725.
2S0
In secton 393) mnus the amount of the dvdends pad durng the
ta abe year. For the purposes of ths secton the amount of dvdends
pad sha be computed n the same manner as provded n subsectons
(d), (e), (f), (g), (h), and () of secton 27 for the purpose of the
bnsc surta credt provded n secton 27.
Sec. 19.392-1. Undstrbuted Suppement 8 net ncome. The term unds-
trbuted Suppement S net ncome means Suppement S net ncome (as defned
n secton 393) mnus the amount of dvdends pad by the corporaton durng
the ta abe year. For the method of computng dvdends pad, see subsectons
(d), (e), (f), (g), (h), and (1) of secton 27 and the reguatons thereunder.
Sec. 393. Supp-emest S Net Income.
For the purposes of ths chapter Suppement S net ncome means
the net ncome, e cept that there sha be aowed as addtona
deductons
(a) The Federa ncome ta payabe under ths chapter for the
ta abe year; and
(b) In eu of the deducton aowed by secton 23(q), contrbu-
tons or gfts, payment of whch s made wthn the ta abe year, to
or for the use of donees descrbed n secton 23(q) for the purposes
theren specfed, to an amount whch does not e ceed 15 per centum
of the corporaton s net ncome, computed wthout the beneft of ths
subsecton and secton 23 (q).
Sec. 19.393-1. Suppement S net ncome. The term Suppement S net In-
come means the net Income as defned n secton 21, but computed wthout the
deducton aowed under secton 23(q), mnus the sum of the foowng:
(a) The Federa ncome ta payabe under Chapter 1 for the ta abe
year; and
(6) The amount of contrbutons or gfts made to or for the use of donees
descrbed In secton 23(q) for the purposes theren specfed, to an amount
whch does not e ceed 15 per cent of the net ncome of the corporaton
computed wthout the beneft of sectons 23(q) and 393(b).
The deductons aowed under secton 393 for contrbutons or gfts made to
or for the use of donees descrbed n secton 23(q) are In eu of deductons
otherwse aowabe under secton 23(q) and are aowabe ony for the ta abe
year n whch such contrbutons or gfts are actuay pad, regardess of when
pedged and regardess of the method of accountng empoyed by the corpora-
ton n keepng ts books and records.
The provsons of the ast two paragraphs of secton 19.23(o)- reatng to (1)
the statement n returns of the name and address of each organzaton to
whch a contrbuton or gft was made and the amount and the appro mate
date of the actua payment of the contrbuton or gft, (2) the substantaton
of the cams for deductons when requred by the Commssoner, and (3) the
bass for cacuaton of the amount of a contrbuton or gft whch s other
than money, are equay appcabe to cams for deductons of amounts of con-
trbutons or gfts by corporatons under secton 393.
The method of computng Suppement S net ncome may be ustrated by the
foowng e ampe:
ampe: The Corporaton, a persona servce corporaton, has for the
caendar year 19 0 a net ncome, as computed under Chapter 1, of 190,000.
The Federa ncome ta payabe under Chapter 1 for that year amounts to
.r),600. Contrbutons or gfts payment of whch Is made durng the ta abe
year to or for the use of donees descrbed n secton 23 (q) for the purposes
theren specfed amount to 35,000. The Suppement S net Income of the
corporaton s 12 , 00, computed as foows:
Net ncome under Chapter 1 190, 000
dd : Contrbutons deductbe n computng net ncome under secton
21 10,000
Net ncome computed wthout the beneft of any deducton for contr-
butons 200,000
Less: Federa ncome ta 5,000
Contrbutons deductbe under secton 393(b) (15 per
cent of 200,000) 30,000
75,000
Suppement S net ncome 12 , 00
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281
11 725.
Sec. 39 . Corporaton Income Ta fd to Sharehoders.
(a) Genera Rue. The undstrbuted Suppement S net Income of
a persona servce corporaton sha be ncuded In the gross ncome
of the sharehoders In the manner and to the e tent set forth n ths
Suppement.
(b) mount Incuded n Gross Income. ach sharehoder who, on
the ast day of the ta abe year of the corporaton, was a share-
hoder In such corporaton sha ncude In hs gross ncome, as a dv-
dend, for the ta abe year In whch or wth whch the ta abe year
of the corporaton ends, the amount he woud have receved as a dv-
dend f on such ast day there had been dstrbuted by the corpora-
ton, and receved by the sharehoders, an amount equa to the unds-
trbuted Suppement S net ncome of the corporaton for Its ta abe
year.
(c) Credt for Obgatons of the Unted States and Its Instru-
mentates. ach such sharehoder sha be aowed a credt aganst
net ncome, for the purposes of the ta mposed by secton 11, 13, 1 ,
201, 20 , 207, or 362, of hs proportonate share of the Interest spec-
fed n secton 25(a) (1) or (2) whch Is ncuded n the gross Income
of the corporaton.
(d) ffect on Capta ccount of Persona Servce Corpora-
ton. n amount equa to the undstrbuted Suppement S net ncome
of the persona servce corporaton for ts ta abe year sha be con-
sdered as pad n as of the cose of such ta abe year as pad-n
surpus or as a contrbuton to capta, and the accumuated earnngs
and profts as of the cose of such ta abe year sha be correspondngy
reduced, f such amount or any porton thereof Is requred to be n-
cuded as a dvdend n the gross ncome of the sharehoders.
(e) ass of Stock n ands of Sharehoders. The amount re-
qured to be ncuded In the gross ncome of the sharehoder under
subsecton (b) sha, for the purpose of ad|ustng the bass of hs
stock wth respect to whch the dstrbuton woud have been made
(f t had been made), be treated as havng been renvested by the
sharehoder as a contrbuton to the capta of the corporaton; but ony
to the e tent to whch such amount Is ncuded n hs gross ncome
In hs return, ncreased or decreased by any ad|ustment of such amount
n the ast determnaton of the sharehoder s ta abty, made before
the e praton of seven years after the date prescrbed by aw for
fng the return.
(f) Perod of Lmtaton on ssessment and Coecton. For
perod of mtaton on assessment and coecton wthout assessment,
n the case of faure to ncude n gross ncome the amount propery
ncudbe theren under subsecton (b), see secton 275(d).
Sec. 19.39 -1. Ta abty of sharehoders. If, by reason of an eecton under
secton 725, a persona servce corporaton s e empt for any ta abe year from
the e cess profts ta Imposed under Subchapter of Chapter 2, the unds-
trbuted Suppement S net ncome of the corporaton sha be treated as a
dvdend receved by those who, at the cose of the ta abe year of the cor-
poraton, were the sharehoders of the corporaton and as such woud have
been entted to receve such ncome as a dvdend had t been dstrbuted at
that tme. ach such sharehoder for hs ta abe year In whch or wth whch
the ta abe year of the corporaton ends, sha ncude In hs gross ncome hs
proportonate share of such undstrbuted Suppement S net ncome as though
such proportonate share had been receved as a dvdend on the ast day of
the ta abe year of the corporaton. Such amount s to be determned by
reference to the Interest of the sharehoder n the corporaton, that s, by
reference to the number of shares of stock owned and the reatve rghts of
each cass of stock If there are severa casses of stock outstandng. Thus,
f a persona servce corporaton has both common and preferred stock out-
standng and the preferred sharehoders are entted to a specfed dvdend
before any dstrbuton may be made to the hoders of the common stock,
then the assumed dstrbuton of the undstrbuted Suppement S net Income
must frst be treated as a payment of the specfed dvdend on the preferred
stock before any part may be aocated as a dvdend on the common stock.
0 3 1 1 10
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725.)
282
Sec. 19.39 -2. Credt for nterest on obgaton of the Unted States and ts
nstrumentates. ach sharehoder of a persona servce corporaton who as
of the ast day of the ta abe year of the corporaton Is requred to Incude
n hs gross ncome hs proportonate share of the undstrbuted Suppement S
net ncome of the corporaton sha, for the purposes of the ta Imposed by
secton 11 (norma ncome ta ), secton 13 (ta on corporatons In genera),
secton 1 (ta on speca casses of corporatons), secton 201 (ta on fe
nsurance companes), secton 20 (ta on nsurance companes other than fe
or mutua), secton 207 (ta on mutua nsurance companes other than fe),
or secton 362 (ta on mutua nvestment companes), be aowed a credt
aganst net ncome of hs proportonate share of the Interest specfed n secton
25(a)(1), nterest on Unted States obgatons, or secton 25(a)(2), Interest
on obgatons of nstrumentates of the Unted States, whch Is ncuded n
the gross ncome of the corporaton.
Sec. 19.39 -3. ffect on capta account of persona servce corporaton.
If the undstrbuted Suppement S net ncome of a persona servce corporaton,
or any porton thereof, for any ta abe year Is requred to be Incuded In the
gross ncome of the sharehoders, such undstrbuted Suppement S net Income
sha, for ncome ta and e cess profts ta purposes, be treated as pad-n
surpus or as a contrbuton to capta, pad n as of the cose of such ta abe
year and the accumuated earnngs and profts of the corporaton sha be
correspondngy reduced.
Sec. 19.39 - . ass of stock n hands of sharehoders. If a sharehoder of
a persona servce corporaton Is requred to Incude In hs gross ncome hs
proportonate part of the undstrbuted Suppement S net Income of the cor-
poraton, the amount so ncuded sha, for the purpose of ad|ustng the bass
of hs stock wth respect to such proportonate part, be treated as a dstrbuton
actuay made by the corporaton and as a renvestment n. the corporaton by
the sharehoder. It sha, however, be so treated ony to the e tent to whch
such amount Is ncuded n the return of the sharehoder, ncreased or de-
creased by any ad|ustment of such amount n the ast determnaton of the
ta abty of the sharehoder made before the e praton of seven years
after the date prescrbed by aw for the fng of hs return.
Sec 395. Nonresdent en Indvduas and Foregn Corporatons.
In the case of a sharehoder ta abe under secton 211(a) or 231(a),
hs dstrbutve share of the undstrbuted Suppement S net ncome of
the corporaton requred to be ncuded n the gross ncome sha be
consdered as a dvdend receved by hm from sources wthn the
Unted States.
Sec. 396. Sharehoder s Ta Pad by Corporaton.
If a persona servce corporaton s e empt for any ta abe year under
secton 725 from e cess profts ta , t sha, at the tme of fng ts return,
pay to the coector an amount equa to the amount that woud be re-
qured by secton 1 3(b) or secton 1 to be deducted and wthhed by
the corporaton f any amount requred by ths Suppement to be ncuded
In the gross ncome of the sharehoder had been, on the ast day of the
ta abe year of the corporaton, pad to the sharehoder In cash as a
dvdend. Such amount sha be coected and pad n the same manner
as the amount of ta due In e cess of that shown by the ta payer upon
a return n the case of a mathematca error appearng on the face of
the return.
Sec. 19.396-1. Ta of certan sharehoders pad by the corporaton. Snce a
sharehoder s proportonate share of the undstrbuted Suppement S net ncome
of a corporaton eectng not to be sub|ect to the e cess profts ta s ta abe to
such sharehoder, the corporaton s requred, at the tme of fng ts ncome ta
return under Chapter 1, to pay to the coector an amount equa to the amount
that woud be requred by secton 1 3(b) or secton 1 to be deducted and wth-
hed by the corporaton had ts undstrbuted Suppement S net ncome been
actuay pad n cash to ts sharehoders as a dvdend on the ast day of Its ta abe
year.
( ) The foowng s nserted mmedatey after secton 275:
Sec. 503. Statute of Lmtatons n Case ok Constructve Dvdends.
(Second Revenue ct of 19 0.)
Secton 275(d) of the Interna Revenue Code (reatng to statute of
mtatons) s amended to read as foows:
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283
15 725.
(d) Constructve Dvdends. If the ta payer omts from gross n-
come an amount propery ncudbe theren
(1) Foregn persona-hodng companes. Under secton 837(b/
(reatng to the ncuson n the gross Income of Unted States share-
hoders of ther dstrbutve shares of the undstrbuted Suppement
P net ncome of a foregn persona-hodng company); or
(2) Persona servce corporatons. Under secton 39 (b) (re-
atng to the ncuson n the gross ncome of sharehoders of ther
dstrbutve shares of undstrbuted Suppement S net Income of a
persona servce corporaton) ;
the ta may be assessed, or a proceedng n court for the coecton of such
ta may be begun wthout assessment, at any tme wthn seven years
after the return was fed.
(C) Secton 19.275-1(6) s amended to read as foows:
(6) If the ta payer omts from gross ncome an amount propery ncudbe
theren under secton 337(b) as hs dstrbutve share of the undstrbuted Suppe-
ment P net Income of a foregn persona hodng company (see sectons 331 to
3 0, ncusve), or an amount propery ncudbe theren under secton 39 (b) aa
hs dstrbutve share of the Suppement S net Income of a persona servce cor-
poraton (see sectons 391 to 396, ncusve) the ta may be assessed at any tme
wthn seven years after the return was fed.
(D) The foowng s nserted mmedatey after secton 216:
Sec. 50 . Credt of Nonresdent en of Ta as Sharehoder n Per-
sona Servce Corporaton. (Second Revenue ct of 19 0.)
Secton 216 of the Interna Revenue Code (reatng to credt aganst
ta of a nonresdent aen ndvdua) s amended by addng at the end
thereof a new sentence to read as foows: nonresdent aen Indvdua
sha be aowed as a credt aganst hs ta the amount requred by sec-
ton 390 to be pad by the persona servce corporaton of whch he Is a
sharehoder wth respect to hs ta abty under Suppement S.
( ) The foowng s nserted mmedatey after secton 23 :
Sec. 505. Credt of Foregn Corporaton of Ta as Sharehoder n Per-
sona Servce Corporaton. (Second Revenue ct of 19 0.)
Secton 23 of the Interna Revenue Code (reatng to credts aganst
ta of foregn corporatons) s amended by addng at the end thereof a
new secton to read as foows: foregn corporaton sha be aowed
as a credt aganst ts ta the amount requred by secton 396 to be pad
by the persona servce corporaton of whch t s a sharehoder wth
respect to ts ta abty under Suppement S.
(Paragraph 2 of ths Treasury decson s ssued under the authorty
contaned n sectons 502-505 of the Second evenue ct of 19 0 (Pub-
c, No. 801, Seventy-s th Congress, thrd sesson), and secton 62 of
the Interna evenue Code (53 Stat, 32).)
Guy T. everng,
Commssoner of Interna Revenue.
pproved February 5,19 1.
ohn L. St| tvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster February C, 19 1, 3.32 p. m.)
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729(a).
28
S CTION 729(a). L WS PPLIC L :
G N R L RUL .
19 1-7-10606
L T. 3 51
INT RN L R NU COD .

uestons and answers reatng to the fng of e cess profts ta
returns for the ta abe year 19 0 under the cess Profts Ta ct
of 19 0.
dvce s requested wth respect to the fng of e cess profts ta
returns for the ta abe year 19 0 under the cess Profts Ta ct
of 19 0. The questons rased are stated herenafter n the same order
and n substantay the same manner as presented.
ueston: The varous coectors of nterna revenue are requred to
condton the grantng of an e tenson of tme for the fng of a cor-
oraton ncome ta return upon the fng of a tentatve return on or
efore the date prescrbed by aw (Mm. 8361, C. . I -2, 69 (1925);
Mm. 3789, C. . I -1, 126 (1930)). W smar nstructons be
ssued to the coectors wth respect to e cess profts ta returns
nswer: The genera authorty granted to coectors by the prov-
sons of sectons 19.53-2 and 19.53-3 of Reguatons 103, reatng to the
ncome ta under the Interna Revenue Code, and the nstructons
ssued to them reatve to e tensons of tme for fng ncome ta re-
turns appy wth equa force and effect to e cess profts ta returns
for 19 0.
ueston: Many corporatons w be unabe to determne by March
15,19 1, whether they shoud eect to compute the e cess profts credt
under secton 713 or secton 71 of the Interna Revenue Code.
(1) If they are to be requred to fe a tentatve e cess profts
ta return as a condton to obtanng an e tenson of tme, w
they be requred to answer queston (e), reatng to the above-
mentoned eecton for computng e cess profts credt, on page 1
of the tentatve return
nswer: No.
(2) Shoud a statement be attached to the tentatve return whch
w recte, n substance, that for purposes of the tentatve return
the ta payer makes no eecton n the matter of computng the
e cess profts credt and that the rght s reserved to make such
eecton at the tme of fng the fna return
nswer: Yes.
ueston: The members of an affated group of corporatons w
not be abe to determne by March 15, 19 1, whether they shoud (1)
ava themseves of the prvege of fng a consodated return and,
f so, whether the consodated e cess profts credt shoud be com-
puted under the ncome method or the nvested capta method; (2)
fe separate corporate returns and, f so, whether the respectve e cess
profts credts shoud be computed under the ncome method or the
nvested capta method. The questons rased n the precedng para-
graph appy equay to affated groups and, n addton, the foowng
questons are presented:
(1) On the assumpton that e tensons of tme w be cond-
toned upon the fng of tentatve returns, may the common
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285
729(a).
parent corporaton obtan an e tenson for tsef and a members
of the group by rng an approprate appcaton accompaned
by a snge tentatve return
nswer: Yes. The appcaton fed wth the coector by the com-
mon parent corporaton shoud, however, aso ncude the name and
address of each member of the group for whch an e tenson s desred.
In the event that any member of the group s ocated n a coecton
dstrct dfferent from the one n whch the appcaton s fed by the
common parent, the coector of that dstrct shoud be notfed by the
common parent when the -equested e tenson has been duy authorzed.
(2) Woud t be necessary to fe Form 851 ( ffatons Sched-
ue) as a part of such tentatve return
nswer: No.
(3) Woud t kewse be necessary for the tentatve consodated
return to be accompaned by Forms 1122 (Return of Informa-
ton and uthorzaton and Consent of Subsdary Corporaton)
wth respect to each member of the group, and woud each such
member be requred to fe a tentatve Form 1122 wth the
approprate coector
nswer: No.
( ) Woud the fng of a consodated tentatve return, whether
or not accompaned by Forms 851 and 1122 , consttute a bnd-
ng eecton wth respect to the fng of a consodated return
nswer: No.
(5) Shoud each member of the group fe a tentatve return,
and woud such acton estop a group members from ater fng
a consodated return
nswer: No.
19 1-10-1063
Mm. 5175
Tme for fng e cess profts tn returns.
Theasoty Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 6,10|.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
1. ttenton s nvted to secton 30.729-1 of cess Profts Ta
Reguatons 109 prescrbed under the cess Profts Ta ct of 19 0,
whch provdes that e cess profts ta returns sha be fed at the
same tme and pace as the tme and pace prescrbed n sectons 53
and 235 of the Interna Revenue Code and the ncome ta reguatons
under such sectons for the fng of ncome ta returns, e cept that
such e cess profts ta returns for ta abe years endng before De-
cember 31, 19 0, whch, f fed wthn the tme prescrbed n such
reguatons, woud be fed before March 15, 19 1, sha be fed on or
before March 15, 19 1.
2. It w be observed that under secton 30.729-1 of Reguatons 109
the ast day on or before whch certan e cess profts ta returns for
ta abe years ended before December 31, 19 0, are requred to be
fed (f no e tenson of tme s granted) s March 15, 19 1, athough
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729(a).
286
the ast day on or before whch the ncome ta returns for such ta -
abe years are requred to be fed (f no e tenson of tme s granted)
s before March 15, 19 1. Coectors may grant e tensons of tme
beyond March 15,19 1, for the fng of e cess profts ta returns for
such ta abe years even though an e tenson of tme beyond March 15,
19 1, may not be granted for the fng of the ncome ta returns for
such ta abe years because of the s months mtaton n secton
53(a)2 of the Code. For e ampe, ncome ta returns of corporatons
(e cept corporatons descrbed n secton 19.53-3 of Reguatons 103)
for the perod from anuary 1, 19 0, to une 30, 19 0, were requred
to be fed on or before September 15,19 0, and e tensons of tme for
fng such ncome ta returns may not be granted beyond March 15,
19 1, because of the mtaton n secton 53(a)2, but e cess profts ta
returns for such perod are not requred to be fed unt March 15,
19 1, and coectors may grant e tensons of tme beyond March 15,
19 1, n the usua manner for the fng of such e cess profts ta
returns.
3. Correspondence regardng ths mmeograph shoud refer to the
number thereof and to the symbos IT: TM.
Guy T. everno,
Commssoner.
19 1-26-10757
Mn. 520
Tme for fng e cess profts ta returns.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, une 18,19 1.
Deputy Commssoners, Coectors of Interna Revenue, Interna
Revenue gents n Charge, and Others Concerned:
1. Reference s made to Mmeograph 5175 (page 285, ths uetn),
settng forth nstructons regardng the grantng of e tensons of tme
wthn whch to fe e cess profts ta returns on Form 1121 under- the
cess Profts Ta ct of 19 0, as amended.
2. No addtona e tensons of tme w be granted for the fng
of e cess profts ta returns for the caendar year 19 0. In no case,
e cept n most unusua crcumstances, w an e tenson of tme for the
fng of e cess profts ta returns for fsca years endng n 19 1 be
granted, and then ony after submsson to and approva by ths offce.
3. It s requested that each coector submt mmedatey a state-
ment (marked for the attenton of C: Co) showng the name and
address of each corporaton and the date to whch an e tenson has
been granted, and where the fna or competed returns have not as yet
been ed. Coectors west of the Msssspp Rver shoud forward
these statements by ar ma.
. Correspondence regardng ths mmeograph shoud refer to the
number thereof and to the symbos IT: TM.
Guy T. faverng,
Commssoner.
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2S7
Regs. 109, 30.731.-1.
S CTION 731. CORPOR TIONS NG G D IN MINING
OF STR T GIC M T LS.
(Secton 30.731-1, Reguatons 109.) 19 1-13-106G1
I. T. 3 63
INT RN L R NU COD .
The word patnum, as used n secton 731 of the Interna
Revenue Code, as amended by secton 201 of the Second Revenue
ct of 19 0, does not Incude rdum, osmum, ruthenum, rhodum,
and paadum, commony known as patnum metas.
dvce s requested by the M Mnng Co. whether the word pat-
num, as used n secton 731 of the Interna Revenue Code, as
amended by secton 201 of the Second Revenue ct of 19 0, n-
cudes rdum, osmum, ruthenum, rhodum, and .paadum, com-
mony known as patnum metas. That secton of the Code pro-
vdes as foows:
Sec. 731. Corporatons ngaged n Mnng or Strategc Metas.
In the case of any domestc corporaton engaged n the mnng of tungsten,
qucksver, manganese, patnum, antmony, chromte, or tn, the porton of
the ad|usted e cess profts net ncome attrbutabe to such mnng n the Unted
States sha be e empt from the ta mposed by ths subchapter. The ta on
the remanng porton of such ad|usted e cess profts net ncome sha be an
amount whch bears the same rato to the ta computed wthout regard to ths
secton as such remanng porton bears to the entre ad|usted e cess profts net
ncome.
The M Mnng Co. s a domestc corporaton engaged n patnum
pacer mnng m the Terrtory of aska. Its product s crude
patnum mnera whch s shpped for anayss, refnement, and mar-
ketng. Shpments of the crude patnum mnera anayze dfferenty.
sma amount of free god s recovered n addton to the so-caed
patnum metas. Omttng a god and mpurtes, the representa-
tve mean anayss of the product recovered Dy dredgng conssts of
8 .65 per cent patnum, 10.30 per cent rdum, 2.36 per cent osmum,
2.17 per cent rhodum, 0.17 per cent ruthenum, and 0.35 per cent
paadum. Irdum and the other metas named (other than pat-
num) are usuay sod wth patnum n aoy form.
It s hed that the word patnum, as used n secton 731 of the
Interna Revenue Code, as amended by secton 201 of the Second
Revenue ct of 19 0, does not ncude rdum, osmum, ruthenum,
rhodum, and paadum. Support for ths concuson may be found
n the prncpe enuncated n I. T. 1601 (C. . II-, 190 (1923)), n
whch t wa. hed that snce secton 30 of the Revenue cts of 1918
and 1921 e empted from the profts ta es mposed by those cts ony
the ncome derved from the mnng of god tsef such e empton
coud not be e tended to ncome derved from other metas, athough
they may have represented nothng more than by-products ncdenta
to god mnng.
ccordngy, ony the porton of the ad|usted e cess profts net
ncome of the M Mnng Co. attrbutabe to the mnng of patnum s
e empt from the e cess profts ta . The e cess profts ta on the
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Regs. 109, 30.731-1.
288
remanng porton of such ad|usted e cess profts net ncome s an
amount whch bears the same rato to the e cess profts ta computed
wthout regard to secton 731 of the Interna Revenue Code, as
amended, as such remanng porton bears to the entre ad|usted e cess
profts net ncome. (See secton 30.731-1 of Reguatons 109.)
Reguatons 109, Secton 30.731-1: Corpora- 19 1-2 -107 3
tons whch mne strategc metas. I. T. 3 82
INT RN L R NU COD .
The e empton from e cess profts ta under secton 731 of the
cess Profts Ta ct of 19 0 n the case of a domestc corporate
ta payer engaged n the mnng of strategc metas appes to that
porton of the ad|usted e cess profts net ncome attrbutabe to mn-
ng and to such mng processes as are treated as a part of mnng
for depeton purposes under secton 19.23(m)-1(f) of Reguatons
103, but does not appy to such ncome attrbutabe to any mng
processes of the ta payer wth respect to ore mned by others.
dvce s requested whether the M Company s e empt from the
Federa e cess profts ta on the ad|usted e cess profts net ncome
attrbutabe to the operaton of a pant constructed by t for the mng
of tungsten mned from ts own property and aso for the mng of
tungsten mned by others from propertes n that ocaty whch coud
not oe worked uness a m was avaabe.
Secton 731 of the cess Profts Ta ct of 19 0 (Subchapter of
Chapter 2 of the Interna Revenue Code, as added by the Second
Revenue ct of 19 0), provdes as foows:
Corporatons ngaged n Mnng of Strategc Metas.
In the case of any domestc corporaton engaged n the mnng of tungsten,
qucksver, manganese, patnum, antmony, chronte, or tn, the porton of the
ad|usted e cess profts net ncome attrbutabe to such mnng n the Unted States
sha be e empt from the ta mposed by ths subchapter. The ta on the re-
manng porton of such ad|usted e cess profts net ncome sha be an amount
whch bears the same rato to the ta computed wthout regard to ths secton as
such remanng porton bears to the entre ad|usted e cess profts net ncome.
Itacs supped.
In connecton wth the phrase whch s emphaszed n the above
quotaton, attenton s drected to secton 30.731-1 of Reguatons 109,
whch reads n part as foows:
(6) The porton of the e cess profts net ncome attrbutabe to
such mnng Is the gross ncome derved from strategc metas and arsng out
of operatons whch gve rse to gross Income from the property, as defned
In secton 19.23(m)-() (/) of Reguatons 103 ess certan tems not
matera here .
In vew of the foregong, t s hed that the e empton from the
e cess profts ta provded n sad secton 731, supra, appes ony to
the porton of the ad|usted e cess profts net ncome of a domestc
corporaton whch s attrbutabe to the mnng (ncudng such mng
processes as secton 19.23 (m)- (/) of Reguatons 103 treats as mnng)
of strategc metas theren enumerated under such emnstances as
woud entte the producer of such natura resources to a depeton
aowance wth respect thereto. The e empton does not appy to
that porton of the ad|usted e cess profts net ncome attrbutabe
to any mng processes of ore mned by others.
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289
5 3672.
C PT R 36 COLL CTION.
SU C PT R . LI N FOR T S.
S CTION 3672. LIDITY G INST MORTG G S,
PURC S RS, ND UDGM NT CR DITORS.
19 1-6-10591
Ct. D. 1 8
F D R L T S R IS D ST TUT S, S M ND D D CISION OF COORT.
Len fob Ta es Cam for Work, Labor, and Materas ssgn-
ment to ank adty of Len ganst fter- cqured
Intangbe Property Prorty of Federa Ta Len.
cam for work, abor, and materas furnshed, evdences of
whch were assgned by the ta payer to a bank for a vauabe con-
sderaton, consttutes property or rghts to property, sub|ect to
en for Federa ta es for the year 1936, wthn the meanng of
secton 3186 of the Revsed Statutes, as amended, athough such
property was ntangbe n character and was acqured after the
fng of the notces of en. Such a en, notces of whch were
fed by the coector as requred by the statute, became effectve
as of the date upon whch the assessment st, sgned by the Comms-
soner, was receved In the offce of the coector assertng the en,
and was pror and superor to the rghts of the assgnee bank, whose
cam accrued subsequent to the fng of the notces of en aganst
the ta payer.
Untfd States Crcut Court of ppeas for the Tenth Crcut.
Ctzens State ank of arstow, Tew., appeant, v. S. P. da, Coector of Inter-
na Revenue for the Dstrct of New Me co; Magnoa Petroeum Co., a Corpo-
raton; Montgomery Transportaton Co., Inc.; . P. ster, dong busness
as uckeye Grocery Store ; d Chase; R. W. Cowe; D. . De art; . .
Fppn; . TP. reen; R. O. ohnson; L. . dkns; . . McDane; rnod
vtta; W. R. Rash; ernce Warren; . W. Wes; L. . ancock; O-rady
Thompson, dong busness as Thompson ardware Co. ; and arry . ance,
Trustee n ankruptcy, appeees.
11 Fed. (2d), 380.
ppea from the Dstrct Court of the Unted States for the Dstrct of New Me co.
uy 19, 19 0.
OPINION.
Murrah, Dstrct udge, devered the opnon of the court.
The Magnoa Petroeum Co., a corporaton, appropratey fed ts b of
Interpeader, acknowedged ts debt to the Montgomery Transportaton Co., Inc.,
for work, abor, and materas furnshed to It by Montgomery, deposted the debt,
In the sum of 5,151. 9, In the regstry of the court and asked to be dscharged.
partes defendant, ncudng appeant and appeees, answered, camng
pror and superor rghts to the fund. ppeee, S. P. da, coector of nterna
revenue for the dstrct of New Me co, cams the fund n satsfacton of a
defcency assessment for ncome ta n the sum of , 72.13, wth penates, for
ta es for the year of 1936, due the Unted States Government. To perfect the
sad en, the coector fed notce of the same In the offce of the cerk of the
Unted States Dstrct Court at Santa Fe, N. Mc ., on December 13, 1938; n
the offce of the county cerk of Lea County, at Lovngton. N. Mt . (the domce
erenafter caed Magnoa.
Under authorty of cts of Contrress of date anuary 20, Oat. Chapter 13, secton 1,
0 Stat., 10 6 ( . S. C. ., Tte 28, secton 1(21 )).
erenafter caed Montgomery.
erenafter caed coector.
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3672.
290
of Montgomery), on December 1 , 1938; In the offce of the county cerk of ddy
County, State of New Me co, at Carsbad, N. Me . (where part of the work was
performed and matera furnshed), on March 13, 1938; In the offce of the cerk
or the Unted States Dstrct Court for the Western Dstrct of Te as, at Pecos,
Te ., on December 16, 1938, and n the offce of the county cerk of Wnker
County, at ermt, Te . (where part of the work was performed and matera
furnshed), on December 18, 1938, as provded by appcabe statutes.
The warrant for dstrant and notce of evy was served upon Magnoa une
16, 1939, based upon a defcency ncome ta assessment aganst Montgomery.
ppeant, Ctzens State ank of arstow, Te ., made cam to the fund by
vrtue of wrtten assgnments, e ecuted and devered to t by Montgomery, for
whch t pad a vauabe consderaton, wthout actua notce of the fng of
notce by the coector, and whch sad assgnments covered work n Te as and
New Me co for and on behaf of Magnoa, pror to the date warrant for
dstrant and notce of evy was served upon the Magnoa, but after the
fng of the notce of the en aforesad.
The fund, n queston, represents the payment of a debt from the Magnoa
to Montgomery for work, abor and materas furnshed, evdence of whch was
assgned to the bank n the manner aforesad and the soe queston presented
here s the prorty of the cam of the coector and the ank.
The tra court hed that the aborers and materamen had frst cam to the
fund; that the coector of nterna revenue had second cam to the fund;
that the ank had thrd cam to the fund. The ank appeas ony from that
porton of the sad udgment whch denes ts prorty to the cam of the
coector. The facts are agreed and are correcty set forth n the court s
fndngs. They evdence the foowng matera facts: Montgomery Transpor-
taton Co., Inc., a New Me co corporaton, was engaged n what mght be
termed o fed work; was empoyed and dd perform abor and furnsh ma-
teras n Te as and New Me co for the Magnoa. To obtan money wth
whch to meet current obgatons, meet ts pay ro and operatng e penses,
Montgomery carred ts temzed statements of work performed and matera
furnshed, approved by Magnoa, to the ank and for a cash consderaton
transferred and assgned to the ank the Itemzed statements of money due
and to become due thereunder. It was understood between the ank, the Mag-
noa and Montgomery that from the amount due Montgomery from Magnoa
there woud be deducted the purchase prce of Magnoa petroeum products
purchased from the Magnoa by Montgomery, n the operaton of ts busness,
and the net amount due after deductons, from tme to tme, woud be retaned
by the ank and the amount so retaned credted n payment of the wrtten
assgnments on due date. Ths course of deang contnued from the year of
1936 unt about the 16th of une, 1939, but the assgnments n queston were
for May 1, 13, 16, 22, 31, une 6, 12, and 1 , 1939. t that tme the assgn-
ments aggregated 13,637. 2 for work, abor and materas furnshed Magnoa
by Montgomery, hut after deductng the credts for petroeum products fur-
nshed by Magnoa to Montgomery there remaned the sum now deposted
n the regstry of the court by Magnoa.
On une 16, 1939, the coector caused to be served on the Magnoa notce
of evy and warrant of dstrant, makng demand upon Magnoa for the
amount now owng from you to the sad Montgomery Transportaton Co., Inc.,
whch precptated the b of nterpeader. The assgnments from the Mont-
Secton 3186 of the Revsed Statutes of the Unted States, as amended by secton 613
of the Revenue ct of 1028 ( ct of May 29, 1028, 5 Stat., 875) and secton 509 of the
Revenue ct of 103 ( ct of May 10, 193 , 8 Stat., 757; 26 U. S. C. ., secton 3072),
whch reads In part as foows:
adty ganst Mortgagees, Pedgees, Purchasers, and udgment Credtors.
(a) Invadty of Len Wthout Notce. Such en sha not be vad as aganst any
mortgagee, pedgee, purchaser, or |udgment credtor unt notce thereof has been fed by
the coector
(1) Under State or Terrtora aws. In accordance wth the aw of the State or
Terrtory n whch the property sub|ect to the en s stuated, whenever the State or Ter-
rtory bus by aw provded for the fng of such notce; or
(2) Wth cerk of dstrct court. In the offce of the cerk of the Unted States
dstrct court for the udca dstrct n whch the property sub|ect to the en s stuated,
whenever the State or Terrtory has not by aw provded for the fng of such notce; or
() Wth cerk of Dstrct Court of the Unted States for the Dstrct of
Coumba. In the offce of the cerk of the Dstrct Court of the Unted States for the
Dstrct of Coumba, f the property sub|ect to the en s stuated n the Dstrct of
Coumba.
bankng corporaton organzed under the aws of the State of Te as, and dong bus-
nesa In arstow, Ward County, Te ., and herenafter caed ank.
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291
3672.
gomery to the ank are vad, In good fath and made In the reguar course of
busness and the ank had no actua knowedge of the Income ta denquency
or notce of the fng of the ta en.
Durng the pendency of the sut, Montgomery was ad|udged a bankrupt and
the trustee In bankruptcy was substtuted party defendant and made cam to
the fund, contendng It shoud be dstrbuted through bankruptcy, but the
assgnments to the ank and the notce of ta en havng been made and fed
more than four months pror to ad|udcaton of bankruptcy, It was decreed that
the trustee n bankruptcy take nothng.
In the ast anayss the soe queston n ths appea s whether or not the
fng of the notce of a ta en by the coector, n the manner estabshed by
these facts, gave the coector a pror and superor en to the ank, as assgnee
of the ta payer. Ths s the controng queston. The queston turns on the
constructon of the appcabe provsons of the Interna Revenue Code, whch
provdes for a en n behaf of the Government for unpad ta es, the scope of
the en and the manner of ts enforcement.
The queston presented may be consdered under two propostons. Frst, s
the fund aganst whch the en s sought to be enforced property or rghts to
property, whether rea or persona, beongng to such person (ta payer),
wthn the conte t and meanng of the statute
cam for work, abor, and matera furnshed s evdence of a debt and a
chose n acton; t s so treated by the partes here. Is t property or rghts
to property 1 If t Is not property wthn the meanng of the ct then
no en can attach; If t s property wthn the meanng of the ct then the
en dd attach from the date the assessment st was receved n the offce of
the coector of nterna revenue assertng the en, provded notce of the sad
en coverng the ta assessment was fed as provded by the ct, sub|ect to
the pror and ntervenng rghts of adverse camants.
The statute coverng coecton of ta es s broad and comprehensve and Con-
gress ntended to sub|ect a of a ta payer s property, e cept that specfcay
e empt to the payment of ta es. Property s a word of very broad meanng
and when used wthout quafcaton, may reasonaby be construed to ncude
obgatons, rghts and other ntangbes, as we as physca thngs. Prop-
erty wthn the ta aws shoud not be gven a narrow or technca meanng.
The evdence of debt for abor, work, and materas furnshed was sub|ect to
ownershp (the ank cams ownershp) ; t was sub|ect to transfer (t was trans-
ferred), and e cusve possesson and en|oyment and may be brought wthn the
domnon and contro of a court, through some recognzed process (t s the sub-
|ect matter of the controversy here). Under we recognzed authorty these
are the essenta ngredents of property where vaue s the test.15
The cam whch has now rpened nto the fund deposted nto the regstry
of ths court s property or rghts to property, athough Intangbe n char-
acter. ppeant ctes Unted States v. Western Unon Teegraph Go. as
authorty that a en for ta es on property or rghts to property contem-
pates a en on tangbe property ony. n e amnaton of the facts n the
Western Unon Teegraph Co. case ceary ndcates that the rghts of the par-
tes to the ntangbe property sought to be ta ed were f ed ong pror to
attachment of the ta en of the Unted States. There the Western Unon
Teegraph Co. became obgated to pay to the stockhoders of the Northwestern
Teegraph Co. certan f ed profts and the stockhoders of the atter company
were the thrd party benefcares to the property and the Northwestern Tee-
Tte 26, O. S. C. ., sectons 3670, 3671, and 3672, Revsed Statutes. 3186, as amended.
Cannon v. Nchoas, Coector of Interna Revenue (80 Fed. (2d), 03 Ct. D. 1113.
C. . -1, 313 (193G) ).
Tte 26, U. S. C. ., secton 3670, 53 Stat, 8. whch reads as foows :
Property Sub|ect to Len. If any person abe to pay any ta negects or refuses
to pay tbe same after demand, the amount (ncudng any Interest, penaty, addtona
amount, or addton to such ta , together wth any costs that may accrue In addton
thereto) sha be a en n favor of the Unted States upon a property and rghts to prop-
erty, whether rea or persona, beongng to such person.
M Unted State v. Rotenfcd et a. (26 Fed. Supp., 33).
n change Natona Dank of Tuea v. Davy et a. (13 Fed. Supp.. 226).
Cannon v. Nchoas, Coector of Interna Revenue, supra.
Fdety Depost Co. of Maryand v. rena (280 U. S., 66) ; Matter of Dunfee (219
N. . 188, 11 N. ., 52) ; Caddy v. Wtt (Te . Cv. pp.) (1 2 S. W.. 92(1).
1 Commssoner of Interna Revenue v. Stephens- damson Mfg. Co. (51 Fed. (2d), 681
Ct. D. 32. C. . -2. 228 (1931)1).
Oeason v. Thaw (236 U. S., 558).
60 Fed. (2d). 102.
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3672.
292
graph Co. dd not own, possess, or contro the property at the tme the ta en
was sought to be enforced aganst It. Whe n the nstant case the cam of the
ank to the fund n queston accrued subsequent to the fng of the ta en
aganst the ta payer.
ppeant does not contend that t cones wthn the securty e empton.
Concedng that appeant s a mortgagee, pedgee, purchaser or |udgment
credtor, and therefore entted to the protectve provsons of subsecton (a),
26 U. S. C. ., secton 3672, t s argued that the transtory stus of the chose
In acton renders nugatory the notce of fng of the ta en, ether at the
domce of the owner, whch Is Lea County, N. Me ., or n Wnker County,
Te ., and ddy County, N. Me ., where the work was performed and materas
furnshed and dd not charge the ank wth notce, as contempated by the
protectve provsons of the ct. We are, thereby, asked to decde the stus of
the property, or when transated Into the anguage of the ct, the pace
where stuated. In our vew, t s unnecessary for us to decde the stus of
the property, or whether or not the aws of the State of Te as or New Me co
provde for the fng of the notce of ta en aganst property faUng wthn
ths cassfcaton. If ths property does not have a stus In Te as or New
Me co, or ether of them, as contempated by the appcabe aws of the States,
the ds|unctve provsons of subdvson (a)2, Tte 26, U. S. C. ., secton
8672, provde for the fng of the notce wth the court cerk of the Unted
States dstrct court, where the property s stuated. Therefore, n Decem-
ber, 1938, when the notce of the ta en was fed both wth the Unted States
Court cerk for the Western Dstrct of Te as, and the Unted States Court
cerk for the Dstrct of New Me co, the property was stuated ether at
the domce of Montgomery n Lea County, N. Me ., or the pace where the
work was performed and materas furnshed, n Wnker County, Te ., and
ddy County, N. Me .
Out of an abundance of precauton the coector fed notce of the en at the
domce of the ta payer and where the work was performed and materas fur-
nshed. It s sgnfcant to note that at that tme the equtes of the ank
had not attached, because evdence of the fund had not been assgned. The
coector met every requrement of the ct when on December 21, 1938, after
notce and demand for payment and refusa to pay the ta assessments, he caused
the same to be recorded n the offces of the Unted States Dstrct Court for the
Dstrct of New Me co; the county cerk of Lea County, N. Me .; the Unted
States Dstrct Court for the Western Dstrct of Te as and the county cerk at
Wnker County, Te .
The ta en upon aU the property and rghts to property of Montgomery,
Incudng the fund, n queston, became effectve as of the date upon whch the
assessment Ust, sgned by the Commssoner of Interna Revenue, coverng the
assessments was receved In the offce of the coector of the dstrct of New
Me co and became a vad en aganst the cams of Montgomery for work,
abor and materas furnshed for Magnoa. They were thereafter assgned
and transferred to the ank, sub|ect to the pror and subsstng en of the
Unted States, under Tte 26, U. S. C. ., secton 3670, 8671, and 3672, Revsed
Statutes, secton 8186.1
The |udgment s affrmed.
19 1-9-10620
L T. 3 5
INT RN L R NU COD .
The statute enacted by the egsature of the State of ermont,
approved March 2 , 1933 (No. 2, Sesson Laws of ermont, 1923,
page 69 now sectons 2716-2718, Pubc Laws of ermont), s ac-
cepted by the ureau as the egsaton authorzed under secton
3186, Revsed Statutes, as amended (now secton 3672, Interna
Revenue Code, as amended), authorzng the fng of notce of
Federa ta ens wth certan desgnated county or other oca
offcas.
26 U. S. C. ., subsecton (b) of secton 3072.
qutabe Lfe ssurance Socety o| the Unted States v. oove et at. (29 Fed. Supp.,
179; Unted States v. Rosenfed et St., supra.
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3798.
C PT R 38. MISC LL N OUS PRO ISIONS.
S CTION 3798. MPTION OF INSOL NT
N S FROM T .
19 1-21-10719
G. C. M. 22656
INT RN L R NU COD .
The Immunty from ta aton provded by secton 3798(b) of the
Interna Revenue Code n the ease of banks and trust companes fa-
ng wthn the provsons of that secton termnates when the baance
sheets of such bank or trust company show earnngs n e cess of out-
standng depostors cams, and, wthn the mts prescrbed by that
secton and the appcabe reguatons, ta es may then be assessed
and coected.
n opnon s requested wth respect to the e tent to whch mmunty
from ta aton shoud be accorded banks and trust companes under
secton 3798(b) of the Interna Revenue Code (mpemented by Treas-
ury Decson 958, ppend to Reguatons 103, page 759, as
amended) n a stuaton wheren State or Federa bankng authortes
refuse to permt payment to depostors who have prevousy waved a
porton of ther depost cams for a en on subsequent earnngs of the
bank unt the bank s abe to pay off such cams and st retan n
capta, surpus, and undvded profts an aggregate sum, or reserve,
n e cess of 10 per cent of the amount of the current depost abty.
Secton 3798 of the Interna Revenue Code, supra, reads n part as
foows:
(b) Whenever any bank or trust company has been reeased or
dscharged from ts abty to ts depostors for any part of ther cams aganst
t, and such depostors have accepted, n eu thereof, a en upon subsequent
earnngs of such bank or trust company, no ta sha be assessed or
coUected whch sha dmnsh the assets thereof whch are avaabe
for the payment of such depostor cams and whch are necessary for the fu
payment thereof.
Secton 6 .7 of Treasury Decson 958, supra, reads n part as
foows:
arnngs. (o) vaabty for tarn coecton. arnngs of a bank wthn sub-
secton (b), whether from segregated or unsegregated assets, whch are necessary
for, appcabe to, and actuay used for, payment of depostors cams under an
agreement, are wthn the mmunty of the secton. If ony a porton or per-
centage of Income from segregated or unsegregated assets Is avaabe and neces-
sary for payment of depostors cams, the remanng ncome s avaabe for
ta coecton. arnngs of the bank s frst fsca year endng after the makng of
the agreement not appcabe to payment of depostors w be assumed to be
appcabe for coecton of any ta due pror or subsequent to e ecuton of the
agreement. arnngs of subsequent fsca perods from unsegregated assets not
appcabe to depostors cams w be assumed to be appcabe to payment of
ta es as to whch mmunty under the secton has not prevousy attached. arn-
ngs from segregated assets are avaabe for coecton of ta , whether prevousy
uncoectbe under the secton or not, after depostors cams aganst such assets
have been pad In fu. .
Some of the banks and trust companes contend that because bankng
authortes requre the wthhodng of earnngs from depostors unt
the above-mentoned reserve or cushon fund to cover contngent
future osses s but up, the earnngs attrbutabe to such reserve fund
the mmunty provded by secton 3798 of the Code shoud be e tended
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22(c), rt. 22(c)-8.
29
unt earnngs are suffcent to cover the reserve or cushon fund re-
qurements pus the cams of depostors. Irrespectve of whether the
atter concuson foows from the premse upon whch t s based, ths
offce beeves the ony reasonabe vew s that earnngs are avaabe,
wthn the meanng of that term as used n the statute, even though
State or Federa bankng authortes w not permt actua payment
to depostors out of earnngs attrbutabe to the reserve or cushon
fund. It s beeved that the statute ntends that the mmunty shoud
termnate f and when there are earnngs over and above the amount
necessary to pay cams of depostors n fu, regardess of any add-
tona bankng requrement smar to that here under consderaton.
That concuson s not nconsstent wth the poston taken n secton
6 .7 of Treasury Decson 958, supra, wheren t s stated n part
that arnngs of a bank wthn subsecton (b), whether from segre-
gated or unsegregated assets, whch are necessary for, appcabe to, and
actuay used for, payment of depostors cams under an agreement,
ton heren was prmary ntended to beneft the depostors, not the
bank, stockhoders, and genera credtors. (See secton 6 . of
Treasury Decson 958, supra.) It seems cear that Congress dd
not ntend that earnngs of a bank shoud be mmune unt State or
Federa bankng authortes fee that capta, surpus, and undvded
profts are suffcenty but up to permt payment of depostors
cams.
arnngs over and above the amount necessary and avaabe to pay
cams of depostors n fu shoud, for Federa ta purposes, be deter-
mned from the baance sheet of the bank. Lftng the mmunty wth
respect to earnngs n e cess of the amount whch covers n fu the
cams of depostors, even though the reserve or cushon fund s
st beng made up, does not dmnsh the assets thereof whch are
avaabe for the payment of such depostor cams and whch are
necessary for the fu payment thereof.
In vew of the foregong, t s the opnon of ths offce that as soon
as baance sheets of such a bank or trust company show earnngs n
e cess of outstandng depostors cams, the mmunty provded by
secton 3798 of the Interna Revenue Code termnates and, wthn the
mts prescrbed by that secton and the appcabe reguatons, ta es
may be assessed and coected.
. P. enche,,
Chef Counse, ureau of Interna Revenue.
. R NU CT OF 1938.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION OP N T INCOM .
S CTION 22(c). GROSS INCOM : IN NTORI S.
rtce 22(c)-8: Inventores of reta merchants.
The statute under consdera-
R NU CT OF 1938.
Reguatons 101, amended. (See T. D. 50 8, page 200.)
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295 23(e), rt. 23(e)-.
S CTION 23(a). D DUCTIONS FROM GROSS
INCOM : P NS S.
rtce 23 (a)-1: usness e penses.
R NU CT OF 1938.
penses ncurred n producton of ta abe ncome. (See I. T.
3 52, page 205.)
S CTION 23(e). D DUCTIONS FROM GROSS INCOM :
LOSS S Y INDI IDU LS.
rtce 23(|e)-: Losses by ndvduas. 19 1-2-10559
G. C. M. 22 01
R NU CT OF 1038.
Where a partnershp reazes a net gambng gan and a member
of the partnershp sustans a net ndvdua gambng oss, the
member s share of net partnershp gambng gan may propery be
reduced by hs ndvdua net gambng oss.
G. C. M. 21 78 (C. . 1939-2, 159) revoked.
In G. C. M. 21 78 (C. . 1939-2,159) t was hed that the ta payer s
share of the gans from wagerng derved by a partnershp of whch
he was a member may not be reduced by hs net ndvdua wagerng
oss.
In that case was a member of a partnershp whch was engaged
n the busness of acceptng wagers on horse racng. personay
bet arge amounts wth handbooks other than those operated by the
partnershp. e sustaned a net oss n 1938 on such ndvdua
wagerng transactons, whereas a net gambng gan was derved by
the partnershp.
In ennngs v. Commssoner (110 Fed. (2d), 9 5, certorar dened,
61 S. Ct., 169), the court reversed the oard of Ta ppeas memo-
randum opnon, and hed that a member of a partnershp may offset
hs gambmg osses as an ndvdua aganst hs share of partnershp
gans from gambng to the e tent of such gans. (See generay
Neuberger v. Commssoner, 61 S. Ct., 97, Ct. D. 1 70, C. . 19 0-2, 228.)
In vew of the poston taken by the court as ndcated by the
decson above referred to, t s hed that s share of the net partner-
shp gambng gan may propery be reduced by hs net ndvdua
gambng oss.
G. C. M. 21 78, supra, s revoked.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
rtce 23(e)-: Losses by ndvduas.
R NU CT OF 1938.
Losses on account of payments for stock after stock becomes worth-
ess. (See I. T. 3 79, page 212.)
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101, rt. 101(12)- . 296
S CTION 23(g).
INCOM :
rtce 23(g)-: Capta osses.
R NU CT OF 1938.
Losses on account of payments for stock after stock becomes -worth-
ess. (See I. T. 3 79, page 212.)
S CTION 23(m). D DUCTIONS FROM GROSS
INCOM : D PL TION.
rtce 23(m)-: Depeton of mnes, o and gas
wes, other natura deposts, and tmber; depre-
caton of mprovements.
R NU CT OF 1038.
Status of o and gas easng transactons. (See G. C. M. 22730,
page 21 .)
rtce 23 (m)-9: Determnaton of mnera contents
of mnes and of o or gas wes.
R NU CT OF 1938.
Reguatons 101, amended. (See T. D. 505 , page 227.)
R NU CT 01 1938 ND INT RN L R NU COD .
The M Company was organzed to make possbe te acquston,
contro, conservaton, and benefca use by ts members of certan
grazng ands n Montana. Its actvtes consst of easng or other-
wse acqurng the ands and apportonng them among ts members
accordng to the number of catte to be grazed. of ts ncome,
consstng of fees and assessments coected from ts members, Is
used to defray the cost of procurng the ands and for other neces-
sary e penses. ed, the company s entted to e empton under
secton 101(12) of the evenue ct of 1938 and the Interna Reveuue
Code.
n opnon s requested whether the M Company s entted to e -
empton from Federa ncome ta aton under secton 101(12) of the
Revenue ct of 1938 and the Interna Revenue Code.
The M Company was ncorporated n 1935 under the Montana Graz-
ng ct of 1935. (Chapter 195, Laws of the Twenty-fourth Legs-
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S OF T .
19 1-1-10551
G. C. M. 2236
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297
101. rt. 101(12)-1.
atve ssemby, State of Montana; Revsed Code of Montana, 1935,
sectons 736 .7 to 736 .29, ncusve.) s set forth n ts artces of
ncorporaton pror to ther amendment n 1939, the company was n-
corporated to organze a cooperatve grazng dstrct assocaton. It
has no capta stock and s not operated for proft. In the artces of
ncorporaton t s provded that the purpose for whch t
s formed s to make possbe the acquston, contro, conservaton, and
benefca use by ts members of cetan grazng ands yng n
County, Mont., to the end that the members of the assocaton may
stabze ther farmng and ranchng operatons. Whe the Montana
Grazng ct of 1935 was repeaed by the Montana Grass Conservaton
ct of 1939 (chapter 208, Laws of 1 wenty-s th Legsatve ssemby,
State of Montana), and, n accordance wth the provsons of that act,
the M Company fed amended artces of ncorporaton to conform
wth the provsons thereof, the nature and purposes of the corporaton
and the method of operaton are substantay the same under the
ater act.
The assocaton ascertans the number of head of ve stock proposed
to be grazed each year by members, eases or otherwse acqures suff-
cent pasture and for grazng purposes, and dvdes such and propor-
tonatey among ts members n order that they may graze ther stock
thereon. The assocaton derves, ts ncome from membershp fees
and pro rata assessments of grazng fees, whch are charged aganst
the members for every head of stock grazed durng each month of the
grazng season. though dfferent fees are charged for the varous
knds of catte grazed, such fees are based upon the actua cost of pro-
curng grazng and, pus the necessary costs of operatng the assoca-
ton. The ncome s used to defray the costs of operaton.
Secton 101(12) of the Revenue ct of 1938 and of the Interna
Revenue Code provdes that the foowng organzatons sha be
e empt from Federa ncome ta :
(12) Farmers , frut growers , or ke assocatons organzed and operated on a
cooperatve bass for the purpose of purchasng suppes and equp-
ment for the use of members or other persons, and turnng over such suppes and
equpment to them at actua cost, pus necessary e penses.
rtce 101 (12)-1 (b) of Reguatons 101 and secton 19.101 (12) -1 (b)
of Reguatons 103 provde n part as foows:
Cooperatve assocatons engaged In the purchasng of suppes and equpment
for farmers, frut growers, vestock growers, darymen, etc., and turnng over
such suppes and equpment to them at actua cost, pus the necessary operatng
e penses, are e empt. Itacs supped.
Under the above-quoted provsons of the reguatons, t seems cear
that the nstant assocaton s of the type to whch secton 101(12),
supra, appes. It aso appears that the assocaton s, under ts artces
of ncorporaton, organzed and operated on a cooperatve bass. If
the acquston of grazng by the assocaton and the aocaton thereof
to ts members for ther use n grazng ther ve stock s tantamount
to the purchasng of suppes for the use of members, the
facts not ony warrant the concuson that the corporaton was organ-
zed for the purpose of purchasng suppes for the use of ts membe-s,
but that t furnshed such suppes to ts members at cost, pus the
necessary cost of operaton.
In defnng the pnrase suppes and equpment as used n secton
101(12), artce 101(12)-1(6) of Reguatons 101 and the correspond-
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101, rt. 101(12)- .
298
ng provsons of Reguatons 103 provde that t ncudes
groceres and a other goods and merchandse used by farmers n the
operaton and mantenance of a farm . In vew of the fact
that such provsons cover cooperatve assocatons engaged n purchas-
ng suppes and equpment for ve-stock growers and darymen as we
as farmers and frut growers, t s beeved the words farm or
farmer, as used n dennng the term suppes and equpment, must
be construed to ncude ve-stock growers, darymen, and frut grow-
ers. Under such constructon and for the purpose of ths opnon, the
term suppes woud be defned to ncude groceres and a other
goods and merchandse used by a ve-stock grower n the operaton
and mantenance of a ve-stock grower s farm. The queston for de-
termnaton s, therefore, whether the acquston of grazng, by pur-
chase or ease, by the nstant cooperatve assocaton s a suppy
wthn the defnton.
In S. M. 2288 (C. . III-2, 233 (1921)), t s hed that a company
organzed for the purpose of purchasng and furnshng suppes to
varous oca ctrus frut growers assocatons s entted to e empton
as a frut growers assocaton where, n order to suppy crates at the
owest cost, t purchased tmberand and converted the tmber nto
crates. That rung reads n part as foows:
In order to suppy crates at the cheapest possbe prce to Its members
fnd n vew of the constanty advancng prces charged for crates, the company
nstead of buyng crates upon the market bought arge tracts of tmberands and a
number of crate ms, and hred abor to put together and fabrcate the crates
whch the company supped to ts members. The ownershp of these ands and
crate ms s ncdenta to the busness of the company. No crates, fertzers, or
other suppes are sod to, or can be bought by, outsders. The company ceary
acts as a purchasng agent wthn the meanng of secton 231(11) of the Revenue
ct of 1921, athough n the process of furnshng crates and fertzers at the
owest possbe prce t buys the raw materas rather than the competed artces
and e pends a certan amount of abor upon them before turnng over the competed
crates and fertzers to ts members. y these operatons the company merey
ncreases ts effcency as a purchasng agent, the functon of such an agent beng
to secure the beneft of the owest possbe prce for suppes for ts members.
It seems apparent that the nstant assocaton, by acqurng grazng
ands and apportonng them among ts members for use n grazng ther
catte, furnshes ts membershp a suppy wthn the aforesad def-
nton. Grazng s a suppy to a ve-stock grower |ust as seeds are a
suppy to a farmer or as crates are a suppy to a frut grower. Further-
more, t w be noted from the defnton of suppes and equpment
that t ncudes groceres and a other goods and merchan-
dse used by farmers n the operaton and mantenance of a farm
. Itacs supped. The use of the word ncudes n
ths defnton s, t s beeved, merey for the purpose of specfyng, not
e cudng, what sha be covered by that phrase. Shoud the word
ncudes be hed to have an e cusve connotaton, nevertheess, the
phrase a other goods n the defnton s suffcenty broad to ncude
grazng.
In vew of the foregong, t s the opnon of ths offce that the M Com-
pany s e empt from Federa ncome ta under the provsons of sec-
ton 101 (12) of the Revenue ct of 1938 and the Interna Revenue Code.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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299 20 (b), rt. 20 (b)-.
SUPPL M NT . COMPUT TION OF N T INCOM .
S CTION 115. DISTRI UTIONS Y CORPOR TIONS.
rtce 115-5: Dstrbutons n qudaton.
R NU CT OP 1038.
tendng tme set for competon of qudaton. (See I. T. 8 5,
page 250.)
S CTION 116. CLUSIONS FROM GROSS INCOM .
R NU CT OF 1938.
Meanng of term coastwse, as used n G. C. M. 22383 (C. .
19 0-2, 227). (See I. T. 3 61, page 251.)
R NU CT OF 1938.
Wages of seamen empoyed on vesses engaged n coastwse trade.
( See f. T. 3 67, page 252.)
SUPPL M NT O CR DITS G INST T .
S CTION 131. T S OF FOR IGN COUNTRI S ND
POSS SSIONS OF UNIT D ST T S.
rtce 131-8: Lmtatons on credt for foregn ta es.
R NU CT OF 1038.
Incuson of unta ed ncome n numerator of credt-mtng frac-
ton prescrbed n secton 131 (b). (See G. C. M. 22556, page 310.)
SUPPL M NT C INSUR NC COMP NI S.
S CTION 20 (b). INSUR NC COMP NI S OT R T N
LIF OR MUTU L: D FINITION OF INCOM , TC.
rtce 20 (b)-: Gross ncome of nsurance com-
panes other than fe or mutua.
R NU CT OF 1038.
Reserves requred by State authorty wth respect to noncanceabe
heath and accdent poces. (See G. C. M. 22503, page 265.
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231, rt. 231-3.1 300
SUPPL M NT . NONR SID NT LI N INDI IDU LS.
S CTION 212. GROSS INCOM .
rtce 212-2: cuson of earnngs of foregn
shps from gross ncome.
R NU CT OF 1938.
Panama, equvaent e empton provsons of sectons 212(b) and
231(d) of the Revenue ct of 193a (See I. T. 3 65, page 268.)
SUPPL M NT I. FOR IGN CORPOR TIONS.
S CTION 231. T ON FOR IGN CORPOR TIONS.
rtce 231-3: cuson of earnngs of foregn
shps from gross ncome.
R NU CT OF 1938.
Panama, equvaent e empton provsons of sectons 212(b) and
231(d) of the Revenue ct of 1938. (See I. T. 3 65, page 268.)
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301 23(c), rt. 23(e)-.
INCOM T RULINGS. P RT II.
R NU CTS OF 1937 ND 1936.
SU TITL G N R L PRO ISIONS.
P RT II. COMPUT TION OF N T INCOM .
S CTION 22(c). GROSS INCOM : IN NTORI S.
rtce 22(c)-8: Inventores of reta merchants.
R NU CT OF 1936.
Reguatons 9 , amended. (See T. D. 50 8, page 200.)
S CTION 23(a). D DUCTIONS FROM GROSS
INCOM : P NS S.
rtce 23(a)-: usness e penses.
R NU CT OF 1036.
penses ncurred n producton of ta abe ncome. (See I. T.
3 52, page 205.)
S CTION 23(c). D DUCTIONS FROM GROSS
INCOM : T S G N R LLY.
rtce 23(c)-1: Ta es. 19 1-19-10706
G. C. M. 22613
R NU CT OF 1936.
The decson In Commssoner v. Rust s state et a. (116 Fed.
(2d), 636), reatng to rea property ta es In the Dstrct of Co-
umba, wIU not be gven genera appcaton, but w be apped
ony In cases Invovng such rea property ta es. Furthermore,
the decson w be apped ony n those cases where, as n the
Rust case, there s an agreement between-the buyer and seer
ad|ustng the ta es to the date of sae.
n opnon s requested as to the e tent of the appcaton of the
decson of the Crcut Court of ppeas for the Fourth Crcut
n Commssoner v. Rust s state et cU. (116 Fed. (2d), 636, Ct D.
1508, page 302, ths uetn), reatng to the deducton for Federa
ncome ta purposes of Dstrct of Coumba rea property ta es n
certan cases.
It was hed n the Rust case that under the ta aws of the Dstrct
of Coumba a en for rea property ta es does not arse unt there
s a denquency and, accordngy, that one who purchased rea
estate subsequent to the date of assessment of rea property ta es
and pad the second semannua nstament of such ta es when t
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8 23(c), rt. 23 c)-.
302
became due coud, for Federa ncome ta purposes, deduct such
payment from gross ncome. The decson s based upon the ground
that the ta es pad may be regarded as a burden mposed upon the
purchaser by reason of hs ownershp of the property at the tme the
ta es fe due, and were, therefore, hs ta es rather than the ta es
of the prevous owner. The court stated that, wth respect to rea
property hed as an nvestment, ta es are perforce treated as a
current e pense to be offset aganst current ncome, and that no part
of the second nstament of the ta es n the present case coud be
fary aotted to the seer. The court took notce of the agreement
between the partes by whch the ta es were ad|usted to the date
of sae.
The court cted Lfson et a. v. Commssoner (98 Fed. (2d), 508,
Ct. D. 1 09, C. . 1939-2, 198) and Commssoner v. Pcstcheeff
(100 Fed. (2d), 62, Ct. D. 1 10, C. . 1939-2, 200), n whch cases
t was hed that the deducton for rea property ta es n the States
of Mnnesota and Washngton, respectvey, s mted to the person
who owns the reaty at the tme the en for the ta es attaches. The
decsons n the Lfson and Pestcheeff cases are contrary to the
ureau s poston that, generay, State property ta es accrue on the
date as of whch the assessment s made (G. C. M. 15305, C. .
I -2, 80 (1935)), and that the owner as of that date s the person
entted to a deducton for such ta es for Federa ncome ta pur-
poses. Upon the bass of the Lfson and Pestcheeff decsons, how-
ever, the ureau changed ts poston as to the accrua of rea prop-
erty ta es n the States of Mnnesota and Washngton, but hed that
such decsons do not affect e stng rungs as to the accrua dates
of rea property ta es n other States (G. C. M. 21373, C. . 1939-2,
82).
Consstent wth the foregong, the decson n the Rust case w
not be gven genera appcaton but w be apped ony n cases
nvovng Dstrct of Coumba rea property ta es. Furthermore,
the decson w be apped ony n those cases where, as n the Rust
case, there s an agreement between the buyer and seer ad|ustng
the ta es to the date of sae.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
rtce 23(c)-: Ta es. 19 1-19-10707
Ct. D. 1508
INCOM T R ND CT OF 193ft D CISION OF COURT.
1. Deducton Ta es Pad or ccrued Wthn Ta abe Year
greement etween Seer and Purchaser as to Ta Pay-
ment Len Upon Rea Propebty Dstrct of Coumba Law.
The decedent In September, 1935, purchased rea estate stuated
n the Dstrct of Coumba aganst whch ta es for the fsca year
endng une 30, 1036, bad been assessed n the name of the former
owner n uy, 1035, payabe n September and March foowng. In
March, 1936, the decedent pad the second semanuua nstament of
such ta es n accordance wth an agreement wth the seer that the
ta es for the current fsca year shoud be ad|usted to the date of
sae. s books were kept on a cash recepts and dsbursements
bass, and the ta es pad were not captazed on hs accounts as
part of the cost of the property. ed: That the decedent was en-
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303
23(c), rt. 23(c)-.
tted to a deducton from 1936 gross ncome, under the provsons
of secton 23(c) of the Revenue ct of 1936, for the ta es pad
n March, 1936. Such ta es may be regarded as a burden Imposed
upon the decedent by reason of hs ownershp of the property when
the ta es fe due and were therefore hs ta es rather than the ta es
of the prevous owner. Under the aw of the Dstrct of Coumba
the assessment of rea estate ta es does not create a persona a-
bty but ony a charge upon the and, and a en for such ta es
does not arse pror to the occurrence of a denquency.
2. Decson ffrmed.
Decson of the Unted States oard of Ta ppeas (19 0) ( 1
. T. ., 832) afSrmed.
Unted States Cbcut Coubt of ppeas fob the Fourth Crcut.
Commssoner of Interna Revenue, pettoner, v. state of . L. Rust, Deceased,
. L. Rust, r., and en|amn 8. Mnor, ecutors, respondents.1
116 Fed. (2d), 636.
On petton to revew the decson of the Unted States oard of Ta ppeas.
efore Parker, Sopeb, and Dobb, Crcut udges.
December 18, 19 0.
OPINION.
Sopeb, Crcut udge: The Commssoner of Interna Revenue pettons for
a revew of a decson of the Unted States oard of Ta ppeas wheren
It was hed that the ta payer, now deceased, was entted to a deducton from
gross Income on account of the payment on March 31, 1936, of a semannua
Instament of ta es for the fsca year endng une 30, 1936, on rea estate n
Washngton, D. C. The ta es had been assessed In 1935, pror to the ta payer s
acquston of the property, but were not payabe unt March, 1936, after the
purchase had been consummated. Income ta es for the caendar year 1936 are
Invoved; and the queston s whether the rea estate ta es pad as aforesad
may be regarded as a burden mposed upon the ta payer by reason of hs
ownershp of the property when the ta es fe due and were therefore hs ta es
rather than the ta es of the prevous owner.
Ta es were assessed aganst the property on or before uy 1, 1936, under the
statutes of the Dstrct of Coumba, for the fsca year then begnnng. On
uy 19, 1935, the ta rate was f ed by the Commssoners of the Dstrct and
tbe amount of the ta was determned to be 1 ,883.3 , whch was payabe n
two equa nstaments of 7, 1.67 n September, 1935, and March, 1936,
respectvey.
On uy 1, 1935, and for a number of years pror thereto, the property,
whch s ocated at 2101 Connectcut venue NW., stood on the ta ros
In the name of the pror owner. On September 17, 1935, t was purchased
by the ta payer at a mortgage forecosure sae for 275,000, sub|ect to a
mortgage of 725,000. Under the terms of the contract of sae the ta es
for the current fsca year, none of whch had been pad, were ad|usted to
the date of sae; and the ta payer was credted wth 3,1 2.10, representng
the porton of the ta es aocabe to the perod between uy 1 and September
17, 1935. The ta payer pad the frst nstament of ta es on September 28,
1935, and the second nstament on March 31, 1936; but ony the second
nstament s nvoved n ths controversy. The ta es thus pad were not
captazed on the accounts of the ta payer as part of the cost of the property.
e kept hs books on a cash recepts and dsbursements bass, and camed
a deducton for the second nstament n hs ta return for the year 1936;
but t was dsaowed by the Commssoner. On revew the oard hed that
tbe amount n dspute was propery deductbe as ta es pad by the ta payer
In the ta abe year for the perod durng whch he was the owner.
The reevant Federa statute Is secton 23(c) of the Revenue ct of 1936
( 9 Stat, 1659), whch aows a deducton from gross Income of ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not here matera.
See G. C. M. 22613, page 301, ths uetn.
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23(c), rt. 23(c)- .
30
Treasury Reguatons 0 , promugated under the Revenue ct of 1936, artce
3 (e)-, provde that In genera ta es are deductbe ony by the person upon
whom they are mposed.
The ta aws of the Dstrct of Coumba are aso reevant, snce they
determne such questons as the ncdents of the assessment and of the ta
en upon the property and the persona abty, f any, of the owner for
the ta es. (Wash-McOure Co. v. Commssoner, 6 Cr., 97 Fed. (2d), 983;
Commssoner v. Pestcheeff, 9 Cr., 100 Fed. (2d), 62 Ct. D. 1 10, O. . 1939-2,
200 ; hotwe v. Moore, 129 U. S., 590, 598; Pau Seected Studed n Federa
Ta aton, Second Seres, pages 23-2 .) These statutes are found In Tte 20
of the Code of the Dstrct of Coumba, 1929. The fsca year for the Dstrct
commences on the 1st day of uy of each year (secton 621). evy s
made for each and every fsca year of a ta upon rea and persona property
sub|ect to ta aton n the Dstrct at a rate f ed annuay by the Commssoners
(secton 681). The assessment s made n the name of the owner wth e cep-
tons not here matera (secton 696). The assessment and vauaton of rea
property are made annuay (secton 697), the vauaton as neary as practcabe
on the frst Monday of une, and the assessment on or pror to uy 1 (sectons
700-705). Rea estate and persona property ta es are payabe n semannua
nstaments n the months of September and March, wth penates for
denquency, e cept as to ta es on famy dwengs whch may be pad
quartery (secton 758). Provsons are made for the sae of rea estate for
denquent ta es (sectons 791-801). The assessor s drected to prepare a st
of a ta es on rea property whch are eved and n arrears on the 1st day
of uy of each year, and the Commssoners of the Dstrct are drected to
se the same f the ta es, together wth penates and costs, sha not be pad
pror to the day f ed for sae. If no bd s receved suffcent to pay the
amount due wth penates and costs, the coector Is drected to bd such
amount and purchase the property from the Dstrct. Provson s aso made
for the ssuance to the purchaser of a certfcate of sae and fnay a deed
f wthn two years from the date of sae the property Is not redeemed by
the owner. It Is then provded n secton 793 that faure on the part of
the Dstrct from any cause whatsoever to enforce the en acqured aforesad
sha not reease the property from any ta whatsoever that may be due the
Dstrct. Secton 800 aso refers to rea estate sod for nonpayment of ta es
and bought n by the Dstrct, and authorzes the Commssoners, after the
apse of two years, to appy to the Supreme Court of the Dstrct for the
purpose of enforcng such ta en by the sad Dstrct of Coumba on the
aforesad property.
It was under these statutes that the ta es on the property purchased by the
ta payer were assessed n the name of the former owner on uy 1, 1935, for the
ensung fsca year. No persona abty on the part of the former owner,
however, arose from ths acton, snce under the decsons In the Dstrct of
Coumba the assessment of rea estate ta es does not create a persona abty,
but ony a charge upon the and. (Tumuty v. Dstrct of Coumba. 102 Fed.
(2d), 25 .) Nor dd any ta en attach to the and by reason of the assess-
ment. en for ta es on rea estate s a creature of statute, and attaches ony
when the egsature prescrbes. ( rvn v. State, 5 Cr., 80 Fed. (2d), 32;
Commssoner y. Pestcheeff, 9 Cr., 100 Fed. (2d), 62.) Snce no reference Is
made n the statute to a en for ta es e cept n connecton wth ta es n arrears,
t s a reasonabe nterpretaton that the en does not arse pror to the occurrence
of a denquency. Ths Is nonetheess true even though the ta es n queston may
have been n some sense a charge upon the and under the statutes of the Dstrct
of Coumba. ute frequenty, as the decsons cted n ths opnon show, the
State ta aw provdes that the ta en sha attach after the assessment s
eved.
It s of course necessary for the ta payer In the pendng case to show that he
comes wthn the terms of the ncome ta statute aowng the deducton, for
the statutes pertanng to the determnaton of ta abe ncome have dscosed
a genera purpose to confne aowabe osses to the ta payer sustanng them,
t. e., to treat them as persona to hm and not transferabe to or usabe by
another. (NeP Coona Co. v. everng, 292 . S., 35, 0 Ct. D. 8 1, C. .
III-1, 1P MP3 11; Coston v. rnrt. C. D. C. 51 Fed. (2d), 867.) The
queston s whether the ta payer has met ths requrement.
The ta es under consderaton were not the persona obgaton of ether the
buyer or the seer of the property; but they, nevertheess, fe wthn the terms
of the statute as a deductbe tem In the computaton of ta abe Income. Whether
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305
23(c), rt. 23(c)- .
or not the deducton coud awfuy be taken by the seer, or by the buyer, or party
by one and party by the other, are questons whch shoud be answered by ascer-
tanng upon whom rests the obgaton under the State aw to pay the ta es,
hayng In mnd the practcates of the stuaton. Ta es upon rea estate const-
tute an ever recurrng burden; and when, as In ths case, the property s hed
as an Investment, they are perforce treated as a current e pense to be offset
aganst current ncome. The provson of the agreement of sae that the ta es
shoud be ad|usted to the date of sae was therefore natura and proper, snce
t aotted to each party a part of the burden proportonate to the perod durng
whch he possessed the property and en|oyed the ncome. Such an arrangement
between buyer and seer Is typca, and It woud be n accord wth the facts even
If pror to the sae the ta has not ony been assessed but has gven rse to a
en. The apportonment of the ta was ceary correct n the transacton under
dscusson, snce no part of the second nstament of the ta coud be fary
aotted to the seer and no part of t was coectbe by the Dstrct durng hs
perod of ownershp. The burden of payng ths nstament was an obgaton
whch passed tq the ta payer wth the ownershp, n much the same fashon that
the beneft of certan covenants s hed to run wth the and n the aw of prop-
erty ; and the burden of the ta rested upon the ta payer In a very rea sense,
for a denquency woud have been foowed by a forced sae by the tu authortes.
The opposng theory advanced by the Commssoner s that In the case of a
sae of property, a ta aready assessed for the current year can not be
treated by the buyer as an tem of current dsbursement to be baanced aganst
current ncome, but becomes a capta tem whch s added to the purchase prce
f prevousy pad by the seer, or subtracted from the purchase prce f
unpad at the tme of the sae; and, therefore, the ta Is not a burden upon
the buyer even f he subsequenty pays t, because he has aready been com-
pensated by the seer. ut ths theory Is not In accord wth the actuates
of the ordnary case. The whoe ta Is not added to or subtracted from the
purchase prce n a sae durng the oca ta year, hut each party s cnn-
sdered as owng a part of the ta proportonate to hs perod of ownershp.
In statng the fna account of sae, a sum representng the apportonment
may for convenence appear as a debt or credt upon the purchase prce, but
It s not a part thereof and Is not so consdered. Furthermore, the Comms-
soner s theory does voence to the purpose of the ncome ta statutes thnt
tems of Income sha be accounted for In annua perods. Ceary ths purpose
w not be served f the constanty recurrng burden of the ta Is refused
recognton 83 an tem of current e pense and Is paced In the category of a
capta e pense to be reckoned wth under the ncome ta statutes ony n
the event of sae at some future date.
The Commssoner s theory certany does not ft the facts of the pendng
case. The second nstament of the ta dd not become due unt March, 193(5,
s months after the sae. It was obvous at the tme of sae that the buyer
woud meanwhe have the en|oyment of the property, and the mpendng ta
burden coud not In fact have nfuenced or entered nto the prce pad for the
property. It woud be as pausbe to say that the ta for the fsca year
begnnng uy 1, 1936, or any succeedng year, represented a capta rather than
a current e pense on the part of the buyer. The oard was correct In decdng
that the ta payer n payng the nstament of the ta In queston was bearng
a burden mposed upon hm by reason of hs ownershp of the property.
The cases n the oard of Ta ppeas turn upon the vew that when the ta
has been assessed, and s f ed as a en upon the property, It becomes the
persona abty of the owner who Is then permtted to accrue t as a abty.
Sometmes the oca statutes e pressy provde that the ta when assessed
sha become a persona abty of the owner of the property. In ether case,
n the vew of the oard, the ta s not a burden Imposed upon a subsequent
purchaser, and f he pays It, It s, so far as he s concerned, a part of the
purchase prce. e can not cam a deducton because ho s not payng hs
ta es but the ta es of another. (Caforna Santary Co., Ltd., v. Commssoner,
32 . T. ., 122; Frst ond rf Mortgage Co. v. Commssoner, 27 . T. ., 30;
Leamngton ote Co. v. Commssoner, 20 . T. ., 100 ; Grand ote Co. v.
Commssoner, 21 . T. ., 890; ohn ancock Mutua Lfe Ins. Co. v. Com-
mssoner, 10 . T. ., 736.) The courts have adopted ths vew n cases where
the oca statutes mpose a en upon the property whch arses before the
property Is sod, and ths s the hodng even though the statutes do not mpose
a persona obgaton upon the owner. (See everng v. Mssour State Lfe
Ins. Co., 8 Cr., 78 Fed. (2d), 778; Merchants ank dg. Co. v. everng,
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23(c), rt. 23(c)- .
308
8 Cr., 8 Fed. (2d), 78 Ct. D. 1189, C. . 1037-1, 189 ; Lfson v. Commssoner,
8 Cr., 98 Fed. (2d), 508 Ct. D. 1 09, C. . 1939-2, 198 ; Wash-McOure Co. v.
Commssoner, 6 Cr., 97 Fed. (2d), 983.)
There may seem to be tte dstncton between the mposton of a statu-
tory en and the evy of an assessment whch s certan to eventuate In a
charge aganst the property. ut t s obvous that there must be some pont
of tme when the specfc en, as dstngushed from the ever Immnent shadow
of the ta burden, attaches to the property, and the courts have not been w-
ng to e tend the rue to embrace cases where the assessment has been eved,
but the en has not been created before the day of sae. Thus, n Comms-
soner v. Pestcheeff (9 Cr., ICO Fed. (2d), 62), the rght to the deducton was
hed to be dependent upon the date when the en for ta es attached.
In Commssoner v. Coward (3 Cr., 110 Fed. (2d), 725 Ct. D. 1 58, C. .
19 0-1, 123 ), where there was no en pror to the sae and no persona ab-
ty on the part of the pror owner, t was suggested that the Commssoner s
argument was founded on precedent rather than on prncpe. The court
sad (page 727) :
We must determne whether a gven payment s a forced contrbuton to
Ihe e pense of government, or whether t s somethng ese a vountary
capta e pendture, for e ampe. Its souton must e n a cose anayss of
the transacton of payment. It can not, n our |udgment, be soved by any
rue of thumb that a property owner s payment s not one of a ta on hs
property because a pror owner (on the accrua bass) mght have been per-
mtted to accrue t. For that permsson to accrue may depend on technca
e gences of accountng uttery foregn to the ater owner s economc poston
n actuay makng the payment.
where on the other hand, the ta payment fas nto nether of
these two categores where t nether dscharges (by contract, e press or
mped) the persona abty of another, nor what was orgnay a ta en
on another s property the deducton has been permtted (Commssoner v.
Pestcheeff, 9 Cr., 100 Fed. (2d), 62).
Ths decson was somewhat smpfed by n oca statute whch provded that
n the absence of an e press agreement to the contrary, the buyer of rea
estate may hod the seer abe for such proporton of the current year s ta es
as the tme between anuary 1 and the date of the deed bears to the fu
caendar year. It was the vew of the court that athough the property had
been assessed pror to the sae, ths dd not mean, under the New ersey
statutes, that the ta resutng from that assessment was to be borne by the
seer. The court sad (page 728) :
It s aways borne by the and n the frst nstance. ut as between buyer
and seer t Is apportoned on the bass of the caendar year. In other words,
t Is consdered far that the owner of and n any gven year sha be caed
upon to contrbute to the year s revenues ony a sum commensurate wth the
ength of tme the and has been hed n that year e cept, of course, n the
rare case of the pror owner s nsovency. Such a contrbuton s, n our |udg-
ment, a ta n every sense of the word.
In Carondeet dg. Co. v. Fontenot (5 Cr., I Fed. (2d), 267), the assessment
on the property occurred pror and the ta en attached subsequent to the ta -
payer s purchase. The ta payer was on an accrua bass and sought a deducton
for the ta es accrung between the date of the purchase and the end of ts fsca
year, whch dd not concde wth the ta year of the State. The Commssoner
dsaowed the deducton on the theory that the whoe ta accrued when the
assessment was made pror to the transfer. The oca statutes mposed no persona
abty upon the ta payer. The court hed for the ta payer, sayng that as a
matter of practca busness, the ta payer was entted to prorate the ta es snce t
owned the budng to rent out, and e pected to pay the ta es as a f ed charge.
mphass was paced upon the provsons of the ncome ta statutes, and of the
reguatons whch requre that deductons sha be taken n accordance wth the
method of accountng under whch the net ncome s computed, and that the com-
putaton sha be made n such manner as ceary refects the ncome. It was hed
that there was no rue of aw whch requred the ta es to be accrued for ncome
ta purposes when the assessment was made. Ths decson not ony re|ected the
contenton that the owner at the tme of the assessment was aone entted to take
the deducton, but aso recognzed the rght of the ta payer to apporton the ta es
between two consecutve fsca years.
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307
2, rt. 2- .
These ater decsons, as we as the decson of the oard In the pendng case,
vew reastcay the stuaton whch ordnary confronts the partes to a ae of
rea estate when they approach the dsposton of the ta burden for the year of
ae. Whether ths atttude shond not aso be taken n the event of a sae after
persona abty on the part of the seer or a statutory en for the ta has arsen,
we have no occason to decde. The qneston here s whether, In the absence of
persona abty and of a en, the partes may agree to apporton a ta , not yet
payabe, to ther respectve perods of ownershp. We thnk that they may |
because such an agreement merey assgns to each party the obgaton to bear hs
own burden of ta aton.
The decson of the oard s affrmed.
S CTION 23 (m). D DUCTIONS FROM GROSS
INCOM : D PL TION.
rtce 23(m)-: Depeton of mnes, o and gas
wes, other natura deposts, and tmber; depre-
caton of mprovements.
R NU CT OF 1938.
Status of o and gas easng transactons. (See G. C. M. 22730,
page 21 .)
rtce 23(m)-9: Determnaton of mnera contents
of mnes and of o or gas wes.
R NU CT OP 1936.
Reguatons 9 , amended. (See T. D. 505 , page 227.)
P RT I . CCOUNTING P RIODS ND M T ODS OF
CCOUNTING.
S CTION 1. G N R L RUL .
rtce 1-2: ases of computaton and changes
n accountng methods.
R NU CT OF 1936.
Income from ong-term contracts cash recepts and dsbursements
method. (See G. C. M. 22682, beow.)
S CTION 2. P RIOD IN W IC IT MS OF
GROSS INCOM INCLUD D.
rtce 2 : Long-term contracts.
( so Secton 1, rtce 1-2.)
R NU CT OF 1036.
Income derved by the M Company from ong-term contracts Is
not requred to be determned upon ether the bass of percentage
of competon or upon the competed contract bass. It s per-
mssbe In proper cases that ncome derved from such contracts
be determned upon the bass of the cash recepts and dsburse-
ments method of accountng.
19 1-21-10720
G. C. M. 22682
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2, rt. 2- .
308
n opnon s requested whether t s mandatory that the M Com-
pany s ta abe ncome for the years 1936 and 1937, n so far as such
ncome s derved from ong-term contracts, be determned upon
ether the bass of percentage of competon or upon the competed
contract bass, or whether t s permssbe that ncome derved from
such contracts be determned upon the bass of the cash recepts and
dsbursements method of accountng.
The ta payer, the M Company, was organzed n 1931. It s en-
gaged n the genera contractng busness, and a substanta part
thereof conssts of ong-term contracts as that term s defned n
artce 2- , Reguatons 9 . From 1931 through 1937, the ta payer
has consstenty kept ts books and fed ts returns upon the bass
of the cash recepts and dsbursements method of accountng. The
queston has arsen, nvovng the years 1936 and 1937, as to whether
the ta payer shoud be requred to use the competed contract bass
as provded n paragraph (b) of artce 2- of Reguatons 9 .
The poston that t shoud be requred to report on such bass s
predcated prmary upon two concusons: (1) that one of the two
methods prescrbed n artce 2- s mandatory; and (2) that the
percentage of competon method can not be apped for ack of nec-
essary records and, therefore, the competed contract bass must be
apped.
Secton 1, Revenue ct of 1936, reads n part as foows:
The net ncome sha be computed upon the bass of the ta payer s annua
accountng perod (fsca year or caendar year, as the case may be) In accord-
ance wth the method of accountng reguary empoyed n keepng the books
of such ta payer; but f no such method of accountng has been so empoyed,
or f the method empoyed does not ceary refect the ncome, the computaton
sha be made n accordance wth such method as n the opnon of the
Commssoner does ceary refect the ncome.
rtce 1-2, Reguatons 9 , reads n part as foows:
ta payer who changes the method of accountng empoyed In keepng hs
books sha, before computng hs Income upon such new method for purposes
of ta aton, secure the consent of the Commssoner. For the purposes of ths
artce, a change n the method of accountng empoyed n keepng books means
any change n the accountng treatment of tems of ncome or deductons,
such as a change from cash recepts and dsbursements method to the accrua
method, or vce versa; a change nvovng the bass of vauaton empoyed n
Ihe computaton of Inventores (see artces 22(c)- to 22(c)-8) ; a change from
the cash or accrua method to the ong-term contract method, or vce versa;
a change n the ong-term contract method from the percentage of competon
bass to the competed contract bass, or vce versa (see artce 2- ) ; .
Secton 2, Revenue ct of 1936, reads n part as foows:
The amount of a tems of gross ncome sha be ncuded In the gross
Income for the ta abe year n whch receved by the ta payer, uness, under
methods of accountng permtted under secton 1. any such amounts are to
be propery accounted for as of a dfferent perod.
rtce 2- , Reguatons 9 , reads n part as foows:
Income from ong-term contracts s ta abe for the perod n whch the
ncome s determned, such determnaton dependng upon the nature and
terms of the partcuar contract. s used n ths artce the term ong-term
contracts means budng, nstaaton, or constructon contracts coverng a
perod n e cess of one year. Persons whose ncome s derved n whoe or
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2, rt. 2- .
In part from such contracts may, as to such ncome, prepare ther returns
tpon ether of the foowng bases:
ta payer may change hs method of accountng to accord wth paragraph
(a) or (6) of ths artce ony after permsson s secured from the Comms-
soner as provded n artce 1-2. Itacs supped.
Secton 1, supra, provdes that net ncome sha be computed upon
the bass of the ta payer s annua accountng perod n accordance
wth the method of accountng reguary empoyed n keepng the
books of such ta payer. rtce 1-2, supra, provdes that a ta -
rnyer who desres to change from the cash or accrua method to the
ong-term contract .method, or vce versa, must secure the consent of
the Commssoner. In provdng for the use of the percentage of
competon method or the competed contract method, artce 2- ,
supra, uses the word may, and s, therefore, permssve and not
mandatory. so, the frst sentence of the artce contans the n-
ference that the ta payer s reguar method of accountng accrua
or cash bass may be permssbe. Furthermore, the provson n
artce 2- , supra, to the effect that the ta payer may change hs
method of accountng to accord wth paragraph (a) or (6) ony
after permsson s secured from the Commssoner s nconsstent
wth the concuson that artce 2- , supra, was ntended to be
mandatory.
It s ponted out that the reguatons n effect pror to 1932 specf-
cay recognzed the proprety of a three methods of accountng
(cash, accrua, or ong-term contract method) n the foowng
anguage:
Where a ta payer has fed hs return n accordance wth the method
of accountng reguary empoyed by hm n keepng hs books and such method
ceary refects the ncome, he w not be requred to change to ether of the meth-
ods above set forth. If a ta payer desres to change hs method of accountng n
accordance wth paragraphs (a) and (6) of ths artce, a statement showng the
composton of a tems appearng upon hs baance sheet and used n connecton
wth the method of accountng formery empoyed by hm, shoud accompany hs
return. (See artce 33 , Reguatons 7 .)
The frst sentence quoted above was omtted from artce 33 , Regu-
atons 77, reatng to the Revenue ct of 1932. (See aso ater regu-
atons.) owever, t s the opnon of ths offce that the omsson was
not for the purpose of makng one of the ong-term contract methods
of reportng ncome mandatory n the case of ncome from ong-term
contracts. It seems obvous that the sentence was omtted because
ts equvaent was to be found esewhere n the statute and reguatons.
Furthermore, n actua practce the ureau has not consdered the
reguatons as requrng a ta payer recevng ncome from ong-term
contracts to report that ncome upon the bass of one of the ong-term
contract methods.
ccordngy, t s the opnon of ths offce that t s not mandatory
that the ncome of the M Company for the years 1936 and 1937, n so
far as such ncome s derved from ong-term contracts, be determned
upon ether the bass of percentage of competon or upon the competed
contract bass; and that t s permssbe n proper cases that ncome
derved from such contracts be determned upon the bass of the cash
recepts and dsbursements method of accountng.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION OF N T INCOM .
S CTION 113(a). D UST D SIS FOR D T RMINING
G IN OR LOSS: SIS (UN D UST D)
OF PROP RTY.
R NU CT OF 1836.
Sae of securtes receved by egatees under testamentary trust.
(See Ct. D. 1516, page 371.)
S CTION 116. CLUSIONS FROM GROSS INCOM .
R NU CT OF 1936.
Meanng of term coastwse, as used n G. C. M. 22383 (C. .
19 0-2, 227). (See I. T. 3 61, page 251.)
R NU CT OF 1936.
Wages of seamen empoyed on vesses engaged n coastwse trade.
(See L T. 3 67, page .)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S OF FOR IGN COUNTRI S ND
POSS SSIONS OF UNIT D ST T S.
rtce 131-8: Lmtatons on credt for foregn ta es.
R NU CT OF 1936.
Incuson of unta ed ncome n numerator of credt-mtng frac-
ton prescrbed n secton 131 (b.) (See G. C. M. 22556, beow.)
rtce 131-8: Lmtatons on credt for 19 1-11-10637
foregn ta es. G. C. M. 22556
R NU CTS OF 1932, 193 , 1936, ND 1938.
To the e tent that a ta payer s Income derved from sources
wthout the Unted States Is propery ncudbe as a part of tota
net Income for Federa ncome ta purposes, such foregn ncome
shoud be Incuded In the numerator of the credt-mtng fracton
provded by secton 131(b) of the Revenue cts of 1932, 193 , 1936,
and 1938, regardess of whether such ncome was ta ed by the
foregn country In whch such Income was reazed.
n opnon s requested whether n determnng the mtaton on
foregn ta credts under the provsons of secton 131(b) of the
Revenue cts of 1932, 193 , 1936, and 1938 there shoud be ncuded
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| 131, rt. 131-8
n the numerator of the credt-mtng fracton, provded by that
secton, ncome (herenafter descrbed) from sources wthn foregn
countres, whch ncome has not been ta ed n those countres.
Secton 131(b) of the Revenue ct of 1932 (reenacted wthout
change n the Revenue cts of 193 , 1936, and 1938) provdes as
foows:
(b) Lmt on Ckedt. The amount of the credt taken under ths secton
sha be sub|ect to each of the foowng mtatons:
(1) The amount of the credt In respect of the ta pad or accrued to
any country sha not e ceed the same proporton of the ta aganst
whch such credt Is taken, whch the ta payer s net ncome from sources
wthn sch country bears to hs entre net ncome for the same ta abe
year; and
(2) The tota amount of the credt sha not e ceed the same pro-
porton of the ta aganst whch such credt s taken, whch the ta payer s
net ncome from sources wthout the Unted States bears to hs entre
net ncome for the same ta abe year.
though the underyng purpose whch Congress had n mnd n
provdng for a credt for ncome, war-profts, and e cess-profts ta es
pad or accrued to a foregn country was to avod doube ta aton
whch woud resut f the same ncome were ta ed both n the foregn
country of ts orgn and n the Unted States ( urnet v. Chcago
Portrat Co., 285 U. S., 1, Ct. D. 63, C. . I-1, 286 (1932); ub-
bard v. Unted States, 17 Fed. Supp 93 Ct. D. 122 , C. . 1937-1, 259,
certorar dened, 300 U. S., 666). te anguage used by Congress s
cear and, unt modfed, must be foowed. In provdng for the frac-
ton to be used n determnng the mt upon credt for foregn ta es,
the words net ncome are used. These words can not fary be con-
strued to have a meanng when used n secton 131 (b), supra, dfferent
from the we-estabshed meanng whch they have when used n
other sectons of the Revenue cts. Therefore, the words net
ncome, as used n secton 131 (b), have been construed to refer to net
ncome wthn the meanng of the Unted States ncome ta aw.
(G. C. M. 21 32, C. . 1939-2, 23 ; urk ros. v. Commssoner, 20
. T. ., 657.) No authorty e sts for nterpretng net ncome from
sources wthn such country as net ncome from sources wthn such
country upon whch a ta has been pad to such country.
Inqury has been made as to whether four categores of ncome
(descrbed beow) receved by a ta payer from sources n foregn
countres are to be ncuded n the numerator of the credt-mtng
fracton provded by secton 131(h), supra. Upon the bass of the
foregong, each category w be dscussed separatey.
(a) Where such specfc ncome s ta abe under the aws of the foregn gov-
ernment but not ta ed for the reason that t has not been dscosed to such
government.
Recepts whch consttute a part of the ta payer s net ncome wthn
the concept of the Unted States ncome ta aw are ncudbe n the
numerator of the credt-mtng fracton regardess of the dscosure
or nondscosure of such recepts to the government of the foregn
country from sources n whch such recepts are derved.
(6) Where such specfc ncome s not ta abe under the aws of the foregn
government but s not specfcay ta e empt. The aws of the foregn govern-
ment dd not ta proft reazed on saes of persona property by a foregn cor-
poraton that had no estabshed pace of busness theren. Ths ncome woud
have been ta abe f an estabshed pace of busness had been mantaned.
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131, rt. 131-8.
312
It appears that the ta payer n queston purchased merchandse from
ts French and German subsdares and resod the same to ts ngsh
and other foregn subsdares. The contracts were made by cabe,
the offers to buy and se beng receved and accepted by the ta payer
at ts offce n the Unted States. The merchandse was shpped c. . f.
drecty by the seng subsdary to the purchasng subsdary by
common carrer. It appears that snce the ta payer dd not mantan
any offce or representatve n Germany or France gans reazed n
those countres by reason of the aforementoned saes were not sub|ect
to French and German ncome ta es. The ncome so reazed by the
ta payer ceary consttutes ncome from sources wthout the Unted
States.
Snce the above-mentoned ncome s from sources wthout the Unted
States and s part of the ta payer s net ncome for Federa ncome
ta purposes, t foows that such ncome s propery ncudbe n
the numerator of the credt-mtng fracton.
(c) Where such specfc ncome s not ta abe under the aws of the foregn
government because of the fact that under those aws no such ncome e sted.
Ths ssue nvoves the sae of the currency of the foregn government, the Unted
States ta bass of the currency sod beng the vaue thereof n terms of Unted
States doars at the tme of recept, the proceeds of the sae aso beng e pressed
n terms of Unted States doars.
Snce the gan derved from the sae of foregn currency s recog-
nzed as beng part of the ta payer s net ncome wthn the concept of
the Federa ncome ta aw, such ncome s propery ncudbe n the
numerator of the credt-mtng fracton regardess of the recognton
or nonrecognton of such recepts as ncome by a foregn country.
(rf) Where such specfc ncome of a Unted States corporaton s not ta abe
because of a treaty wth the foregn government. The purpose of the treaty
was to avod doube ta aton on certan desgnated casses of ncome.
No facts have been presented wth respect to the type of ncome
whch s camed to be nonta abe by France under the conventon
and protoco between France and the Unted States. (See T. D. 7 6,
C. . 1937-2, 6 . The far nference to be drawn from the record
before ths offce s that the ta payer mantaned no permanent estab-
shment n France and, therefore, was not abe for French ta es
upon ts ncome derved from that country even n the absence of any
agreement between France and the Unted States. If, n any event,
the gan derved n the foregn country consttutes part of the ta -
payer s net ncome for the purposes of the Unted States ncome ta ,
such gan s ncudbe n the numerator of the credt-mtng frac-
ton even when the gan s nonta abe under the aw or treaty com-
mtments of such foregn country.
In vew of the foregong, t s the opnon of ths offce that to
the e tent that the ta payer s ncome derved from sources wthout the
Unted States s propery ncudbe as a part of net ncome for Federa
ncome ta purposes such foregn ncome shoud be ncuded n the
numerator of the credt-mtng fracton provded by secton 131(b)
of the Revenue cts of 1932, 193 . 1936, and 1938, regardess of
whether such ncome was ta ed by the foregn country n whch such
ncome was reazed.
. P. Wencte,
Chef Counse, ureau of Interna Revenue.
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313 ( 231, rt. 231- .
SUPPL M NT C INSUR NC COMP NI S.
S CTION 20 (b). INSUR NC COMP NI S OT R T N
LIF OR MUTU L: D FINITION OF INCOM , TC.
rtce 20 (b)-: Gross ncome of nsurance com-
panes other than fe or mutua.
R NU CT OP 1936.
Reserves requred by State authorty wth respect to noncanceabe
heath and accdent poces. (See G. C. M. 22503, page 265.)
SUPPL M NT . NONR SID NT LI N INDI IDU LS.
S CTION 212. GROSS INCOM .
rtce 212-2: cuson of earnngs of foregn
shps from gross ncome.
R NU CT OF 1936.
Panama, equvaent e empton provsons of sectons 212(b) and
231(d) of the Revenue ct of 1936. (See I. T. 3 65, page 268.)
SUPPL M NT I. FOR IGN CORPOR TIONS.
S CTION 231. T ON FOR IGN CORPOR TIONS.
rtce 231- : cuson of earnngs of foregn
shps from gross ncome.
R NU CT OF 1936.
Panama, equvaent e empton provsons of sectons 212(b) and
231 (d) of the Revenue ct of 1936. (See L T. 3 C5, page 208.)
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22 (ft), rt. 22(a)- .
31
INCOM T RULINGS. P RT III.
R NU CTS OF 1935 ND 193 OR PRIOR CTS.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION OF N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D FINITION.
rtce 22(a)-: What ncuded n gross ncome. 19 1-13-10662
Ct. D. 1 97
ncome ta revenue act of 193 decson of supreme court.
1. Crcut Court of ppeas Power to Consder ueston of
Law Not Rased efore oaud of Ta ppeas ppcab-
ty of Secton Defnng Gross Income Remand to oard of
Ta ppeas.
For the reasons set out n the decson n orme v. evcrng
Ct. D. 1-19 , page 315, ths uetn , the crcut court of appeas
was n error n ts concuson that t coud not consder the app-
cabty of secton 22(a) of the Revenue ct of 193 to the facts
n ths case on the ground that the ssue was not presented before
the oard of Ta ppeas. Under the crcumstances of the case,
the pettoner s entted to ntroduce addtona evdence upon re-
mand of the case to the oard.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (1010) (11 Fed. (2d), 52), affrmng memorandum opn-
on of the oard of Ta ppeas, reversed.
Supreme Coubt of the Unted States.
Guy T. Ievcrng, Commssoner of Interna Revenue, pettoner, v.
O. O. Rchtcr.
01 S. Ct., 723.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
IMarch 17, 19 1.
OPINION.
Mr. ustce ack devered the opnon of the Court.
ecause the decson beow (11 Fed. (2d), 52) was n confct wth that of the
Crcut Court of ppeas for the ghth Crcut n everng v. orme (111
Fed. (2d), 1) affrmed ths day, we granted certorar mted to the frst
queston presented by the petton for the wrt. (311 U. S., .) The petton
stated that queston as foows:
The ta payer transferred securtes to a thrd party n trust to pay the
ncome to hs wfe. t the end of fve years, or earer f the benefcary con-
sented, the securtes were to be transferred back to the ta payer. The oard
of Tu ppeas hed that the grantor was not ta abe wth respect to the
ncome from the trust. Two questons are presented:
1. Whether, by nvokng the genera gross ncome provsons of secton 22,
the Commssoner had so changed the theory of the Government s case on appea
as to precude the crcut court of appeas from consderng the ssue.
2. Whether, on the merts, the trust ncome was ta abe as ncome of the
grantor under secton 22.
In vew of the mted grant of certorar, the second queston s not before
ub. On the frst queston, the crcut court of appeas hed that t coud not
consder the appcabty of secton 22(a), that beng an ssue now for the
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315
22 (a), rt. 22 (a)-.
frst tme presented by the Commssoner. The decson of the oard of Ta
ppeas, whch the crcut court of appeas affrmed, was handed down pror
to our decson In everng v. Cfford (309 U. S., 331 Ct. D. 1 , C. . 19 0-1,
105 ). Respondent urges that had he been advsed wth far certanty that the
Government reed upon secton 22(a), he coud have ntroduced addtona
evdence drected to that ssue. For reasons set out n our decson n orme
v. everng Ct. D. 1 98, beow , we are of opnon that the crcut court of
appeas was n error n ts concuson, but we are as/ of opnon that respondent
Is entted to ntroduce addtona evdence f he so desres. The |udgment s
accordngy reversed, wth drectons to the court beow to remand to the oard
of Ta ppeas for rehearng n the ght of the Cfford case.
Reversed.
rtce 22(a)-: What ncuded n gross ncome. 19 1-13-10663
Ct. D. 1 98
INCOM T R NU CT OF 193 D CISION OP SUPR M COURT.
1. cbcut coubt of appeas poweb to consder queston or aw
Not Rased efobe oard of Ta ppeas ppcabty of
Secton Defnng Gross Income Remand to oard of Ta
ppeas.
The crcut court of appeas was correct In gvng consderaton to
the appcabty of secton 22(a) of the Revenue ct of 193 n deter-
mnng whether ncome of certan trusts created by the ta payer was
ta abe to hm, athough that secton was not reed upon before the
oard of Ta ppeas. The genera prncpe of appeate practce
that a revewng court may not consder questons of aw whch were
nether presented nor passed upon beow shoud not be apped f to
do so woud defeat rather than promote the ends of ustce. Under
the crcumstances of ths case, the pettoner shoud not be fore-
cosed from the opportunty to offer evdence before the oard on the
ssue of the appcabty of secton 22(a).
2. Shobt-Term Trust Income Ta abe to Grantor.
The ta payer created three short-term trusts, namng hmsef and
another as trustees, wth substanta contro over the trust propertes
and wth power n the grantor and hs wfe to remove the co-trustee
at any tme. Trust ncome up to a certan amount was to be pad to
the wfe as guardan of ther three sons, any e cess to be pad to the
grantor. ed: s the record stands, the court beow correcty hed
that the trust ncome was ta abe to the grantor under the prncpes
announced n everng v. Cfford (309 U. S., 331 Ct. D. 1 , C. .
19 0-1, 105 .)
3. Cases Dstngushed.
everng v. Wood (309 U. S., 3 Ct. D. 1 5, C. . 19 0-1, 162 ),
everng v. Tew-Penn O Co. (300 U. S., 81 Ct. D. 1220, C. . 1937-1,
23(5 ), and Genera Uttes Operatng Co. v. everng (296 U. S.,
200 Ct. D. 1055, C. . -1, 21 (1936) ) dstngushed.
. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (19 0) (111 Fed. (2d), 1), reversng decson of the Unted
States oard of Ta ppeas (1939) (39 . T. ., 2 ), affrmed.
Supreme Court of the Unted States.
ay C. orme, pettoner, v. ty T. everng, Commssoner of Interna Revenue.
61 S. Ct., 719.
On wrt of certorar to the Unted States Crcut Court of ppeas for the ghth Crcut.
March 17, 19 1.
OPINION.
Mr. ustce ack devered the opnon of the Court.
The Commssoner of Interna Revenue assessed a defcency aganst pettoner
for faure to ncude n hs 193 and 1935 ta returns the Income of three separate
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22(a), rt. 22(a)- .

316
trusts decared by hnt n 193 . ach of the decaratons of trust rected that
the benefcares were ay O. orme pettoner hmsef , and Geruane D.
orme, hs wfe, as guardan for ther son, a dfferent son beng desgnated by
each trust nstrument. ach trust estate conssted of shares of stock n Geo. .
orme Co., of whch pettoner was an offcer. Pettoner named hmsef and
another as co-trustees; a dvdends from each trust estate, up to 2,000 a year,
were to be pad to pettoner s wfe as guardan for the son named n the partcu-
ar trust nstrument, and any e cess over 2,000 was to be pad to pettoner; the
trusts were to e pre automatcay after three years, or upon the death of pet-
toner, or upon the death of the named son, whchever event shoud occur rst;
upon e praton of each trust, the entre prncpa shoud be the property of
pettoner, hs egatees, devsees, or hers; pettoner and hs wfe (as guardan)
had the power to remove pettoner s co-trustee at any tme, and to choose a suc-
cessor ; the co-trustees coud appont pro es to e ercse votng rghts over the
shares of stock makng up the trust estates, and coud se the securtes deposted
and substtute others; t was provded that no tte to the trust estates shoud
vest n pettoner s wfe, as guardan, or n hs sons, and t was further provded
that the wfe and sons shoud have no power to se, transfer, encumber or n
any manner antcpate or dspose of any nterest n the trust estate ; and,
fnay, the trust nstruments stated that the co-trustees were to be responsbe for
oss ony upon wfu and deberate voatons of ther dutes.
of the trust ncome for the years n queston was dstrbuted to pettoner s
wfe as guardan, who reported t to the Federa Government as guardanshp
Income. Pettoner, n hs ndvdua returns, dd not ncude t. The Comms-
soner, takng the poston that petton shoud have ncuded the trust ncome
n hs ndvdua returns, assessed a defcency aganst hm, assortng that the
trusts were revocabe and the ncome therefore pettoner s wthn the meanng
of secton 166 of the Revenue ct of 193 .1 The oard of Ta ppeas decded
aganst the Commssoner, hodng that the ncome n queston was ta abe to
pettoner nether under secton 160 nor 107, the two sectons e pressy reed on
by the Commssoner before the oard. In the crcut court of appeas, the Com-
mssoner abandoned reance on secton 160, urged that the oard was n error
as to ta abty under secton 167, and argued that n any event the Income was
ta abe to pettoner under secton 22(a). The ta payer argued that the app-
cabty of secton 22(a) was not open for consderaton, nasmuch as that secton
had not been reed on before the oard. The crcut court of appeas, though
agreeng wth the oard as to nonta abty under sectons 106 and 167, neverthe-
ess rued that secton 22(a) coud propery be consdered, and hed the ncome
ta abe to pettoner under that secton. ecause of a confct among the crcut
courts of appeas on the proprety of consderng secton 22(a) under these crcum-
stances, we granted certorar. (311 U. S., .) Two questons are presented for
our decson: Frst, Was the court beow correct In hodng that secton 22(a)
shoud be consdered Second, If so, was the court beow ustfed n determnng
that the ncome of these trusts was ta abe to pettoner under secton 22(a)
1 Where at any tme the power to revest n the grantor tte to any part of the corpus
of the tru t s vested
(1) In the grantor, ether aone or n con|uncton wth any person not havng a
substanta adverse nterest In the dsposton of such part of the corpus or the ncome
therefrom, or
(2) In any person not hnvng a substanta adverse Interest In the dsposton of
such part of the corpus or the ncome therefrom, then the ncome of such part of the
trust sha be ncuded n computng the net ncome of the grantor.
Secton 167 reads n part as foowa:
(a) Where any part of the Income of a trust
(1) Is, or n the dscreton of the grantor or of any person not havng a substan-
ta adverse nterest n the dsposton of such part of the Income may be, hed or
accumuated for future dstrbuton to the grantor; or
(2) may, n the dscreton of the grantor or of any person not havng a substanta
adverse Interest In the dsposton of such part of the ncome, be dstrbuted to the
grantor,
Gross ncome ncudes gnns, profts, and ncome derved from saares, wages, or
compensaton for persona servce, of whatever knd and In whatever form pad, or from
professons, vocatons, trudes, busnesses, commerce, or saea. or deangs n property,
whether rea or persona, growng out of the ownershp or use of or Interest n such prop-
erty : aso from nterest, rent, dvdends, securtes, or the transacton of any busness
curred on for gan or proft, or gans or profts and ncome derved from any source what-
ever. .
Of., e. g., Iercrno v. orme (111 Fed. (2d), 1) (the decson beow), wth Ueverng
. cher (11 Fed. (2d). 52 ICL D. 1 97, page 31 , ths Uuotn , reversed tU day).
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317
22(a), rt. 22(a)-.
Frst. Pettoner In effect chaenges the power of the crcut court of appeas
to pass upon any questons other than those whch were drecty and squarey
presented n the proceedngs before the oard of Ta ppeas. That court s
authorty to revew decsons of the oard rests on statutes, whch provde In
part that the crcut courts of appeas have power to affrm or, f the decson of
the oard s not In accordance wth aw, to modfy or to reverse the decson
Of the oard, wth or wthout remandng the case for a rehearng, as |ustce
may requre. (26 U. 8. C, secton 11 1(c)(1) (Supp. 1930).) In genera,
It Is the functon of the oard to determne the facts of a ta controversy on
Issues rased before t and to appy the aw to those facts; and t s the functon
of the revewng court to decde whether the oard has apped the correct rue
of aw.
Ordnary an appeate court does not gve consderaton to ssues not
rased beow. For our procedura scheme contempates that partes sha come
to ssue n the tra forum vested wth authorty to determne questons of fact.
Ths s essenta n order that partes may have the opportunty to offer a the
evdence they beeve reevant to the ssues whch the tra trbuna Is aone com-
petent to decde; It s equay essenta n order that tgants may not be sur-
prsed on appea by fna decson there of Issues upon whch they have had no
opportunty to ntroduce evdence. nd the basc reasons whch support ths
genera prncpe appcabe to tra courts make t equay desrabe that partes
shoud have an opportunty to offer evdence on the genera ssues nvoved n the
ess forma proceedngs before admnstratve agences entrusted wth the re-
sponsbty of fact fndng. Recognton of ths genera prncpe has caused ths
Court to say on a number of occasons that the revewng court shoud pass by,
wthout decson, questons whch were not urged before the oard of Ta p-
peas. ut those cases do not announce an nfe be practce, as ndeed they
coud not wthout dong voence to the statutes whch gve to crcut courts of
appeas revewng decsons of the oard of Ta ppeas the power to modfy,
reverse or remand decsons not n accordance wth aw as |ustce may re-
qure. There may aways be e ceptona cases or partcuar crcumstances whch
w prompt a revewng or appeate court, where n|ustce mght otherwse resut,
to consder questons of aw whch were nether pressed nor passed upon by the
court or admnstratve agency beow. (See ar v. Oestercn Machne Co., 275
U. S., 220, 225 T. D. 120, C. . II-1, 181 (1928) .)
Rues of practce and procedure are devsed to promote the ends of ustce,
not to defeat them. rgd and undevatng |udcay decared practce under
whch courts of revew woud nvaraby and under a crcumstances decne to
consder a questons whch had not prevousy been specfcay urged woud bo
out of harmony wth ths pocy. Ordery rues of procedure do not requre
sacrfce of the rues of fundamenta |ustce. nd e amnaton of the cases
reed upon by pettoner dscoses that ths Court, n foowng n some cases the
genera prncpe sought to be nvoked here by pettoner, has been carefu to
pont out the crcumstances |ustfyng appcaton of the practce n the partcuar
case. Thus, for e ampe, we hed n ercrng v. Wood (309 U. S., 3 , 3 8-3 9
Ct. D. 1 5, C. . 19 0-1, 162 ) that the Government coud not present n ths
Court as a whoy new ssue the appcabty of secton 22(a). ut we there
especay reed upon the fact that the Government, when the case was before
the crcut court of appeas, had made an e press waver of any reance upon
22(a). In everng v. Te -Penn O Co. (300 U. 8., 81, 98 Ct. D. 1220, C. .
1937-1, 236 ), ths Court decned to consder a newy presented queston, but
ponted out that t had not been rased by the Commssoner ether n hs notce
of ta defcency, In hs appearances before the oard of Ta ppeas or the
crcut court of appeas, or n hs petton for certorar to ths Court. nd n
Genera Uttes d Operatng Co. v. cvcrna (2 6 U. 8., 200, 206-207 Ct. D.
1055, C. . -1, 21 (1936) ), though ths Court sad that the crcut court of
appeas shoud not have consdered a contenton not presented to or rued upon
by the oard of Ta ppeas, the statement was buttressed by addng that the
crcut court of appeas had made an nference of fact drecty n cottct wth
The oard s rungs on questons of aw, whe not as concusve os Its fndngs of
fact, are nevertheess persuasve, an It s desrabe tt. t a revewng court have the beneft
of such rungs. (See er-crny v. Wood, 309 U. S., 3 . 3 0 ; eTverng v. Ter-Penn O
Co., 300 T . 8., 81 08.) Ths s true not ony of the oard of Tn ppeas but of other
admnstratve bodes as we. (Cf. Federa Trade Commsson v. . F. epve at ro..
291 T . 8.. 30 , 81 .)
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22 (a), rt. 22 (a)-.
318
the stpuaton of the partes and the fndngs, for whch we thnk the record
affords no support whatever. To remand the cause for further fndngs woud
be fute. The oard coud not propery fnd anythng whch woud assst the
Conm soner s cause. The pan mpcaton of that decson was that the
cause woud have been remanded to the oard of Ta ppeas had the Court
consdered the newy rased pont to be of suffcent mert These decsons and
others ke them, whe recognzng the desrabty and e stence of a genera
practce under whch appeate courts confne themseves to the ssues rased
beow, nevertheess do not ose sght of the fact that such appeate practce
shoud not be apped where the obvous resut woud be a pan mscarrage of
|ustce. naogous n prncpe s the phosophy whch underes ths Court s
decsons wth reaton to appeate practces n other cases: those n whch t has
been hed that a decson of the oard of Ta ppeas can be supported n the
revewng court on a new theory of aw; those whch have been remanded be-
cause the ower courts faed to gve consderaton to a phase of the case nvovng
ega theores not presented; and those n whch there have been udca nter-
pretatons of e stng aw after decson beow and pendng appea nterpreta-
tons whch f apped mght have materay atered the resut. Whether
artcuated or not, the phosophy underyng the e ceptons to the genera prac-
tce s n accord wth the statutory authorty gven to courts revewng decsons
of the oard of Ta ppeas decsons not n accordance wth aw shoud be
modfed, reversed or reversed and remanded as |ustce may requre.
In accordance wth ths prncpe, we are of opnon that the court beow shoud
have gven and propery dd gve consderaton to secton 22(a) n determnng
pettoner s ta abty. The Commssoner urged ths pont before the crcut
court of appeas and has strongy presented t here. t the tme the oard of
Ta ppeas made ts decson n ths case, we had not yet handed down our
opnon n cverng v. Cfford (309 U. S., 331 Ct. D. 1 , C. . 19 0-1, 105 ),
n whch we hed that under secton 22(a) the ncome of certan trusts was ta -
abe to respondent. The crcut court of appeas was of opnon that there were
no controng dstnctons between the trusts created by pettoner n ths case
and those created by Cfford. ere, as there, contro over the trusts was com-
petey n the hands of the ta payer and hs wfe. For whe pettoner s trust
nstruments showed a co-trustee actng wth pettoner, the same nstruments aso
dscosed that such co-trustee coud be removed at any tme by the |ont acton
of pettoner and hs wfe. To hod otherwse . e., that pettoner s not sub-
|ect to the ta woud be to treat the wfe as a compete stranger; to et mere
formasm obscure the norma consequences of famy sodarty; and to force
concepts of ownershp to be fashoned out of ega ncetes whch may have tte
or no sgnfcance n such househod arrangements. s the record now stands
we thnk the court beow correcty concuded that the trust Income was ta abe
to pettoner under the prncpes announced In the Cfford case. Therefore to
appy here the genera prncpe of appeate practce for whch pettoner contends
woud resut n permttng hm whoy to escape payment of a ta whch under
the record before us he ceary owes. Thus vewed, ths s e acty the type of
case where appcaton of the genera practce woud defeat rather than promote
the ends of |ustce, and the court beow was rght n so hodng.
ut the oard of Ta ppeas nether found the facts nor consdered the ap-
pcabty of 22(a) n the ght of the Cfford case. Congress has entrusted the
oard wth e cusve authorty to determne dsputed facts. Under these cr-
cumstances we do not fee that pettoner shoud be forecosed from a oppor-
tunty to offer evdence before the oard on ths ssue, however remote may be
hs chance to take hs case out of the Cfford rue. ccordngy, the udgment
of the ower court reversng the decson of the oard of Ta ppeas s affrmed,
wth drectons to the oard of Ta ppeas for further proceedngs n accord-
ance wth ths opnon.
It s so ordered.
. g ere ng . Ootrron (302 T7. 8., 238, 2 8 Ct. D. 1292, C. . 1938-1, 300 ).
. g.. Unted Statrt v. Sheby Iron Co. (273 U. S., 571, 679) ; Unted State . Ro
Grande Dam d Irrgaton Co. (18 D. 8., 16, 23).
. k., andenbark v. Orent-IUno mast Co. (No. 1 1 ths term), and cases there cted.
everng . Cfford COO I . 8., 331. 33(1-337).
10 In thn connecton pettoner ponted out n bs bref before the crcut court of appeas
thnt If any contenton whatsoever had at any tme been suggested or consdered as to
secton 22, the matter of the evdence Introduced or to be ntroduced woud have requred
further consderaton.
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319
22(a), rt. 22 (a)-.
rtce 22(a)-: What ncuded n gross ncome. 19 1-15-10675
Ct. D. 1502
ncome ta revenue act op 1932 decson of supreme court.
1. Gross Income Consderaton Receved fob Canceaton of
Lease No Reducton on ccount of Loss of Income pected
to be Reazed.
Ta payer acqured property by devse from hs father n 1028,
whch property was eased n 1932 for a 15-year term at an annua
renta of 25,000. In 1933 the ease was canceed n consderaton of
a payment to ta payer of 1 0,000. ed: The amount receved by
ta payer n 1933 for canceaton of the ease was not a return of
capta but must be regarded as ordnary ncome and Incuded n
gross ncome as defned n secton 22(a) of the Revenue ct of 1932,
wthout regard to the camed dsparty between that amount and the
dfference between the present vaue of the unmatured renta pay-
ments and the far renta vaue of the property for the une pred
perod of the ease. Nothng n secton 23(e) ndcates that Congress
ntended to aow ta payer to reduce ordnary ncome actuay re-
ceved and reported by the amount of Income he faed to reaze.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut 19 0 (112 Fed. (2d), 107), affrmng decson of the Unted
States oard of Ta ppeas 1939 (39 . T. ., 922), affrmed.
Supreme Court or the Unted States.
Water M. Sort, pettoner, v. Comm roner of Interna Revenue, respondent.
61 S. Ct, 757.
On wrt of certorar to the Unted Statea Crcut Court of ppeas for the Second Crcut.
March 31, 19 1.
opnon.
Mr. ustce Murphy devered the opnon of the Court.
We must determne whether the amount pettoner receved as consderaton
for canceaton of a ease of reaty n New York Cty was ordnary gross ncome
as denned n secton 22(a) of the Revenue ct of 1932 ( 7 Stat., 169. 178), and
whether, n any event, pettoner sustaned a oss through canceaton of the
ease whch s recognzed n secton 23(e) of the same ct ( 7 Stat., 109, 180).
Pettoner acqured the property, a ot and 10-story offce budng, by devse
from hs father n 1928. t te tme he became owner, the premses were eased
to a frm whch had subet the man foor to the Irvng Trust Co. In 1927, fve
years before the head ease e pred, the Irvng Trust Co. and pettoner s father
e ecuted a contract n whch the atter agreed to ease the man foor and base-
ment to the former for a term of 15 years at an annua renta of 20,000, the
term to commence at the e praton of the head ease.
In 1933, the Irvng Trust Co. found t unproftabe to mantan a branch n
pettoner s budng. fter some negotatons, pettoner and the Trust company
agreed to cance the ease n consderaton of a payment to pettoner of 1 0,000.
Pettoner dd not ncude ths amount n gross ncome n hs ncome ta return
for 1933. On the contrary, he reported a oss of 21, 9 .75 on the theory that
the amount he receved as consderaton for the canceaton was 21, 1) .75 ess
than the dfference between the present vaue of the unmatured renta payments
and the far renta vaue of the man foor and basement for the une pred term
of the ease. e dd not deduct ths fgure, however, because he reported other
osses n e cess of gross ncome.
The Commssoner ncuded the entre 1 0,000 n gross ncome, dsaowed
the asserted oss, made certan other ad|ustments not matera here, and assessed
a defcency. The oard of Ta ppeas affrmed. (39 . T. ., 922.) The
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22(a), rt. 22(a)- .
320
crcut court of appeas affrmed per curam on the authorty of Warren Servce
Corporaton v. everng (110 Fed. (2d), 723). (112 Fed. (2d), 167.) ecause
of confct wth Commssoner v. Langwe Rea state Corporaton ( 7 Fed.
(2d), 8 1 Ct. D. 3 8, C. . -, 361 (1931) ), we granted certorar mted to the
queston whether, n computng net gan or oss for ncome ta purposes, a
ta payer can offset the vaue of the ease canceed aganst the consderaton
receved by hm for the canceaton. (311 U. S., .)
Pettoner apparenty contends that the amount receved for canceaton of
the ease was capta rather than ordnary ncome and that t was therefore
sub|ect to sectons 101, 111-113, and 117 ( 7 Stat., 169, 191, 196-202, 207) whch
govern capta gans and osses. Further, he argues that even f that amount
must be reported as ordnary gross ncome e sustaned a oss whch secton 23(e)
authorzes hm to deduct. We can nut agree.
The amount receved by pettoner for canceaton of the ease must be ncuded
n hs gross ncome n ts entrety. Secton 22(a), coped n the margn,1
e pressy defnes gross ncome to Incude gans, profts, and ncome derved
from rent, or gans or profts and ncome from any source
whatever. Pany ths defnton reached the rent pad pror to canceaton
|ust as It woud have embraced subsequent payments f the ease had never been
canceed. It woud have ncuded a prepayment of the dscounted vaue of
unmatured renta payments whether receved at the ncepton of the ease or at
any tme thereafter. Smary, t woud have e tended to the proceeds of a
sut to recover damages had the Irvng Trust Co. breached the ease nstead of
concudng a settement. (Compare Unted States v. Safety Car eatng Co.,
297 U. S., 88 Ct. D. 1073, C. . -1, 29 (1936) ; urnet v. Sanford, 282 U. S.,
359 Ct. D. 277, C. . -, 363 (1931) .) That the amount pettoner receved re-
suted from negotatons endng n canceaton of the ease rather than from a
sut to enforce t can not ater the fact that bascay the payment was merey a
substtute for the rent reserved In the ease. So far as the appcaton of
secton 22(a) s concerned, t s Immatera that pettoner chose to accept an
amount ess than the strct present vaue of the unmatured renta payments
rather than to engage n tgaton, possby uncertan and e pensve.
The consderaton receved for canceaton of the ease was not a return of
capta. We assume that the ease was property, whatever that sgnfes ab-
stracty. Presumaby the bond n everng v. orst (311 U. S., 112 Ct. D. 1 72,
C. . 18 0-2. 206 and the ease n everng v. Iruun (309 U. S., 61 Ct. D.
1 50, C. . 19 0-1, 112 ) were aso property, but the nterest coupon n orst
and the budng n ruun nevertheess were hed to consttute tems of gross
ncome. Smpy because the ease was property the amount receved for ts
canceaton was not a return of capta, qute apart from the fact that property
and capta are not necessary synonymous n the Revenue ct of 1932 or n
common usage. Where, as n ths case, the dsputed amount was essentay a
substtute for renta payments whch secton 22(a) e pressy characterzes as
gross ncome, t must be regarded as ordnary ncome, and t s mmatera that
for some purposes the contract creatng the rght to such payments may be treated
as property or capta.
For the same reasons, that amount was not a return of capta because pet-
toner acqured the ease as an ncdent of the reaty devsed to hm by hs father.
Theoretcay, t mght have been possbe n such a case to vaue reaty and ease
separatey and to abe each a capta asset. (Compare Maass v. gqntt. No.
27 . decded March 3,19 1 Ct. D. 1 9 , page 3 , ths uetn ; ppea of Farmer,
1 . T. ., 711.) ut that woud not have converted nto capta the amount
pettoner receved from the Trust company snce secton 22(b)3 of the 1932
ct ( 7 Stat., 169, 178) woud have requred hm to ncude n gross ncome the
rent derved from the property, and that secton, ke secton 22(a), does not
1 Sec. 22. (a) Gross Income Incudes gans, profts, and Income derved from saares,
wanes, or compensaton for persona servce, of whatever knd and In whatever form pad,
or from professons, vocatons trades, busnesses, commerce, or saes, or deangs In prop-
erty, whether rea or persona, growng out of the ownershp or use of or Interest n such
property : aso from Interest, rent, dvdends, securtes, or the transacton of any busness
curred on for gan or proft, or gans or profts and Income derved from any source
whatever.
Sue. 22. (h) The foowng Items sha not be ncuded In gross Income and sha be
e empt from ta aton under ths tte :
(3) The vaue of property acqured by gft, bequest, devse, or nhertance (but the
Income from such property sna be Incuded In gross Income).
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321
22(a), rt. 22(a)-.
dstngush renta payments and a payment whch s ceary a substtute for
renta payments.
We concude that pettoner must report as gross ncome the entre amount
receved for canceaton of the ease wthout regard to the camed dsparty
between that amount and the dfference between the present vaue of the un-
matured renta payments and the far renta vaue of the property for the un-
e pred perod of the ease. The canceaton of the ease nvoved nothng more
than renqushment of the rght to future renta payments n return for a present
substtute payment and possesson of the eased premses. Undoubtedy t
dmnshed the amount of gross ncome pettoner e pected to reaze, but to that
e tent he was reeved of the duty to pay ncome ta . Nothng n secton 23(e)
ndcates that Congress ntended to aow pettoner to reduce ordnary ncome
actuay receved and reported by the amount of ncome he faed to reaze. (See
Warren Servce Corporaton v. Commssoner, supra; osc.y v. Commssoner, 10
Fed. (2d), 53; Tscorna v. Commssoner, 95 Fed. (2d), 678; Farrey-Wash,
Inc., v. Commssoner, 13 . T. ., 923; corcke Co. v. Commssoner, 7 . T. .,
860; Merckent v. Commssoner, 7 . T. ., 32. Compare Unted States v. Safety
Car eatng Co., supra; ova v. Commssoner, 36 Fed. (2d), 212 Ct. d. 102,
C. . 1 -1, 301 (1930) ; ppea of Devhom, 2 . T. ., .) We may assume
that pettoner was n|ured n so far as the canceaton of the ease affected the
vaue of the reaty. ut that woud become a deductbe oss ony when ts
e tent had been f ed by a cosed transacton. (Reguatons No. 77, artce 171,
page 6; Unted States v. Whte Denta Mfg. Co., 27 U. S., 398.)
The |udgment of the crcut court of appeas s affrmed.
rtc|s 22(a)-: What ncuded n gross ncome. 19 1-15-10676
Ct. D. 1503
INCOM T R NU CT OF 1928 D CISION OF SUPR M COURT.
1. Testamentary Trust ssgnment of Trust Income by Lfe
enefcary foe Perod of a Yeab Income Ta abe to
ssonob.
Where the fe benefcary of a testamentary trust assgned to
certan of her chdren specfed amounts n doars from the ncome
of the trust for the year foowng the assgnment, the assgned
ncome, whch was pad by the trustees to the severa assgnees, s
ta abe as such to the assgnor. The fe benefcary, n pont of
substance, parted wth no substanta nterest n property other than
the specfed payments of ncome whch, ke other gfts of ncome,
are ta abe to the donor.
2. Decsons Foowed.
Corss v. occrs (1930) Ct. D. 188, C. . I -1, 2T (281 U. S.,
376). Lucas v. ar (1930) (281 U. S.. I), cverng v. orst
(19 0) Ct. D. 1 72, C. . 19 0-2, 2(t (311 U. S., 112), vverng
v. ubank (19 0) Ct. D. 1 73, C. . 19 0-2, 20 ) (811 U. S., 122),
and everng v. Cfford (19 0) Ct. D. 1 , C. . 19 0-1, 103 (309
U. S., 331), foowed.
3. Decson Reversed.
Decson of the Unted Strfes Crcut Court of ppeas, Seventh
Crcut (19 0) (113 Fed. (2d), 9), reversed.
Sec. 23. (e) Sub|ect to the mtatons provded In subsecton (r) of ths secton, In
the case of an Indvdua, osses sustaned durng the ta abe year and not compensated
for by nsurance or otherwse sha be deductbe from gross ncome
(1) f ncurred n trade or busness; or
(2) If Incurred In any transacton entered nto for proft, though not connected wth
the trade or busness : or
(3) of property not connected wth the trade or busness, If the oss arses from fres,
Storms, shpwreck, or other casuaty, or from theft. No oss sha be aowed as a deduc-
ton under ths paragraph If at the tme of the fng of the return such oss has been
camed as a deducton for estate ta purposes n the estate ta return.
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22(a), rt. 22(a)- .
322
Supreme Coubt of the Unted States.
Carter . arrson, Coector of Interna Revenue for the Frst Dstrct of Inos,
pettoner, v. Sarah U. Soaffner.
61 S. Ot, 750.
On wrt ot certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
March 31, 19 1.
OPINION.
Mr. ustce Stone devered the opnon of the Court.
In December, 1929, respondent, the fe benefcary of a testamentary trust,
assgned to certan of her chdren specfed amounts In doars from the
Income of the trust for the year foowng the assgnment. She made a ke
assgnment to her chdren and a son-n-aw n November, 1930. The queston for
decson s whether, under the appcabe 1928 Revenue ct ( 5 Stat., 791) the
assgned ncome, whch was pad by the trustees to the severa assgnees, Is
ta abe as such to the assgnor or to the assgnees.
The Commssoner rued that the ncome was that of the fe benefcary and
assessed a defcency aganst her for the caendar years 1930 and 1931, whch
she pad. In the present sut to recover the ta pad as egay e acted the
dstrct court beow gave |udgment for the ta payer, whch the court of appeas
affrmed. (113 Fed. (2d), 9.) We granted certorar November 12, 19 0, to
resove an aeged confct n prncpe of the decson beow wth those n Lucas
v. ar (281 U. S., I) ; urnet v. Lenngcr (285 U. S., 130), and Ueverng v.
Cfford (309 U. S., 331 Ct. D. 1 , C. . 19 0-1, 105 ).
Snce grantng certorar we have hed, foowng the reasonng of Lucas v. ar,
supra, that one who s entted to receve at a future date, nterest or compensaton
for servces and who makes a gft of t by an antcpatory assgnment, reazes
ta abe ncome qute as much as f he had coected the ncome and pad t over
to the ob|ect of hs bounty. Ueverng v. orst, 311 . S., 112 Ct. D. 1 72,
C. . 19 0-2, 206 ; everng v. ubank, 311 U. S., 122 Ct. D. 1 73, C. . 19 0-2,
201) .) Decson n these cases was rested on the prncpe that the power
to dspose of Income s the equvaent of ownershp of t and that the e ercse of
the power to procure ts payment to another, whether to pay a debt or to make a
gft, s wthn the reach of the statute ta ng ncome derved from any source
whatever. In the ght of our opnons n these cases the narrow queston
presented by ths record s whether t makes any dfference n the appcaton
of the ta ng statute that the gft s accompshed by the antcpatory assgnment
of trust ncome rather than of nterest, dvdends, rents and the ke whch are
payabe to the donor.
Respondent, recognzng that the practca consequences of a gft by assgnment,
n advance, of a year s ncome from the trust, are, so far as the use and en|oyment
of the ncome are concerned, no dfferent from those of the gft by assgnment of
nterest or wages, rests hs case on technca dstnctons affectng the convey-
ancng of equtabe Interests. It Is sad that snce by the assgnment of trust
ncome the assgnee acqures an equtabe rght to an accountng by the trustee
whch, for many purposes, s treated by courts of equty as a present equtabe
estate n the trust property, It foows that each assgnee In the present case s a
donee of an nterest n the trust property for the term of a year and s thus
the recpent of ncome from hs own property whch s ta abe to hm rather than
to the donor. (See ar v. Commssoner, 300 U. S., 5 Ct D. 1205, C. . 1937-1,
175 .)
We ay to one sde the argument whch the Government coud have made that
the assgnments were no more than an attempt to charge the specfed payments
upon the whoe ncome whch coud pass no present nterest n the trust property.
(See Scott on Trusts, sectons 10.1,10.6, 29, 30.) For we thnk that the operaton
of the statutes ta ng ncome s not dependent upon such attenuated subtetes,
but rather on the mport and reasonabe constructon of the ta ng act (Lucas v.
ar, supra, 11 .)
Secton 22(a) of the 1928 Revenue ct provdes, Gross ncome Incudes
gans, profts, and ncome derved from nterest, rent, dvdends, secur-
tes or the transacton of any busness carred on for gan or proft, or gans
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323
22(a), rt. 22(a)-.
or profts, and ncome derved from any source whatever. y sectons 161(a)
and 102(b) the tu s ad upon the ncome of any knd of property hed n trust,
and ncome of a trust for the ta nbe year whch s to be dstrbuted to the
benefcares s to be ta ed to them whether dstrbuted to them or not In
construng these and ke provsons n other Revenue cts we have unformy hed
that they are not so much concerned wth the refnements of tte as wth the
actua command over the Income whch s ta ed and the actua beneft for whch
the ta s pad. (See Cor s v. owers, 281 D. S., 376 Ct. D. 188, C. . 1 1, 25
(1930) ; Lucas v. ar, supra; everng v. orst, supra; ererng v. ubank,
supra; everng v. Cfford, supra.) It was ftrr that reason that n each of those
cases t was hed that one vested wth the rght to receve ncome dd not escape
the ta by any knd of antcpatory arrangement, however skfuy devsed, by
whch he procures payment of t to another, snce, by the e ercse of hs power
to command the ncome, he en|oys the beneft of the ncome on whch the ta
s ad.
Those decsons are controng here. Ta aton s a practca matter and
those practca consderatons whch support the treatment of the dsposton
of one s ncome by way of gft as a reazaton of the ncome to the donor
are the same whether the ncome be from a trust or from shares of stock or
bonds whch he owns. It s true, as respondent argues, that where the bene-
fcary of a trust had assgned a share of the ncome to another for fe wthout
retanng any form of contro over the nterest assgned, ths Court construed
the assgnment as a transfer n praescnt to the donee, of a fe Interest In
the corpus of the trust property and hed n consequence that the ncome there-
after pad to the donee was ta abe to hm and not the donor. ( ar v. Com-
mssoner, supra.) ut we thnk t qute another matter to say that the bene-
fcary of a trust who makes a snge gft of a sum of money payabe out of
the ncome of the trust does not reaze ncome when the gft s effectuated
by payment, or that he escapes the ta by attemptng to cothe the transacton
n the guse of a transfer of trust property rather than the transfer of ncome
where that Is ts obvous purpose and effect. We thnk that the gft by a
benefcary of a trust of some part of the ncome derved from the trust property
for the perod of a day, a month or a year nvoves no such substanta
dsposton of the trust property as to camoufage the reaty that he s
en|oyng the beneft of the ncome from the trust of whch he contnues to be
the benfcary, qute as much as he en|oys the benefts of nterest or wages
whch he gves away as In the orst and ubank cases. ven though the
gft of ncome be n form accompshed by the temporary dsposton of the
donor s property whch produces the Income, the donor retanng every other
substanta Interest n t, we have not aowed the form to obscure the reaty.
Income whch the donor gves away through the medum of a short term trust
created for the beneft of the donee s nevertheess ncome ta nbe to the donor.
( everng v. Cfford, supra; orme v. everng, No. 257, decded March 17,
19 1 Ct. D. 1 98, page 315, ths uetn .) We perceve no dfference, so far as
the constructon and appcaton of the Revenue ct s concerned, between a
gft of ncome n a specfed amount by the creaton of a trust for a year (see
orme v. everng, supra) and the assgnment by the benefcary of a trust
aready created of a ke amount from ts ncome for a year.
Nor are we troubed by the ogca dffcutes of drawng the ne between
a gft of nn equtnbe Interest n property for fe effected by a gft for fe
of a share of the ncome of the trust and the gft of the ncome or a part of t
for the perod of a year as n ths case. Drawng the ne s a recurrent
dffcuty n those feds of the aw where dfferences In degree produce utmate
dfferences n knd. (See Irwn v. Oavt, 268 U. S., 161, 168 T. D. 3710, C. .
I -1, 123 (1925) .) It s enough that we fnd In the present case that the
ta payer, n pont of substance, has parted wth no substanta nterest n
property other than the specfed payments of ncome whch, ke other gfts
of ncome, are ta abe to the donor. Uness n the meantme the dffcuty be
resoved by statute or Treasury reguaton, we eave t to future |udca
decsons to determne precsey where the ne sha be drawn between gfts of
ncome-prodncng property and gfts of ncome from property of whch the
donor remans the owner, for a substanta and practca purposes. (Cf.
etvrng v. Cfford, supra.)
Reversed.
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32
rtce 22(a)-: What ncuded n gross
ncome.
19 1-19-10708
Ct. D. 1510
INCOM T R NU CT OF 193 D CISION OF SUPR M COURT.
1. Income Compensaton Receved for Loss of udngs, Ma-
chnery, and qupment Sae or change of Capta sset.
The amount receved u 1035 from an nsurance company as com-
pensaton for the oss of budngs, machnery, and equpment whch
had been fuy deprecated for ncome ta purposes pror to 1935,
and no part of whch was used to acqure other smar property,
or to acqure contro of a corporaton ownng such property, or to
estabsh a fund to repace the property destroyed, was not derved
from the sae or e change of a capta asset. Such amount con-
sttuted ordnary ncome and may not be offset aganst capta osses
sustaned n that year, under secton 117(d) of the Revenue ct
of 193 .
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (19 0) (11 Fed. (2d), 783), reversng memorandum opnon
of the Unted States oard of Ta ppeas (19 0), reversed.
Ovy T. eve-rng, pettoner, v. Wam Faccvs Oak Leather Co., respondent.
61 S. Ct, 87a
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
Mr. ustce Murphy devered the opnon of the Court.
In September, 1935, respondent s pant was destroyed by fre. Later that year
t receved . 73,132.50 from an nsurance company as compensaton for the oss
of budngs, machnery, and equpment. The budngs, machnery, and equp-
ment had been fuy deprecated for ncome ta purposes pror to 1935, and no
part of the nsurance proceeds was used to acqure other property smar or
reated u servce or use to the property destroyed, or to acqure contro of a
corporaton ownng such property, or to estabsh a fund to repace the property
destroyed.
In ts return for 1935, respondent reported the Insurance proceeds as capta
gan and added to that amount a gan, not n ssue here, of 862.50 from saes
of securtes. Durng that same year, respondent had capta osses, aso not n
dspute, of 76,767.62 whch t used to offset competey the tota reported capta
gans of 73,995. Ths eft an e cess of capta osses over capta gans of
2,772.62, and respondent deducted 2,000 of that amount from ordnary ncome.
The Commssoner hed that the nsurance proceeds were ordnary ncome
rather than capta gan. ccordngy, he decreased respondent s capta gan
and ncreased ts ordnary ncome by 73,132.50, and aowed respondent capta
osses of ony 2,862.50, an amount equa to the gan from securty saes pus
2,000. The oard of Ta ppeas affrmed n a memorandum opnon on the
authorty of state of erder (36 . T. ., 93 ). The crcut court of appeas
reversed. (11 Fed. (2d), 783.) We granted certorar on February 10, 19 1,
because the decson beow was n confct wth erder v. everng (106 Fed.
(2d), 153).
It s conceded that respondent s osses resuted from saes or e changes of
capta assets. It Is aso conceded that the entre amount receved from the
nsurance company must be ncuded In respondent s Income snce the property
had been fuy deprecated for ncome ta purposes pror to 1935. Respondent
contends, however, that that amount may be reported as capta gan, n order
that capta osses may absorb t, rather than as an tem of ordnary gross ncome.
Secton 117(d) of the Revenue ct of 193 ( 8 Stat, 680) provdes n part:
Supreme Court of the Unted States.
pr 28, 19 1.
opnon.
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22(a), rt. 22(a)-.
Losses from saes or e changes of capta assets sha he aowed ony to the
e tent of 2,000 pus the gans from such saes or e changes. Thus, the snge
queston s whether the amount respondent receved from the nsurance company
derved from the sae or e change of a capta asset.
Generay speakng, the anguage n the Revenue ct, ust as n any statute,
s to be gven ts ordnary meanng, and the words sae and e change are
not to be read any dfferenty. (Compare everng v. amme. 311 U. S.,
50 ; Farbanks v. Unted States, 306 U. S., 36 Ct D. 1301, C. . 1930-1, 260 ;
urnet v. armc, 287 U. S., 103 Ct. D. 611, C. . I-2, 210 (1932) .) Nether
term s approprate to characterze the demoton of property and subsequent
compensaton for ts oss by an Insurance company. Pany that par of
events was not a sae. Nor can they be regarded as aa e change, for e -
change, as used n secton 117(d), Impes recproca transfers of capta
assets, not a snge transfer to compensate for the destructon of the trans-
feree s asset.
The fact that secton 112(f) characterzes destructon of property and
ndemnfcaton for ts oss as an nvountary converson does not estabsh
that the two events consttuted a sae or e change. That secton provdes:
If property (as a resut of ts destructon n whoe or n part, theft, sezure,
or an e ercse of the power of requston or condemnaton, or the threat or
mmnence thereof) Is compusory or Invountary converted nto property
smar or reated In servce or use to the property so converted, or Into money
whch Is forthwth n good fath, under reguatons prescrbed by the Comms-
soner wth the approva of the Secretary, e pended n the acquston of other
property smar or reated n servce or use to the property so converted, or
n the acquston of contro of a corporaton ownng such other property, or n
the estabshment of a repacement fund, no gan or oss sha be recognzed.
If any part of the money s not so e pended, the gan, f any, sha be recog-
nzed, but n an amount not n e cess of the money whch Is not so e pended.
We can nd nothng n ths anguage or n other sectons of the ct whch
ndcates, ether e pressy or by mpcaton, that Congress ntended to cassfy
as saes or e changes the nvountary conversons enumerated n secton
112(f). It s true that secton 111(c) says that n the case of a sae or
e change, the e tent to whch the gan or oss sha be recognzed
sha be determned under the provsons of secton 112. It s aso
true that secton 112(f) foows secton 112(a) whch provdes that upon the
sae or e change of property the entre amount of the gan or oss
sha be recognzed e cept as herenafter provded In ths secton.
The Inference, drawn from the |u taposton and cross referencng of these
three sectons, that the nvountary converson of respondent s property s thus
Impcty characterzed as a sae or e change gnores the fact that n the same
ct Congress has chosen a partcuar method for cassfyng as saes or e changes
transactons whch woud not ordnary be descrbed by one of those terms.
Thus secton 115(c) provdes: mounts dstrbuted n compete qudaton
of a corporaton sha be treated as n fu payment In e change for the stock,
and amounts dstrbuted n parta qudaton of a corporaton sha be treated
as n part or fu payment n e change for the stock.
Secton 117(e) provdes: For the purposes of ths tte gans or osses from
short saes of property sha be consdered as gans or osses from saes or
e changes of capta assets; and gans or osses attrbutabe to the faure
to e ercse prveges or optons to buy or se property sha be consdered as
gans or osses from saes or e changes of capta assets hed for one year or
ess. (See . ept. No. 70 , Seventy-thrd Congress, second sesson, page 31;
. Rept. No. 1385, Seventy-thrd Congress, second sesson, page 23.) Secton
117(f) provdes: For the purposes of ths tte, amounts receved by the hoder
upon the retrement of bonds, debentures, notes or certfcates or other evdences
Of ndebtedness Issued by any corporaton wth nterest coupons or u
regstered form, sha be consdered as amounts receved n e change therefor.
(See McCan v. Commssoner, 311 U. S., 527; Farbanks v. Unted States, supra;
. Rept. No. 70 , Seventy-thrd Congress, second sesson, page 31.)
These sectons demonstrate that Congress has e pressy specfed the ambguous
transactons whch are to be regarded as saes or e changes for ncome ta
purposes. They are convncng evdence that the nvountary converson of re-
spondent s property, whch bears far ess resembance to a sae or e change than
the transactons embraced In sectons 115(c), 117(e), and 117(f) s not to be
paced n one or the other of those categores by mpcaton. The prompt wth-
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S 22 (a), rt. 22(a)- .
326
drawa of artce 113(a) (9)- of Treasury Reguatons No. 88 (see T. D.
698, C. . -2, 159 1936 ) Indcates that the admnstrators charged wth the
enforcement of secton 112(f) reached a smar concuson. (Compare urnet v.
Chcago Portrat Co., 285 U. S., 1,16 Ct. D. 63, C. . I-1, 286 (1932) .)
The |udgment of the crcut court of appeas s reversed.
rtce 22 (a)-: What ncuded n gross 19 1-21-10721
ncome. Ct. D. 1512
( so Secton 22(b), rtce 22(b) ( )-L)
INCOM T R NU CT OF 193 D CISION OF COURT.
2. Geoss Income cusons Ta -free Interest Street Im-,
pbovement bonds ssued by muncpaty.
The dfference between the amount of a snge premum payment
for an endowment nsurance contract and the sum of the amounts re-
ceved by the nsured pror to and upon maturty of the contract
consttutes ordnary ncome and not capta gan. Secton 117(f)
of the Revenue ct of 193 , reatng to retrement of bonds, s not
appcabe, n the absence of e press menton theren of fe nsurance
or endowment contracts and n the absence of showng of a egsatve
hstory ndcatve of the Intent that they come wthn ts scope.
2. Gross Income cusons Ta -free Interest Street Improve-
ment onds Issued by Muncpaty.
Interest receved by the ta payer durng the year 1935 on street
Improvement bonds ssued by Caforna muncpates under munc-
pa street mprovement acts of the egsature of Caforna s e empt
from Federa ncome ta . ryant v. Commssoner Ct. D. 1513,
page 330, ths uetn (19 0) (111 Fed. (2d), 9) foowed.
3. Decson Reversed.
Memorandum opnon of the Unted States oard of Ta ppeas
(1938) reversed.
Unted States Crcut Court of ppeas for the Nnth Crcut.
M. N. very, pettoner, v. Commssoner of Interna Revenue, respondent.
I Fed. (2d), 19.
Upon petton to revew a decson of the Unted States oard of Ta ppeas.
efore Denman, Mathews, and Stephens, Crcut udges.
pr 12, 19 0.
opnon.
Denman, Crcut udge: Pettoner seeks revew of a decson of the oard
of Ta ppeas redetermnng a defcency n ncome ta for the year 1935 In
the amount of 1,375.68.
The oard hed (1) that the dfference between the snge premum payment
and the sum of the amounts receved by the pettoner pror to and upon ma-
turty of an nsurance pocy was not capta gan but ordnary Income, and
(2) that nterest receved upon certan street mprovement bonds was not
e empt but ta abe.
The nsurance pocy, taken out In 1925 upon payment of a snge premum
of 23,069.75, carred both endowment and death provsons, the Insurer agree-
ng to pay 25,000 on pr 27, 1935, to pettoner (descrbed as the nsured )
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327
22 (a), rt. 22 (a)-.
If then vng, or to certan named persons or the survvor, or to pay 25,000
npon recept of due proof of the death of the nsured before the maturty
ot the endowment. 1
It s stpuated that between the date of ssuance and pr 27, 1935, the
Insured pad to pettoner as dvdends on account of sad pocy of n-
surance the tota sum of 5,63 , ths tota beng made up of pay-
ments occurrng at east once n each of the years subsequent to 1925 and
Incudng 1935, and that pror to the year 1935 the pettoner reported no part
of ths sum n hs Federa ncome ta return.
The amount receved on maturty, 25,000, pus the Intervenng payments
of 5,63 , made a tota of 30,63 . The dfference between ths tota and the
snge premum payment of 23,069.75 was 7,56 .25. Ths dfference the pet-
toner treated n hs 1935 ncome ta return as capta gan ta abe under
secton 117 of the Revenue ct of 193 , and reported 30 per cent thereof, or
2,269.27, as the amount to be taken nto account n computng net ncome. 1
The Commssoner determned that none of the 7,56 .25 was capta gan but
that a was ordnary ncome. The oard agreed wth the Commssoner.
Secton 117(a) of the Revenue ct of 193 provdes that f a capta asset
has been hed for more than 10 years ony 30 per cent of the gan recognzed
upon the sae or e change thereof sha be taken nto account n computng
net ncome. ( 8 Stats., 680, 71 .) Itacs supped.
The 25,000 payment was not receved upon a sae or e change of the
endowment contract uness secton 117(f) of the Revenue ct of 193 Is app-
cabe. Farbanks v. Unted (Mate . 306 U. S., 3G, 37; odne v. Comms-
soner (C. C. . 3), 103 Fed. (2d), 982. 987.)
Pettoner contends that secton 117(f) s appcabe and that, consequenty,
under secton 117(a) ony 30 per cent of the 7,56 .25 Is to be taken nto
account n computng net Income.
Secton 117(f) provdes that amounts receved by the hoder upon
the retrement of bonds, debentures, notes, or certfcates or other evdences of
Indebtedness ssued by any corporaton , wth nterest coupons or n
regstered form, sha be consdered as amounts receved n e change therefor.
The report of the Ways and Means Commttee (Seventy-thrd Congress,
second sesson, . Rept. 70 fC. . 1030-1 (Part 2). 55 1) states (page 31)
wth reference to the provson enacted as secton 117(f): Subsecton (f)
provdes that amounts receved upon the retrement of corporate bonds and
smar evdences of ndebtedness sha be consdered as amounts receved In
e change therefor. Itacs supped.
New Tork Lfe Insurance Company
grees to ray
ndowment to Insured
to Moses N. very, the nsured
Face amount
(the fnee of ths pocy) twenty ve thousand doars on the twenty-seventh dny of pr,
nneteen hundred nnd thrty-fve. If the nsured Is then vng; or to Forence L. and Lews
G. very, share and share ake or to the survvor

Insurance payabe at death
(the face of ths pocy) twenty-fve thousand doars upon recept of due proof of the
death of the Insured before the maturty of the endowment.
Genera benefts and provsons
Ths pocy contans the foowng benefts and provsons:
Partcpaton n surpus Dvdends, secton 1.

Premum
Ths contract s made In consderaton of the payment n advance of the snge
premum of twenty three thousand s ty-nne 75/100 doars, the recept of whch Is
hereby acknowedged.

Secton 1 Partcpaton In surpus Dvdends.
The proporton of dvsbe surpus accrung upon ths pocy sha be ascertaned
annuay. On each annversary such surpus as sha have been apportoned by the com-
pany to ths pocy sha at the opton of the nsured be ether
(a) rad n cash; or
(6) pped to purchase a partcpatng pad up addton to the sum Insured; or
(e) Left to accumuate at such rate of nterest as the company may decare on funds
so hed, but at a rate never ess than 3 per cent compounded and credted annuay, and
wthdrawabe In cash on any annversary or pa|abe at the maturty of the pocy to the
person entted to Its proceeds.

Secton 117(a) of the Revenue ct of 193 ( 8 Stats., 680, 71 ).
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22(a), rt. 22(a)- .
328
The gross ncome provsons of secton 22 of the Revenue ct of 1932 ncuded
specfc and separate provsons for the treatment of amounts receved under fe
nsurance, endowment and annuty contracts and prescrbed a specfc formua for
the computaton of the porton thereof to be ncuded In gross ncome. Specfc
and separate treatment was contnued n the gross ncome provsons of secton 22
of the Revenue ct of 19:3 , n whch ct there appeared for the frst tme he
provsons of secton 117(f). It s apparent that at east for purposes of the gross
ncome provsons of secton 22, Congress dd not regard endowment contracts as
smar to corporate bonds, but as so dssmar as to warrant ndependent
treatment.
Pettoner s contenton woud requre us to hod that the formua provded n
the frst sentence of secton 22(b)2 ether s not appcabe or s superfuous n
nstances of payment at maturty of endowment contracts. The superfuous or
useess character s ustrated by the fact that the act of computng gross ncome
under secton 22(b)2 woud be wthout sgnfcance because the gan of whch
the percentage s tnken under secton 117(a) Is computed by a dfferent formua.
The dfference n formua s ustrated by the fact that under the frst sentence
of secton 22(b)2 the mnuend s the tota of the amounts receved n the ta year
and pror years or, here, 30,63 , whereas n computng capta gan the mnuend
coud not e ceed 25,000 because under secton 117(f) t s provded that amounts
receved upon the retrement of sha be consdered as
amounts receved n e change therefor, and the most that coud be consdered as
receved upon the retrement woud be the 25,000 payment.
Itacs supped.
We are of the vew that Congress dd not ntend that the specfc formua for
computaton of the gan under an endowment contract to he ncuded n gross
Income, provded by secton 22(b)2, shoud be ether nappcabe or superfuous
n the nstant case.
Sue. 22. Gross Income.

(b) cusons from Gross Income. The foowng tems sha not be Incuded In
gross ncome and sha be e empt from ta aton under ths tte :
(1) Lfe nsurance. mounts receved under a fe nsurance contract pad by reason
of the death of te nsured, whether In a snge sum or n nstaments (but If such amounts
are hed by toe nsurer under an agreement to pay nterest thereon, the nterest payments
sha be ncuded n gross ncome) ;
(2) ctes, etc. mounts receved (other than amounts pad by reason of the
death of the Insured and nterest payments on such amounts) under a fe Insurance,
endowment, or annuty contract, but f such amounts (when added to amounts receved
before the ta abe year under such contract) e ceed the aggregate premums or consdera-
ton pad (whether or not pad durng the ta abe year) then the e cess sha ho ncuded
n gross ncome. In the case of a transfer for a vauabe consderaton, bv assgnment or
otherwse, of a fe nsurance, endowment, or annuty contract, or any Interest theren,
ony the actua vaue of such consderaton and the amount of the premums and other
sums subsequenty pad by the transferee sha be e empt from ta aton under paragraph
(1) or ths paragraph;
a
(Revenue ct of 1932, 7 Stats., 169, 17S.)
Sec. 22. Gross Income.

(b) cusons from Gross Income. The foowng tems sha not be Incuded n
gross ncome and sha be e empt from ta aton under ths tte:
(1) Lra nsurance. mounts receved under a fe nsurance contract pad by reason
of the death of the nsured, whether In a snge sum or otherwse (but If such amounts
are hed by the nsurer under an agreement to pay Interest thereon, the Interest payments
sha e Incuded n gross, ncome) ;
12) nnutes, etc. mounts receved (other than amounts pad by reason of the death
of the nsured and Interest payments on such amounts and bther than amounts receved aa
annutes) under a fe nsurance or endowment contract, but If such amounts (when added
to amounts receved before the ta abe year under such contract) e ceed the aggregate
premums or consderaton pad (whether or not pad durng the ta abe year) then the
e eesg sha be Incuded In gross ncome. mounts receved as an annuty under an
annuty or endowment contract sha be ncuded In gross Income; e cept that there sha
be e cuded from gross ncome the e cess of the amount receved In the ta abe year over
an amount equa to 3 per centum of the aggregate premums or consderaton pad for such
nnnnfy (whether or not pad durng such year), unt the aggregate amount e cuded
from gross Income under ths tte or pror ncome ta aws n respect of such annuty
equas the aggregate prtmums or consderaton pad for such annuty. In the case of a
transfer for a vauabe consderaton, by assgnment or otherwse, of a fe nsurance,
endowment, or annuty contract, or any nterest theren, ony the actua vaue of such
consderaton and the amount of the premums and other sums subsequenty pad by the
transferee sha be e empt from ta aton under paragraph (1) or ths paragraph;

(Revenue ct of 193 , 8 Stats., 680, 686, 687.)
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329
22(a), rt. 22(a)-.
Pettoner contends that secton 117(f) was enacted for the purpose of over-
comng the prncpe announced n ohn . Watson, r. (27 . T. ., 03, 05), that
the oss .sustaned from the retrement at maturty of a corporate bond was not a
capta oss because no sae or e change was nvoved; that at the tme of the
enactment of the Revenue ct of 193 there aso was n effect I. T. 2001 (C. .
I-2, 3 ) (1032)) whch provoed:
The gan renzod from the surrender of a combned annuty and fe nsur-
ance contract hed for more than two years may not be treated as capta gan
and ta ed under secton 101 of the Revenue ct of 1932, but must be treated as
ordnary ncome.
and that the ntent of Congress must have been to overcome ths rung as we
as the prncpe announced n the Watson case. We note that n enactng secton
117(f) Congress e pressy used the word bond. If t had ntended that secton
117(f) shoud appy to endowment contracts we are entted to assume that t
aso woud have referred n e press terms to them or the cass nto whch they
had been segregated, partcuary n vew of the pecuar treatment Congress had
accorded them n the past.
Pettoner aso asserts that the purpose of secton 117(f) s to pace the proft
accrung to an ndvdua upon the maturty of an obgaton on an equa footng
wth the proft accrung to an ndvdua who actuay sod an obgaton to a
thrd person before maturty. owever ths may be, t shond be nrted that
secton 117(f) s not a-ncusve. For e ampe, t s mted to evdences of
ndebtedness of a corporaton, and further mted to evdences of ndebtedness
of a corporaton trth nterest coupons or n regstered form. f Itacs supped.
Pettoner further contends that what we are deang wth here s n tact
an nvestment rather than a true pocy of fe nsurance, and ctes cases n
support of the Investment character of an endowment contract. It s argued
that ths nvestment character brngs t wthn secton 117(f). s ndcated
prevousy, t s not every nvestment that s ncuded wthn the mtng terms
of secton 117(f). Moreover, assumng the nvestment character of an endow-
ment contract, any smarty to bonds whch may be drawn from ths character
s more than outweghed by the prevousy mentoned dssmar treatment
accorded by Congress to endowment contracts.
In vew of ths dssmarty of treatment and as we are deang wth the
scope of a egsatve reducton of amount to be taken nto consderaton n
computng net ncome, we hod that n the absence of e press statutory men-
ton of fe nsurance or endowment contracts n secton 117(f) and n the
absence of showng of a egsatve hstory ndcatve of the ntent that they
come wthn ts scope, secton 117(f) s not appcabe here.
The bond nterest receved was upon street mprovement bonds stpuated by
the partes to have been ssued by varous Caforna muncpates under the
Caforna Improvement ct of 1911, as amended, approved pr 7, 1911,
Caforna Stats. 1911, page 730, Deerng s Genera Laws of Caforna, ct No.
8199. Itacs supped.) Decson as to whether ths nterest was e empted
by secton 22fb) of the Revenue ct of 193 , as Interest upon the
obgatons of a State, or any potca subdvson thereof
Is controed by our decson n ryant v. Commssoner, No. 9103, ths day
decded Ct. D. 1513, page 330, ths uetn , hodng nterest of the character
here nvoved e empt.
In summary, we agree wth the oard as to the proft from the endowment
contract and hod that none of t s capta gan; we dsagree wth the oard as
to the bond nterest and hod that t Is e empt.
It appears that n reachng ts decson that there s a defcency of 1,375.68
the oard treated the bond nterest as ta abe and that a dfferent decson
may resut f, n accordance wth our hodng, the bond nterest s treated as
e empt.
The decson s reversed and the cause s remanded for further proceedngs
consstent wth ths opnon.
Cf. Whte v. Unted Stated (305 U. S., 281, 202)
8 Stat.. 680, 687.
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22 (b), rt. 22 (b) ( )- . 330
S CTION 22(b). GROSS INCOM : CLUSIONS
FROM GROSS INCOM .
rtce 22(b) (2)-2: nnutes. 19 1- -1057
G. C. M. 22519
R NU CT OF 193 .
Where the proceeds of a snge premum endowment pocy are
payabe at maturty In 120 equa monthy Instaments, the nsta-
ments receved consttute annuty payments and are ta abe In
accordance wth artce 22(b) (2)-2, Reguatons 86, rrespectve of
whether the pocy granted an opton to the nsured to take the
cash surrender vaue at maturty, such opton not havng been
e ercsed.
n opnon s requested whether the concuson reached n G. C. M.
21666 (C. . 19 0-1, 116) woud have been the same f the nsurance
pocy nvoved n that rung had granted the nsured an opton to
take the cash surrender vaue of the pocy at the tme of maturty,
but the nsured dd not e ercse such opton.
In G. C. M. 21666, supra, t was hed that where the proceeds of a
snge premum endowment pocy are payabe at maturty n 120 equa
monthy nstaments, the nstaments receved consttute annuty
payments and are ta abe n accordance wth artce 22(b) (2)-2,
Reguatons 86.
It s the opnon of ths offce that had the pocy nvoved n that
case contaned such an opton whch the nsured dd not e ercse t
woud not have affected the concuson reached.
. P. Wence,
Chef Counse, ureau of Interna Revenue.
rtce 22(b) ( )-: Interest upon State obgatons.
R NU CT OF 393 .
Interest on street mprovement bonds ssued by Caforna munc-
pates. (See Ct. D. 1512, page 326.)
rtce 22(b) ( )-: Interest upon State 19 1-21-10722
obgatons. Ct. D. 1513
INCOM T R NU CT OF 193 D CISION OF COURT.
1. Gross Income cusons Ta -frek Interest Street Im-
provement onds Issued by Muncpaty.
Interest receved by the ta payer durng the year 1935 on street
mprovement bonds ssued by Caforna muncpates under
muncpa street mprovement acts of the egsature of Caforna
s e empt from Federa ncome ta . Such bonds are obgatons
of a State or any potca subdvson thereof wthn
the meanng of secton 22(b) of the Revenue ct of 193 , even
though payabe from a speca fund coected from owners of the
property benefted.
2. Decson Reversed.
Decson of the Unted States oard of Ta ppeas (1938) (38
. T. ., 618) reversed.
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331 22 (b), rt. 22(b)( )- .
Unted States Crcut Court or ppeas fob the Nnth Crcut.
Susanna by ryant, pettoner, v. Commssoner of Interna Revenue,
respondent.
I Fed. (2d), 9.
Upon petton to revew a decson of the Unted States oard of Ta ppeas.
efore Denman, Mathews, and Stephens, Crcut udges.
pr 12, 19 0.
OPINION.
Denman, Crcut udge: The pettonng ta payer seeks revew of a decson
of the Unted States oard of Ta ppeas that nterest pad her durng the
year 1935 on street mprovement bonds ssued to obtan street mprovements
n the cty of Los ngees and n the county of Los ngees was not Ta -free
nterest upon ( ) the obgatons of a State, , or any
potca subdvson thereof, made e empt from the Federa ncome
ta by secton 22(b) of the Revenue ct of 193 ( 8 Stat., 680, 687).
the bonds here n queston were ssued under one or another of four
muncpa street mprovement acts1 of the Caforna Legsature. It s stpu-
ated that a four acts are ake n ther pertnent features, that of 1911 under
wh ch the cty of Los ngees created certan mprovements n ts streets beng
descrbed n ths opnon.
The bonds were ssued n the process of a statutory pan whereby the cty
acqured a pubc and genera mprovement of the streets and rghts of way t
owns. Intay, the cty contracted wth a contractor for the mprovement, the
obgaton of whch the statute requred the cty, n the crcumstances here
pertnent, to dscharge by ssung ts bonds and performng the bond obgatons.
The bonds are payabe n annua Instaments over a perod not e ceedng 1
years, wth semannua Interest payments. ach bond prncpa s for the
amount of a ta assessment, mposed n nvtum by the cty s ta ng power, on
a separate parce of property whch has a speca beneft as dstngushed from
the genera pubc beneft to the cty s street system as a whoe. The bonds are
servced by the cty s e ercse of ts governmenta functon of ta coecton,
ts ta moneys so coected beng paced n a speca fund n the cty treasury
where t s hed by the cty and from whch t s pad on demand of the bond-
hoder. In effect, n the fna dscharge of the orgna contract for the cty s
mprovement. The pertnent detas of the severa statutory steps, begnnng
wth the resouton of ntenton of the cty s egsatve body to contract for the
mprovement of ts street system and ssue and servce bonds n payment there-
for, are hereafter consdered.
The Commssoner has stpuated that the bonds here gven to the contractors
to accompsh the payment of the cty s contracts wth them are bonds ssued
by the cty of Los ngees and the county of Los ngees n the State of
Caforna. Itacs supped.
The Treasury reguaton nterpretng the e empton provdes:
Obgatons ssued by or on behaf of the State or Terrtory or a
duy organzed potca subdvson actng by consttuted authortes empowered
to ssue such obgatons, are the obgatons of a State or Terrtory or a
potca subdvson thereof. Speca ta bs ssued for speca benefts to
property, f such ta bs are egay coectbe ony from owners of the prop-
erty benefted, are not the obgatons of a State, Terrtory, or potca subd-
vson. The term potca subdvson, wthn the meanng of the e empton,
denotes any dvson of the State or Terrtory whch s a muncpa corporaton,
or to whch has been deegated the rght to e ercse part of the soveregn
power of the State or Terrtory. s thus defned, a potca subdvson of a
State or Terrtory may, for the purpose of e empton, ncude speca assessment
dstrcts so created, such as road, water, sewer, gas, ght, recamaton, dran-
ct of February 27, 1803 (Caf. Stats., 1893, page 33), as amended, repeaed Caf.
Stats., 1933, page 9 6: Deerng/s Genera Laws of Caforna (1931) ct 8208. ct of
pr 7, 1911 (Caf. Statu., 1911, page 730). as amended : Deerng s Genera Laws of
Caforna (1987), ct 8199. ct of une 18, 1913 (Caf. Stats., 1913, page 00 ), as
amended; Deerng s Genera Laws of Caforna (1937). ct 8205. ct of une 3, 1021
(Caf. Stats., 1921, page 1658), as amended; Deerng s Genera Laws of Caforna (1037),
ct 8289.
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22 (b), rt. 22 (b)( )- .
332
age, rrgaton, evee, schoo, hnrbor, port Improvement, and smar dstrcts,
an dvsons of a State or Terrtory. Itacs supped.
( rtce 22(b) ( )-, Treasury Reguatons 86, promugated under the Revenue
ct of 103 .)
The stpuaton of the Commssoner that the bonds were ssued by the
cty of Los ngees and the county of Los ngees brng them wthn the e press
wordng of the reguaton.
Ths reguaton thus decarng these bonds, some so stpuated to have been
ssued by the cty and some by the county of Los ngees through ther
respectve treasurers as ther statutory consttuted authortes, to be ob-
gatons of potca subdvsons of Caforna whose nterest s wthn the e -
empton of the Revenue ct of 103 , s smar to the reguaton frst promu-
gated n 1919. Up to that tme, t was admtted at the argument, the Treasury
Department had regarded such nterest as wthn the e empton. Snce then
Congress at east eght tmes has reenacted the e empton. On each reeuact-
nent substantay the same reguaton has been promugated. Such reguatons
were In force up to the fng of the brefs n ths revew and we have not been
advsed that they are not st n force.
The admnstratve practce at east unt 1936, or for more than 22 years,
appears to have been to treat as wthn the statutory e empton nterest upon
bonds whch were not genera obgatons of the ssung potca subdvson
but were payabe ony out of a partcuar fund. In 1936, two years after the
ta year here nvoved, a contrary opnon was e pressed n G. C. M. 16861 C. .
-2,170 (1030)1.
The estabshed admnstratve practce of so many years, durng whch tme
the e empton was severa tmes reenacted, carres weght as a constructon of
the statute whch s not offset, at east as to the ta year n queston, by the ater
e presson of opnon n G. C. M. 16861 (C. . -2, 179 (1936)).
In decdng ths case, we need not and do not go beyond construng the Federa
statute. Consderng the revew apart from the stpuaton and the admnstra-
tve constructon, t appears that the statute was ntended to e empt nterest upon
bonds of the character here nvoved.
The Supreme Court, n 1805, decded the case of Poock v. Farmers Loan
Trust Cu. (157 U. S., 29, 585, 5S6), and gave as a bass for hodng nvad a
Federa ta on the Interest from muncpa securtes the reasonng e pressed by
Chef ustce Marsha n Weston v. Cty Counc (2 Pet., 9, 68), to the effect
that:
The rght to ta the contract to any e tent, when made, must operate upon
the power to borrow, before t s e ercsed, and have a sensbe nfuence on the
contract. The e tent of ths nfuence depends on the w of a dstnct gov-
ernment. To any e tent, however nconsderabe, t s a burden on the operatons
of government . The ta on Government stock s thought by ths Court
to be a ta on the contract, a ta on the power to borrow money on the credt
of the Unted States, and consequenty, to be repugnant to the Consttuton.
The Poock opnon, after quotng ths matter, goes on to state, page 586:
ppyng ths anguage to these muncpa securtes, t s obvous
that ta aton on the Interest therefrom woud operate on the power to borrow
before t s e ercsed, and woud have a sensbe nfuence on the contract and that
the ta n queston s a ta on the power of the States and ther Instrumentates
to borrow money, and consequenty repugnant to the Consttuton. Itacs
supped.
The Poock case was decded pror to the adopton In 1913 of the s teenth
amendment, but n dstngushng between the nvadty of ta aton of the bond
Interest and the vadty of ta aton of the proft from the sae of bonds, the
Supreme Court quotes n the subsequent case of Wcuts v. unn (282 U. S., 216,
227 Ct. D. 280, C. . -, 309 (1031) ), the anguage of Chef ustce Marsha
appearng n Weston v. Cty Counc, supra.
It appears from congressona reports and debates that not ony was the
e empt on enacted and reenacted because of doubt as to the effect of the s teenth
O. P. 7 (C. . 2, 03 (1020)) ; O. D. 91 (C. . 2, 03 (1020)) ; I. T. 207 (C. .
III-2. 70 (102 )) ; Ct G. C. M. 13 00 (C. . III-2, 125 (103 )) ; 30 Op. tty. Gen.,
252 (101 ) : 3S Op tty. Gen., 563 (1037).
In I. T. 2001 (C. . - 2, 258 (1830)), D. 7 and O. D. 91 were revoked.
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333
22(b), rt. 22(b) ( )-.
amendment on a source of Income prevousy decared Immune by the Poock cnse,
but aso on grounds of pocy 1 apart from the consttutona queston. s recenty
as 1938 apprehenson was e pressed n terms of road dstrcts, sewer dstrcts
and the ke, that a ta on the nterest from State and muncpa securtes woud
burden the borrowng power of the States and ther potca subdvsons, whether
or not that burden be regarded as one forbdden by the Consttuton.
Respondent contends that the bonds here nvoved are prvate rather than
pubc n character, that they were not ssued n the e ercse of governmenta
borrowng power, but represent borrowng by prvate ndvduas. It seems to us
ths contenton dsregards reates.
Not ony are the bonds pubc n character, they were Issued In the performance
of an essenta governmenta functon. We are not concerned here wth bonds
to repay money borrowed to create works of a propretary character from whose
ncome for servces rendered the bond prncpa and Interest are pad. The bor-
rowng here Is on the pedge of governmenta ta ng power for mprovement of
streets and roads hed, In Caforna, n a governmenta and not a propretary
capacty. (McNe v. Cty of Pasadena, 166 Ca., 153. 155.) Cf. rush v. Comms-
soner (300 U. S., 352, 371, 373 Ct. I). 1212, C. . 1937-1, 217 ).
Our succeedng e tended consderaton of the statutes under whch these
bonds were created and of the decsons of the Caforna courts showng that
they were ssued n the e ercse of governmenta ta ng power to support govern-
menta borrowng for the creaton of governmenta mprovements, s made n
pursuance of the prncpe stated by the Supreme Court that State aw creates
ega Interests and rghts. The Federa Revenue cts desgnate what Interests
or rghts, so created, sha be ta ed. (Morgan v. Commssoner, anuary 29,
19 0, U. S., , , 60 S. Ct., 2 , 26.)
It s safe to say the great ma|orty of the streets n a Caforna ctes n the
ast severa decades have had ther Improvements through the Issuance of bonds
of the character here Invoved. What s true In Caforna Is true of the cty
streets n many States throughout the Unon under egsaton smar In character,
of whch Commssoner v. Pontare (C. C. . 7) (97 Fed. (2d), 793) and
Commssoner v. Carey-Reed Co. (C. C. . 6) (101 Fed. (2d), 602) furnsh
e ampes.
When Congress enacted the e empton In 1913 there must have been outstandng
hundreds of mons of doars In such bond obgatons. We beeve Congress
had n mnd such bonds ssued by mercan ctes and that they come wthn the
crtera It estabshed for the obgatons of a State or any potca
subdvson thereof, In ts successve ncome ta cts. (Lyeth v.
ory, 305 U. S., 188, 19 .)
t the tme the bonds were Issued, rtce I, secton 12, of the Caforna Con-
sttuton, consdered In mercan Company v. Cty of Lakeport (220 Ca., 5 8,
555), provded for the creaton of the muncpa ta ng power whch supports
the bonds:
Ta es for oca purposes. The egsature sha have no power to Impose
ta es upon countes, ctes, towns or other pubc or muncpa corporatons, or
upon the nhabtants or property thereof, for county, cty, town or other muncpa
purposes, but may, by genera aws, vest n the corporate, authortes thereof the
power to assess and coect ta es for such purposes. Itacs supped.
(Consttuton of Caforna, TreadweU (1931), rtce I, secton 12.)
It s apparent from the provson of the Caforna Consttuton that the nstant
bonds are vady ssued ony f they are to repay borrowngs for a muncpa
purpose as dstngushed from a purpose to beneft the prvate property of the
ta payer. The Commssoner does not queston the vadty of the bonds and
hs stpuaton admts they are ssued by a muncpaty.
The work that may be done under the 1911 Improvement ct and pad for
through the e ercse of the ta ng power Is descrbed n secton 2 of that act
whch provdes: Whenever n the opnon of the cty counc the pubc n-
terest or convenence may requre. It s hereby authorzed and empowered to
order the Improvement of the streets owned by any muncpaty
50 Congressona Record, 508, 1261-1263; . Rept. No. 767, S ty ffth Congress, second
onon, 9; 8. Rept. No. 617, S ty-ffth Congress, thrd sesson, 6; FT. Rept. No. 1037,
S ty-ffth Congress, thrd sesson. 8.
8. Rept. No. 617, S ty-ffth Congress, thrd sesson, 6 ; . Rent. No. 1037, S ty-ffth
Congress, thrd sesson, 8; 83 Congressona Record, 1581-1583 ; 50 Congressona Record,
508, 1261-1263.
83 Congressona Record, 5182, 5183.
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22 (b), rt. 22 (b) ( )- .
33
or of property for the mmedate possesson and use of whch as rghts of
way requred for pubc use, an order has been obtaned n compance wth
the provsons of secton 1 of rtce I of the consttuton of the State of
Caforna, . Itacs supped.
The pubc purpose of the mprovement s agan refected n the provson of
secton 0 of the act to the effect that the cty counc may, at Its dscreton,
provde by resouton that the whoe or any part of the cost and e penses of
any of the work mentoned n the act be pad out of the treasury of the
muncpaty from such fund as the counc may desgnate.
In the eadng case of Irsh v. ahn (208 Ca.. 339, 3 ), we fnd stated the
prncpes that a cty derves Its power to evy and coect a speca assessment
fom ts power of ta aton and that for a vad e ercse of the power of speca
assessment the mprovement must be pubc n Its nature whe aso conferrng
a speca beneft upon the property assessed. Frst n mportance n the use
of the bond borrowng power s the creaton of genera beneft for the cty as
a whoe.
The Caforna Supreme Court n emphaszng that n the mprovement of
streets the work s for a pubc purpose, treats the benefts to ndvduas
resutng therefrom as ncdenta. ( mercan Company v. Cty of Lakeport,
220 Ca., 5 8, 556.) The requrement of beneft to the ndvdua property
owner Is regarded as so secondary that fe s not permtted to show that t
w be ess than the amount of the assessment. (Larsen v. San Francsco, 1S2
Ca., 1, 9.)
It s apparent that a dstrct n whch the streets were barred by gates to
be opened ony to the property owners and ther permtted vstors coud not
be but by money borrowed on bonds created and servced by the cty. It s
ony where the cty as a whoe s benefted, that Is, where the muncpa
purpose of rtce I, secton 12, of the consttuton s served, that t may
bnd tsef for the bond s payment from Its to funds.
The frst step n the e ercse of a muncpaty s borrowng power s ts
resouton of ntenton to ssue to the contractor, wth whom the cty Is to
make ts street mprovement contract,10 ts sera bonds wth annua nstament
of prncpa and semannua Interest, the nterest f ed by the resouton, to
dscharge the contract obgaton when the cty has obtaned Its mprovement.
The promse so to Issue these bonds wth ther pedge to pay them by the e ercse
of the governmenta ta ng power s a necessary mpcaton of the resouton.
It s on both of these pedges to assess and coect that the contractor makes
hs bd for the Improvement. The passage of the resouton s essenta for
ursdcton for the bond Issue, and ts absence can not be cured and the bonds
made vad by subsequent egsaton. (Chase v. Trout, 1 6 Ca., 350, 36C. Cf.
Gordon v. Rarsomc-Crummcy Co., 37 Ca. pp., 755, 757.)
It s here that the ta on the nterest operates upon the power to borrow
before t s e ercsod. Its sensbe nfuence on the contract, n takng t
from the wde market for the ta e empt securtes, s that t w cause ether
the contractors bddng for the work to rase ther prce or the bonds to carry
a hgher rate of nterest.
Secton 1 of rtce I of the Caforna Consttuton contans provsons wth respect
to the e ercse of tte power of emnent doman.
From an eary day n ths State t has boon estabshed that a cty derves ts power
to evy and coect a speca assessment from Its power of ta aton. ( mery v. San
Francsco Can Co., 28 Ca., 3 6.) Generay speakng, the ony mtatons upon
the e ercse of the power of s oca assessment are that the mprovement must be pubc
In Its nature, and must confer a speca beneft upon the property assessed. (Federa
Const,uctton Co. v. nsgn, 59 Ca. pp . 2 n. 21(1, 210 P., 530.)
On the record before us, two ma|or questons are presented : Frst, was the Improvement
as constructed a pubc mprovement nd. secondy, was the defendants property specay
benefted thereby If both these questons be answered n the atnnatve, t wouu neces-
sary foow that the proceedngs n queston were vad and the assessment Is enforceabe,
uness the other reasons advanced by the defendants deprved the cty of the power to
proceed.
We thnk both ma|or questons must be answered In the affrmatve. It s now generay
accepted that, when a muncpaty, awfuy so empowered, undertakes to furnsh to Its
Inhabtants who w pay therefor the uttes and factes of urban fe. It Is thereby
orformm a muncpa and pubc functon. (See Pasadena v. Chamberan (Ca. Supp.),
69 P., 63u; In re Oros Pubc Utty Dnt., 196 Ca., 3, 235 P., 100 . .)
Numerous nstances mght be cted where smar mprovements have been decared
to be pubc and the consttuton thereof ustf vd under speca assessment proceed-
ngs. . (Ctng many Caforna cases, ncudng those treatng the act of 1911.)
Caforna Stats., 1911. page T. O. sectons 3, G, as amended; Deerng s Genera Laws of
Caforna (n:7). ct 81S9, sectons 3, 01.
Id., sectons 10, 18.
u Id., secton 01.
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335 22(b), rt. 22(b)( )- .
When the work 1b competed the muncpaty through Its superntendent of
streets assesses aganst the ndvdua peces of property aso benefted by
the mprovement a ta whch becomes a en thereon. The bonds are for the
amount of the unpad assessment on each parce assessed.
In so creatng the dstrct, n the evyng of the assessment and ssuance of
the bonds to be pad by the cty from ts ta coected fund, hereafter con-
sdered, a drect contractua reatonshp arses between the cty and the bond-
hoder. (County of Los ngees v. Rockhod, 3 Ca. (2d), 192, 200.)
The assessment Is n nvtum, beng vad though a the dstrct property
owners protest at the hearng before the cty counc whch the statute provdes
for such protests.
The contractor after competng hs contract wth the cty frst receves a
ta b or warrant and has 30 days wthn whch to attempt to coect the ta . If
the property owner fas to pay It and does not state to the cty treasurer before
the bonds are ssued that he does not desre to have hs and sub|ect to the bond n
the cty must ssue t to the contractor. It s apparent that f the property
owner has not the money to pay the entre assessment Imposed on hm n nvtum
he w not prevent the ssuance of the bond wth ts future Instaments of prn-
cpa and nterest and submt hs property to an mmedate forecosure for the
tota amount due, uness he rees upon some ega defect n the street mprove-
ment proceedng. Such contests are the e cepton. In neary every case the
cty s contract for ts mprovement s pad by coecton through the ta b or by
the dscharge of the bond obgaton.
The muncpaty ssues to the contractor a suffcent number of bonds to have
the sum of ther prncpa amounts equa the amount due on the contract. Many
of the bonds are for very sma sums. mnmum prncpa Is 25 whch, on
a 10-year payment, requres an annua ta coecton by the treasurer of but 2.50
wth a frst (and argest) semannua Interest at, say, 6 per cent, or 75 cents.
These bonds were transferred by the contractors and they fnay reached the
hands of the pettoner n ths revew.
When we consder the sma amounts nvoved, It Is absurd to assert that what
the contractor or hs order ooks to n determnng hs contract prce Is the
mere rght to reaze on the ta en by a process of ether governmenta ta sae
or udca forecosure. y ether method the coecton e penses or ega fees In
a very arge percentage of cases woud e ceed the tota prncpa and nterest.
What moves the contractor to construct the muncpa mprovement Is the antc-
pated performance of the cty s obgaton to coect the ta , pace t n the fund
In the cty treasury, hod It there and pay t over on the demand of the bondhoder.
The statute of 1911 requres the muncpaty to servce the bond obgaton of
prncpa and nterest by the e ercse of the governmenta power of coectng the
ta from the owner of the ened property. The statute requres the cty treasurer
as ta coector to send hs notces of the amount due and to be coected 15 days
before the date of the semannua Interest payment date. Upon coectng It he
paces t n a speca fund n the cty treasury for each bond ssued from whch
he must pay t on the bondhoder s demand.
If the muncpaty fa to coect the ta and defaut In payment of Its bond,
the bondhoder ether may compe t to coect the ta and depost It In the fund
by the e ercse of ts governmenta functon of a ta sae, or e may forecose n
a court proceedng.
If there be a faure to evy the assessment, the bondhoder may compe t by
mandate. In servcng them the cty treasurer must act as the agent of the
muncpaty for, as seen, the ta ng power can be e ercsed ony by the muncpa
corporaton for the genera muncpa purpose of the mprovement. e s
such an agent when he coects the ta and pays t Into the fund. If he coects t
Id., secton 21.
w Id., ecton 23.
Id., secton 02.
Id., secton 21.
Id., Sectons 32, 22-25.
M Id., secton 65.
Id., secton 63.
a Id., secton 63.
Id., secton 62.
Id., secton 60. 1 87.
1011, pose 730, secton 70a, as added v Caf. Stats., 1929, page 1806;
. Laws of Caforna (1937). ct SI09. secton 7fn.
. mercan Company v. Cty of Lakeport (202 Ca., 5 8, 565)
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22(b), rt. 22(b)( )- .
336
and hods It otherwse than n the fund mandate w compe hm to pace t there.
If, whe as such agent, he refuses to advertse the ta sae to suppy the fund
mandate aso w e aganst hm. the strct constructon of ta sae pro-
cedure and of ta deeds appy to the cty s treasurer s acts. If the treasurer has
the coected ta n the fund and refuses to pay t over, mandate aso w e.
of these rghts to the wrt of mandate e st n the bondhoder because the
bonds are ssued by the cty n the e ercse of a governmenta power deegated to
the muncpaty for the Improvement, reguaton and contro of the hghways
wthn ts boundares.
In 1913, n construng the rooman act, an eary statute for street mprovement
smar to the Street Improvement ct of 1911, the Supreme Court of Caforna
hed, n McNe v. Cty of South Pasadena (166 Ca., 153, 155) :
The mprovement, reguaton, and contro of the hghways wthn
a muncpaty ca for the e ercse of a deegated governmenta power, a functon
whch the muncpaty tsef, nether by ordnance nor by contract, can surrender
or mpar.
In 1938 the Supreme Court of Caforna, n Gbson Propertes Co. v. Cty of
Oakand (12 Ca. (2d), 291, 301), reaffrmed that hodng n a sut seekng to make
the cty abe for damages camed because of changes n the desgn and con-
structon of a budng made by the company In antcpaton that a street openng
proceedng, ater abandoned, woud be carred through to competon. In decd-
ng In favor of the cty the court based ts decson on ts hodng:
That the cty n the mprovement of ts hghways Is actng In a governmenta
capacty s hed n McNe v. Cty of South Pasadena (166 Ca., 153 135 Pac, 32,
8 L. R. . (N. S.), 138 ) and Muncpa ond Co. v. Cty of Rversde (138 Ca.
pp., 267, 27 32 Pac. (2d), 681 ).
We can see no dfference pertnent to the ta ng cam of the Commssoner
between these Los ngees bonds and those of Chcago, aso payabe from a
speca fund, whose nterest was hed e empt from ncome ta aton n Com-
mssoner v. Pontare (C. C. . 7) (97 Fed. (2d), 793), and of the entucky
ctes, aso payabe from speca funds, and hed e empt n Commssoner v.
Carey-Reed Co. (C. C. . 6) (101 Fed. (2d), 602).
The form of the bond s set forth n the statute requrng the performance
of a these muncpa acts n creatng and servcng t. They are ts mpct
obgaton as much a part of the bond as those t e pressy assumes. It s
sgned by the cty s treasurer who promses to pay the bond from the ta es
coected and pad nto ts fund and not otherwse. The cause reads:
Ths bond s payabe e eusrey from sad fund, and nether the nund-
poty nor any offcer thereof s to be hoden for payment otherwse of ts
prncpa or nterest. Itacs supped.
In our vew the muncpaty s hoden for payment from Its ta coected
moneys n ts fund for the creaton of ts pubc mprovement (Irsh v. ahn,
fo v. n of Pasadena (C. C. . 9) (78 Fed. (2d), 9 8, 9r.O).
M Oakand St. Impr. ond Co. v. Ftzmaurce ( 7 Ca. p.. 25S).
n v. Mtmcr (13 Ca., 2 9, 66 Pac, 301) : Los ng es Ove Orocers ssn. . Pozz
(107 Ca., 51, 1 0 I nc, SSI) ; Shftman v. Forbes (07 Ca., 572. 32 ac. 590).
Meyer v. Porter (65 Ca.. 67, 70) ; See Meyer v. WMer (126 Ca., 252, 2D5) ; Meyer
v. C-y and County of San Francsco (150 Ca.. 131, 13 . 135).
Ct. Mmucm ond Co. v. Cty of versde ( Ca. pp. (2d), 2. 7), where the
court hed that the cty became a trustee for the bondhoder wth a rght to sue the offca
bondsmen of Its cty treasurer for hs msappropraton of the ta coected money for
the street Improvement bond fund because he had receved It as an offcer and agent
of the muncpaty. In the precedng appea n the same case the court, reyng on
McNe v. Cty of South Pasadena (160 Ca., 153), hed that the bond was Issued by the
ctv n performance of ts purey governmenta functon of the mprovement of ts streets.
(Muncpa ond Co. v. Cty of Rversde, 138 Ca. pp., 267, 27 .)
30 The pettoner s bond here dscussed s for a tota prncpa of 117. 9 wth an annua
nstament of prncpa of 13.05, and reads In part:
117 and 0/100 No. 1
In the Cty of Los ngees
County of Los ngees, State of Caforna
Under and by vrtue of an net of the egsature of the State of Caforna entted n
act to provde for work n and upon streets, and provdng for the ssuance
and payment of street mprovement bonds to represent certan assessments for the cost
thereof, and provdng n method for the payment of such bonds, approved pr 7, 1911,
and acts amendatory thereof, I, out of the fund for the above desgnated street Improve-
ment bonds, seres No. S , w pay to Grffth Company or order the sum of one hundred
seventeen and 9/100 doars (S. 9) wth Interest at the rate of seven (7 ) per cent
per annum, a as Is herenafter specfed and at the offce of the treasurer of the cty
of Los ngees, State of Caforna.
Ths bond Is payabe e cusvey from sad fund, and nether the muncpaty nor any
offcer thereof s to be hoden for payment othcrtcse of ts prncpa or nterest. .
Itacs supped.
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337 22(b), rt. 22(b)( )- .
supra. 3 ) and the bond s nonetheess an obgaton of the muncpaty be-
cause t s not obgated to pay otherwse than from such a ta coected
fund. From the standpont of the ta aton of the nterest as upon an obgaton
of the muncpaty we can see no dfference between the ncome of ths bond
nterest and nterest on money ent to a borrower who agrees to pay nterest
and prncpa ony from the ncome from hs apartment house whch he
mortgages to secure the oan.
The Commssoner s contenton, n effect, s that the bond s entrey an ob-
gaton of the owner of the and upon whch the ta assessment s ad n
n v turn.
s argument s based on an nterpretaton of the provson of the bond that
snce the muncpaty Is not to be hodcn for payment of prncpa or nterest
otherwse than from ts ta moneys n the fund, t s not hodeu to pay them
to the bondhoder at a. We see no mert n ths contenton. It gnores the
fact that no contractor woud make the same bd for the constructon of the
pubc mprovement, f a he were to receve s the rght to forecose or have
a ta sae of ndvdua peces of property, securng each of a bunde of bonds
payng hm sma amounts. s was hed by the Supreme Court In Wess v.
Steam (265 U. S., 2 2, 25 T. D. 3609, C. . II-2, 51 (102 ) ), when
appyng the provsons of the s teenth amendment and ncome aws enacted
thereunder we must regard matters of substance and not mere form.
The Commssoner thus gnores the fact that the muncpaty by Issung the
bond wth ts accompanyng statutory obgatons, n effect, promses, frst, to
e ercse ts governmenta power of ta coecton for the fund and, second, to
pay the bondhoder from the fund whch makes possbe the partcuar contract
for the muncpaty s pubc mprovement and that under Irsh v. ahn, supra,
and rtce I, secton 12 of the consttuton of Caforna, no such ta ng
power e sts n the muncpaty uness for a pubc beneft for the cty as a
whoe as we as a prvate beneft to andhoders n the mprovement of the
cty s streets.
The Commssoner s brefs do not menton Irsh v. ahn and rey on dcta
In earer Caforna decsons n suts dscussng the power to make hodcn
the cty or the State otherwse than on the promse to pay from the bond
fund. These are Meyer v. Cty and County of San Francsco (150 Ca., 131, 13 ),
Unon Trust Co. v. State of Caforna (15 Ca., 716, 725), and rookes v. Cty
of Oakand (160 Ca., 23).
These cases hod no more than that If the muncpaty has not coected the
ta for the fund the cty or State s not abe to pay the bonds from Its genera
fund, or that speca assessment abtes are not ncuded n a ta mtaton
on genera obgatons.
The Commssoner s cases do not and coud not hod that the muncpaty,
n obtanng ts genera mprovements by ts bond promses to coect the ta
and pay the bondhoder from the bond fund, s any the ess engaged n borrow-
ng than s one who obtans a oan wth a promse to repay t from the Income
of a specfc parce of the borrower s property whch s mortgaged for the debt
To the suggeston that speca assessment ta es, each mposed on a part as
dstngushed from a ta abe rea property n the muncpaty, do not dmnsh
ts borrowng power, the answer s that such ta es aways have and that the
depresson perod has gven a devastatng demonstraton of that fact.
The orgn of any muncpaty s borrowng power Is In ts power to e ercse
the governmenta functon of ta aton of property n Its area. The cumua-
ton of ta ens of a knds on the rea estate n muncpates ed to the
so-caed ta strkes. Denquent ta saes to the State and ts subdvsons
wthdrew arge areas from muncpa ta aton. From such strkes and such
oss of ta abe property ensued the muncpa bankruptces of the ast decade.
In Caforna a muncpaty may have ts ta abe property sub|ect at one
tme to bond payments by ta aton of a street dstrct, a sewer dstrct, a
ghtng dstrct, a recamaton dstrct, a dranage dstrct, an rrgaton
dstrct, n addton to State, county and genera ta aton.
ach ta Invason on the muncpaty s ta abe property causes a essenng
of borrowng power, unt, as stated, many muncpates can not borrow to
keep themseves out of bankruptcy. The Supreme Court In ekns v. Unted
States (30 U. S., 27, 8), recognzes the condton n Caforna as stated by ts
egsature:
There e st throughout the State of Caforna economc condtons whch
make t mpossbe for property owners to pay ther ta es and speca assess-
ments eved upon rea or ta abe property. The burden of such ta es and
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22(b), rt. 22(b)( )- .
33S
speca assessments s so onerous n amount that great denquences have
occurred In the coecton thereof and serousy affect the abty of ta ng
dstrcts to obtan the revenue necessary to conduct governmenta functons
and to pay obgatons represented by bonds. It s essenta that fnanca
reef, as set forth n ths act, be mmedatey afforded to such ta ng dstrcts
n order to avod serous mparment of ther ta ng systems, wth consequent
crppng of the oca governmenta functons of the State. Ths act w ad
n accompshng ths necessary resut and shoud therefore go nto effect
mmedatey. Itacs supped.
The Supreme Court then states smar condtons e sted n other parts
of the county. (See aso County of San Dego v. ammond, 5 Ca. (2d),
709, 712.)
The Commssoner aso ctes from a tort case arsng under the Idaho aws.
There the hoder of bonds of an assessment dstrct sought to hod the cty of
Nampa abe from ts genera funds because ts offcers had ssued a certf-
cate statng that no tgaton was pendng affectng ther vadty when, In
fuct, such tgaton e sted and utmatey caused them to be decared nvad.
On appea of ths court t hed that under the Idaho aw the cty offcers
were e ercsng a speca power vested n them wth reference to oca m-
provements, n whch the cty as a whoe s not concerned. The Idaho aw n
ths regard s of no appcaton to these Caforna bonds whch can not be
ssued f the mprovement Is not genera and are vad ony f there be a beneft
to the cty as a whoe. (Irsh v. ahn, supra.)
On certorar the Supreme Court hed that under the Idaho statutes the
cty offcas owed no duty to the b6ndhoder wth respect to the certfcate
and that the cty was not abe. In the opnon, page 5 1, are dcta that the
cty s fath or credt s not pedged and that the vaue of the bond depends
on the vadty and worth of the assessments. We take ths to refer to the
fact that the fath and credt of the genera funds of the cty are not pedged
to pay the bonds. If t means that n Idaho there s no obgaton of the
muncpaty, frst, to e ercse ts ta ng power to coect the ta for the fund
and, second, to pay t from the fund so coected to the bondhoder, ths s not
the aw of Caforna where, as seen, the bonds are a vad pedge of the e er-
cse of the ta ng power ony when the mprovement created s for the cty as
a whoe and not soey for the assessment dstrct.
The Commssoner ctes Caforna cases hodng the ta es assessed and ened
on the and for the cty s Improvement, athough mposed n nvtum, can not
be ncreased by subsequent egsaton, because t woud voate an mped
contractua obgaton of the ened andowner. These cases recognze that
the bond s supported by the muncpaty s governmenta power of ta aton,
the e ercse of whch power we have seen s a part of the bond obgaton to
the bondhoder.
In the most recent case cted by the Commssoner as recognzng the mped
contractua character of the property owner s obgaton so preventng an n-
creased abty by ater statutes, the contract between the bondhoder and the
muncpaty as an agency of the State Is shown to be that controng the
e ercse of the ta ng power n the formaton of the dstrct, the evy of the
assessment and the ssue of the bond promsng to pay from the ta coected fund:
When a dstrct s formed, assessments are eved, and bonds are ssued, there
s. of course, a contractua reatonshp between the State or ts agency on the one
hand and the bondhoder on the other. It s aso the setted doctrne n Caforna
that by such proceedngs, a contractua reatonshp arses as far as the property
owner s concerned. Itacs supped.
(County of Los ngees v. Rockhod, 3 Ca. (2d), 102, 200.)
ere the agences by whch the bonds are Issued are stpuated to be the
county and the cty of Los ngees.
The Commssoner aso cams these muncpa bonds are mere ta bs or
warrants wthn Treasury Reguatons 86, artce 22(b) ( )-, whch provdes, f
Ifnnre v. Cttu of . nmpa (C. C. . 0) (18 Fed. (2d), 860, 862).
nnre v. Cty of nmpa (276 U. S 538).
County of Los tu/crs v. Rorkhod (3 Ca. (2d), 102. Pac. (2d), S 0. 100 . L. R..
1 t) ; County of San Detm v. Chdn (217 Cn.. 10 ). 17 Pac. (2d). 73 ) : effreys v. Pont
Rchmond Cnnn d and Co (202 Cat. 200, 260 Pac. 5 8) ; Pao erde Irr. Dnt. v. Seeey
(198 Ca., 77, 215 ac, 1092) : La Mesa, etc., Irr. DM. v. II aey (107 Cat, 50, 239 Pac,
710) ; I eery v. Cty of Lot noees (187 Cn.. 753, 203 Pnc, 992, 19 . L. ., 10 ) ;
Chapman v. oeeyn (182 Cat, 29 , h7 Pac, 902).
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339
23(a), rt. 23(a)-.
such ta bs are egay coectbe ony from owners of the property benefted,
they are not the obgatons of a State, Terrtory, or potca subdvson.
Obvousy the bond payabe from the ta rased fund does not come wthn ths
defnton of the ta b. s we have seen, the act of 1011 tsef creates a tn
b caed a warrant whch precedes the ssue of the bond. It s of an entrey
dfferent character. It s ssued to the contractor by the superntendent of streets
and countersgned by the mayor after the cty s mprovement s competed.3 It s
a mere power of attorney n the contractor or hs agent to demand and receve
the assessed ta from the ndvdua property owners. The bond wth ts promse
by the cty to coect the ta es, hod them n the fund, and pay thera on the bond-
hoder s demand s ssued after the faure of the contractor as a prvate person
to coect the amount due through the ta b. Whether, despte the Treasury
reguaton, such ta bs are such ncome ta e empt obgatons s a matter wth
whch wc are not here concerned.
The oard of Ta ppeas decson erred In sustanng the Commssoner s
Incuson n pettoner s ta abe ncome of the nterest of the muncpaty s bonds
Issued to dscharge the obgaton of the cty s contract for Its street mprovement
and s reversed.
Reversed.
S CTION 22(c). GROSS INCOM : IN NTORI S.
rtce 22(c)-8: Inventores of reta merchants.
R NU CT OF 193 .
Reguatons 86, amended. (See T. D. 50 8, page 200.)
S CTION 23(a). D DUCTIONS FROM GROSS
INCOM : P NS S.
rtce 23(a)-: usness e penses. 19 1-7-10598
Ct. D. 1 86
ncome ta revenue act of 1932 decson of supreme court.
1. Deducton Ordnary and Necessary pense Trade or us-
ness pportonment or pense etween Rea state and
Securty Investments.
n ndvdua wth e tensve nvestments n rea estate and
Income-producng securtes, who dd not partcpate drecty or
Indrecty n the management of the corporatons n whch he hed
stock or bonds, and whose fnanca affars bad been conducted for
many years by offce empoyees pursuant to hs persona nstructons,
was not carryng on a trade or busness wthn the meanng of secton
23(a) of the Revenue ct of 1932, so far as the securty Investments
were concerned, and therefore was not entted to a deducton for
e penses attrbutabe to the securtes. though the rea estate and
securty matters were handed by the same offce, the e penses
were capabe of apportonment between rea estate and securty
Investments.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (111 Fed. (2d), 795), affrmng decson of the Unted
States oard of Ta ppeas (1939) (39 . T. ., 1005), affrmed.
Caf. Stats., 1911, page 730, sectons 22, 23, as amended; Deertng s Genera Laws of
Caforna (1037), ct 8189, sectons 22, 23.
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23(a), rt. 23(a)- .
3 0
Supreme Coubt or the Unted States.
ugene ggns, pettoner, v. Commssoner of Interna Revenue.
312 U. S., 212.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
February 3,19 1.
OPINION.
Mr. ustce Reed devered the opnon of the Court.
Pettoner, the ta payer, wth e tensve nvestments In rea estate, bonds and
stocks, devoted a consderabe porton of hs tme to the oversght of hs nterests
and hred others to assst hm n offces rented for that purpose. For the ta
years In queston, 1932 and 1933, he camed the saares and e penses Incdent to
ookng after hs propertes were deductbe under secton 23(a) of the evenue
ct of 1932.1 The Commssoner refused the deductons. The appcabe phrases
are: In computng net ncome there sha be aowed as deductons: (a) -
penses. the ordnary and necessary e penses pad or Incurred durng the ta -
abe year n carryng on any trade or busness . There s no dspute
over whether the camed deductons are ordnary and necessary e penses. s
the Commssoner aso conceded before the oard of Ta ppeas that the rea
estate actvtes of the pettoner n rentng budngs consttuted a busness, the
oard aowed such portons of the camed deductons as were fary aocabe
to the handng of the rea estate. The same offces and staffs handed both rea
- estate and securty matters. fter ths ad|ustment there remaned for the year
1932 over 20 and for the year 1933 over 10 thousand doars e pended for manag-
ng the stocks and bonds.
Pettoner s fnanca affars were conducted through hs New York offce
pursuant to hs persona detaed nstructons. s resdence was n Pars,
France, where he had a second offce. y cnbe, teephone and ma, pettoner
kept a watchfu eye over hs securtes. Whe he sought permanent nvestments,
changes, redemptons, maturtes and accumuatons caused mted shftngs In
hs portfoo. These were made under hs own orders. The offces kept records,
receved securtes. Interest and dvdend checks, made deposts, forwarded
weeky and annua reports and undertook generay the care of the nvestments
as nstructed by the owner. Purchases were made by a fnanca nsttuton.
Pettoner dd not partcpate drecty or ndrecty In the management of the
corporatons n whch he hed stock or bonds. The method of handng hs
affars under e amnaton had been empoyed by pettoner for more than 30
years. No ob|ecton to the deductons had prevousy been made by the
Government.
The oard of Ta ppeas hed that these actvtes dd not consttute
carryng on a busness and that the e penses were capabe of apportonment
between the rea estate and the nvestments. The crcut court of appeas
affrmed, and we granted certorar because of confct.
Pettoner urges that the eements of contnuty, constant repetton, reguarty
and e tent dfferentate hs actvtes from the occasona ke actons of the
sma nvestor. Is actvty s and the occasona acton s not carryng on
busness. On the other hand, the respondent urges that mere persona nvest-
ment actvtes never consttute carryng on a trade or busness, no matter how
much of one s tme or of one s empoyees tme they may occupy.
Snce the frst ncome ta ct, the provsons authorzng busness deductons
have vared ony sghty. The Revenue ct of 1913 aowed as a deducton
the necessary e penses actuay pad n carryng on any busness. y 1918
the present form was f ed and has so contnued. No reguaton has ever been
promugated whch nterprets the meanng of carryng on a busness, nor any
7 stnt.. 100, ch. 209.
IT. Pnrhot v Cnmmunoner (113 Fed. (2d), 718).
39 . T. ., 1005.
111 Fed. (2d), 795.
ae v. omms oner (101 Fed. (2d), 35) d Ponf . Deputy (103 Fed. (2d), 257).
38 Stat., 107, Secton 11 .
0 Stut., 1006, secton 21 (a) .
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3 1
t 23(a), rt. 23(a)- .
rungs approved by the Secretary of the Treasury, . e., Treasury decsons.
Certan rungs of ess dgnty, favorabe to pettoner, appeared n ndvdua
cases but they are not determnatve.10 ven acquescence u n some oard rungs
after defeat does not amount to setted admnstratve practce. Uness the
admnstratve practce s ong contnued and substantay unform n the
ureau and wthout chaenge by the Government n the oard and courts, t
shoud not be assumed, from rungs of ths cass, that Congressona reenactment
of the anguage whch they construed was an adopton of ther nterpretaton.
Whe the Commssoner has combated vews smar to pettoner s n the
courts, sometmes successfuy11 and sometmes unsuccessfuy, the pettoner
urges that the ureau accepted for years the doctrne that the management of
one s own securtes mght be a busness where there was suffcent e tent, con-
tnuty, varety and reguarty. We fa to fnd such a f ed admnstratve
constructon n the e ampes cted. It s true that the decsons are frequenty
put on the ground that the ta payer s actvtes were sporadc but t does not
foow that had those actvtes been contnuous the Commssoner woud not
have used the argument advanced here, . e., that no amount of persona nvest-
ment management woud turn those actvtes nto a busness. vdenty such
was the Government s contenton n the aes case, where the thngs the ta -
payer dd met pettoner s tests, and n Foss v. Commssoner u and Washburn v.
Commssoner where the opnons turned on the e tent of the ta payer s partc-
paton n the management of the corporatons n whch nvestments were hed.
Pettoner rees strongy on the defnton of busness n Fnt v. Stone Tracy
Co.: u usness s a very comprehensve term and embraces everythng about
whch a person can be empoyed. Ths defnton was gven n consderng
whether certan corporatons came under the corporaton ta aw whch eves a
ta on corporatons engaged n busness. The Immedate ssue was whether
corporatons engaged prncpay n the hodng and management of rea
estate were sub|ect to the ct. defnton gven for such an Issue s not
controng n ths dssmar nqury. 1
To determne whether the actvtes of a ta payer are carryng on a busness
requres an e amnaton of the facts n each case. s the crcut court of appeas
observed, a e penses of every busness transacton are not deductbe. Ony
those are deductbe whch reate to carryng on a busness. The ureau of In-
terna Revenue has ths duty of determnng what s carryng on a busness, sub-
|ect to ree amnaton of the facts by the oard of Ta ppeas and utmatey
to revew on the aw by the courts on whch |ursdcton s conferred. The Com-
mssoner and the oard apprased the evdence here as nsuffcent to estabsh
pettoner s actvtes as those of carryng on a busness. The pettoner merey
kept records and coected nterest and dvdends from hs securtes, through
managera attenton for hs nvestments. No matter how arge the estate or how
contnuous or e tended the work requred may be, such facts are not suffcent as
a matter of aw to permt the courts to reverse the decson of the oard. Its con-
cuson s adequatey supported by ths record, and rests u| on a concepton of
carryng on busness smar to that e pressed by ths Court for an antecedent
secton.
Cf. evernq v. New York Trust Co. (292 T . 8., 55, 67- 68 Ct. D. 8 0, C. .
III-1, 188 (103 ) ).
0. D. 537 (C. . 2, 175 (1920)); 0. D. 877 (C. . , 123 (1021)) ; I. T. 2751 (C. .
I -1, 3 (103 )).
tdde v. Commssoner (302 T . 8.. 073, 582 Ct. D. 1303, C. . 1938-1, 309 ). Cf.
ate o Sanford v. Commssoner (308 U. 8., 39, 52). ut ee everng v. ss (293
U. 8.. 1 , 151 (Ct. D. 88 . C. . III 2, 191 (103 ) ), and McFeey v. Commssoner
(296 T . S.. 102. 108 Ct. D. 10 0, C. . I -2, 209 (1935) ).
u sse v. Commssoner (15 . T. ., 1270, acquesced In, C. . III-2, 28 (1929)) ;
Crokcr v Commssoner (27 . T. ., .I S, acquesced In, C. . II-1, (1033)).
myens v. Smth (308 U. S 73, 7S- 70).
ede v. Commssoner (30 Ffd. (2d), 622. 62 ) ; Mone v. evernf (70 Fed. (2rt),
631 Ct. D. 896. C. . III-2, 288 193 ) ; ane . Commssons (100 Fed. (2d) 382).
aes v. Commssoner (101 Fed. (2d), 35) ; du Pon v. Deputy (103 Fed. (2d), 257,
250. reversed on oth.T grounds. 308 T . S.. S8 Ct. D. 1 35. C. . 19 0-1, 118 ).
aes v. Commssoner (3 . T. ., 10 6. 101 Fed. (2d), 35).
75 Fed. (2d), ._..
. 1 Fed. (2d), 0 9, 053.
Cf. Rorbng v. Commssoner (37 . T. ., 82); ebroner v. Commssoner (3
. T. .. 1200).
220 D. 8., 107, 171.
20 Id., 100.
11 Cohens v. trpna (6 Wheat., 28 , 399) : Puerto Rco v. She Co. (302 T7. 8., 253, 269).
Revenue ct of 1932 ( 7 Stat., 169, secton 272) ; Interna Revenue Code, secton 272.
Interna Revenue Code, secton 11 1.
an Wart v. Commssoner (203 U. 8., 112, 115 Ct. D. 903, C. . I -1, 292
(1935) ).
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23(a), rt. 23(a)-
3 2
The pettoner makes the pont that hs actvtes n managng hs estate, both
reaty and personaty, were a unfed busnesa Snce t was admttedy a busness
n so far as the reaty s concerned, he urges, there s no statutory authorty to
sever e penses aocabe to the securtes. ut we see no reason why e penses
not attrbutabe, as we have ust hed these are not, to carryng on busness can not
be apportoned. It s not unusua to aocate e penses pad for servces party
persona and party busness.
ffrmed.
rtce 23(a)-: usness e penses. 19 1-19-10709
Ct. D. 1509
ncome ta revenue act of 193 decson of supreme court.
1. Deducton ttorneys Fees Ordnary and Necessary -
pense Tbade or usness.
Upon the record presented, attorneys fees propery ncurred n
the admnstraton of an estate and pad by the e ecutors durng
the ta abe year 193 are not deductbe from gross ncome of the
estate under secton 23(a) of the Revenue ct of 193 as e penses
pad or ncurred n carryng on a trade or busness. The fndng
of the Court of Cams that the e ecutors contnued to conserve
the decedent s estate as he had when he was hmsef a fnancer
and nvestor s not suffcent to support a concuson that the
e ecutors were carryng on busness wthn the meanng of the
statute.
2. Case Dstngushed.
Fnt v. Stone Tracy Co. (220 U. S., 107) dstngushed.
8. udgment acated.
udgment of the Court of Cams (19 0) (35 Fed. Supp., 81)
vacated.
Supreme Court of the Unted States.
The Unted States, pettoner, v. erbert Rvngton Pyne, Grafton owand
Pyne, Mary Pyne Fey, and Percy R. Pync, r., ecutors of the state of
Percy R. Pyne.
6 S. Ct. 893.
On wrt of certorar to the Court of Cams.
pr 28, 19 1.
opnon.
Mr. ustce ack devered the opnon of the Court
The queston presented s whether upon ths record the Court of Cams1
commtted error n concudng that respondents, as e ecutors, were, n com-
putng ther Federn ncome ta , entted to deduct e penses propery ncurred
n the admnstraton of an estate, Congress havng provded that such a
deducton coud be taken ony by ndvduas, estates, or trusts engaged-n
carryng on busness. (Revenue ct of 193 , sectons 23(a), 161,
162.) (Compare Cty ank Farmers Trust Co. v. everng, |ust announced
Ct. D. 1.111. page 3 , ths uetn .)
In computng the 193 net ncome of the estate, respondents camed a
deducton of 0,000 for fees pad to the estate s attorney durng the ta abe
year. The Commssoner of Interna Revenue dsaowed the deducton; the
respondents pad under protest, and fed sut for refund n the Court of
Cams. Ther compant aeged that The payment of attorney s fees and
the cam for aowance thereof as a deducton from gross Income s predcated
upon the contenton that the tremendous sze of the corpus of the estate and
the proper admnstraton thereof consttuted the operaton of a busness and
the empoyment of an attorney as counse to gude the e ecutors n the bundng
3 Pau Mortens. Law of Federa Iucome Ta aton, secton 23.05; cf. Natona
Outdoor dvertsng ureau . everng (89 Fed. (2d), 878, 881).
1 35 Fed. Supp., 81.
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23(a), rt. 23(a)-.
of the affars of the estate was ust as much a necessary e pense of the estate
as s ncurred n the operaton of any commerca busness engaged n the
manufacturng or seng of commodtes. The court made detaed fndngs
of fact, and as ts snge concuson of aw stated that the respondents shoud
recover.
We recenty stated In Uy/ns v. Commssoner (311 U. S., Ct. D. 1 SG,
page 339, ths uetn ) that determnaton of what amounts to carryng on bus-
ness requres e amnaton of the facts n each case. In ths case, the record
before us contans the fndngs of the Court of Cams, a concuson of aw, and an
opnon summarzng the fndngs of fact and ndcatng the reasons whch
prompted the court to reach ts concuson of aw. The most that can be sad
of the fndngs of fact s that the court was of the opnon that the facts found
showed that the actvtes of the e ecutors were such as to meet certan crtera
set out n the opnon as determnatve of what consttuted carryng on bus-
ness. For what the court found as a fact was that the decedent, pror to hs
death was engaged n busness as a fnancer and nvestor, mantanng an
offce where he empoyed an offce manager and an nverage of s cerks.
In genera, the operatons of the estate contnued n substantay
the same manner after the decedent s death as before . In addton
the court found that the attorney empoyed by the e ecutors was caed upon
to advse them wth reference to matters both ega and economc that arose n
the busness actvtes of the estate, wth reference to Federa estate and
State nhertance ta es, and aso n regard to the acquston and dsposa of
the estate s securtes and n regard to varous matters pertanng to companes
n whch the estate hed nvestments. ut the e ecutors mght do a the
thngs that the court found that they dd and st not be engaged n carryng
on busness wthn the meanng of the Revenue ct. For as we
sad n the ggns case, e penses of every busness transacton are not
deductbe. Ony those are deductbe whch reate to carryng on a busness.
so, we there sustaned a hodng that an ndvdua who was engaged n
fnanca and nvestng actvtes n a ways smar to those of the decedent
and hs e ecutors n ths case was not entted to a deducton such as that
sought by respondents. Therefore, the fndng of the Court of Cams that the
e ecutors contnued to conserve the decedent s estate as he had when he was
hmsef a fnancer and nvestor fas far short of a fndng that the e e-
cutors were entted to a deducton accorded by Congress ony to those carry-
ng on busness. Faure of the Court of Cams to make a specfc
fndng on ths utmate and determnatve ssue deprves that court s udgment
of support. Under such crcumstances we are not caed upon to wegh the
dfferent facts set out n the subsdary fndngs n order to determne whether
or not they woud support a concuson that the e ecutors were carryng on
busness wthn the meanng of the statute.
When we turn to the opnon of the Court of Cams It s made cear that
absence of such a specfc fndng was the resut of the court s adopton of crtera
of carryng on busness nconsstent wth our hodng n the g-
gns case Snce the udgment must be vacated because not supported by adequate
fndngs, t s approprate that we pont out ths nconsstency. cceptng as true
the statement of the Court of Cams that a broad defnton of busness mght
be that It s whatever engages the tme, attenton, and abor of men n order to
conserve what they have or to avod oss t does not foow at a that ths s
synonymous wth the statutory anguage, carryng on busness. Ths
defnton of busness stems n part from the case of Fnt v. Stone Tracy Co.
(200 U. S., 107, 171), upon whch the Court of Cams reed. ut however
appcabe that defnton may have been to the case there under consderaton,
t can not be accepted as a gude n the present case. The reasons why It s
not appcabe to the statutory provson now under consderaton were gven n
our opnon n the ggns case; ts nonappcabty to specfc stuatons has aso
been e paned n a number of other opnons of ths Court.
Nor can the udgment of the Court of Cams be supported by that court s state-
ment that the e ecutors were engaged n the busness of conservng the estate and
Unted 8tate v. snaut-Petere (209 . 8., 201, 206).
Cf. Chppewa Indans of Mnnesota v. Unted States (305 T . 8., 79, 81) : mercan
Propeer Mfg. Co. . Unted States (300 U. 8., 75, 7 t.SO ICt. D. 1218. C. .
1937-1, 267 ).
See, e. g.. on aumbrwh v. Rarn-ent Land Co. (2 2 U. 8.. T03, 51 -515) ; McCoarh v.
Une.hM d Schuyk aven R. S. (228 D. 8., 295, 303) ; Zonne v. Mnncapon Syndcate
(220 U. 8., 187, 190).
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23(a), rt. 23(a)- .
3
protectng ts ncome. Such actvtes are the tradtona duty of e ecutors.
ecutors who engage actvey n trade and busness are the e cepton and not the
rue. Rather obvousy, there coud be cear cases where e ecutors -carry on
busness by contnung to operate a store, a factory or some other we
known, we marked type of busness actvty. ut n the absence of evdence show-
ng actvtes comng wthn the genera acceptaton of the concept of carryng on
a trade or busness, t can not be sad as a matter of aw that an e ecutor comes nto
ths category merey because he conserves the estate by marshang and gatherng
the assets as a mere condut for utmate dstrbuton. nd determnaton of what
consttutes carryng on busness under the Revenue ct does not
depend upon the sze of the estate or the number of peope whose servces are
requred n order propery to conserve It.
The |udgment of the Court of Cams s vacated and the cause s remanded to
that court for proceedngs n accordance wth the vews heren e pressed.
It s so ordered.
rtce 23(a)-: usness e penses. 19 1-19-10710
Ct. D. 1511
ncome ta revenue act op 1928 decson of supreme court.
1. Deducton Trustees Commssons Ordnary and Necessary
pense Trade or usness Trust and Indvdua Sub|ect
to Same Rue n Computng Net Income.
Commssons pad n 1931 to testamentary trustees pursuant to
surrogate court order are not deductbe from trust ncome under
secton 23(a) of the Revenue ct of 1928 as e penses pad or n-
curred n carryng on a trade or busness. ggns v. Comms-
soner Ct. D. 1 86, page 339, ths uetn (311 U. S., ), decded
February 3, 19 1, s controng, even though admnstratve prac-
tce, whch has not receved support by Treasury reguatons, has
permtted such deductons. The statute e pressy provdes that
the same method and bass of computaton must be apped to trust
ncome as to ndvdua Income.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (112 Fed. (2d), 57), affrmng decson of the
Unted States oard of Ta ppeas (1939) (39 . T. ., 29),
affrmed.
Supreme Court of the Unted States.
Cty ank Farmers Trust Co., as Trustee of a Trust Under the Last W and
Testament of nger . Duke, Deceased, for the eneft of nthony Newton
Duke, pettoner, v. Guy T. everng, Commssoner of Interna Revenue.
Cty ank Farmers Trust Co., as Trustee of a Trust Under the Last W
and Testament of nger . Duke, Deceased, for the eneft of nger .
Duke, r., pettoner, v. Ghy T. everng, Commssoner of Interna Revenue.
61 S. Ct., 896.
On wrts of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
pr 28, 19 1.
OPINION.
Mr. ustce ack devered the opnon of the Court.
The utmate queston here nvoved s whether two testamentary trusts of
whch pettoner s trustee were n 1931 carryng on busness
wthn the meanng of secton 23(a) of the Revenue ct of 1928.
Pursuant to the w of nger . Duke, two trusts, consstng of stocks and
bonds worth appro matey 7,600,000, were estabshed n 1923 for the beneft
of Duke s two mnor sons. Pettoner, as trustee, was charged wth the duty
of appyng a suffcent amount of the ncome of each trust to the support and
educaton of the benefcary; the surpus ncome was to be accumuated unt
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23(a), rt. 23(a)-.
the benefcary s ma|orty; and at that tme a accumuated ncome was to
be pad to the benefcary, whe the prncpa was to be contnued n trust
for the beneft of the son and hs descendants. y 1931, the prncpa and
accumuated ncome of the two trusts aggregated about 10,000,000. In that
year the Surrogate Court of New York County aowed trustees commssons
of about 77,000, orderng that payment be made out of prncpa. In report-
ng trust Income for 1931, the trustee dd not cam any deducton for these
commssons. Later, In proceedngs before the oard of Ta ppeas, the
deducton was camed but dened. The ground of dena was that durng
the ta abe year the trusts had not been carryng on any trade or busness,
the carryng on of such an actvty beng a condton precedent to the aow-
ance of the camed deducton under the controng Revenue ct1 The cr-
cut court of appeas affrmed. Dfferng Interpretatons as to the meanng
and scope of carryng on any trade or busness prompted us to grant
certorar n ths case, n the case of Pyne v. Unted States (35 Fed. Supp.,
81), and n the case of ggns v. Commssoner (111 Fed. (2d), 795, 311 U. S.,
Ct. D. I 86, page 339, ths uetn ).
In the ggns case, decded on February 3, we affrmed the |udgment of
the same crcut court of appeas that rendered the decson beow. ggns,
an ndvdua ta payer whose actvtes dd not vary materay from the
actvtes of .the ta payng trusts n the case at bar, was dened the deducton
whch pettoner here seeks. nd sectons 161-162 of the Revenue ct of
1928 provde: The ta es mposed by ths tte upon ndvduas sha appy
to the ncome of estates or of any knd of property hed n trust.
The net ncome of the estate or trust sha be computed n the same manner
and on the same bass as n the case of an ndvdua. . Snce the
trust s sub|ect to the same rues as the ndvdua, and snce the fndngs of
the oard of Ta ppeas n the ggns case and n the case at bar are
substantay the same, the ggns case s controng here, uness, as pettoner
contends, dstngushabe by reason of admnstratve practce n reaton to
trusts.
ut we regard the ggns decson as controng despte pettoner s In-
sstence that admnstratve practce has ong permtted deducton of trustees
commssons. In vew of the e press Congressona command that the same
method and bass of computaton must be apped to trust ncome as to
ndvdua ncome, t s doubtfu whether any admnstratve practce, no
matter how cear or ong e stng, woud warrant our appyng one concept
of carryng on busness n the case of an Indvdua and another concept n
the cage of a trust. Ths Is partcuary true here, where the statutory
nterpretaton pettoner urges has never receved support n any reguatons
promugated by the Secretary of the Treasury.1 nd not ony s the resut
reached by the court beow consstent wth our decson n ggns v. Com-
mssoner, but, as we sad n the ggns case, the concuson of the oard
Revenue ct of 1028. sectons 23(a), 181, 162. (Cf. George anderbt Trust, 38
. T. ., 007.) Though pettoner urges that the Commssoner, because of concessons
made before the oard of Ta ppeas, shoud be barred from assertng that the trusts wers
not carryng on busness, the |udgment of the oard rested on ts fndng that the trusts
were not so engaged, and the ssue s propery before us.
112 Fed. (2d), 57.
The oard found n ths case that the trustee s actvtes were mted to revewng the
stocks and bonds n trust severa tmes a yeur : seng securtes and renvestng the pro-
ceeds n other stocks and bonds; coectng nterest and dvdends on securty : keepng
account books for the trusts and renderng statements to the nterested partes; preparng
and fng ncome ta returns; and dstrbutng ncome to the henecares. Summarzng,
the oard of Ta ppens sad, The above facts demonstrate concusvey to us that ths
Is a case of passve nvestment and not of carryng on a busness, for not ony s the
trustee mted n ts Investments, but It s cautoned n effect to be a safe nvestor rather
than a partcpant n trade or busness, and, pany carryng out the testator s n|unctons,
It conducts no busness, because t has, as above seen, no e penses of conductng busness
other than the coecton of coupons and mang bonds, amountng to a few doars, and
an even more neggbe amount for transfer stamps or notary fees. tensve
authorty need not be comped to demonstrate that a mere passve Investor, coectng
Interest and cppng coupons, and makng a very few renvestments, s not engaged n trade
or busness.
It Is cear that the oard was ustfed In reachng the concuson that the Instant
trusts were not busness trusts, but e sted merey to hod and conserve property and
dstrbute the ncome receved. (Compare Morrm y v. Comm suu r, 206 TT. R., 3 ,
856-3 7 Ct. D. 106 , C. . -1, 26 (1036) ; on aumbarh v. Sargent Land Co., 212
U 8 , 503, 515 ; Zonne v. ttnnenpos Sundcate. 2 . 0 U. S.. 187.)
dde v. Commssoner (302 U. S.. 573. 582 Ct. D. 1313, C, . 1038-1, 3001 : TTeverng
. etc York Trust Co. (292 U. S. 05, 67- 68 Ct. D. 8 0, C. . III-1, 188 (103 ) ).
0 8 1 1 12
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23(c), rt. 23(c)-
3 6
of Ta ppeas s adequatey supported by ths record, and rests upon a
concepton of carryng on busness smar to that e pressed by ths Court
for an antecedent secton. The |udgment beow s accordngy affrmed.
rtce 23(a)-: usness e penses.
R NU CT OF 193 ND PRIOR R NU CTS.
penses ncurred n producton of ta abe ncome. (See I. T.
3 52, page 205.)
rtce 23 (a)-2: Traveng e penses.
R NU CT OF 1921.
I. T. 1 97 (C. . I.-2,89 (1922)) modfed. (See I. T. 3 7 , page 207.)
S CTION 23(c). D DUCTIONS FROM GROSS
INCOM : T S G N R LLY.
rtce 23 (c) -1: Ta es. 19 1-8-10611
Ct. D. 1 90
INCOM T R NU CT OF 1918 D CISION OF COURT.
Deducton Massachusetts Corporaton cse Ta ccrua.
Massachusetts corporaton whch kept ts books and prepared Its
returns of net ncome on the accrua bass of accountng and fed ts
ncome ta returns on the caendar year bass, and whch pad to the
State n 1921 an e cse ta for the year 1920 equa to the sum of a
prescrbed percentage of ts 1920 net ncome for Federa ncome ta
purposes and a percentage of the vaue of ts corporate e cess de-
termned as of pr 1,1921 (the date of assessment under State aw),
s entted to a deducton from 1920 gross ncome for the porton of
the State ta representng the frst factor n the computaton, a-
though the second factor was not ascertanabe unt after the date of
assessment. For Federa ncome ta purposes, the two factors com-
prsng the e cse ta are separabe, and the amount of ta attrb-
utabe to net ncome accrued durng 1920 wthn the meanng of
secton 23 (a) of the Revenue ct of 1918.
Unted States Crcut Court of ppeas for the Frst Crcut.
George S. Coton astc We Co., pantff, appeant, v. Unted States of merca,
defendant, appeee.
116 Fed. (2d), 202.
ppea from the Dstrct Court of the Unted States for the Dstrct of Massachusetts.
December 9, 19 0.
OPINION.
M ORun R, .: Ths acton was brought for the recovery of aeged overpayments
of ncome and e cess profts ta es for the caendar year 1920. wrtten agree-
ment of the partes has suspended the runnng of the statute of mtatons.
The facts were stpuated beow. The appeant s a Massachusetts corpora-
ton whch kept ts books of account and records and prepared ts returns of
The case rcferre to was an Wart v. Commssoner (295 U. S., 112, 115).
o See O. C. M. 22525. page 350, ths uetn.
ntered nto n accordance wth secton 08(b)(2) of the Revenue ct of 1928 ( 5
Stat., 87 ), as amended. Interna Revenue Code, secton 377 ( 8 Stat., 756).
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23(c), rt. 23(c)-.
net ncome on the accrua bass of accountng for caendar years. In 1921
t pad the Massachusetts domestc corporaton ta assessed as of pr 1, 1921.
t that tme ths ta was ascertaned by addng together an amount equa to
0. 5 per cent of the corporate e cess, determned as of pr 1, 1921, and an
amount equa to 2 per cent of the corporaton s net ncome as reported to
the Federa Government on ts ast ncome ta return pror to pr 1, 1921.
The amount pad under the frst factor was deducted n the Federa return
for 1921, and no queston s rased as to the proprety of that deducton. The
amount pad under the second factor was 3,336.27. The soe ssue nvoved
In the present appea s whether or not ths sum accrued, wthn the meanng
of secton 23 (a) of the Revenue ct of 1918, durng 1920, and thus became
deductbe from the appeant s gross ncome for that year.
In essence, our decson must turn upon the queston whether, for ncome ta
accountng purposes, the two factors comprsng the Massachusetts domestc
corporaton ta shoud be regarded as a snge, ndvsbe unt or as separate
tems. If the ta s regarded as a unt, then the tota amount of the ta coud
not be ascertaned unt pr 1, 1921, snce by defnton the amount of
corporate e cess coud be determned ony as of that date. If, however,
the ta shoud be regarded as comprsed of two separabe tems, then the
amount due under secton 2(2), f ed as a percentage of the ta payer s net
ncome for 1920, was mathematcay determnabe on December 31, 1920. The
court beow, dsaowng the deducton, rued that the ta must be regarded
as a snge, nseparabe Item, n vew of the anguage of the Massachusetts
Supreme udca Court that Ths ta s a snge e cse . Sprngdae
Fnshng Co. v. Commonweath, 2 2 Mass., 37 (1922).)
We do not thnk ths anguage s determnatve of the Issue n the case at
bar. Certany the characterzaton of the e cse as snge, apparenty
drected to the queston of consttutonaty, s not concusve upon us n deter-
mnng how the Massachusetts ta s to be treated for Federa ncome ta pur-
poses. owever, as an Interpretaton of the Massachusetts statute nvoved,
and as an ndcaton of the abtes of corporate ta payers under that act,
the Sprngdae decson s of course bndng upon us. The case nvoved a cor-
poraton whch sod out ts busness n uy, 1920. Durng 1920 t had pad
the domestc corporaton ta based upon ts corporate e cess as of pr
1. 1920, and ts net ncome durng the caendar year 1919. The Commonweath
of Massachusetts, contendng that ths payment dd not free the corporaton
from abty for a further payment of a corporate e cse ta based upon the
net ncome earned durng 1920, acceerated the due date of the ta under Genera
Laws, chapter 63, secton 76, and brought sut for the ta otherwse payabe
Massachusetts Genera cts of 101 ), chapter 3.15:
Part I. Domestc Corporaton Ta .
Secton 1. When used In Part I of ths act:
(2) The term ta abe year sha mean the fsca year of the corporaton.
(3) The term corporate e cess sha mean the far cash vaue of a the shares con-
sttutng the capta stock of a corporaton on the 1st day of pr when the return caed
for by secton of ths act Is due.
ee. 2. cept as Is otherwse provded In ths secton, every domestc busness cor-
poraton sha be sub|ect to pay annuay, wth respect to the carryng on or dong of
busness by It. an e cse ta equa to the sum of the foowng :
) n amount equa to 5 per thousand upon the vaue of Its corporate e cess.
2) n amount equa to 2 per cent of that part of Its net Income as herenafter
ned. whch Is derved from busness carred on wthn ths Commonweath .
Sec. 3. cept as provded In the ast paragraph of secton 2, the term net Income
sha mean the net ncome for the ta abe year as requred to be reported by the cor-
poraton In Its ast pror return to the Federa Government as denned In the Federa
Revenue ct of 1918.
Sec. . very such corporaton sha, wthn the frst 10 days of pr, make a return
as of pr 1st, sworn to by the treasurer or assstant treasurer, or In ther absence or
ncapacty by any other prncpa offcer, In such form as the ta commssoner may
prescrbe .
Sec. 23 . (a) That n computng the net Income of a corporaton there
ha be aowed as deductons :
(3) Ta es pad or accrued wthn the ta abe year ( 0 Stat., 1077.1
The dstrct court reached the same resut, for the same reason, In Connorfatcd Dry
Ooods o. v. Unted States. That case Invoved the same Issues and, by stpuaton of the
partes, t w be governed on appea by our decson n ths case.
The sae or transfer, otherwse than n the ordnary course of trade and In the
reguar and usua prosecuton of the corporaton s busness, of any part or the whoe of the
assets of a domestc busness corporaton sha be frauduent and vod as aganst the
Commonweath, uness such corporaton sha, at east fve days before the sae or transfer,
notfy the ta commssoner of the proposed sae or transfer . Whenever such
It corporaton sha make such a sae or transfer, the ta sha become due and
payabe at the tme when the commssoner Is so notfed, or, f he Is not so notfed, at
the tme when be shoud have been notfed.
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23(c), rt. 23(c)- .
3 8
Id October, 1021. The ta payer contended that, havng pad the ta assessabe
as of pr 1, 1920, t has pad for the prvege of dong busness durng that
caendar year; that to assess a further ta was ether to ta It twce for the
same prvege (dong busness In 1920) or once for a prvege whch t never
coud or dd e ercse (dong busness In 1921). The Massachusetts court hed
that the second ta was rghty assessed. Chef ustce Rugg e paned:
Ths ta Is a snge e cse . though both property and Income are
used as a bass for ts cacuaton, the ta Is nevertheess an e cse on the com-
modty of e ercsng the corporate franchse . The ta here assaed
was eved n respect to the dong of busness durng the caendar year begn-
nng anuary 1, 1920. Ths s the pan effect of sad chapter 355. That act
was approved on uy 2 , 1919. y secton 33 It went nto effect on anuary 1,
1920. The frst return under the act was requred to be fed by the corpora-
ton durng the frst 10 days of pr, 1920, as of the 1st day of that pr. (Sec-
ton .) The Items of that return Incuded the corporate e cess as of that 1st
day of pr and the net ncome for the ta abe year as requred to be reported
by the corporaton n ts ast pror return to the Federa Government. (Secton
3.) That ast pror return was and of necessty must have been for the ca-
endar year 1919. The ne t e cse ta , beng that here n queston, was eved
In respect to the dong of busness durng the caendar year begnnng wth
anuary 1, 1920. Ths part of the e cse s eved for a perod of tme whch
s past and not for a perod n the future. The effect of that statute was to
mpose an e cse for the commodty of carryng on busness by a domestc cor-
poraton for a ess perod than one year n cases where such busness was not
carred on for an entre year .
The pettoner en|oyed the commodty of carryng on busness as usua unt
uy 29, 1920 . These corporate actvtes are egay sub|ect to an
e cse .
What the court meant by descrbng the ta as a snge e cse was that
the ta , though made up of two components, was eved on a snge commodty,
that s, the e ercse of the corporate franchse durng the caendar year pre-
cedng the pr 1st as of whch the corporate e cess was cacuated. That
these two components n truth were separabe was demonstrated by what
happened n the Sprngdae case Itsef; the ta there sustaned was based
soey on the net ncome of the corporaton earned durng the eary months of
1920 before t went out of busness.
It becomes apparent that that porton of the ta camed as a deducton by
the ta payer n the present case, athough pad durng 1921, was e acted for
the prvege of dong busness durng 1920 and that t became an nescapabe
abty durng that year. The corporaton coud, of course, have escaped
payment of that part of the ta cacuated on ts corporate e cess had t
dssoved pror to pr 1, 1921; and at any rate the amount of ths factor
coud not e determned unt that date. No such choce was open n regard
to that part of the ta determned by the ta payer s net ncome; as of December
31, 1920, the amount of e cse to be pad under ths factor became mathemat-
cay ascertanabe and ts utmate payment Inevtabe. (Sprngdae Fnsh-
ng Co. v. Commonweath, 2 2 Mass., 37 (1922) ; Commonweath of Massa-
chusetts v. Meehan, 67 Fed. (2d), 638 (C. C. . 1, 1933).)
The Supreme Court has had occason to defne the requrements of accrua
of ta es. In Unted States v. nderson (269 U. S., 22 (1926) T. D. 3839, C. .
-, 179 (1926) ), the ta payer had attempted to deduct the muntons ta
from hs gross Income for 1917. The muntons ta was cacuated on a bass
of the ta payer s 1916 gross ncome, but was not assessed and dd not
become due unt much ater n 1917. In hodng that the deducton shoud
have been taken n 1916, Mr. ustce Stone sad (pages 0- 1) :
Ony a word need be sad wth reference to the contenton that the ta
upon muntons manufactured and sod n 1916 dd not accrue unt 1917. In
a technca ega sense t may be argued that a ta does not accrue unt t
has been assessed and becomes due; but t s aso true that n advance of
the assessment of a ta , a the events may occur whch f the amount of
the ta and determne the abty of a ta payer to pay t. In ths re-
spect the muntons ta here n queston dd not stand on any
dfferent footng than other accrued e penses appearng on appeee s books.
To the same effect, see mercan Natona Co. v. Unted States (27 U. S.,
99 T. D. 099, C. . I-2,193 (1927) ); Nes ement Pond Co. v. Unted States
Revenue ct of 1916, sectons 300 et seq. (39 Stat., 780).
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3 9
23(c), rt. 23(c)- .
(281 U. S., 357 Ct. D. 185, C. . I -1, 295 (1930) ) ; umnum Castngs Co. v.
Routzahn (282 U. S., 92 Ct. D. 270, O. . -, 352 (1931) ). Cf. Fawcus
Machne Co. v. Unted States (282 U. S., 375 Ct. D. 278, C. . -, 2 (1931) ).
We thnk that the deducton sought by the present appeant, representng
ta es e acted for the prvege of dong busness n 1020 and ascertanabe n
that year, was a proper deducton from 1920 gross ncome nnd shoud have
been aowed. In the case of a ta payer whose books are kept on an accrua
bass, whe the ta es for any year are not payabe unt the foowng year,
good accountng practce requres an accrua of them as a abty of th
current year s busness. corporaton can not cam to have accumu-
ated any net Income n any year unt provson s made for ta es accrued,
based on net ncome for the same year. Fawcus Machne Co. v. Unted
tates, 282 U. S., 375, 378.) ud the Massachusetts aw provded for two for-
may separate ta es, each cacuated on a bass of one of the factors, there
coud be no doubt n vew of the nderson case that that ta based on 1920 net
ncome accrued n 1920. We can see no reason why the formay composte
nature of the e cse shoud necesstate a contrary resut. The fact that a
further ndefnte mpost may be eved s scarcey a vad reason for refusng
to permt the accrua of that whch s aready certan.
The Massachusetts Department of Corporatons and Ta aton has consstenty
rued that the ncome porton of the Massachusetts domestc corporaton ta
becomes a abty of the ta payer n the year n whch the ncome s earned
and has aways permtted the accrua of that amount n that year. cose
anaogy may be found n a rung by the Genera Counse for the Interna
Revenue ureau that one-tenth of the Federa soca securty ta , whch s
cacuated as a percentage of wages pad by the empoyer, s to be accrued
durng the perod when the wages are pad. The other nne-tenths of the same
e cse can not be accrued unt ater, snce the ta payer s abty s dependent
upon a certfcaton of the State aw whch mght create a credt up to nne-
tenths of the tota ta . (G. C. M. 19692, C. . 1938-1, 1 8.) It seems cear,
therefore, that the forma unty of a presenty uncertan ta does not prevent
the accrua of any porton of t as of the tme that porton becomes certan.
We are aware of authorty whch woud suggest a decson contrary to
ours, but we do not consder t persuasve snce t apparenty resuts from a
fundamenta msconcepton of the Massachusetts corporaton e cse aw: In
. . rown Co. (8 . T. ., 112 (1927)), the ta payer sought to accrue ts
entre Massachusetts domestc corporaton ta , assessabe as of pr 1, on
the ensung une 30, the cose of ts accountng year. The oard hed that
ths was permssbe. Whe the hodng s not precsey In pont, t mght
foow as a coroary that an earer accrua of a porton of the ta woud
have been regarded as mproper. t any rate, the oard based ts decson
upon the assumpton that The corporaton e cse ta s assessed
as of pr 1 of the ta abe year a statement whch Is erroneous n vew
of the Sprngdae decson whch determned the ta abe year to be the
Federa ncome ta year precedng the pr 1 assessment date. (Cf. Natona
Casket Co., Inc., 29 . T. ., 139 (1933), rev d n part, 78 Fed. (2d), 9 0 (C. C. .
3, 1935) Ct. D. 1097, C. . -1, 2 3 (1936) .) That the oard mght have
reached a decson agreeng wth ours had not ts constructon of the Massa-
chusetts statute been erroneous, s ndcated by ts e poston of the appcabe
prncpes: The basc dea under the accrua system of accountng s that
the books sha Immedatey retect obgatons and e penses defntey ncurred
and ncome defntey earned wthout regard to whether payment has been
2 U. S. C.| sectons 1101, et sea,. ( 9 Stat., 639, sectons 901 et seq.).
Provsons for credt aganst the ta are as foows :
Sec. 902. Credt aganst ta . The ta payer may credt aganst the ta mposed by
secton 901 the amount of contrbutons, wth respect to empoyment durng the ta abe
year, pad by hm (before the date of fng hs return for the ta abe year) nto an unem-
poyment fund under a State aw. The tota credt aowed to a ta payer under ths
secton for a contrbutons pad Into unempoyment funds wth respect to empoyment
durng such ta abe year sha not e ceed 90 per centum of the ta aganst whch t s
credted, and credt sha be aowed ony for contrbutons made under the aws of States
certfed for the ta abe year as provded n secton 903.
Sec. 903. pprova and certfcaton of State aws. (a) The Soca Securty oard
sha approve any State aw submtted to t, wthn 30 days of sucb submsson, whch t
fnds provdes that certan spoced crtera are comped wth) .
(b) On December 31 n each ta abe year the oard sha certfy to the Secretary of
the Treasury each State whose aw t has prevousy approved, e cept that t sha not
certfy any State whch, after reasonabe notce and opportunty for bearng to the State
agency, the oard fnds has changed Its aw so that t no onger contnns the provsons
specfed In subsecton (a) or has wth respect to such ta ube year faed to compy sub-
stantay wth any sucb provsons.
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23(c), rt. 23(c)- .
350
made or whether payment s due. penses ncurred In the operatons for
a partcuar year are propery accrued n the accounts for that year, athough
payment may not be due unt the foowng year. Under the accrua system,
the word accrued does not sgnfy that the tem s due n the sense of beng
then payabe. On the contrary, the accrua system whoy dsregards due
dates. (8 . T. ., at page 117.) It seems cear to us that the deducton
sought n the present case was an e pense ncurred n the operatons for
1920 and was therefore propery accrued n the accounts for that year.
second apparenty contrary rung Is found n G. C. M. 6616 (0. . I -2,
335 (1930)). There a ta payer sought to accrue the tota Massachusetts
domestc corporaton ta es, payabe n 1921 and 1922, durng ts fsca year
endng March 31, 1922. Naturay t was hed that such an accrua was
mproper. The memorandum decded, however, that each ta shoud be con-
sdered as a unt. It therefore aowed a deducton of the entre ta payabe n
1921 from the ta payer s gross ncome for the ta abe year pr 1, 1921, to
March 31, 1922; and It permtted a smar deducton n the foowng year.
It does not appear that the ta payer argued for separate consderaton of the
two factors comprsng the Massachusetts domestc corporaton ta .
The Massachusetts domestc corporaton aw was amended In 1927 so that
vauaton of the corporate e cess was to be made as of the cose of the
corporaton s ta abe year. (Massachusetts cts and Resoves, 1927, ch. 258,
secton 3, amendng Genera Laws, ch. 63, secton 32.) Snce 1927, therefore,
both factors of the e cse ta have become cacuabe smutaneousy. Under
the aw as amended t has been rued that the entre ta may be accrued
aganst the gross ncome of the year at the cose of whch the ta s cacuated,
(G. C. M. 8503, C. . I -2, 109 (1930). We need have no fear, therefore, that
our present decson, deang as t does wth ncome ta returns pror to 1927,
w affect current Treasury practce.
The decson of the dstrct court s reversed, and the case s remanded to
that court wth drectons to enter |udgment for the pantff n accordance
tenth the stpuaton.
NU CTS OF 1921, 102 , 1926, 1928, ND 1932.
corporaton keepng ts accounts on the accrua bass and
fng ts returns on the caendar year bass was entted to accrue
and deduct for the year 1920 that part of the Massachusetts
e cse ta on corporatons (adopted n the year 1919) whch s
based upon ts net ncome for Federa ncome ta purposes for the
year 1920, even though the other part of the ta , based on cor-
porate e cess as of pr 1, 1921, coud not be accrued and de-
ducted unt the year 1921.
In vew of the amendment of the Massachusetts aw n 1927,
effectve anuary 1, 1928, a corporaton keepng ts accounts on
the accrua bass and fng ts returns on the caendar year bass
was entted to deduct for the year 1928 the Massachusetts e cse
ta on corporatons whch accrued as of anuary 1, 1928, and as
of December 31, 1928.
G. C. M. 6616 (C. . I -2, 335 (1930)) revoked.
G. C. M. 8553 (C. . I -2, 109 (1930)) modfed to accord wth
the reasonng of the court n the case of Coton astc Web Co.,
v. Unted States, decded December 9,19 0 (Ct. D. 1 90, page 3 6, ths
uetn).
n opnon s requested whether, n vew of the decson of the
Unted States Crcut Court of ppeas for the Frst Crcut, dated
The pprsunsve force of the memorandum s somewhat essened by ts msquotaton of
the pru||dae ease, whch resuted n a msapprehenson of the Massachusetts court s
defnton of ta abe year. In the paragraph of the Sprngdae decson set forth above,
the memorandum msquotes the orgna te t (referrnc; to the ne t e cse ta ) by
speakng of the net e cse ta . The resut Is to confuse the dscusson of the ta
tgated n the sut wth the dscusson of that ta aready pad, the proprety of whch
was unquestoned.
rtce 23(c)-: Ta es
( so Secton 1, rtce 1-3.)
19 1-S-10612
G. C. M. 22525
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351
23(c), rt. 23(c)-.
December 9, 19 0, n Coton astc Web Co. v. Unted States, re-
atng to the accrua and deductbty of the Massachusetts corpora-
ton e cse ta for the year 1920, G. C. M. 6616 (C. . I -2, 335
(1930)) and G. C. M. 8553 (C. . I -2, 109 (1930)) shoud be
revoked or modfed.
The Massachusetts corporaton e cse ta , adopted n 1919, whch
s a ta on the prvege of carryng on or dong busness, s computed
by addng together a percentage of the corporate e cess deter-
mned as of pr 1 and a percentage of the corporaton s net ncome
as reported to the Federa Government on ts ast ncome ta re-
turn pror to pr 1. The court n ts opnon n the above-cted
case was concerned wth the accrua and deducton for Federa n-
come ta purposes of that part of the State ta based upon net
ncome of the corporaton. The court hed that the appeant cor-
Soraton, beng on a caendar year bass, was entted to accrue and
educt for the year 1920 that part of the ta whch was based upon
ts net ncome for that year for Federa ncome ta purposes, even
though the other part of the ta , based on the corporate e cess
as of pr 1, 1921, coud not be accrued and deducted unt the
caendar year 1921. The court cted the case of Sprngdae Fnshng
Co. v. Commonweath (2 2 Mass., 37; 136 N. ., 250) wheren the
Massachusetts ta was characterzed as a snge ta , and e paned
ths reference to mean that the ta , athough made up of two com-
ponents, was a ta on a snge commodty, that s, the e ercse of the
corporate franchse durng the year precedng the pr 1st as of
whch the corporate e cess was cacuated, and not to mean that the
ta was a snge ndvsabe ta .
In G. C. M. 6616, supra, the Sprngdae case was nterpreted as
hodng that the Massachusetts ta , athough made up of two sep-
arate parts, was a snge ndvsbe ta . ccordngy, t was hed
that the ta , as a whoe, must be accrued as of pr 1. The court,
n referrng to G. C. M. 6616, stated that It does not appear that
the ta payer argued for separate consderaton of the two factors
comprsng the Massachusetts domestc corporaton ta . The con-
fct between G. C. M. 6616 and the opnon of the court as to the
nature of the Massachusetts ta appears to have resuted from d-
vergent nterpretatons of the Sprngdae case.
The Massachusetts corporaton e cse ta aw was amended n
1927, effectve anuary 1, 1928, so that the vauaton of the cor-
porate e cess was to be made as of the cose of the corporaton s
ta abe year. ccordngy, G. C. M. 8553, supra, hed that a cor-
poraton on the caendar year bass coud deduct for the year 1928
the Massachusetts e cse ta whch accrued as of anuary 1, 1928,
and as of December 31, 1928. In vew of the change n the Massa-
chusetts aw, the concuson reached n G. C. M. 8553 s consstent
wth the opnon of the Crcut Court of ppeas for the Frst
Crcut, but the reasonng, n so far as t foows that contaned n
G. C. M. 6616, confcts therewth.
In vew of the foregong, G. C. M. 6616, supra, s revoked, and
G. C. M. 8553, supra, s modfed to accord wth the reasonng of
the court n Coton astc Web Co. v. Unted States, supra.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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23(m), rt. 23(m)-.
352
rtce 23(c)-1: Ta es. 19 1-15-10677
( so Secton 1, rtce 1-3.) G. C. M. 22636
R NU CT OF 1928.
Iowa rea property ta es accrue for Federa Income ta purposes
In September, when they are eved by the board of supervsors
and when the amount of the ta s fnay determned.
G. O. M. 9793 (C. . -2, 1 2 (1931)) modfed.
n opnon s requested whether G. C. M. 9793 (C. . -2, 1 2
(1931)) shoud be modfed n vew of the decson of the oard of
Ta ppeas n the case of Lowe . Chamberan et u . v. Comms-
soner ( 3 . T. ., 259, acquescence, page 2, ths uetn).
In G. C. M. 9793, supra, t was hed that rea property ta es n the
State of Iowa accrue for Federa ncome ta purposes as of anuary
1 of each year, whch s the date as of whch the ta es are assessed.
In the Chamberan case, t was hed that rea property ta es n
Iowa accrue n September, when they are eved by the board of
supervsors and when the amount of the ta s fnay determned,
at whch tme, under decsons of the Supreme Court of Iowa, the
ta frst becomes a en or obgaton aganst the and. (See Gates
v. Wrth, 181 a,, 19; 163 N. W., 215. so compare Iowa Weseyan
Coege v. nght, 207 a., 1238; 22 N. W., 502.)
The State of Iowa s n the |ursdcton of the Unted States Crcut
Court of ppeas for the ghth Crcut, whch n Lfson et a. v.
Commssoner (98 Fed. (2d), 508, Ct. D. 1 09, C. . 1939-2, 198) took
the poston that the accrua date of Mnnesota rea property ta es
s the date on whch the en for such ta es attaches to the and.
ccordngy, acquescence has been entered n the case of Lowe .
Chamberan v. Commssoner, supra. The decson n the Chamber-
an case, however, w not be foowed generay wth respect to the
accrua date of State property ta es, but w be confned n ts app-
caton to cases nvovng the accrua date of Iowa rea property ta es.
G. C. M. 9793, supra, s modfed to accord wth the vews e pressed
heren- . P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 23(e). D DUCTIONS FROM GROSS
INCOM : LOSS S Y INDI IDU LS.
rtce 23(e)-: Losses by ndvduas.
R NU CT OF 1932.
Deductbty of dfference between vaue of ease canceed and con-
sderaton receved for the canceaton. (See Ct. D. 1502, page 319.)
S CTION 23(m). D DUCTIONS FROM GROSS
INCOM : D PL TION.
rtce 23(m)-: Depeton of mnes, o and gas
wes, other natura deposts, and tmber; de-
precaton of mprovements.
R NU CT OF 193 .
Meanng of the word property. (See G. C. M. 22106, page 2 5.)
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rtce 23(m)-: Depeton of mnes, o and gas
wes, other natura deposts, and tmber; depre-
caton of mprovements.
R NU CT OF 193 ND PRIOR R NU CT
Status of o and gas easng transactons. (See G. C. M. 22730,
page 21 .)
rtce 23 (m)-9: Determnaton of mnera contents
of mnes and of o or gas wes.
R NU CTS OF 193 ND 1932.
Reguatons 86 and 77, amended. (See T. D. 505 , page 227.)
P RT I . CCOUNTING P RIOD ND M T ODS OF
CCOUNTING.
S CTION 1. G N R L RUL .
rtce 1-3: Methods of accountng.
R NU CTS OF 1921, 192 . 1920, 1928, ND 1932.
ccrua of Massachusetts e cse ta on corporatons. (See G. C.
M. 22525, page 350.)
rtce 1-3: Methods of accountng.
R NU CT OF 1928.
Iowa rea property ta es date of accrua. (See G. C. M. 22636,
page 352.)
S CTION 2. P RIOD IN W IC IT MS OF
GROSS INCOM INCLUD D.
rtce 2-1: When ncuded n gross ncome. 19 1-15-10678
Ct. D. 1500
INCOM T R NU CT OF 193 D CISION OF SUPR M COURT.
1. Gross Income Method of ccountng ccrua. of Deceased
Partner s Share of Profts arned but not Receved.
When both the decedent and the aw partnershp of whch e was
a member reported ncome on a cash recepts and dsbursements bass,
the decedent s share of partnershp profts earned but not yet receved,
consstng of uncoected accounts and unfnshed work, may be n-
cuded In gross ncome as accruabe tems for the perod endng wth
hs death, under the provsons of secton 2 of the Revenue ct of
193 .
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Thrd Cr-
cut 19 0 (112 Fed. (2d), 919), reversng memorandum opnon of
the Unted States oard of Ta ppeas 1938 , reversed.
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35
Supreme Court of the Unted States.
Guy T. cverng, Commssoner of Interna Revenue, pettoner, v. state of
ohn M. nrght, Deceased, ames G. nrght, mma . Neson, and Mdred It.
nrght, ecutors.
61 S. Ct. 777.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
March 31, 19 1.
OPINION.
Mr. ustce Reed devered the opnon of the Court.
Certorar was granted to revew the udgment beow1 because of a confct
between t and Pfaf v. Commssoner n the Second Crcut The ssue Is whether
secton 2 of the Revenue ct of 193 permts the ncuson, as accruabe tems,
In a decedent s gross ncome for the perod endng wth hs death of hs share of
the profts earned, but not yet receved, of a partnershp, when both the decedent
and the partnershp reported ncome on a cash recepts and dsbursements bass.
Respondents are the e ecutors of ohn M. nrght, an attorney and member
of a aw partnershp n New ersey. oth Mr. nrght and hs frm kept ther
accounts and made ther ncome ta report on a caendar year cash recepts and
dsbursements bass. e ded, testate, November 19, 193 . The partnershp
agreement provded for the termnaton of the partnershp on the death of any
partner and that hs estate shoud have hs partnershp percentage n the net
moneys then n the treasury of the frm, pus hs ke percentage n the outstand-
ng accounts and the earned proporton of the estmated recepts from unfnshed
busness. The w drected that the vauaton for the purpose of cosng out
the partnershp shoud be made by hs senor survvng partner, Mr. ames D.
Carpenter, and by agreement between Mr. Carpenter and the e ecutors a vauaton
was made of these tems as of the date of death for use n the Federa estate ta
and New ersey nhertance ta returns, wth the further understandng that the
survvng partners woud pay over to the e ecutors whatever was utmatey
renzed out of the vaued assets.
Pursuant to ths arrangement the Interest of Mr. nrght n the uncoected
accounts was vaued at 2,0, 0.55 and n the unfnshed work at 0,855.77. These
sums were reported as assets n the estate and nhertance ta returns but were
not ncuded n the ncome ta return made for the decedent for 193 nor were the
sums derved from these assets reported n the estate s ncome ta for 193 or
ater years.
The Commssoner assessed a defcency because he Incuded In the decedent s
return for 193 , under the camed authorty of secton 2, supra note 3, the
tems of accounts and unfnshed work. Respondents appeaed to the oard of
Ta ppeas. The oard decded that the evdence dd not show the stuaton
of the unfnshed work n suffcent deta to enabe the oard to determne nde-
pendenty tha t was not accruabe. The accounts recevabe were hed accruabe.
Ths eft the Commssoner s assessment Intact
On appea the crcut court of appeas reversed the oard. It was of the
opnon that the partnershp was a ta computng unt separate from ts members
and that secton 2 had the effect of pacng the decedent upon an accrua bass
at the date of hs death. Consequenty hs return shoud be made as t woud
have been made If the deceased used the accrua method. The court then
reasoned that the requrement of secton 182 of the Revenue ct of 193 , ncudng
a partner s dstrbutve share of the partnershp earnngs, whether dstrbuted
or not, n the partner s computaton of hs own net ncome, put a partner on an
accrua bass n accountng for partnershp earnngs, Irrespectve of secton 2.
1 112 ed. (2d). 919.
113 Fed. (2d). See Pfaff v. Commssoner, No. 79 ths term, decded today
Ct. D. 1501, pn:-. 357, ths uetn .
S Stat., 6 0, oh. 277 : Sec. 2. Perod n Whch Items of Gross Income Incuded.
The amount of n Items of cross ncome ha be Incuded n the gross ncome for the
ta abe year In whch receved by the ta payer, uness, under methods of accountng
permtted under secton 1, any such nmounts nre to bp propery accounted for as of a df-
ferent perod. In the case of the death of a ta payer there sha be Incuded n computng
net ncome for Ihe ta abe pt rod n whch fas the date of hs death, amounts accrued
up to the date of hs death If not otherwse propery ncudbe n respect of such perod
or a pror perod.
1 ugust 28, 1939, by memorandum opnon. (Cf. Lan 0. Fehrman. ecutr , 38
. T. ., 37.)
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Consequenty secton 2 was hed not to affect the partnershp accountng prac-
tces. It was further determned that It was the rght to receve payment whch
made an earnng accrue an that as Mr. urgt under the partnershp agree-
ment had no rght to receve anythng from the frm e cept hs proportonate
Share of the cash recepts, these cash recepts were a that accrued to hm
before hs death.
The ast sentence of secton 2 whch requres the Incuson of amounts
accrued up to the date of hs death In computng net ncome for the perod n
whch hs death fas was added by the 193 Revenue ct. The reports recom-
mended ts addton because the courts have hed that ncome accrued by a
decedent on the cash bass pror to hs death s not Income to the estate, and under
the present aw, uness such Income s ta abe to the decedent, t escapes ncome
ta atogether. So secton 2 was drawn to requre the Incuson of a amounts
accrued to the date of death regardess of the fact that he may have kept hs
books on a cash bass. Wth the decared purpose of Congress n mnd, we
proceed to e amne the meanng of the secton.
s the questoned tems of unfnshed work appear n the partnershp accounts,
we must determne whether such earnngs, even f accruabe, are ncudbe n
the partner s return for 193 . Respondent argues, as the crcut court of appeas
hed, that secton 182 accrues, wthout any effect from the anguage of secton
2, a the earnngs that are ncudbe n a partner s return, and that snce the
partnershp method of keepng ts books dd not treat unfnshed busness as
recepts, ony the earnngs actuay coected are a part of the partner s dstrbu-
tve share under secton 182.
We thnk such a concuson s erroneous. The partnershp agreement and the
subsequent arrangement between the e ecutors and the survvng partners caed
for a vauaton on Mr. nrght s death and a dssouton as of that day. Ths
necesstated an accountng of partnershp earnngs for ths perod. y the terms
of the agreement, as woud have been necessary anyway, the earned proporton
of the unfnshed busness was to be vaued to determne the decedent s nterest
n the partnershp assets.9 ssumng at ths pont that the unfnshed busness
Is accruabe. ths accountng as of the tme of death woud show the partnershp
ncome for the ta abe year of the partnershp.10 s the net ncome of the part-
nershp s to be accounted for n the deceased partner s return, wthout consder-
aton of the perod over whch the ncome s earned, the fact that the payment for
the unfnshed busness w not be coected unt another ta abe year s m-
matera. Crcumstances whoy fortutous may determne the year n whch
ncome, whenever earned, s ta abe. n The dstrbutve share referred to n
Of. Revenue ct of 1932 ( 7 Stat.. 160, eh. 209. secton 2).
. ept. No. 70 , Seventy-thrd Congress, second sesson, page 2 ; S. Rept. No. 558,
eventy-thrd Congress, second sesson, page 28.
Ths stuaton foowed the decson of the Court of Cams n Nchos . Unted State
(6 Ct. CI., 2 1). decedent on the cash bass was a member of a partnershp dssoved
by hs death. Commssons earned before death but unpad to the partnershp were
vaued n the estate ta and coected by the partnershp after death for payment to the
e ecutors. The Court of Cams hed sums pad the e ecutors were part of the corpus and
not ncome.
The oard of Ta ppeas foowed the reasonng of the Court of Cams. (Wam O.
Frank. dm., 8 . T. .. 1071 ; . 8. eer, ec, 10 . T. ., 53: eorne Sr hos et a.,
ec, 10 . T. ., 919 ; state of . Pumer ustn, 10 . T. ., 10.15 ; Wam . Yandcr.
ot. ec, 11 . T. ., 291 ; . oand uchncoss. ec, 11 . T. ., 9 7 ; Wam P.
odaet et a., ec, 13 . T. ., 12 3; ackaon . emper, dm., 1 . T. ., 931;
Maurce L. Godman, 15 . T. ., 13 1.)
. Report, supra.
Sec. 182. Ta of Partners.
There sha be Incuded n computng the net Income of each partner hs dstrbutve
share, whether dstrbuted or not, of the net ncome of the partnershp for the ta abe
year.
We do not consder or decde whether ths accountng for a fractona year may affect
the Indvdua returns of survvng partners. Nether do we apprase the effect of agree-
ments for contnuaton of an nterest n the partnershp after death. (See u v. Unted
States. 295 U. S., 2 7 Ct. D. 969. C. . I -1 310 (1935) .)
If the partnershp had been upon an accrua bass whch treated accounts as accrued
upon a determnaton of the amount of fees, t may be that a decedent s nterest woud
not be dstrbutabe unt a ater year. It mght then be Income to the estate, even
though the vaue of the rght to receve ft was ncuded In the estate return. concuson
as to ths s unnecessary and Is pretermtted. (Cf. note 23, the cases cted n note 0 and
u v. Unted States, 205 U. S., 2 7, 255, 256-2.57.)
Sc. 8. Defntons.
When used n ths tte
(a) Ta abe Year. Ta abe year means the caendar year, or the fsca year end-
fng durng such caendar year, upon the bass of whch the net ncome s computed under
ths Part. Tasabe year ncudes, n the case of a return made for a fractona part
of a year under the provsons of ths tte or under reguatons prescrbed by the Com-
mssoner wth the approva of the Secretary, the perod for whch such return s made.
uorantv Trust Co. . Commr. (303 U. S., 93, 98 Ct. D. 1327, C. . 1938-1, 258 ).
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356
secton 182 does not mean avaabe In cash for payment to the partner. It means
ony that gans attrbutabe to the partner s nterest n the frm were earned.
Partnershp returns may be made on a dfferent bass of computaton than those
of the members.12 Thus because of the partnershp arrangement and agreement,
the vaue of the unfnshed busness must be determned as of the date of death.
Further the resut, under the assumpton here that t s an accrua, s a dstrbu-
tve share and s to be carred nto the partner s return. Respondent s argu-
ment that the requrement of secton 182, ncudng a dstrbutabe shares n
the partner s return, puts a partnershp returns on the accrua bass fas to
gve weght to the fact that a partnershp on the cash method shows ony cash
recepts as a partner s dstrbutve share. The requrement to account for a
dstrbutve share, athough the share s actuay not dstrbuted, s not a requre-
ment to account for partnershp Income on an accrua bass. Snce a partner s
return of hs partnershp earnngs woud vary, dependent upon whether the part-
nershp used the cash or accrua method of accountng, we do not agree wth
respondent s suggeston.
We turn now to whether ths vauaton of the decedent s Interest In the part-
nershp s an accrua of ncome whch must be refected n the ncome ta or a
vauaton of assets ony refected n estate or Inhertance reports. Ths partner-
shp uses the cash recepts method. There was no customary accountng system
to determne whether the vaue of servces rendered shoud be accrued before
payment. Under such crcumstances, we are of the vew that Items of partner-
shp ncome propery accrued shoud be ncuded n the ncome ta return of the
deceased partner. Ths w cause the accrued tems of partnershp returns
to be ncuded n the Income ta return of a deceased partner, whether the
partnershp method Is accrua or cash.13 Furthermore, an accrua of com-
pensaton for the unfnshed busness seems sound n vew of the purpose of
the enactment of secton 2.
The meanng of amounts accrued up to the date of hs death s cear as
to f ed rent, nterest, saary or wages for persona servces and other smar
ncome whch may ready be attrbuted to a partcuar perod. There are
ke deductons such as nterest and ta es.1 The uncertanty as to the meanng
arses n the fed of persona servce from tems whch can not be accounted
for on a bass of successve equa unts of tme. ampes of the dffcuty
are the vaue, pror to a successfu resut, of servces rendered on a contngent
bass, done on a quantum merut whether that woud or woud not vary wth the
outcome, or e poratory or premnary steps ookng towards fna accompsh-
ment.
Whe accrue and ts varous dervatves are not new to the nomencature of
accountng or ta aton, ts use has not suffced to bud t Into a word of art
wth a dente connotaton when empoyed n descrbng tems of gross ncome.
The 1913 ct put the ta payer on an actua cash recept and dsbursement bass.
The 1916 ct gave the ta payer the opton of reportng on ether the cash or
accrua bass and the 1918 ct mted the return to the method of accountng
reguary empoyed uness otherwse drected by the Commssoner of Interna
Revenue. smar provson covers the year here n queston.1 That the
meanng to be attrbuted to accrued as used n secton 2 s to be gathered from
Its surroundngs s emphaszed by secton 8, Defntons, whch says:
(c) Pad, Incttbbed, ccbukd. The terms pad or Incurred and pad
or accrued sha be construed accordng to the method of accountng upon the
bass of whch the net ncome Is computed under ths Part
It Is to be noted that no change was made by the 193 ct In the secton 8
defnton of accrued. 10 Yet, It s obvous that the defnton Is nappcabe
snce a ta payer on a cash bass can not have a method of accountng by
whch the meanng of accrua Is f ed. Consequenty It Is besde the pont to gve
weght to provsons of the reguatons or accountng practces whch do not
a Truman v. Unted State ( Fed. Supp., 7 ; sectons 183 and 187).
The nevtabe varatons of accrued whch depend upon estabshed accountng
practce do not destroy the prncpe.
Cf. Unted State . nderson (269 D. S., 22 T. D. 8830, C. . -, 170 (1026)1).
38 Stat., 11 at 166.
39 Stat, 756. sectons 8(b) and 13(d).
11 0 Stat.. 1057, secton 212(b).
8 Stat.. 680, secton 2.
Cf. rnest f. u, ec. (7 . T. ., 993. 095).
Cf. secton 8(c) of the Revenue ct of 1932 ( 7 Stat., 188).
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recognze accruas unt a determnaton of compensaton. Such provsons when
apped brng the Income nto succeedng years. It has been frequenty sad, and
correcty, that secton 2 was amed at puttng the cash recept ta payer on the
accrua bass.11 ut that statement does not answer the meanng of accrua In
ths secton. ccounts kept consstenty on a bass other than cash recepts
mght treat accruas qute dfferenty from a method desgned to refect the
earned Income of a cash recept ta payer. ccruas here are to be construed
In furtherance of the ntent of Congress to cover Into ncome the assets of
decedents, earned durng ther fe and unreported as ncome, whch on a cash
return, woud appear n the estate returns. Congress sought a far refec-
ton of ncome.
ccrued ncome obvousy connotes more than Interest. In Unted States v.
mercan Can Co., ths Court approved an accrua bass where pecunary
obgatons to or by the company were treated as f dscharged when ncurred.
In Unted States v. nderson accruas of f ed annua charges, e. g., ta es
payabe n another year, were permtted aganst determnabe gross Income.
eepng accounts and makng returns on the accrua bass, as dstngushed
from the cash bass, mport that t s the rght to receve and not the actua
recept that determnes the ncuson of the amount In gross ncome. The
competon of the work n progress was necessary to f the amount due but the
rght to payment for work ordnary arses on parta performance. ccrued
Income under secton 2 for uncompeted operatons ncudes the vaue of the
servces rendered by the decedent, capabe of appro mate vauaton whether
based on the agreed compensaton or on quantum merut. The requrement of
vauaton comprehends the eements of coectbty. 1 The tems here meet
these tests and are sub|ect to accrua.
The |udgment of the crcut court of appeas Is reversed and the decson of the
oard of Ta ppeas affrmed.
rtce 2-1: When ncuded n gross ncome. 19 1-15-10679
Ct. D. 1501
INCOM T R NU CT OF 103 D CISION OF SUPR M COURT.
1. Ghosb Income Method of c|countno ccrua of Deceased
Partner s Share of Profts arned but not Receved.
The far vaue of a deceased partner s Interest In the accounts of
a medca partnershp were ncudbe n hs gross Income for the
perod endng wth hs death n 1935, under the provsons of secton
2 of the Revenue ct of 193 and artce 2(1) of Reguatons 80,
where the decedent and the partnershp were on a cash bass.
2. Decson Foowed.
everng v. state of ohn 11. nrght Ct. D. 1500, page 13, ths
uetn foowed.
8. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut 19 0 (113 Fed. (2d), 11 ), affrmng memorandum opnon
of the Unted States oard of Ta ppeas 1939 , affrmed.
Reguatons 86, artce 2-1.
Lan O. Fchrman, Usee. (38 . T. ., 37); state of Wton . Lambert ( 0
. T. ., 802, 800) : state of O. Percy UcUue ( 1 . T. ., 1186, 1193) ; nrght v.
Commssoner (112 Foc. (2d), 9111). ths case beow.
It Is mmatera that a possbty of escapng an ncome ta s not barred, as for
nstance the ncreased vaue of asset tems n an estate return. ct, 113ta) (5)
the entre fed ot proper egsaton need not be covered by a snse enactment.
(Rosentha v. ew York, 22G U. S., 260, 271; cf. eokee Coke Co. v. Tayor, 23 U. S.,
22 , 227).
280 U. S., 12, 17 Ct. D. 16 , C. . I -1, 292 (1930)1.
269 U. S., 22. 37 T. D. 3839, C. . -, 179 (1926U.
Sprng Cty Co. v. Commr. (292 U. S 182, 18 Ct. D. 829, C. . III-1. 281
(193 ) ) ; Guaranty Trust Co. . Commr. (303 . S.. 93, 98).
Cf. Parn, ccruas to Date of Death (87 U. of Fa. L. Rev.. 29 , 301) ; Farrand
Farrand, Treatment of ccrued Items on Death (13 So. Ca. L. Rev., 31).
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358
Supreme Court op thb Untes) States.
Norman . Pfaff and Frank . Waace, ecutors of the state of Wam L.
Waace, Deceased, pettoners, v. Commssoner of Interna Revenue.
61 S. Of., 783.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
March 81, 19 1.
OPINION.
Mr. ustce Reed devered the opnon of the Court
Ths case presents the same queston as everng v. nrght, decded to-day
Ct. D. 1500, page 353, ths uetn . Pettoners are the e ecutors of a de-
ceased physcan who durng 1935 was a member of a medca partnershp and
entted to 0 per cent of ts profts. e ded December 25, 1935, on whch
date there were outstandng about 69,000 of partnershp accounts recevabe
for servces rendered to patents durng hs fetme. s death worked a ds-
souton of the partnershp under secton 62( ) of the New York Partnershp
Law. The decedent s nterest n these accounts came to over 27,000. oth
he and the partnershp were on a cash bass. Pursuant to secton 2 of the
Revenue ct of 193 and artce 2(1) of Treasury Reguatons 86, the Com-
mssoner ncuded the decedent s share of the accounts recevabe n hs 1935
ncome, though ony at about one-ffth of face vaue. The oard of Ta p-
peas sustaned the Commssoner s vew of the statute, and aso rued that
the vauaton of the decedent s nterest n the accounts at one-ffth of face
vaue was ampy supported. The crcut court of appeas, wthout wrtng
an opnon, affrmed the oard. (113 Fed. (2d), 11 .) ecause of a confct
wth the Thrd Crcut s decson n the nrght case, supra, we granted
certorar.
There s no reevant dfference between these facts and everng v. nrght.
For the reasons stated n that opnon t was proper to Incude n the dece-
dent s 1935 ncome the far vaue of hs nterest n the accounts.
rmed.
S CTION 5. LLOC TION OF INCOM
ND D DUCTIONS.
rtce 5-1: Determnaton of the ta abe 19 1-23-10733
net ncome of a controed ta payer. Ct. D. 151
INCOM T R NU CT OF 193 D CISION OF COURT.
1. Income Deductons ocaton Loss on Sae of Stock c-
qured from Corporaton Under Common Contro Wth
Ta payer.
In 193 the Corporaton sod through a broker certan stock
whch t had acqured n 1931 In a transacton wth Y Corporaton,
whch was whoy owned and controed by an ndvdua who waa
the soe stockhoder and owner of . t the tme of acquston the
stock was entered on s books at the orgna cost to Y, whch waa
much greater than the far market vaue of the stock at that date.
ed: The acton of the Commssoner was not arbtrary or ca-
prcous In usng the far market vaue of the stock on the date of
acquston, rather than the orgna cost to Y, as a bass for ao-
catng to the Corporaton the amount of deducton for oss sus-
taned on the sae. The queston of what Is actua cost Is to be
determned by the Commssoner as a matter of fact, and he Is gven
a wde attude under secton 5 of the Revenue ct of 193 In
makng such determnaton.
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359
5, rt. 5-1.
2. Case Foowed n Prncpe.
satc Petroeum Co. v. Comms onrr (1935) Ct. D. 1105, C. .
-1, 181 (1930) (79 Fed. (2d), 23 ) foowed In prncpe.
8. Decson ffrmed.
Decson of the Unted States oard of Ta ppeas (19 0) ( 1
. T. . 223) nfrned.
Unted States Crcut Court of ppeas for the Seventh Crcut.
Cf. U. R. Co., pettoner, v. Commssoner of Interna Revenue, respondent,
117 Fed. (2d), 187.
Petton for revew of decson of the Unted States oard of Tar ppeas.
efore vans and Sparks, Crcut udges, and Lndey, Dstrct udge.
anuary 17, 19 1.
opnon.
Sparks, Crcut udge: ppeant pettoned for revew of a proposed def-
cency n ncome ta abty for the year 193 . The defcency was due to
reducton In a capta oss sustaned on the sae of 300 shares of mercan
Superpower Co. stock. Respondent, under secton 5 of the Revenue ct of
193 ,1 made hs determnaton on the bass that the stock had been acqured
from a company under common contro wth pettoner. The oard of Ta
ppeas sustaned the respondent s rung, and determned pettoner s Income
ta for 193 to be 2,713.59.
The queston presented s whether the acton of the Commssoner was
arbtrary or caprcous, n aocatng to the ta payer the amount of 80 .76,
as a deducton from gross ncome, rather than 7,159.51 camed by the
ta payer.
The oard found the facts to be as foows: George T hen was the soe
stockhoder of the ta payer and of the Oakwood company, both of whch were
under hs contro. In 193 the ta payer, through a broker, sod 300 shares
of the Superpower company stock for 263.99. In ts return for 193 , ta payer
camed a oss of 7,159.51 by reason of ths sae, beng the dfference between
the aeged cost of the stock and ts sae prce. Ths stock was part of 1,500
shares of the Superpower company whch had been acqured by the ta payer
In a transacton wth the Oakwood company on December 28, 1931. The
1,500 shares had been paced on ta payer s books at a cost to It of 37,117.50,
whch was the orgna cost of ths stock to Oakwood. owever, the far
market vaue of 300 shares of that stock on the date of transfer to the ta payer
was 1,068.75.
On ths date the ta payer had a maturng oan of 100,000 at the Marne
Natona change ank of Mwaukee. Its portfoo of securtes on that date
had a market vaue of 91,07 ) whch wth ts cash of ,060.05 consttuted Its ony
qud assets, makng a tota of 95,135.05. Its ony other asset at that tme
was an open account advance to the Oakwood company of 929,6 . 0, and ts
ony other abty was an advance from Uhen, Its soe stockhoder, of
561,687.08.
In order to present an acceptabe bank statement and to obtan qud assets
n e cess of ts bank oan, the ta payer purchased securtes from Oakwood, In-
cudng the stock here nvoved. These securtes were fgured at Onkwood s
cost of 369,65 .90, and Oakwood assumed the ta payer s debt to Uhen of
. 61,687.08. The tota of these fgures e ceeded Oakwood s debt to ta payer of
929,6 . 0 by 1,697.58, whch was pad to Oakwood on the same day by ta -
payer s check. Ths transacton n effect canceed Oakwood s account owng to
1 Sec. 5. In any case of two or more organzatons, trades, or busnesses (whether or not
Incorporated, wh ther or not organzed n the Unted States, and whether or not affated)
owned or controed drecty or Indrecty by the same Interests, the Commssoner s
authorzed to dstrbute, apporton, or aocate gross ncome or deductons between or
among such organzatons, trades, or busnesses, t he determnes that such dstrbuton,
apportonment, or aocaton Is necessary n order to prevent evason of ta es or ceary
to refect the ncome of any of such organzatons, trades, or busnesses.
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113(a).
360
ta payer, rendered a of ta payer s assets qud, and protected ta payer on a
of ts obgatons e cept that to the bank.
On the same day. after the transacton, ta payer renewed ts note at the bank.
oth the renewa note and the maturng note were coatera obgatons of the
ta payer aone, but the bank ooked to the credt of ta payer s soe stockhoder
In makng the oans.
The Commssoner used 1,008.75, the far market vaue of 300 shares of the
Superpower company on the date of the transfer, as ta payer s bass, and ao-
cated to It 80 .76 of the oss, on the ground that such aocaton was necessary
n order to propery refect the ta payer s Income for that year. In ths we thnk
there was no error.
Congress has paced broad dscreton n the Commssoner and the oard and
we can not substtute our |udgment for thers uness that dscreton has beeu
abused. ( encr v. Damond ka Co., 288 U. S., 502 Ct. D. 652, C. . II-1,
833 (1933) .) The Revenue ct, of course, provdes that cost s the proper bass
for determnng oss on securtes sod. ut the queston of what Is actua cost
Is to be determned by the Commssoner as a matter of fact, and he s gven a
wde attude under secton 5 of the ct n makng such determnaton. The
evdence here does not convnce us that the Commssoner abused hs dscreton.
We thnk he s supported n prncpe by satc Petroeum Co. v. Commssoner
(79 Fed. (2d), 23 Ct. D. 1105, O. . -, 181 (1936) ). We approve the
oard s decson, and t Is affrmed.
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION OF N T INCOM .
S CTION 113(a). D UST D SIS FOR D T RMINING
G IN OR LOSS: SIS (UN D UST D)
OF PROP RTY.
19 1-16-10685
Ct. D. 150
INCOM T R NU CTS OP 1928 ND 1932 D CISION OF SUPR M COURT.
1. Gan or Loss ass Sae of Persona, Property by Remander-
men Under Testamentary Trust.
Remandermen under a testamentary trust receved dstrbutons
from the trustees n 192 , 1928, and 1931 of trust corpus consstng of
securtes some of whch had been owned by the decedent at hs
death, others had beeu purchased by the e ecutors, and some by the
trustees. Saes of certan of the securtes, ncudng those receved
In e change In a nonta abe transacton, were made by the reman-
dermen n 1930 and 1933. ed: For the reasons stated n Magure
v. Commssoner (Ct. D. 1506, page 366, ths uetn , the bass for
determnng gan or oss upon such saes, under secton 113 of the
Revenue cts of 1928 and 1932, s the vaue of the property when
devered by the e ecutors to the trustees n the case of securtes
owned by the decedent at death and those purchased by the e ecu-
tors, and n the case of securtes purchased by the trustees, the bass
s cost to the trustees.
2. Capta sset odng Perod n Case of Remandermen
Under Testamentary Trust.
For the purpose of determnng whether property consttutes a
capta asset under the provsons of secton 101(c)8 of the Reve-
nue ct of 1928, the hodng perod n the case of securtes purchased
by trustees and dstrbuted to a remanderman under a testamentary
trust dates from the tme of purchase by the trustees. everng .
ambr Ct. D. 1505, page 36 , ths uetn foowed.
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361
113(a).
8. Gan ok Loss ass Saes of Stock Frst-n, Fbst-out
ue Condtona, Remander.
Where shares of stock were sod by remandermen under a testa-
mentary trust, some securtes havng been acqured under the
trust and some havng been ater acqured n e change for stock
prevousy purchased by one of the remandermen, and where the
stock sod coud not be dentfed wth any partcuar shares so ac-
qured, t must be presumed, under the frst-n, frst-out rue
refected n artce 58 of Reguatons 77, whch adopts the rue of
tackng contaned n secton 101(c)8( ) of the Revenue ct of
1932, that the stock receved from the decedent s estate was the frst
sod, and the date of decedent s death s the date of acquston for
the purpose of determnng gan or oss on such saes. The cond-
tona nature of the remander nterest of one of the benefcares
does not necesstate a dfferent resut. For the purpose of a pont
of reference and a standard of vaue for the determnaton of gan
or oss reazed on subsequent saes of property acqured by bequest,
devse, or nhertance, dstnctons between vested and contngent
remanders or between absoute and condtona property nterests
have no reevancy.
. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (112 Fed. (2d), 530), affrmng decson of the Unted
States oard of Ta ppeas (1939) (39 . T. ., 916), and two
memorandum opnons of the oard (1939), reversed.
Supreme Court of the Unted States.
Gup T. everng, Commssoner of Interna Revenue, pettoner, v. Mar|ore .
Campbe.
Guy T. everng, Commssoner of Interna Revenue, pettoner, v. Seymour .
no .
Guy T. everng, Commssoner of Interna Revenue, pettoner, v. Dorothy . O.
Rogers.
61 S. Ct, 798.
On wrts of certorar to the Unted States Crcut Court of ppeas for the Second Crcut
March 31, 19 1.
OPINION.
Mr. ustce Dougas devered the opnon of the Court.
The questons presented by these cases are n part reated to, and In part the
same as those nvoved n Magure v. Commssoner, No. 3 6 Ct. D. 1506, page 366,
ths uetn , and everng v. Gambr, No. 72 Ct. D. 1505, page 36 , ths
uetn , decded ths day.
The father of these respondents ded n 1915. y hs w t was provded that
hs resduary estate shoud be dvded nto four parts. One part was devsed
and bequeathed to trustees: To receve, hod and, from tme to tme, nvest
and renvest the same, and to coect the rents, ncome, ssues, and profts on
the property from tme to tme consttutng such trust fund and to pay over so
much of the net ncome arsng therefrom, as to my sad trustees sha seem wse
and proper toward the support, mantenance, and educaton of my daughter,
Mar|ore no , unt she sha arrve at the age of twenty-one (21) years, and to
accumuate the baance of the ncome durng her mnorty for her beneft, and
to pay over the accumuated ncome to her when she sha arrve at the age of
twenty-one (21) years and thereafter to pay over the entre net ncome to my
sad daughter, Mar|ore no , unt she sha arrve at the age of twenty-eght
(28) years, at whch tme, I gve, devse, and bequeath to my sad daughter,
Mar|ore no , one-haf ( ) of the property then consttutng sad trust fund
and 1 drect my sad trustees to pay over the net ncome on the remanng one-
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113(a).
362
haf ( ) of sad trust fund unt she sha arrve at the age of thrty-fve (35)
years, at whch tme I gve, devse, and bequeath the remanng part of sad trust
fund to my sad daughter, Mar|ore no , and to her hers and assgns forever.
In the event that my sad daughter, Mar|ore no , sha de before reachng the
age of thrty-fve (35) years, I gve, devse, and bequeath any part or porton of
sad trust fund, whch has not then been pad over to her, or to the possesson
of whch at the tme of her death she was not entted, unto the ssue of sad
Mar|ore no , f any, survvng her, to be dvded among them, share and
share ake. nd n case there be no ssue her survvng, then I gve, devse, and
bequeath sad trust fund unto her hers.
Mar|ore no s respondent Mar|ore . Campbe. nother part of the resdu-
ary estate was paced n trust for respondent Dorothy . G. Rogers, under the
game terms. nd a thrd part together wth certan securtes was paced n trust
for respondent Seymour . no , under smar terms. e, however, was to re-
ceve 500,000 of the trust fund when he reached the age of 25, one-haf of the
remanng trust fund when he became 30, and the baance at 35. Meanwhe, the
Income was payabe to hm. On uy 1, 1921, the e ecutors, pursuant to an order
of the probate court, transferred the property to the trustees.
Mar|ore . Campbe attaned the age of 28 on uy 10, 1928, and receved at
that tme one-haf of the property of her trust. Certan of the securtes whch
she then receved were sod by her durng 1933 and certan of the bonds matured
and were pad durng 1933. Some of those securtes had been hed by her father
at hs death, others had been purchased by the e ecutors, and some had been pur-
chased by the trustees. In 1926 and 1927 she purchased stock of the F. W. Woo-
worth Co., whch wth dvdends receved n 1927 amounted to 1.000 shares. In
1928 she receved devery from the trustees of 15,000 shares of Woohvorth stock
whch represented shares owned by her father at hs death, a subsequent ta -free
stock spt-up, stock dvdends, and purchases by the trustees. In 1929 she sur-
rendered the .OOO shares she owned and receved ta free 0,000 shares pursuant
to a spt-up of the stock. In 1933 she sod 10,000 of the shares receved n 1929.
There s no way of Identfyng the shares sod wth any partcuar shares sur-
rendered n 1929.
Dorothy . G. Rogers became 28 on ugust 26, 192 , and 35 on ugust 26, 1931,
at whch tmes she receved dstrbutons of the corpus. Durng 1933 she sod
securtes so receved. Some of those securtes had been purchased by the trus-
tees, some by the e ecutors, and others had been owned by her father at hs death.
Seymour . no attated the age of 30 on September 1, 1928, and receved on
that date one-haf of the corpus, ncudng 8,575 shares of stock of Mane Share
Corporaton, of whch 5,100 were purchased by the trustees on ugust 31,1927, and
8, 15 were purchased by the trustees on ugust 30, 1928. e ater e changed
those shares n a nonta abe transacton and on une 10, 1930, sod the shares
receved n that e change.
The oard of Ta ppeas1 and the crcut court of appeas (112 Fed. (2d),
530) hed: (1) that the bass to respondents under secton 113(a)5 of the Rev-
enue cts of 192S and 1932 as respects saes made by them was the far market
vaue at the tme when the securtes were devered to them by the trustees, no
matter when or how the trustees or the e ecutors may have obtaned the secur-
tes; (2) that n determnng how ong respondent no hed securtes for pur-
poses of computng the term of hs hodng under secton 101 of the Revenue
ct of 1928, the date of transfer from the trustees shoud govern; and (3) that
as respects the sae of Wooworth stock by respondent Campbe, her own shares
shoud be treated, under the frst-n-frst-out rue, as sod pror to those whch
were devered to her by the trustees.
It foows from our hodng n Magure v. Commssoner, supra, that the rungs
on the frst ssue were erroneous. s respects the securtes owned by the
decedent at death, the bass s ther vaue when devered by the e ecutors to
the trustees. s respects the securtes purchased by the trustees, the bass Is
cost to the trustees. nd we are of the vew that as respects securtes purchased
by the e ecutors the bass s the vaue when devered by them to the trustees.
s we sad n Magure v. Commssoner, supra, the egsatve hstory of secton
113(a)5 ceary ndcates that t appes to purchases by e ecutors. ence t
foows from our reasonng n Magure v. Commssoner, supra, that the date
of devery by the trustees to the benefcares s no more approprate here than
t s n case of property owned by the decedent at date of death.
The opnon of the oard In eve ng v. Campbe s reported In 39 . T. ., 916; ts
opnons n the other two cases are unreported.
Secton 113(a)5 of the 1932 ct ( 7 Stat., 1G9, 199) was the same as secton 113(a)S
of the 1D2S ct ( 5 Stat., 791, 819).
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363
113(a).
We aso dsagree wth the court beow on the second Issue. Some of the
securtes were sod by respondent no more than two years after they had
been purchased by the trustees. For the reasons stated n cvcrng v.
Oambr, supra, t foows, therefore, that they had been hed by hm for
more than two years wthn the meanng of secton 101(c)8.
We aso ake a dfferent vew on the thrd proposton. The frst-n-frst-out
rue s refected n Treasury reguatons. The genera rue s that where shares
of stock can not be Identfed wth any partcuar ots purchased, they w be
charged aganst the earest purchases. For the purpose of determnng the
earest purchases the reguaton adopts the rue of tackng contaned n secton
101(c)8( ). That beng true. It must be presumed that the Wooworth stock
comng from the decedent s estate was frst sod. The hodng by the trustees
s ncuded n that of the benefcary. ence, as we .ndcated n Ieverng v.
Oambr, supra, the date of acquston by the benefcary was the date of death.
It s that date of acquston whch governs the appcaton of the frst-n-frst-
out rue. Therefore, the court beow was n error n rung that respondent
Campbe s own shares were sod frst.
Respondents have contended, at east n regard to some of these ssues, that
the nature of ther remander nterests necesstates a dfferent resut. Thus, n
case of respondent no t s strongy urged that n vew of the condtona
nature of hs remander nterest he hed the securtes ony from the date when
hs nterest became ndefeasbe and the securtes were dstrbuted to hm, snce
one can not be deemed to have hed or acqured property whch he mght never
obtan. ut unke the stuaton n Ieverng v. aock (309 U. S., 106 Ct. D.
1 0, C. . 19 0-1, 223 ), we are not concerned here wth the queston as to when
the transfers took effect for purposes of the estate ta . s we ndcated n
Magure v. Commssoner, supra, we are deang ony wth a pont of reference
and a standard of vaue for determnaton of gans or osses reazed on subsequent
saes of property acqured by bequest, devse, or nhertance. For that purpose
dstnctons between vested and contngent remanders or between absoute and
condtona property nterests have no reevancy. ach remanderman has be-
come the ta payer because he has obtaned possesson and contro of the property
and has sod t. Whe the property s hed n trust, the vested remanderman
has no more rghts of possesson and contro than the contngent remanderman.
Yet each has acqured a property nterest. The statutory provsons here n
queston come nto pay when that nterest ater rpens nto fu ownershp and
a sae s made. ence the vaue of the property at the tme when the ta payer
frst acqures an nterest n It has reevance to a subsequent determnaton of
the gans or osses. s we remarked n Magure v. Commssoner, supra, the
resduary egatee n rewster v. Gage (280 U. S., 327 Ct. D. 1 8, C. . I -1, 27
(1930) ) was hed to have acqured hs nterest at date of death though at that
tme t was not absoute. To be sure, n these cases the nterest of the reman-
dermen In the property at the earer tme was mted by the very terms of the
bequest. ut the ta here n queston Is not on ther remander nterests; t s
on gans reazed by them as owners of that property. ence, to carry nto that
computaton the earer vaue of the property Is not to ta them on vaues whch
they never receved. It merey provdes a rue of thumb n aevaton of a ta
whch woud be computed by reference to the entre amount of the orgna
Inhertance were t to be based or cost to the ta payer.
Reversed.
The Chef ustce and Mr. ustce Roberts thnk the |udgments shoud be
affrmed for the reasons stated by the court beow (112 Fed. (2d), 530).
On ths phase of the eases no queston Is presented as to securtes purchased by
e ecutors.
rtce 58, Treasury Reguatons 77, promugated under the 1932 ct, provdes:
Sae of stock and rghts. When shares of stock n a corporaton are sod from ots
purchased at dfferent dates or at dfferent prces and the dentty of the ots can not be
determned, the stock sod sha be charged aganst the earest purchases of such stock.
In the determnaton of the earest purchases of stock the rues prescrbed n subparagraphs
( ), ( ), (C), and (D) of secton 101(c)8 (reatng to the perod for whch property has
been hed) sha be apped. .
nd see artce 600( ) deang wth stock or securtes dstrbuted n reorganzaton.
The reguatons refer ony to purchases. ut no queston has been rased as to ther
appcaton to shares acqured under a w. In fact, the oard of Ta ppeas stated (39
. T. ., 916, 919) that the partes are n agreement that the frst n, frst out rue must
be apped, snce the shares whch the pettoner sod can not be dentfed as those pur-
chased at any partcuar tme. Furthermore, respondent concedes here that the ns
shoud not be mted to securtes whch have been bought as dstngushed from those
whch have been otherwse obtaned.
rtce 68, supra note .
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113(a).
36
19 1-16-10686
Ct. D. 1505
INCOM T R NU CT OF 1928 D CISION OF SUPR M COURT.
1. Gan or Loss ass Sae or Persona Property by Remander-
man Under Testamentary Trust.
For the reasons stated n Magure v. Commssoner Ct. D. 1506,
page 306, ths uetn , the bass under secton 113 of the Revenue
ct of 1928 for determnng gan or oss upon the sae, by a remander-
man under a testamentary trust, of trust property some of whch was
part of the orgna trust res and some was purchased by the trustees,
Is ts vaue when dstrbuted by the e ecutors to the trustees f the
property was owned by the decedent at the tme of death, and cost to
the trustees f t was purchased by them.
2. Capta sset odng Perod n Case of Remanderman Under
Testamentary Trust.
For the purpose of determnng whether property consttutes a
capta asset under the provsons of secton 101(c)8 and 101 (c)8( )
of the Revenue ct of 1928, the hodng perod n the case of persona
property acqured by a remanderman under a testamentary trust
dates from the decedent s death for property owned by decedent at
the tme of death, and from the date of purchase for property pur-
chased by the trustees. McFeey v. Commssoner Ct. D. 10 0, C. .
1 -2, 209 (1935) (296 U. S., 102) foowed.
3. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (112 Fed. (2d), 530 , affrmng decson of the Unted
States oard of Ta ppeas (1938) (38 . T. ., 981), reversed.
Supreme Court of tue Unted States.
Ouy T. cverng, Commssoner of Interna Revenue, pettoner, v. Rchard an
Nest ambr.
61 S. Ct., 795.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
March 31, 19 1.
OPINION.
Mr. ustce Dougas devered the opnon of the Court.
The questons nvoved here are n part the same as those n Magure v. Com-
ms oter, No. 3 6 Ct. D. 1506, page 366, ths uetn , decded ths day. Re-
spondent was a remanderman under a tnost created by the w of hs
grandmother1 who ded n 1897. The trust res, consstng of personaty, was
devered by the e ecutors to themseves as trustees n 1898. The fe bene-
fcary, respondent s mother, ded n March, 1928. On May 5, 192S, the trustees
devered the corpus to respondent as remanderman. Some of the property
was part of the orgna trust res, and some was purchased by the trustees both
1 Respondent was the soe survvng Issue of hs mother, nna an Nest Gambr, and
took under the foowng provsons of hs grandmother s w:
Nnth. the resdue of my estate of every knd I gve and devse as foows :
One haf thereof In equa shares to my daughters Mary an Nest ackson, nna an
Nest Gambr, and enne an Nest Foster, and my granddaughter, Mary ce an Nest
absoutey.
The other haf thereof In four equa shares to my e ecutors, to hod the same In
trust, one share for the beneft of each of the same four persons to wt my sad three
daughters and my sad granddaughter and to receve the ncome and pay the same to her
durng ter fe wth fu power to nvest and renvest n ther dscreton wthout any
mtaton whatsoever and at her denth to transfer and dever the same as she If eavng
ssue sha by w drect or n the absence of such drecton, to her ssue equay, or f she
ha eave no Issue, then to the survvors of the sad four persons to wt my sad three
daughters and my sad granddaughter, and to the ssue of any of the sad four persons who
may have ded, the ssue to take the share whch the parent woud have taken f vng.
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365
113(a).
pror to and subsequent to March 1, 1913. Durng the year 1030 (In February,
on May 6, and In une) respondent sod some of the property In each group.
The oard of Ta ppeas (38 . T. ., 981) and the crcut court of appeas
(112 Fed. (2d), 530) hed: (1) that for the purpose of determnng gan or oss
on the sae of the property n queston the bass to respondent by vrtue of sec-
ton 113(a)5 of the Revenue ct of 1928 ( 5 Stat., 791) was the far market
vaue of the property on the date when the corpus was devered to respondent;
and (2) that the property sod In February, 1930, had not been hed by the ta -
payer for more than two years and was, therefore, not a capta asset wthn the
meanng of-secton 101(c) of the 1928 ct, whe that sod on May 6 and n
une, 1930, had been hed by respondent for more than two years and was
therefore a capta asset.
The rungs on the frst queston were erroneous. For the reasons stated n
Magure v. Commssoner, supra, the bass under secton 113 (a) 5 for the property
devered to respondent by the testamentary trustees was ts vaue when ds-
trbuted by the e ecutors to the trustees f the property was owned by the
decedent at her death, and cost to the trustees f It was purchased by them.
We aso dsagree wth the dsposton made of the second queston. Capta
gans or osses are defned as those resutng from saes or e changes of capta
assets. (Secton 101(c) (1) and (2).) Capta assets are defned (wth e cep-
tons not matera here) as property hed by the ta payer for more than two
years. (Secton 101 (c)8.) nd secton 101(c)8( ) provdes: In determnng
the perod for whch the ta payer has hed property however acqured there sha
be ncuded the perod for whch such property was hed by any other person, f
under the provsons of secton 113, such property has, for the purpose of deter-
mnng gan or oss from a sae or e change, the same bass n whoe or n part n
hs hands as t woud have n the hands of such other person.
We are of the vew that under these provsons respondent s hodng perod
dates from the decedent s death for property whch she then owned and from
the date of purchase for property purchased by the trustees. In McFccy v.
Commssoner (296 U. S., 102 Ct. D. 10 0, C. . 1 -2, 209 (1935) ), ths Court
hed that a egatee s hodng perod under secton 101 (c)8 of the 1928 ct dated
from the decedent s death for property owned by the decedent and dstrbuted
to the egatee by the e ecutors, n spte of the fact that the egatee s bass under
secton 113(a)5 was vaue at the tme of dstrbuton to hm by the e ecutors.
The date of acquston was hed to be the date of death, regardess of the gap
between that date and the date of dstrbuton. nd that resut was reached
even though some of the ta payers Invoved were resduary egatees whose n-
terests at date of death were not uncondtona. The reasonng of that case
pus secton 101(c)8( ) make t pan that respondent s Interest, abet a
remander, was acqured at the date of decedent s death for property then owned
and at the date of purchase for property purchased by the trustees. The con-
tnuty In hs hodng was not broken by the ntervenng trust. The forma con-
sttuton of that trust though of speca sgnfcance under secton 113(a)5 (Ma
ffure v. Commssoner, supra) dd not change the basc quaty of hs property
nterest. nd the fact that that nterest dd not rpen nto fu and compete
ownershp e cept by the passage of tme or the occurrence of subsequent events
s nconsequenta. For secton 101(c)8( ) provdes, as we have seen, that n
determnng the ta payer s hodng perod there sha be Incuded the perod for
whch the property was hed by any other person f under secton 113 the prop-
erty had the same bass In whoe or n part n the ta payer s hands as t woud
have n the hands of the other person. It s pan that under secton 113 the
bass to the trustees was the same as the bass to the ta payer. ence the
perod of ther hodng Is not to be e cuded from the perod of the ta payer s
hodng. That makes pan that property hed by the ta payer as used In
secton 101 (c)8 embraces not ony fu ownershp but aso any nterest whether
vested, contngent, or condtona. Otherwse the perod of the hodng by trustees
3 It shoud, of course, be noted that secton 113(b) provded :
(b) Property cqured efor March 1, 1913. The bass for determnng the Ran
or oss from the sae or other dsposton of property acqured before March 1, 1913,
ba be:
(1) the cost of such property (or. In the case of such property as Is descrbed In
ubsecton (a) (1), ( ), (5), or (12) of ths secton the bass as theren provded), or
(2) the far market vaue of such property as of March 1. 1913, whchever s creater.
In determnng the far market vaue of stock n a corporaton as of March 1, 1913, due
regard sha be gven to the far market vaue of the assets of the corporaton as of that
data.
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113(a).
366
woud not be Incuded n the hodng by a mere remanderman. ence, as n
McFeey v. Commssoner, supra, we ook to the tme when the ta payer frst
acqured the nterest whch ater rpened nto fu ownershp. It s pan that
for property owned by the decedent he acqured that nterest at her death and
that for property purchased by the trustees he acqured that nterest at the
date of purchase.
Reversed.
The Chef ustce and Mr. ustce Roberts thnk the udgment shoud be
affrmed for the reason stated by the court beow (112 Fed. (2d), 530).
19 1-16-10687
Ct. D. 1506
ncome ta revenue act of 1028 decson of supreme court.
1. Gan ok Loss ass Saes op Persona Property Receved
by enefcary Under Testamentary Trust.
The benefcary of a trust, estabshed pursuant to the w of her
father, receved n 1923 from the trustees persona property part of
whch had been owned by the decedent and part purchased by the
trustees. Durng the year 1930 parts of both groups of property
were sod. In determnng gan or oss upon such saes, under the
provsons of secton 113 of the Revenue ct of 1928, the bass n the
case of property whch had been owned by the decedent s, under
secton 113(a)5 of that ct, ts vaue at the date when t was re-
ceved by the trustees from the e ecutors and not ts vaue at the
date of devery by the trustees to the benefcary. Dstrbuton to
the ta payer as used n that subsecton Is not necessary re-
strcted to stuatons where property s devered to the ta payer,
but ncudes the case where property s devered by the e ecutors to
trustees n trust for the ta payer. In the case of property whch
had been purchased by the trustees, the bass Is ts cost to the trus-
tees and not ts vaue at the date of devery by the trustees to the
benefcary. In the atter case the property was not acqured
by w wthn the meanng of secton 113(a)5, and the
bass s cost, as provded In secton 113(a).
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (19 0) (111 Fed. (2d), 8 3), reversng memorandum opnon
of the Unted States oard of Ta ppeas (1939), affrmed.
Supreme Court of the Unted States.
eremah D. Itagure and Ruth S. Magure, pettoners, v. Commssoner of
Interna Revenue.
61 S. Ct, 789.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
March 31, 19 1.
OPINION.
Mr. ustce Dougas devered the opnon of the Court.
The ta payer s1 share of a testamentary trust, estabshed pursuant to the
w of her father, was devered to her n knd n 1923. The property was
personaty, part of whch had been owned by the decedent and part purchased
by the trustees. The decedent ded In 1903 and hs e ecutors were dscharged
by the probate court n 1905. Pursuant to that order the e ecutors turned over
1 Pettoners are husband and wfe who fed a |ont return. The Income here Invoved
s that of the wfe.
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367
113(a).
to themseves, as trustees, a of the resdue of the estate. From that resdue
the ta payer s cam to the property n queston derved. Durng the year 1930
parts of both groups of property were sod. The questons presented reate to
the proper bass under the Revenue ct of 1928 ( 5 Stat., 791) for determnng
gan or oss upon those saes: (1) whether the bass n case of the personaty
owned by decedent s ts vaue when receved by the trustees from the e ecutors
or ts vaue at the date of devery by the trustees to the ta payer; and (2)
whether the bass n case of the personaty purchased by the trustees s ts cost
to the trustees or ts vaue at the date of devery by the trustees to the ta -
payer. The case s here on a petton for certorar whch we granted because
of a confct among the crcuts on those two questons.
L s respects the property owned by the decedent at hs death, we are of the
vew that the date when t was receved by the trustees from the e ecutors, rather
than the date when t was devered by the trustees to the ta payer, governs. In
the case of genera bequests, secton 113(a)5 of the Revenue ct of 1928 provded
that the bass sha be the far market vaue of the property at the tme of the
dstrbuton to the ta payer. ut n case of specfc bequests of personaty or
In case of reaty, the bass was the far market vaue of the property at the death
of the decedent. (Secton 113(a)5.) In the atter cases the property ether
vested n the her or devsee at death or was rather defntey marked at the
tme of death for the egatee. In the former the egatee normay must have
awated admnstraton of the estate before the property bequeathed to hm
coud have been dentfed wth certanty. That dfference suggests the dstnc-
ton n treatment under secton 113(n)5 of genera bequests of personaty. It
emphaszes that the words at the tme of the dstrbuton to the ta payer
meant the tme when the dstrbuton was made out of the estate. It supports the
vew that Congress focused secton 113(a)5 on the decedent s death and the
admnstraton of hs estate, and not on subsequent transfers or transmssons of
the property.
The egsatve hstory of secton 113(a)5 ends support to that concuson.
Pror to the 1928 ct the bass for property obtaned by bequest, devse, or
nhertance was the far market vaue at the tme of such acquston. The
ouse b whch became the Revenue ct of 1928 provded that the bass for
The w drected the e ecutors and trustees, not ess than 10 and not more than 20
years after the death of the testator, to make fna dstrbuton of ths resdue as foows:
to my wfe the one-thrd part thereof, the baance to be equay dvded among
my chdren, share and share ake, and shoud my wfe not be vng ut the tme of such
dstrbuton, then the 6ame sha be dvded equay among my chdren, share and share
ake, the descendants of any deceased chdren n such dstrbuton to take the proporton
of ther deceased parent, .
The saes were made by trustees of new nter vvos trusts under whch the property
had been paced on ts devery n 1023. It was stpuated that the benefcares (ncudng
the ta payer) were ta abe as though the saes were made bv them Indvduay.
The opnon of the court beow s reported nt 111 Fed. (2d), 8 3. On the arst queston
t hed that the bass was the vaue at the tme the property was receved by the trustees
from the e ecutors; on the second, that the bass was cost to the trustees. On those two
questons that decson s In confct wth Commssoner v. Gamor (112 Fed. (2d), 530),
from the Second Crcut Court of ppeas. nd see Commssoner v. Lbbey (100 Fed.
(2d). 58).
Secton 113(a)5 provded: (a) Property cqured fter F nRt RT 28, 1013. The
bass for determnng the gan or oss from the sae or other dsposton of property ac-
qured after February 28, 1913, sha be the cost of such property : e cept that
(5) Property transmtted at death. If persona property was acqured by specfc
bequest, or f rea property was acqured by genera or specfc devse or by ntestacy, the
bass sha be the far market vaue of the property at the tme of the death of the decedent.
If the property was acqured by the decedent s estate from the decedent, the bass n the
hands of the estate sha be the far market vaue of the property at the tme of the death
of the decedent. In a other cases If the property was acqured ether by w or by
Intestacy, the bass sha be the far market vaue of the property at the tme of the ds-
trbuton to the ta payer In the case of property transferred n trust to pay the ncome
for fe to or upon the order or drecton of the grantor, wth the rght reserved to the
grantor at a tmes pror to hs death to revoke the trust, the bass of such property n
the hands of the persons entted under the terms of the trust nstrument to the property
after the grantor s death sha, after such death, be the same as If the trust nstrument
had been a w e ecuted on the day of the grantor s death;
Secton 113(b) provded: (b) Property cqured efore March 1, 1013. The bass
for determnng the gan or oss from the sae or other dsposton of property acqured
before March 1, 1913, sha be: (1) the cost of such property (or, In the case of such
property as s descrbed n subsecton (a) (5) of ths secton, tha
oass as theren provded), or (2) the far market vaue of such property as of March 1,
1913. whchever s greater.
Revenue ct of 1921 ( 2 Stat., 227), secton 202(a) ; Revenue ct of 192 ( 3 Stat.,
253), secton 20 (a): Revenue ct of 1020 ( Stat., 9), secton 20 (a).
. R. 1, Seventeth Congress, frst sesson.
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t 113(a).
368
a property acqured by bequest, devse, or nhertance shoud be the far market
vaue of the property at the date of the decedent s death a provson desgned
to carfy the meanng of acquston n the earer cts. In the Senate that
anguage of secton 113(a)5 was changed to the form In whch t appeared n
the Revenue ct of 1928 a change specfcay desgned to avod the confuson
as to the bass on whch gan or oss on the sae of property purchased by the
e ecutor and dstrbuted to benefcares was to be determned.10
There does not appear to be the sghtest suggeston that ths change was
desgned as a substanta departure from the vaue-at-death rue. To be sure,
t dd produce a mted devaton from that prncpe n that no ncome ta
effect was to be gven changes n vaue of persona property, passng otherwse
than by specfc bequest, durng the admnstraton of the estate. ut to hod
that t effected the change whch pettoner urges woud be to mpute to Congress
a purpose to go far beyond the e gences of the specfc stuatons wth whch
It was deang.
The anguage used does not requre that resut. Dstrbuton to the ta -
payer Is not necessary restrcted to stuatons where property s devered
to the ta payer. It aso apty descrbes the case where property s devered
by the e ecutors to trustees In trust for the ta payer. Such dstrbuton of the
estate resuts n the acquston by the ta payer of an equtabe estate under the
testamentary trust. The fact that he does not then obtan possesson or contro,
the fact that hs nterest s condtona or contngent, the fact that ega tte
may not be transferred to hm unt years ater, are mmatera. Secton 113(a)5
merey provded a pont of reference and a standard of vaue for determnaton
of gans or osses reazed on subsequent saes of property acqured by bequest,
devse, or nhertance. In rewster v. age (280 U. S., 327, 33 ), ths Court hed
under earer cts u that the date of death was the date of acquston even
n case of a resduary egatee whose nterest at the date of death ceary was not
absoute. That concuson suggests that the crtca date s the tme when the
egatee acqures some nterest n the property athough hs nterest then may
not be uncondtona. ence, n case of remanders governed by secton 113(a)5
of the 1028 ct, t can not reastcay be asserted that the date when the re-
manderman acqured hs nterest came ater than the tme when he obtaned
an equtabe estate under the testamentary trust.
II. Rppt. No. 2. Seventeth Congress, frst sesson (Int. Rev. C. . 1039-1 (Part 2), 396).
nd see report of the ont Commttee on Interna Revenue Ta aton ( . Doc. No. 139,
Seventeth Congress, frst sesson), pages 17-18.
Much of that confuson was ater emnated by rewster v. Gage (280 . S., 327 Ct.
D. 1 8, C. . I -1, 27 (1930)1), hodng that n case of a resduary egatee of persona
property the tme of acquston was the date of decedent s death, not the date of ds-
trbuton of the property hy the e ecutors to the egatee. That decson was rendered In
1930 under the 1918 and 1921 cts. The wordng of secton 113(a)5 contaned n the 1928
ct was contnued n the 1932 ct ( 7 Stat., 169, 199). ut under the 193 ct ( 8
Stat.. 6 0. 706) there was a return to the anguaRe of the 1926 ct, the Senate report
statng: Secton 113 a)5 of the Revenue ct of 1932 s a reenactment of a smar pro-
vson contaned n the 1928 ct. The change n the 1928 ct was made because there
was some doubt as to the meanng of the term date of acquston, whc was the term
used under the Revenue ct of 1026. Snce the 1928 ct was passed, the Supreme Court
has defned the date of acquston to mean the date of death n the case of a property
passng by bequest, devse, and nhertance, whether rea or persona. ( retcttter v. Gat/e,
280 U. S., 327.) Secton 113(a)5 of the ouse b conforms to the anguage contaned
In the Revenue ct of 1926. so that a unform bass rue may be requred n the case of
property passng at death, whether rea or persona. (S. ept. No. 508, Seventy-thrd
Congress, second sesson. Int. Rev. C. .. supra note 8. pages 612-613.)
10 S. ept. No. 960, Seventeth Congress frst sesson (Int. Rev. C. .. supra note 8, page
09), where t was sad (page 27) : It appears that the ouse b s nadequate to
take cnre of a number of stuatons whch frequenty arse. For e ampe, the e ecutor,
pursuant to the terms of the w, may purchase property and dstrbute t to the bene-
fcares, n whch case t s mpossbe to use the vaue at the decedent s death as the bass
for determnng subsequent gan or oss, for the decedent never owned the property. More-
over, the far market vaue of the property at the decedent s death can not propery be used
as (he bass, n the case of property transferred n contempaton of death where the donee
es the property whe the donor s vng.
ccordngy, the commttee has revsed secton 113(a)5 and certan reated sectons,
so as to provde that n the case ot a specfc bequest of personaty or a genera or specfc
devse of reaty, or the transmsson of reaty by ntestacy, the bass sha be the far
market vaue at the tme of the death of the decedent. In these cases It may be sad, as
a matter of substance, that the property for a practca purposes vests n the benefcary
Immedatey upon the decedent s death, and therefore the vaue at the date of death s a
proper bass for the determnaton of pan or oss to the benefcary. The same rue s
apped to rea and persona property transmtted by the decedent, where the sae s made
by the e ecutor. In a other cases the bass s tbe far market vaue of the property at
the tme of the dstrbuton to te ta payer. The atter rue woud obtan, for e ampe
In the case of persona property not transmtted to the benefcary by specfc bequest, but
by genera bequest or by ntestacy. It woud aso appy h cases where the e ecutor
purchases property and dstrbutes t to the benefcary.
u See note 9, supra.
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369
It 113(a).
There are other reasons why we can not Infer that Congress ntended to make
more than a mted departure from the vaue-at-death prncpe n enactng
secton 113(a)5 of the 1928 ct. s respondent ponts out, there woud be a
substanta dsparty between the treatment of remandermen of reaty and re-
mandermen of personaty under the same testamentary trust, f the atter
were gven a bass of vaue at the tme of dstrbuton by the trust. Further-
more, we can not on the bass of the egsatve hstory of secton 113(a)5 mpute
to Congress a purpose to aow trustees ether to se the property or to dstrbute
t n knd, as woud be most advantageous for ta purposes. The creaton of
such an opportunty for manpuaton of ta abty can not be ghty presumed.
Smary we can not assume n absence of e pct provsons that Congress
ntended to create substanta perods of tme foowng the date of death durng
whch the vaue of the property bequeathed woud have no ncdence as respects
subsequent gans or osses. Respect for the obvous symmetry of ths statutory
scheme nduces the concuson that there was a dstrbuton to the ta payer
when ths property was devered by the e ecutors to the trustees.
II. s respects the property whch was purchased by the trustees, we are of
the vew that ts cost to them, rather than ts vaue at the date of devery
to the ta payer, governs. Secton 113(a) provded that the bass n case of
property acqured after February 28, 1913, shoud be the cost of such prop-
erty. a That standard contros here uness these transactons are governed
by the provson of secton 113(a)5 that, In a other cases f the property
was acqured ether by w or by ntestacy, the bass sha be the far market
vaue of the property at the tme of the dstrbuton to the ta payer. The
atter provson s appcabe f the property n queston was acqured
by w. We thnk t was not.
The tte of secton 113(a)5 Is Property transmtted at death. Whe the
tte of an ct w not mt the pan meanng of the te t Camnett v. Unted
States, 2 2 U. S., 70, 90 ; Strathearn 8. 8. Co. v. Don, 252 U. S., 3 8, 35 ),
t may be of ad n resovng an ambguty. ( nowton v. Moore, 178 U. S., 1,
65.) It suggests, as does the egsatve hstory whch we have reated, that
the foregong provson of secton 113(a)5 was confned, wth mnor e ceptons,
to the specfc property owned by the decedent at hs death. To be sure, the
ta payer s rght n the property n queston had ts source n the provsons of
the w. ut there s no ndcaton that Congress n draftng secton 113(a)5
ooked beyond the dstrbuton of the estate by the e ecutors. In that con-
necton, the Senate report specfcay stated that the foregong provson of
secton 113(a)5 governed purchases by the e ecutors. No reference was made
to purchases by testamentary trustees. The nference s strong that Congress
was fashonng secton 113(a)5 on the theory that for ncome ta purposes
acquston of persona property passng by genera bequest or ntestacy dd
not occur unt dstrbuton of the estate was made. In that posture of the
probem, property purchased by the e ecutor (actng, so to speak, n the
decedent s stead) pror to that dstrbuton was acqured by the dstrbutee
by w. ut once the admnstraton of the estate had been competed and
the basc testamentary dsposton effected, subsequent purchases were to be
governed by cost as provded n secton 113(a). Property so purchased woud
not be part of the orgna nhertance. Certany f the trustees themseves had
sod the property, the transacton woud have been ta abe on the cost bass.
To hod that a dfferent bass appes n case the benefcary made the sae
woud be to open an avenue for ta avodance. Furthermore, we are deang
here wth a statutory scheme whch n genera recognzes vaue at the date of
death n computng subsequent gans or osses. We are not ncned n absence
of cear and unambguous anguage to mpy a greater devaton from that
prncpe than that whch s necesstated by the decared ob|ectve of Congress.
ffrmed.
The Chef ustce and Mr. ustce Robebts are of opnon that the |udgment
shoud be reversed for the reasons stated n the opnon of the Crcut Court
of ppeas for the Second Crcut n Commssoner v. Oamor (112 Fed. (2d),
530).
u We are not aded by admnstratve constructon. The ureau of Interna Revenue
orgnay took the vew whch we have reached (G. C. M. 6195, C. . III-1, 99 (19291).
Ths vew ws reversed In G. C. M 11309 (C. . II-1, 12(1 (1933)). Its orgna vew
was aean taken n G. C. M. 1 893 (C. . I -1, 202 (1935)).
See note 5, supra. nd see secton 113(b), supra note f , as respects the bass n case
Of property acqured before March t, 1913.
8. ept. No. 980, supra note 10.
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5 113(a).
370
19 1-23-10735
Ct. D. 1515
INCOM T R NU CTS OP 193 ND 1936 D CISION OF SUPR M COURT.
L Gan oe Loss ass Sae of Securtes Receved by Legatees
Under Testamentary Trust.
For the reasons stated n everng v. Reynods Ct D. 1518,
page 371, ths uetn , the bass under secton 113(a)5 of the
Revenue cts of 193 and 1936 for determnng gan or oss upon
saes n 193 and 1936, by egatees under a testamentary trust, of
securtes owned by the decedent and dstrbuted to the egatees by
the testamentary trustee n 1923, s the vaue of such securtes on
the date of death of the decedent. The fact that the nterests of
the egatees on the date of decedent s death may have been contn-
gent s mmatera
2. Decsons ffrmed.
Decsons of the Unted States Crcut Court of ppeas, Second
Crcut (19 1) (116 Fed. (2d), 800) affrmng memorandum opnons
of the Unted States oard of Ta ppeas (19 0), affrmed.
Supreme Court op the Unted States.
Mary Fager Cary, pettoner, v. Commssoner of Interna Revenue.
arry arkness Fager, pettoner, v. Commssoner of Interna Revenue.
state of nne L. Fager, Deceased, arry arkness Fager, ecutor, pet-
toner, v. Commssoner of Interna Revenue.
ean Louse Matthews, pettoner, v. Commssoner of Interna Revenue.
61 S. Ct, 978.
On wrts of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
May 26, 19 1.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
enry M. Fager ded on May 20, 15)13. Pettoners are egatees under a
testamentary trust created under hs w. The trust contnued for a perod
of 10 years from hs death and termnated on May 20, 1923. s of that tme
the trustees devered to pettoners1 certan securtes whch were sod by
them n 193 and 1936. The queston presented s whether the bass for com-
putng gan or oss on such saes under secton 113(a)5 of the Revenue cts of
193 ( 8 Stat., 680) and 1936 ( 9 Stat, 16 8) s the vaue of the securtes
when devered to the egatees or ther vaue on the date of death of the
decedent. Pettoners make substantay the same argument for appcaton of
the former crteron as dd respondent n everng v. Reynods, No. 68 , decded
ths day Ct. D. 1516, page 371, ths uetn . nd they contend that under
Forda aw they had at the date of death ony contngent nterests. ut
assumng they are correct n the atter contenton, t s of no ava. For the
reasons stated n everng v. Reynods, supra, the proper bass was the vaue
of the securtes at the death of the decedent. ccordngy, the |udgments of
the court beow (116 Fed. (2d), 800) must be
ffrmed.
1 Sonc securtes had prevousy been devered to arry arkness Fager, pettoner In
No. 7. .- , on pr 2(1, 1921. nne L. Fager, whose estate s the pettoner In
No. 736, receved the securtes here nvoved as a gft from her husband, arry arkness
Fager. The stuaton therefore s the same as to both these partes, snce t Is stpuated
that e had receved the securtes as ndcated above.
Secton 113(a)5 of the 1036 ct Is the same as secton 113(a)5 of the 193 ct.
rtce 113(a) (5)- of Treasury Reguatons 9- . promugated under the 1936 ct, con-
tans provsons Identca wth those of artce 113(a) (5)- of Reguatons Sf under the
193 ct. The reevant portons of that secton and reguaton under the 193 ct are
et forth n everng v. Reynods, supra.
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371
113(a).
19 1-23-10736
Ct. D. 1516
INCOM T R NU CT OP 103 D CISION OF SUPR M COURT.
. Gan ob Loss ass Sams of Securtes Receved by Con-
tngent Remanderman Undeb Testamentabt Tbust.
The remanderman of a trust, estabshed by the w of hs father,
receved n 193 from the trustee securtes part of whch had been
owned by the decedent and part purchased by the trustee. Durng
the year 193 some of the securtes n each group were sod. In
determnng gan or oss upon such saes under the provsons of
secton 113 of the Revenue ct of 193 , the bass n the case of
securtes whch had been owned by the decedent s, under secton
113(a)5 of that ct, ther vaue at the tme of decedent s death
even though the remanderman s nterest was then contngent
cquston as used n that subsecton embraces a nterests
whch have ther orgn n a bequest, devse, or nhertance. In
the case of securtes purchased by the trustee, the proper bass
s ther cost to hm for the reasons stated n Magure v. Com-
mssoner Ct. D. 1506, page 366, ths uetn (312 U. S., ). In
the atter case the securtes were not acqured by bequest, devse,
or nhertance wthn the meanng of secton 113(a)5 and ther
bass s cost, as provded n secton 113(a).
2. Reguatons Sustaned.
The provsons of artce 113(a) (5)-(6) of Reguatons 86,
promugated on February 11, 1935, under the Revenue ct of 193 ,
are vad. The fact that the reguatons were not promugated
unt after the transactons n queston had been consummated and
that admnstratve constructon of the term acquston tnder
earer cts, as apped to a contngent nterest, had been dfferent
are not matera. everng v. R. . Reynods Tobacco Co. (306
U. S., 110 (Ct. D. 1383, C. . 1939-1 (Part 1), 225)) dstngushed.
3. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Fourth
Crcut (19 0) (11 Fed. (2d), 80 ), reversng decson of the
Unted States oard of Ta ppeas (19 0) ( 1 . T. ., 59),
reversed.
Supreme Coubt of the Unted States.
Guy T. everng, Commssoner of Interna Revenue, pettoner, v. Rchard ,
Reynods.
61 S. Ct, 971.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Fourth Crcut.
May 2G, 19 1.
OPINION.
Mr. ustce Dougas devered the opnon of the Court.
Respondent s father ded n 1918, eavng hm a remander nterest In a
testamentary trust, an nterest whch the court beow found to be contngent
under North Carona aw. e receved hs share of the trust, ncudng secur-
tes, from the trustee on pr , 193 . Some of the securtes so dstrbuted
had been receved by the trustee from the decedent s estate and others had
been purchased by the trustee between 1918 and 193 . Durng the year 193
respondent sod some of the securtes n each group. In computng hs gans
and osses he used as the bass the vaue on pr , 193 , when he receved the
securtes from the trustee. The Commssoner determned that the proper bass
under the Revenue ct of 193 ( 8 Stat., 680) was the vaue of the securtes
at the tme of decedent s death n the case of those then hed by decedent and
ther cost to the trustee n the case of those whch the trustee had purchased.
The oard of Ta ppeas sustaned the Commssoner. ( 1 . T. ., 59.)
The crcut court of appeas reversed. (11 Fed. (2d), 80 .) We granted the
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113(a).
372
petton for certorar (e cusve of the queston whether the remander was
Tested or contngent under the aw of North Carona) because of a confct
among the crcuts.1
Secton 113(a)5 of the 193 ct provded: If the property was acqured
by bequest, devse, or Inhertance, or by the decedent s estate from the de-
cedent, the bass sha be the far market vaue of such property at the tme
of such acquston. The Government paces consderabe stress on Magure
v. Commssoner (312 U. S., Ct. D. 1506, page 366, ths uetn ) ; everng v.
Oambr (312 U. S., Ct. D. 1505, page 36 , ths uetn ) ; and everng v.
Campbe (312 U. S., Ct. D. 150 page 360, ths uetn ), decded under the
1928 and 1932 cts, n support of ts contenton that as respects securtes owned
by decedent the proper bass was ther vaue at hs death even though respond-
ent s nterest was then contngent. nd t aso rees on Treasury Reguatons 86,
promugated under the 193 ct, artce 113(a) (5)-(6) of whch provded that
a ttes to property acqured by bequest, devse, or nhertance reate back to
the death of the decedent, even though the Interest of hm who takes the tte
was, at the date of death of the decedent, ega, equtabe, vested, contngent,
genera, specfc, resdua, condtona, e ecutory, or otherwse. Respondent on
the other hand urges that the phrase at the tme of such acquston when
t was Incuded n the 193 ct had acqured by constructon a defnte meanng
whch e cuded contngent remanders and therefore that Congress must be pre-
sumed to have used those words n that sense. In that connecton he ponts out
that the phrase at the tme of such acquston had appeared n the 1921, 192 ,
nnd 1926 cts and that certan offce decsons of the Treasury and certan
decsons of the ower Federa courts under those cts, made pror to the
enactment of the 193 ct, had hed that a benefcary dd not acqure property
when hs nterest was merey contngent. Respondent emphaszes that the
egsatve hstory of the 193 ct shows no menton of the pror admnstratve
and |udca treatment of contngent remanders and makes no compant
wth the practce of the ureau or wth the decsons. e nssts that the
words acqured or acquston are not vague or ambguous words but
mean to obtan as one s own, as hed n everng v. San oaqun Frut
Investment Co. (297 U. S., 96, 99). y these arguments and reated ones
respondent seeks to demonstrate that the earer rue had become embedded
n the aw so that t coud be changed not by admnstratve rues or regu-
atons but by Congress aone. On the bass of such reasonng and the
dfference n wordng between the 193 ct and the 1928 and 1932 cts, he
seeks to dstngush the Magure, Gambr, and Campbe cases. nd snce
artce 113(a) (5)-(6) was promugated on February 11, 1933, respondent
nssts that to make t appcabe to transactons occurrng n 193 woud be
to gve It a retroactve effect contrary to everng v. R. . Reynods Tobacco
Co. (306 U. S., 110 Ct. D. 1383, C. . 1939-1 (Part 1), 225 ).
Respondent s poston s not tenabe. We are not deang here wth a stuaton
where the meanng of statutory anguage s resoved by reference to e pct
statements of Congressona purpose. Magure v. Commssoner, supra; e-
verng v. Campbe, supra.) ere the commttee reports on the 193 ct are
whoy sent as to whether a ta payer has acqured property wthn the mean-
ng of secton 113(a)5 at a tme when he has obtaned ony a contngent
remander nterest. nd we need not stop to nqure whether, n absence of
the Treasury reguatons under the 1931 ct, the admnstratve constructon
of acquston under the earer cts was of such a character ( ggns v.
Commssoner, 312 U. S., 212) and the pror |udca decsons had such con-
sstency and unformty that Congressona reennctment of the anguage n
queston was an adopton of ts prevous nterpretaton wthn the rue of such
cases as Unted States v. Dakota-Montana O Co. (288 U. S., 59 Ct. T). 655, O.
. I1-1, 2 3 (1933) ). That rue s no more than an ad n statutory construc-
Opposed to tho decson beow arp on ranken v. everng (115 Fed. (2d), 709);
Carp v. everng (118 Fed. (2d), 800) ; rehbud v. everng (f Fed. (2d), oo.-)) a
from the Second Crcut; and ugustus v. Commssoner (118 Fed. (2d), 38), from the
8 (h Crcut.
Secton 202(a)3. Revenue ct of 1921 ( 2 Stat., 229) ; secton 20 (a)5, Revenue ct
of 19- ( : Stat.. 2. N) ; secton 20 (a)G, Revenue ct of 1926 ( Stat., 1 ).
O D 727 (C. . 3, r 3 (1920)) ; G. C. M. 10200 (C. . I-1, 79, 80 (1932)).
See for e ampe, Prnge v. Commsnoner (0 Fed. (2d), 863) ; opkns v. Commt-
Soner ( O Fed. (2d). 11). C f. Lane v. Corun (63 Fed. (2d), 767).
II ept. No. 701, Seventy-trd Congress, second sesson, pages 27-28 C. . 1939-1
(Pnrt 2). 35 ; S. ept. No. 508, Seventy-thrd Congress, second sesson, pages 3 -35
C. . 1939-1 (Part 2), 0SU ,
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373
113(a).
too. Whe It s usefu at tmes n resovng statutory ambgutes. It does
not mean that the pror constructon has become so embedded n the aw that
ony Congress can effect a change. (Morrssey v. Commssoner, 296 U. S., 3 ,
355 Ct. D. 106 , C. . -1, 26 (1836) .) nd see Murphy O Co. v. urnet (287
U. S., 299 Ct. D. 619, C. . II-1, 231 (1933) .) It gves way before changes n
the pror rue or practce through e ercse by the admnstratve agency of ts
contnung rue-makng power. ( everng v. Wshre O Co., 308 U. S., 90,
100-101 Ct. D. 1 2 , C. . 1939-2, 213 .) Nor s artce 113(a) (5)-(6) of the
reguatons condemned by everng v. R. . Reynods Tobacco Co., supra. That
case turned on ts own speca facts. The transactons there In queston took
pace at a tme when a reguaton was n force whch e pressy negatved any
ta abty. The reguaton remaned outstandng for a ong tme and was
foowed by severa reenactments of the statute. bout fve years after the
transactons In queston took pace the pror reguaton was amended so as
to mpose a ta abty There are no such crcumstances here. No reevant
reguaton was n force at the tme respondent sod the securtes In 193 .
The reguaton here n queston was promugated under the very ct whch
determnes respondent s abty. The fact that the reguaton was not pro-
mugated unt after the tranactons In queston had been consummated s
mmatera. (Cf. Manhattan Oenera qupment Co. v. Commssoner, 28R U. 8.,
129.) The magntude of the task of preparng reguatons under a new ct
may we occason some deay. To hod that respondent had a vested nterest
n a hypothetca decson n Ms favor pror to the advent of the reguatons
woud ntroduce nto the scheme of the Revenue cts refned notons of statu-
tory constructon whch woud, to say the east, mpar an mportant admns-
tratve responsbty In the ta coectng process.
ence the reguaton governs ths case f the word acquston as used In sec-
ton 113(a)5 was susceptbe of ths admnstratve nterpretaton. We thnk t
was. owever unambguous that word mght be as respects other transactons
everng v. an oaqun Frut d Investment Co., supra) ts moanng n ths
statutory settng was far from cear as respects property passng by bequest,
devse, or nhertance. The defnton of acquston contaned In the regu-
aton s not a straned or artfca one. dmttedy the date of death woud
be the proper bass If respondent s Interest under the testamentary trust had
been a vested remander. ut even a vested remanderman does not have a
of the attrbutes of ownershp. So the test n ths type of cast s not whether
respondent had fu en|oyment of the pro erty pror to the devery of the se-
curtes to hm but whether he earer had acqured an Interest whch ut-
matey rpened nto compete ownershp. Respondent has become the ta payer
because he has obtaned fu ownershp of the property and has sod It. The
ta Is on gans, f any, reazed by hm In that transacton. ence, ns we n-
dcated n the Magure and Campbe cases, to carry nto that computaton the
vaue of the property at the tme the ta payer had ony a contngent remander
Interest n It s not to ta hm on vaues whch he never receved. The statute
as thus Interpreted merey provdes a rue of thumb n aevaton of a ta
whch wond be computed by reference to the entre amount of the orgna
nhertance were It to be based on cost to the ta payer. ( everng v. Campbe,
supra.) s stated by udge rant n ugustus v. Commssoner (118 Fed. (2d),
38, 3), the reguaton was an apt nterpretaton to make ths part of the
statute ft effcenty and consstenty Into the scheme of the revenue system as
a whoe. See Magure v. Commssoner, supra.
Respondent s suggeston that the reguaton does not cover ths case w not
stand anayss. It has a broad sweep and embraces a nterests whch have
ther orgn In a bequest, devse, or nhertance.
For the reasons stated, the proper bass as to the securtes owned by the
decedent was ther vaue at hs death.
There remans the queston as to the proper bass for securtes purchased by
the trustee. In the Magure case we hed that cost was the proper bass as
provded n secton 113(a) of the 1928 ct snce securtes purchased by a
trustee were not acqured by w wthn the meanng of secton
113(a)5 of that ct. Whe secton 113(a)5 of the 193 ct substtutes ac-
qured by bequest, devse, or nhertance for acqured ether by w or In-
testacy n the 1928 ct, that change does not ca for a resut dfferent from
that reached In the Magure case. For the reasons there stated, we hod that
as respects securtes purchased by the trustee the proper bass s the cost to
hm. That makes t unnecessary to e amne the vadty of the hodng of the
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117, rt. 117-2.
37
court beow that artce 113(a) (5)-(d) of the reguatons Is nappcabe be-
cause decedent dd not de before March 1, 1913.
Reversed.
S CTION 116. CLUSIONS FROM GROSS INCOM .
R NU CTS OF 1928, 1032, ND 193 .
Meanng of term coastwse, as used n G. C. M. 22383 (C. . 19 0-2,
227). (SeeI. T. 3 61, page 251.)
R NU CTS OF 1928, 1932, ND 193 .
Wages of seamen empoyed on vesses engaged n coastwse trade.
(See I. T. 3 67, page 252.)
S CTION 117. C PIT L G INS ND LOSS S.
rtce 117-2: Lmtatons on capta gans and 19 1-2-10560
capta osses. G. C. M. 22 91
R NU CT OF 1932.
In appyng the mtaton on stock osses prescrbed by secton
23(r) of the Revenue ct of 1932, a ta payer may offset hs persona
osses from the sae of securtes hed for a perod of two years or
ess aganst hs share of smar gans of a partnershp.
G. C. M. 1 012 (C. . I -1,1 5 (1935)) revoked. Recommended
that I. T. 2892 (C. . I -1, 1 8 (1935)) be modfed.
Reconsderaton has been gven to G. C. M. 1 012 (C. . I -1,
1 5 (1935)) n the ght of the decson of the Unted States Supreme
Court n Neuberger v. Commssoner (61 S. Ct., 97, Ct. D. 1 70, C. .
19 0-2, 228).
In G. C. M. 1 012, supra, t was hed that n appyng the mtaton
on stock osses prescrbed by secton 23(r) of the Revenue ct of 1932,
a ta payer may not offset hs persona osses from the sae of securtes
hed for a perod of two years or ess aganst hs share of smar
gans of a partnershp.
In Neuberger v. Commssoner, supra; t was hed, n effect, that an
ndvdua engaged n tradng n securtes s entted, under secton
23 (r) of the Revenue ct of 1932, to offset osses from the sae for hs
own account of securtes whch are not capta assets aganst hs share
of gans from the sae of smar noncapta assets by a partnershp of
whch he s a member. In vew of the decson of the Supreme Court
n that case, G. C. M. 1 012, supra, s revoked.
It s recommended that I. T. 2892 (C. . I -1, 1 8 (1935)) be
modfed to the e tent that t s nconsstent wth the decson n the
Neuberger case.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
Property acqured before March 1, 1913; renvestments by fducary. If the decedent
ded before March 1, 1013, the far market vaue on that date Is taken n en of the far
market vaue on the date of death, but ony to the same e tent and for the same purposes
as the far market vaue on March 1, 1913. Is taken under secton 113(a) (1 ).
If the property s an nvestment by the fducary under a w (as, for e ampe, n the
case of a ae by a fducary under a w of property transmtted from the decedent, and
the renvestment of the proceeds), the cost or other bass to the fducary Is taken In eu
to the far market vaue at the tme when the decedent ded.
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375
117, rt. 117-2.
rtce 117-2: Lmtatons on capta gans and 19 1-2-10561
capta osses. I. T. 3 0
R NU CT OF 1932.
In vew of G. C. M. 22 91 page 37 , ths uetn , I. T. 2892 (C. .
I -1, 1 8 (1935)) s modfed to the e tent that t s nconsstent
therewth.
rtce 117-2: Lmtatons on capta gans 19 1-3-10567
and capta osses. Ct. D. 1 80
INCOM T R NU CT OF 193 D CISION OF SUPR M COURT.
1. Deducton Capta Loss Forecosure Sae.
oss sustaned by an ndvdua ta payer upon the forecosure
sae of hs Interest n rea estate, acqured for proft, s not a oss
whch may be deducted n fu from gross ncome under the prov-
sons of secton 23(e)2 of the Revenue ct of 103 , but s a capta
oss, deductbe ony to the mted e tent provded n sectons 23( |)
and 117(d) of that ct. The saes referred to n the statute
ncude forced as we as vountary saes of capta assets.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, S th
Crcut (19 0) (108 Fed. (2d), 753), affrmng unreported decson of
the Unted States oard of Ta ppeas (1937), reversed.
Supreme Court of the Unted States.
uy T. everng, Commssoner of Interna Revenue, pettoner, v. Godfrey
Uamme and Pear amme.
311 U. S., 50 .
On wrt of certorar to the Unted States Crcut Court of ppeas for the S th Crcut.
anuary 6, 19 1.
opnon.
Mr. ustce Stone devered the opnon of the Court.
We are asked to say whether a oss sustaned by an ndvdua ta payer upon
the forecosure sae of hs nterest n rea estate, acqured for proft, s a oss whch,
under secton 23(e)2 of the 193 Revenue ct ( 8 Stat., 6S0), may be deducted
n fu from gross ncome for the purpose of arrvng at ta abe ncome, or s a
capta oss deductbe ouy to the mted e tent provded n sectons 23(e)2, ( ),
and 117.
In the computaton of ta abe ncome secton 23(e)2 of the 193 Revenue ct
permts the ndvdua ta payer to deduct osses sustaned durng the year n-
curred n any transacton for proft. Subsecton (|) provdes that osses from
saes or e changes of capta assets, sha be aowed ony to the e tent of 2,1)00
pus gans from such saes or e changes as provded by secton 117(d). y sec-
ton 117(b) t s decared that capta assets means property hed by the
ta payer but does not ncude stock n trade of the ta payer
or property hed by the ta payer prmary for sae to customers n the ordnary
course of hs trade or busness.
Respondent ta payers, wth other members of a syndcate, purchased on and
contract a pot of and n Oakand County, Mch., for the sum of 9G,000, upon
a down payment of 20,000. The precse nature of the contract does not appear
beyond the fact that payments for the and were to be made In nstaments, and
the vendor retaned an nterest n the and as securty for payment of the baance
of the purchase prce. efore the purchase prce was pad In fu the syndcate
defauted on ts payments. The vendor nsttuted forecosure proceedngs by
sut n equty n a State court whch resuted n a |udca sae of the property, the
vendor becomng the purchaser, and n a defcency |udgment aganst the mem-
bers of the syndcate. Respondents contrbuton to the purchase money, some
,000, was ost.
The Commssoner, n computng respondents ta abe ncome for 193 , treated
the ta payers nterest n the and as a capta asset and aowed deducton of
the oss from gross ncome ony to the e tent of 2,000 as provded by sec-
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I 117, rt. 117-2.
376
tons 23(|) and 117(d), n the ease of osses from saes of capta assets.
The oard of Ta p eas rued that the oss was deductbe n fu. The
crcut court of appeas affrmed (103 Fed. (2d), 753), hodng that the oss
estabshed by the forecosure sae was not a oss from a sae wthn the
meanng of secton 23( ). We granted certorar (310 U. S., 619), to resove a
confct of the decson beow wth that of the Court of ppeas for the
Second Crcut n Commssoner v. ectro-Chemca ngravng Co. (110 Fed.
(2d), 01 ) Ct. D. 1 82, page 380, ths uetn .
It s not dened that t was the forecosure sae of respondents nterest
n the and purchased by the syndcate for proft, whch fnay qudated
the capta nvestment made by ts members and f ed the precse amount of
the oss whch respondents seek to deduct as such from gross Income. ut
they argue that the osses from saes whch by secton 23 (|) are made deductbe
ony to the mted e tent provded by secton 117(d) are those osses resutng
from saes vountary made by the ta payer, and that osses resutng from
forced saes ke the present not beng sub|ect to the mtatons of secton
117(d) are deductbe n fu ke other osses under secton 23(e)2.
To read ths quafcaton Into the statute respondents rey on |udca
decsons appyng the famar rue that a restrctve covenant aganst sae or
assgnment refers to the vountary acton of the covenantor and not to trans-
fers by operaton of aw or |udca saes n nvtum. (See Guaranty Trust
Co. v. Green Cove d M. R. Co., 139 U. S., 137; Gazay v. Wams, 210 U. S.
1; Rggs v. Purcc, 68 N. Y., f)3.) ut here we are not concerned wth
a restrctve covenant of the ta payer, but wth a soe as an effectve
means of estabshng a deductbe oss for the purpose of computng hs n-
come ta . The term sae may have many meanngs, dependng on the con-
te t, see Webster s New Internatona Dctonary. The meanng here depends
on the purpose wth whch t s used n the statute and the egsatve hstory
of that use. ence the respondents argue that the purpose of provdng n
the 193 ct for a speca treatment of gans or osses from capta assets
was to prevent ta avodance by deprvng the ta payer of the opton aowed
to hm by the earer cts, to effect osses deductbe n fu by saes of
property at any tme wthn two years after t was acqured, whch unt
hed for that perod was not defned as a capta asset, secton 208, Revenue
ct of 192 ( 3 Stat., 2 3) ; secton 208, Revenue ct of 1026 ( Stat, 19),
and secton 101 of the Revenue ct of 1928 ( 5 Stat., 811).
It s sad that snce osses from forecosure saes not wthn the contro of
the ta payer are not wthn the ev amed at by the 103 ct, they must be
deemed to be e cuded from the reach of ts anguage. To support ths con-
tenton respondents rey on the report of the Ways and Means Commttee
submttng to the ouse the b whch, wth amendments not now matera,
became the Revenue ct of 193 . The commttee In pontng out a defect
of the e stng aw sad: Ta payers take ther osses wthn the 2-yenr perod
and get fu beneft therefrom and deay takng gans unt the 2-year perod
has e pred, thereby reducng ther ta es. ( . Rept. 70 , Seveuty-thrrd
Congress, second sesson, pages 9 and 10.)
ut the treatment of gans and osses from saes of capta assets on a
dfferent bass from ordnary gans and osses was not ntroduced nto the
revenue aws by the 198 ct. That had been a feature of every revenue
aw begnnng wth the ct of 1921 ( 2 Stnt., 227), and ench had defned as
capta osses osses from saes or e changes of capta assets. The 103
ct made no change n ths respect but for the frst tme t provded that
capta assets shoud ncude a property acqured by the ta payer for
proft regardess of the ength of tme hed by hm and that capta gans
and osses from saes of capta assets shoud be recognzed n the computaton
of ta abe ncome accordng to the ength of tme the capta assets are hed
by the ta payer, varyng from 100 per cent f the capta asset s hed for not
more than a year to 30 per cent f t s hed more than 10 years. (Secton
117(a).) Fnay, for te frst tme, the statute provded that capta osses
n e cess of capta gans shoud be deducted from ordnary ncome ony to
the e tent of 2,000. Thus by treatng a property acqured by the ta payer
for proft as capta assets and mtng the deducton of capta osses n the
manner ndcated, the ct materay curtaed the advantages whch the ta -
payer had prevousy been abe to gan by choosng the tme of seng hs
property.
The defnton of capta osses as osses from saes of capta assets, as
we have ponted out, was not new. s w presenty appear, the egsatve
hstory of ths defnton shows that t was not chosen to e cude from the cap-
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377
15 117, rt. 117-2.
Ita assets provsons osses resutng from forced saes of ta payers property.
nd, f so construed, substanta oss of revenue woud resut under the 103
ct, whose purpose was to avod oss of revenue by the appcaton of the cap-
ta assets provsons. In draftng the 193 ct the commttee had before t
proposas for stabzng the revenue by the adopton of the rtsh system under
whch nether capta gans nor osses enter nto the computaton of the ta .
In decnng to foow ths system n ts entrety the commttee sad: It Is
deemed wser to attempt a step n ths drecton wthout ettng capta gans
go entrey unta ed. It accordngy reduced the ta burden on capta gans
progressvey wth the ncrease of the perod up to 10 years, durng whch the
ta payer hods the capta asset, and permtted the deducton, on the same
scae, of capta osses, but ony to the e tent that there are ta abe capta
gans, pus 2,000. In thus reevng capta gans from the ta mposed on
other types of ncome, t can not be assumed, n the absence of some cear nd-
caton to the contrary, that Congress ntended to permt deductons n fu
of osses resutng from forced saes of the ta payers property, from ether
capta gans or ordnary gross ncome, whe ta ng ony a fracton of the
gans resutng from the saes of such property. (See Whte v. Unted States,
305 U. S., 281. 292 Ct D. 1372, C. . 1938-2, 238 ; everng v. Inter-Mountan
Lfe Ins. Co.. 29 U. S., 086, 689, 090 Ct. D. 950, C. . I -1, 339 (1935) .)
The ta aton of capta gans after deducton of ta abe osses on a more
favorabe bass than other ncome, was provded for by secton 206 of the 1921
Revenue ct, as the means of encouragng proft-takng saes of capta n-
vestments ( . ept. No. 350, S ty-seventh Congress, second sesson, page 8.
urnet v. Iarme, 287 U. S., 103, 106 Ct. D. 611, C. . I-2, 210 (1932) ).
In ths secton, as n ater cts, capta not gan was defned as the e cess of
the tota capta gan over the sum of capta deductons, and capta osses ;
capta osses beng defned as the oss resutng from the sae or e change of
capta assets. In submttng the proposed Revenue ct of 192 , the ouse
commttee ponted out that the 1021 ct contaned no provson for mtng
deducton of capta osses where they e ceeded the amount of capta gans.
( . ept. No. 179, S ty-eghth Congress, frst sesson, page 1 .) Ths was
remeded by provdng n secton 208(c) that the amount by whch the
ta s reduced on account of a capta oss sha not e ceed 12 per cent of
the capta oss. In commentng on ths provson the commttee sad (page 10) :
If the amount by whch the ta s to be ncreased on account of capta gans
s mted to 12 per cent of the capta gan It foows ogcay that the
amount by whch the ta s reduced on account of capta osses sha be m-
ted to the 12 per cent of the oss. Ths provson was contnued wthout
changes now matera unt the 19:5 ct. (Secton 208(c) n the 192 and
192G cts; secton 101 (b) In the 1928 and 1932 cts; 7 Stat., 191.)
Congress thus has gven cear ndcaton of a purpose to offset capta assets
by osses from the sae of ke property and upon the same percentage bass as
that on whch the gans are ta ed. (See Unted States v. Peasants, 305 U. S.,
357, 360 Ct. D. 1379, C. . 10.19-1 (Part 1), 139 .) Ths purpose to treat gans
and deductbe osses on a party but wth n further specfc provson provded
by secton 117(d) of the 103 ct, permttng specfed percentages of capta
osses to be deducted from ordnary ncome to the e tent of 2,0d0 woud be
defeated n a most substanta way f ony a percentage of the gans were
ta ed but osses on saes of ke property coud be deducted In fu from gross
ncome. Ths treatment of osses from saes of capta assets n the 102 and
ater cts and the reason gven for adoptng t afford convncng evdence that
the saes referred to n the statute ncude forced saes such as have suffced,
under ong accepted ncome ta practce, to estabsh a deductbe oss In the ca ;e
of noncapta assets. Such saes can equay he taken to estabsh the oss n
the case of capta assets wthout Infrngng the decared pocy of the statute
to treat capta gans and osses on a party.
We can fnd no bass In the anguage of the ct. ts purpose or ts egsatve
hstory, for sayng that osses from saes of capta assets under the 193 ct,
more than Its predecessors, were to be treated any dfferenty whether they
resuted from forced saes or vountary saes. True, courts n the nterpretaton
of a statute have some scope for adoptng a restrcted rather than a tera or
usua meanng of ts words where acceptance of that meanng woud ead to
absurd resuts (Unted States v. atz, 271 U. S., 35 , 362), or woud thwart
the obvous purpose of the statute aggar v. evernn. 308 U. S.t 389 Ct. 1).
1 33, C. . 19 0-1, 237 ). ut courts are not fr ee to re|ect that meanng where
no such consequences foow and where, as here, t appears to be consonant
0 3 1 1 13
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f 117, rt. 117-2.
378
wth the purposes of the ct as decared by Congress and pany dscosed by
ts structure.
It s not wthout sgnfcance that Congress, n the 193 ct, enarged the
scope of ts provsons reatng to osses from saes of capta assets by ncud-
ng wthn them osses upon the dsposton of the ta payer s property by methods
other than sae and wthout reference to the vountary acton of the ta payer.
It thus treats as osses from saes or e changes the oss sustaned from redemp-
ton of stock (secton 115(c)), retrement of bonds (secton 117(f)), osses from
short saes (secton 117(e)), and oss sustaned by faure of the hoder of
an opton to e ercse t (secton 117(e)2), athough none of these transac-
tons nvoves a oss from a sae. (See MrCan v. everng, No. 55, decded
ths day Ct. D. 1 81, beow .)
The scope of the capta oss provsons was st further enarged by secton
23(k)2 of the Revenue ct of 1938 (52 Stac, 7), whch provdes that f
securtes, whch are capta assets, are ascertaned to be worthess and are
charged off wthn the ta abe year the oss, wth an e cepton not now matera,
sha be consdered as a oss arsng from a sae or e change. These provsons
dscose a consstent egsatve pocy to enarge the cass of deductbe osses
made sub|ect to the capta assets provsons wthout regard to the vountary
acton of the ta payer In producng them. We coud hardy suppose that Con-
gress woud not have made provson for the ke treatment of osses resutng
from a forced sae of the ta payer s property acqured for proft ether n the
193 or 1938 ct, f t had thought that the term saes or e changes as used
n both cts dd not Incude such saes of the ta payer s property.
Pettoners aso advance the argument, sustaned n Commssoner v. Frchofer
(102 Fed. (2d), 787), that the defntve event f ng respondents oss was not
the forecosure sae but the decree of forecosure whch ordered the sae and pre-
ceded t. ut snce the forecosure contempated by the decree was forecosure
by sae and the forecosed property had vaue whch was concusvey estabshed
by the sae for the purposes of the forecosure proceedng, the sae was the
defntve event estabshng the oss wthn the meanng and for the purpose
of the revenue aws. They are desgned for appcaton to the practca affars
of men. The sae, whch fnay cuts off the nterest of the mortgagor and s
the means for determnng the amount of the defcency |udgment aganst hm s
a means adopted by the statute for determnng the amount of hs capta gan
or oss from the sae of the mortgaged property.
The court beow aso thought that the oss suffered by respondents coud not
be treated as a oss from a sae snce by the aw of Mchgan the vendor upon
a and contract contanng the usua forfeture cause had the rght to deprve
respondents and ther |ont adventurers of a Interest n the property by a
decaraton of forfeture, and that the ony addtona advantage of forecosure
was to obtan a defcency |udgment. ut there s nothng n ths record to
show that the and contract n ths case contaned a forfeture cause. ven f
t dd, t does not appear that there was n fact a forfeture apart from the
sae on forecosure. (Of. Dardson v. Commssoner. 305 D. S.. , 0 Ct. D. 1366,
C. . 1938-2, 227 ; cvcrng v. Mdand Insurance Co., 300 U. S., 21G, 22 Ct. D
2( 6, C. . 1937-1, 178 ; Unted States v. Phes, 257 U. S., 156, 172 Ct. D. 19,
C. . 5, 37 (1921) .)
Mr. ustce Robkrts s of opnon that the |udgment shoud be affrmed for the
reasons stated n the opnon of the crcut court of appeas (108 Fed. (2d). 753).
ncome ta revenue act of 193 decson or supreme court.
1. Deducton Capta Loss Rethkment of onds or Debentures.
Upon the surrender of bonds or debentures n e change for a money
payment ess than cost, a ta payer may not deduct the oss from
hs gross ncome as a bad debt under secton 23(k) of the Revenue
ct of 193 , but must treat t as a capta oss under secton 117(f)
of that ct, such transactons consttutng retrement of bonds, de-
bentures, etc. The word retrement s broader n scope than
redempton and s not mted to vountary acton on the debtor s
part n fufment of hs promse to pay.
Reversed.
rtce 117-2: Lmtatons on capta gans
and capta osses.
19 1-3-10568
Ct. D. 1 81
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379
117, rt. 117-2.
2. Decson fftbmed.
Decson of the Unted States Crcut Court of ppeas, Ffth
Crcut (19 0) (110 Fed. (2d), 878), affrmng unreported decson of
the Unted States oard of Ta ppeas, affrmed.
3. Decson Revebskd.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (108 Fed. (2d), 6 2). reversng decson of the Unted
States oard of Ta ppeas (1939) ( 0 . T. ., 60), reversed.
SUP M COD T OF T UNIT D ST T S.
55. Donad S. McCan, pettoner, v. Commssoner of Interna Revenue.
On petton for wrt of certorar to the Unted States Crcut Court of ppeas for the
Ffth Crcut.
58. Guy T. everng, Commssoner of Interna Revenue, pettoner, v. Forence
Stanton Thomson, ecutr Under the W of 8. C. Thomson, Deceased.
311 U. S., 527.
On petton for wrt of certorar to the Unted States Crcut Court of pppa9 for the
Second Crcut.
anuary G, 19 1.
OPINION.
Mr. ustce Roberts devered the opnon of the Court.
These cases present the queston whether upon the surrender of bonds or
debentures n e change for a money payment ess than cost, a ta payer may
deduct the oss from hs gross ncome as a bad debt under secton 23(k) or
must treat t as a capta oss under secton 117(f) of the Revenue ct of 19. .
In No. 55 It appears that the ta payer owned 15,000 par vaue of bonds
of a water dstrct, acqured by gft. The dstrct beng n fnanca dffcutes
offered to pay 7, 76.75 for them. The offer was accepted and the bonds
devered. In hs ta return the ta payer camed a deducton of 7,523.25 as
for a bad debt charged off. The Commssoner dsaowed the deducton, and
the oard of Ta ppeas and the crcut court of appeas sustaned hs
rung.
In No. 58 the facts are that the ta payer bought 25,000 par vaue of deben-
tures for 2 ,750. The ssuer s affars were paced In the hands of a recever.
pan of reorganzaton provded that the recever shoud pay 5 for each
1,000 debenture surrendered for canceaton. The ta payer avaed hmsef
of ths provson, and n hs ta return camed a deducton of 2 ,025, as for
a bad debt. The Commssoner dsaowed the cam, and the oard of Ta
ppeas affrmed hs decson. The crcut court of ap eas reversed.
y reason of the confct of decson we granted certorar n both cases.
The earer Revenue cts contaned sectons smar to 23(k) of the ct of
193 . They aso emboded provsons for cacuaton of ta es on capta net gans.
None of them ncuded any secton ke 117(f). Pror to the adopton of the
193 ct t had been hed that the phrase sae or e change of capta assets,
empoyed n those cts, was not descrptve of the redempton or ca for repny-
ment of corporate securtes, and hence gan thereby occasoned was to be
treated as ordnary ncome,5 and oss so arsng was to be deducted from gross
ncome as a bad debt
The Revenue ct of 193 , by subsecton (f) of secton 117, provded that for
the purposes of the tte deang wth capta gans and osses, amounts receved
8 Stat., 689 ; 26 U. S. C, secton 23(k).
8 Stat., T1.1 ; 26 U. S. C, secton 117(f).
110 Fed. (2d). 878.
108 Fed. I2d). 0 2
Watson v. Commsnoner (27 . T. ., 03) ; ram v. Commssoner (29 . T. ., 1101).
Ths vew was adopted by ths Court as respects the Revenue ct of 1928. subsequent to
the adopton of the ct of 193 . .Farbanks v. Untfd State . .106 U. S.. 36 Ct. D. 1391,
C. . 1939-1, 2601.)
Commontceath ank v. Lucas ( 1 Fed. (2d), I Ct. D. 2 0. C. . I -2. 3 5 (1(130) ) ;
Lebanon Nat. ank v. Commssoner (76 Fed. (2d). 792) ; Pacfc Nat. ank v. Comms-
soner (91 Fed. (2d), 103).
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117, rt. 117-2.)
380
by the hoder upon the retrement of such securtes as are here Invoved,
sha be consdered as amounts receved n e change therefor.
It s pan that Congress ntended by the new subsecton (f) to take out of
the bad debt provson certan transactons and to pace them In the category
of capta gans and osses. The queston s whether by empoyng the word
retrement the transactons here nvoved were so transferred. We hod
that they were.
Retrement apty descrbes what occurred n the nstant cases. The
statute docs not use the word n an unusua or artfca sense. In common
understandng and accordng to dctonary defnton the word retrement
s broader n scope than redempton ; s not, as contended, synonymous wth
the atter, but ncudes t. Nothng n the egsatve hstory of the provson
requres us to attrbute to the term used a meanng narrower than ts accepted
meanng n common speech.
The ta payer n No. 58 urges that to hod subsecton (f) appcabe n hs
case woud gve the provson an un|ust effect, snce, f he had refused to sur-
render hs debentures for the trfng consderaton offered, he coud have
charged off ther whoe cost as a bad debt under secton 23(k). The answer
s that we must appy the statute as we fnd t, eavng to Congress the cor-
recton of asserted nconsstences and Inequates In ts operaton.
The court beow hed n No. 58 that the phrase retrement coud propery
be apped ony to vountary acton on the debtor s part n fufment of hs
promse to pay. Ths s but to say that retrement means no more than ca
and redempton pursuant to the terms of the obgaton. ut as we have sad,
the two are not n common understandng the same.
The |udgment In No. 55 s affrmed, and that n No. 58 s reversed.
rtce 117-2: Lmtatons on capta gans 19 1-3-10569
and capta osses. Ct. D. 1 82
INCOM T R NU CT OF 193 D CISION OP SUPR M COURT.
1. Deducton Capta Loss Forec.osure Sae.
oss suffered by a corporaton on forecosure sae of ts mort-
gaged property, acqured for proft, may not be deducted n fu from
gross ncome, but s a capta oss, deductbe ony to the e tent pro-
vded by secton 117(d) of the Revenue ct of 193 .
2. Decson Foowed.
everng v. amme Ct. D. 1 S0, page 375, ths uetn , de-
cded by ths Court on anuary 6, 10 1. foowed.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (110 Fed. (2d), 61 ), reversng unreported decson
of the Unted States oard of Ta ppeas (1939), affrmed.
Supreme Court of the Unted States.
ectro-Chemca ngravng Co., Inc., pettoner, v. Commssoner of Interna
Revenue.
311 U. S., 513.
On wrt of certorar to the Unted Stntes Crcut Court of ppeas for the Second Crcut.
anuary 6, 19 1.
OPINION.
Sr. ustce Stone devered the opnon of the Court.
Ths s a companon case to No. 9, cvcrng v. amme, decded ths day
Ct. D. 1 S0. page 375, ths uetn .
The queston s whether the oss suffered by pettoner on forecosure sae
of hs mortgaged property, acqured for proft, may be deducted In fu from gross
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381
11 117, rt. 117-3.
ncome or ony to (he e tent provded by secton 117(d) of the 193 Revenue ct.
The statutory provsons nvoved are those of the 193 ct reatng to capta
gans or osses, partcuary osses from saes or e changes of capta assets
consdered n the amme case whch are made appcabe to pettoner, a
corporaton, by secton 23(f) (|).
The oard of Ta ppeas rued that pettoner s oss was deductbe n fu
from ts ordnary ncome. The Court of ppeas for the Second Crcut reversed
the oard (110 Fed. (2d), 61 ), hodng that the oss sustaned by pettoner
was a oss from a sae of capta assets (secton 23(|)), whch under secton
117(d) coud be deducted from the gross ncome ony to the e tent of capta
gans, pus 2,000. We granted certorar (310 U. S., 622), so that the case mght
be consdered wth the confctng decson of the Court of ppeas for the S th
Crcut n the amme case (108 Fed. (2d), 753). For the reasons stated n
our opnon n the amme case we thnk that ths case was rghty decded
beow.
ffrmed.
Mr. ustce Roberts dssents.
rtce 117-3: Determnaton of perod for whch 19 1-16-10688
capta assets are hed. G. C. M. 226 7
R NU CTS OF 1921, 192 , 1926, 1928, ND 1932.
Stock acqured through the e ercse of stock rghts and sod wthn
a perod of two years, where the stock n respect of whch the rghts
were ssued had been hed for more than two years, was n part a
capta asset (the porton attrbutabe to the rghts) and n part a
noncapta asset (the porton attrbutabe to the subscrpton prce).
G. C. M. 10063 (C. . -2, 159 (1931)) and G. C. M. 129 2
(C. . III-1, 73 (193 )) revoked to the e tent nconsstent here-
wth. G. C. M. 116 5 (C. . II-1, 117 (1933)) renstated.
Recommended that I. T. 2609 (C. . -2, 339 (1931)) be revoked
and that I. T. 1786 (C. . II-2, 5 (1923)) be not renstated.
n opnon s requested whether, n vew of certan court decsons
referred to heren, G. C. M. 10063 (C. . -2, 159 (1931)), G. C. M.
129 2 (C. . III-1, 73 (193 )), and I. T. 2609 (C. . -2, 339
(1931)) shoud be revoked, and G. C. M. 116 5 (C. . II-1, 117
(1933)) and I. T. 1786 (C. . II-2, 5 (1923)) shoud be renstated.
The queston nvoved s whether stock, whch was acqured by the
e ercse of stock rghts and sod wthn a perod of two years after
the e ercse of the rghts, was a capta asset wthn the meanng of
the statute; or, to state t otherwse, where stock s acqured through
the e ercse of stock rghts, s such stock acqured (1) as of the date
on whch the orgna stock (n respect of whch the rghts were
ssued) was acqured, (2) as of the date on whch the rghts were
e ercsed, or (3) n part as of the frst date and n part as of the
second date
In G. C. M. 129 2, supra, t was hed that where stock s acqured
through the e ercse of rghts, the hodng perod begns on the date of
acquston of such stock and not on the date of acquston of the stock
wth respect to whch the rghts were ssued. That rung revoked, n
so far as nconsstent, G. C. M. 11615, supra, and renstated G. C. M.
10063, supra, whch was n accord wth G. C. M. 129 2, supra. In
G. C. M. 116 5, supra, t was stated n effect that stock acqured through
the e ercse of rghts and hed for ess than two years, where the stock
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117, rt. 117- .
382
n respect of whch the rghts were ssued had been hed for more than
two years, was n part a capta asset (the porton attrbutabe to the
rght) and n part a noncapta asset (the porton attrbutabe to the
subscrpton prce). Under the rung made n G. C. M. 129 2, supra,
whch was based upon decsons of the oard of Ta ppeas on od-
man . Grscom v. Commssoner (22 . T. ., 979) and en yer
Wood v. Commssoner (29 . T. ., 1050), no part of such stock was
consdered to be a capta asset.
The decson of the oard n the Grscom case, supra, earer had
resuted n the revocaton of I. T. 1786, supra, whch rung had nd-
cated that stock acqured through the e ercse of rghts, where the stock
n respect of whch the rghts were ssued was hed for more than two
years, consttuted a capta asset. I. T. 1786 was revoked by I. T. 2609.
supra, n conformty wth G. C. M. 10063 and G. C. M. 129 2, supra.
Ths queston has now been consdered by the courts Wood v. Com-
mssoner, 75 Fed. (2d), 36 ; Macy v. e verng, 82 Fed. (2d), 183:
Insu, v. Commssoner, 87 Fed. (2d), 6 8), and the concusons reached
have been n substanta accord w th G. C. M. 116 5, supra.
The oard of Ta ppeas ater recognzed and foowed the genera
rue estabshed by the courts n the Wood case, the Macy case, and the
Insu case, and stated that ts pror decsons, n so far as n confct,
woud not be foowed n the future. Water Ftch, r., v. Comms-
soner, 35 . T. ., 537.)
In vew of the fact that the rung made n G. C. M. 116 5, supra, s
n harmony wth the prncpes ad down n the above-cted court
cases, that G. C. M. s renstated, and G. C. M. 10063, supra, and G. C. M.
129 2, supra, are revoked n so far as nconsstent therewth.
It s recommended that I. T. 2609, supra, be revoked and that I. T.
1786, supra, be not renstated.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
rtce 117-3: Determnat on of perod for whch 19 1-16-10f 89
capta assets are hed. L T. 3 09
R NU CTS OF 1921, 192 . 1020, 1928, ND 1932.
In vew of G. C. M. 226 7 (page 381, ths uetn). I. T. 2609 (C. .
-2, 339 (1931)) s revoked, and I. T. 1786 (C. . II-2. 5 (1923)) s
not renstated.
rtce 117- : ppcaton of secton 117 generay.
R NU CT OF 193 .
Compensaton receved for oss of budngs, machnery, and equp-
ment. (See Ct. D. 1510, page 32 .)
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383
20 (b), rt. 20 (b)- .
SUPPL M NT G. INSUR NC COMP NI S.
S CTION 20 (b). INSU NC COMP NI S OT R T N
LIF OR MUTU L: D FINITION OF INCOM , TC.
ktce 20 (b)-: Gross ncome of nsurance com-
panes other than fe or mutua.
R NU CTS OF 1921, 192 , 1926, 1928, 1982, ND 193 .
Reserves requred by State authorty wth respect to noncanceabe
heath and accdent poces. (See G. C. M. 22503, page 265.)
tTCL 20 (b): Gross ncome of nsurance com- 19 1-5-10581
panes other than fe or mutua. Ct. D. 1 83
INCOM T R NU CT OF 1920 D CISION OF COURT.
1. Insurance Company Other Than Lfe or Mutua Unearned
Premums ddtona Reserve fob Noncanceabe eath
and ccdent Poces ass fob Computaton.
n nsurance company other than fe or mutua, Issung non-
canceabe accdent and heath poces the premums on whch were
payabe In a constant and f ed amount e cept for read|ustment at
a certan age, was entted to ncude wthn unearned premums
the addtona reserve for such poces as shown on ts annua
statement, n computng earned premums for the ta abe year
1926 n accordance wth secton 2 G(b)5 of the Revenue ct of 1920.
The amount aocated to the addtona reserve as of December 31,
1925, on the bass of 1921 computed e perence (the ony e perence
then known) was propery used n such computaton rather than
an amount based upon the e perence of 1927-1929.
2. Rehearng: Dented.
Moton for rehearng dened ugust 21, 19 0.
Unted States Crcut Court of ppeas for the Frst Crcut.
Massachusetts Protectve ssocaton, Inc., pantff, appeant, v. Unted States
of merca, defendant, appeee.
11 Fed. (2d), 30 .
ppea from the Dstrct Court of the Unted States for the Dstrct of Massachusetts.
efore Maoruder, Mahoney, and Peters, .
ugust 6, 19 0.
OPINION.
Mahoney, .: Ths Is an appea from a |udgment of the dstrct court a
favor of the Government n a sut brought under the Tucker ct (2 Stat.,
505 (1887), 28 U. S. C. ., secton 1 (20)) by the Massachusetts Protectve
ssocaton, Inc., a Massachusetts stock nsurance corporaton, to recover Fed-
era ncome ta es assessed for the years 1926 and 1928 and coected by a
coector who s now out of offce. The case was tred upon a stpuaton and
a suppementa stpuaton of facts, and upon ora testmony taken n open
court. The fcts as found by the dstrct court from ths evdence may be
summarzed as foows:
The pantff s a stock corporaton organzed under the aws of Massachusetts.
Durng the caendar year 1920, the pantff was engaged, as t had been for many
See O. C. M. 22503, page 205, ths uetn.
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20 (b), rt. 20 (b)- .
38
years prevousy, n wrtng accdent and heath nsurance n Massachusetts,
New York and n a number of other States, and was ta abe for 1926 as an nsur-
ance company, other than fe or mutua, under the provsons of secton 2 6 of the
Revenue ct of 19261 ( Stat., 8, 26 U. S. C. , Interna Revenue cts, page 195).
Snce 1919 the pantff has been Issung an accdent and heath pocy whch s
noncanceabe by the company and whch the nsured can keep n force unt reach-
ng the age of 70 smpy by payng the premums f ed n the pocy. The premum
on ths type of pocy from the date of ssuance unt the nsured reached the age
of 50 s n a constant and f ed amount whch can not be ncreased by the company.
The premum ncreases at 50, the amount of such ncrease beng f ed n the pocy,
and thereafter remans constant and f ed.
The pantff ncudes wth ts annua ncome ta return an annua statement
n the form approved by the Natona Conventon of Insurance Commssoners
settng forth t ncome and dsbursements, assets and abtes, and other pert-
nent nformaton. y secton 2 6(b) of the Revenue ct of 1926, ths statement
s made the bass for the computaton of statutory gross ncome. Wth ts ncome
ta return for 1926 the pantff submtted a copy of the statement for that year.
On ths bank, on page 5, ne 25, the pantff reports ts pro rata unearned pre-
mums, . e., the part of the net premums receved on a ts poces proportoned
to the une pred term of the perod for whch the premums were receved. Of
the ast quartery premums pad on December 1, 1926, there was here reported
60 per cent of the whoe whch was pad for protecton to be rendered n anu-
ary and February of 1927, pus any premums pad n advance.
On the same page on ne 25 , the pantff reports ts ddtona Reserve on
Non-Canceabe eath and ccdent Poces as of the ast day of the ta abe
year. Ths reserve s set up as a abty of the company and s hed to meet the
addtona hazards on noncanceabe heath and accdent poces due to the fact
that the premums must reman constant whe the rsk and cost nevtaby ncrease.
efore 1922, the pantff had on ts books no addtona reserve on non-
canceabe heath and accdent poces smar to that shown on ne 25
of ts annua statement for ater years. In March, 1923, the New York super-
ntendent of nsurance requred such a reserve to be set up; and pendng a
determnaton of the proper sze of such reserve as shown by ts own e -
perence, the pantff 6et up an arbtrary reserve of 75,000 as of December,
1922. Ths was ncreased each year thereafter because of the growth of saes
of ths type of contract unt n December, 1925, on the bass of the 1921 com-
puted e perence, the reserve set up was 750,000. Ths was reported on ne
25 of the annua statement and was approved by the State nsurance com-
mssoner. In 1926, a further ncrease of 91,098.68 was made to the reserve
of 750,000, and the tota of 1,2 1,098.68 was reported on ne 25 .
In arrvng at ts net ncome for 1926, the pantff was requred to compute
ts earned premums accordng to secton 2 6(b)5 of the Revenue ct of 1926.
In so dong the pantff added to ts gross premums wrtten durng the year
(mnus return premums and premums pad for rensurance) ts unearned
premums as of December 31, 1925, ncudng n ths amount both the pro
rata unearned premums, shown on ne 25 of the 1925 statement, and the sum
of 750,000, the addtona reserve for noncanceabe heath and accdent n-
1 SF.r. 2 0. (a) In eu of the ta Imposed by secton 2.10. there sha be eved, coected,
and pad for each ta abe year upon the net Income of every nsurance company (other
than a fe or mutua nsurance company) a ta as foows :
(1) In the case of such a domestc nsurance company. 12 per centum of Its net
ncome ;

(b) In the case of an Insurance company sub|ect to the ta Imposed by ths secton
(1) The term gross Income means the combned gross amount earned durn the
ta abe year, from nvestment ncome and from underwrtng ncome as provded n
ths subdvson, computed on the bass of the underwrtng and nvestment e hbt of the
annua statement approved by the Natona Conventon of Insurance Commssoners;
(2) The term net Income means the gross ncome as defned n paragraph (1) of
ths subdvson ess the deductons aowed by secton 2 7 ;

( ) The term underwrtng ncome means the premums earned on Insurance con-
tracts durng te ta abe year ess osses ncurred and e penses Incurred ;
(5) The term premums earned on nsurance contracts durng the ta abe year
means an amount computed as foows :
From the amount of gross premums wrtten on Insurance contracts durng the ta abe
year, deduct return premums and premums pad for rensurance. To the resut so obtaned
add unearned premums on outstandng busness at the end of the precedng ta abe year
and deduct unearned premums on outstandng busness at the end of the ta abe year;

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385
20 (b), rt. 20 (b)- .
surance, shown on ne 25 of the 1925 statement, and It deducted from the
amount so obtaned the pro rata unearned premums, shown on ne 25 of
the 1926 statement, and the sum of 1,2 1,098.68, the addtona reserve for
noncanceabe heath and accdent Insurance, shown on ne 25 of the 1926
statement. In other words, as one of the tems of net unearned premums
whch the pantff Is entted to deduct from gross premums wrtten, the
pantff deducted 91,098.68 whch equaed the net addton to the addtona
reserve for noncanceabe heath and accdent nsurance between December,
1925, and December, 1926.
In 1930, an actuara frm empoyed by the pantff competed a study of the
pantff s e perence In the years 1927-1929, and reported what the reserve
shoud be for the comng year on the bass of that e perence. It aso n-
formed the pantff that f the 1927-1929 e perence had been known n
December, 1925, the proper reserve at that tme woud have been 900,890
rather than the 750,000 based on the 1921 e perence and actuay hed by
the pantff.
Thereafter, In 1930, the Commssoner assessed aganst the pantff a def-
cency n ts 1926 ncome ta . porton of ths defcency was made up by
the Commssoner s determnaton that n computng the earned premums
accordng to secton 2 6(b)5, the pantff shoud have taken as the reserve for
December 31, 1925, shown on ne 25 | of the statement for that year, the
sum of 900,890 rather than the 750,000 actuay hed by the pantff and
reported on ne 25 , and accepted by the Commssoner In computng the
1925 ta . The resut of ths acton by the Commssoner was to ncude n
the pantff s premums earned In 1926, the dfference between 900,890 and
750,000, . e., 150,890. Ths dfference resuted n an addtona ta , pus
nterest, of 23, 28.29. The pantff duy fed n cam for refund whch was
re|ected and ths sut was brought to recover the 23, 28.29 wth nterest thereon.
The dstrct court aso found as a fact that n n of the pantff s tn
returns, the Commssoner has aowed as an e cuson from gross ncome
through the nne years between 1922 and 1930, the net Increase n the add-
tona reserve for noncanceabe heath and accdent nsurance e cept ths
amount of 150,890. Snce 1930, the 1927-1929 e perence as been used to
fgure the reserves set up, and the net ncrease n the aggregate reserves has
been accepted each year by the Commssoner as an e cuson from gross
ncome.
The refund for 1928 s camed for the purey technca reason that a sma
porton of the 23, 28.29 here sought to be recovered was not pad n cash but
was a credt for an aeged 1928 overpayment whch was apped by the Com-
mssoner to the neged 1926 defcency. Snce the defendant rased no queston,
ether n the tra court or n ths court, of the proprety of ncudng ths
sum n the present sut, other than the genera cam that t was not aowabe
as a deducton from gross ncome, we do not consder t necessary to pursue
the matter further than to say that we consder t to be properv before us.
(See Unted States v. ertesen f Peterson Co., 306 U. S., 276 (1939) Ct. D.
1387, C. . 1939-1 (Part 1), 271 .)
t the cose of a the evdence, both the pantff and defendant moved for
|udgment n ther favor, and the pantff requested the court to make certan
fndngs of fact and concusons of aw. The |udge dened the pantffs moton,
and fed an opnon contanng fndngs of fact and concusons of aw, gvng
|udgment for the defendant. To the dena of ts moton for |udgment nnd
the refusa to make the requested fndngs and concusons, the pantff
e cepted.
Later the pantff moved to vacate the |udgment and reopen the tra on the
ground that the |udge had erred n not aowng t to see hs opnon nnd take
e cepton to the dena of ts motons and requests for fndngs before |udgment
was entered. The udge dened the moton and hed that the e ceptons pre-
vousy taken safeguarded the pantff s rghts on appea. Ths court ns hed
thnt the opnon n a case brought under the Tucker ct, supra, s a part of
the record and e ceptons taken to fndngs of fact and concusons of aw there
made and to the |udgment entered are duy taken durng the course of the
tra. (Unted States v. yams, 1 6 Fed., 15 (C. C. . 1, 1906) ; Unted States
v. Swft, 139 Fed., 225 (C. C. . 1, 1905).) The frst b of e ceptons was
propery taken and s vady before ths court. The dstrct court propery
dened the moton to vacate the |udgment and reopen the tra.
The rea queston nvoved n the present controversy s whether the pantff
In computng ts premums earned for the year 1926, under secton 2 6(b)5
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20 (b), rt. 20 (b)- .
3S6
of the Revenue ct of 1920, was entted to e cude therefrom the net addton
made durng that year to the addtona reserve for noncanceabe heath and
accdent poces requred by State aws. In other words, s ths addton to
the reserve fund a part of unearned premums wthn the meanng of the
above secton
The pantff contends that the words unearned premums mean not ony
the pro rata porton of the premums coected for the perod whch has yet to
run, shown on ne 25 of the annua statement, but, n addton, ncudes the
annua addtons to the reserve, set up on ne 25 2, to take care of the n-
creased rsk or addtona cost of nsurance n the ater years of the nsured s
fe. Where the pocy s a eve premum noncanceabe pocy, the pantff
cams that some of the premums coected n the eary years are unearned
an must be set up n ths reserve to provde funds for payng the pocy
obgatons n the ater years when the cost of the Insurance s greater than the
eve premum coected n those years. Snce the pantff cams that the por-
ton of the premums so set asde s n fact unearned, t nssts that t s de-
ductbe from gross premums accordng to the method provded n secton
2 6(b) 5.
On the other hand, the defendant asserts that the words unearned pre-
mums are strcty mted to that porton of the premums coverng the un-
e pred term of the perod for whch they are pad, . c, the pro rata unearned
premums, shown on ne 25 of the annua statement. The man argument on
whch the Government rested ts case s that the net addton to the addtona
reserve for noncanceabe heath and accdent poces s no onger deductbe
from gross premums n order to arrve at gross ncome, and that such net
addton represents earned premums.
The dstrct court gave |udgment for the defendant on the ground that the
net addton to the reserve was earned premums wthn the meanng of
sectfn 2 6(105 and that Congress-dd not ntend to aow ths addton as
a deducton. The dstrct |udge n hs opnon stated that he coud not fnd
from the evdence that the tota premum coected from the nsured n any
one perod, even n the ater years n whch he s entted to have hs pocy,
Is nadequate to take care of the rsk or cost of nsurance durng that perod ;
that when a quartery premum was accepted, t was accepted for payment
for nsurance for three months ony; that the company guaranteed nothng
but that the pocy woud be kept n force for the ne t three months; and
that the fact that the pantff was requred to take some part of ts earned
or unearned premums to set up a sovency reserve s of no mportance as far as
secton 2 6(b)5 s concerned. e hed that ony the pro rata unearned pre-
mum, shown on ne 25, was deductbe. We can not agree wth ths ds-
poston of the case.
The pantff s moton for |udgment on a the evdence, n a case tred wth-
out a |ury, s the equvaent of a moton for a drected verdct and rases a
queston of aw whether the fndngs support the |udgment and whether the
fndngs are supported by evdence. (Maryand Casuaty Co. v. ones, 279
U. S.. 7 )2 (1929) ; Grffn v. Thompson. 10 Fed. (2d), 127 (C. C. . 5, 1925) ;
unt; of Waterproof v. Fdety Depost Co.. 299 Fed., 78 (C. C. . 5, 192 ) :
rf. Federa Intermedate Credt ank v. erh on. 33 Fed. (2d), 8 1 (C. C. .
8, 1929).) Though ordnary the fndngs of fact n a tra wthout a |ury are
concusve, where the proper motons are made and e ceptons taken at the
tra, and when, as here, the record contans a the testmony on whch the
fndngs are based, the appeate court can see f the fndngs are supported
v evdence and. f not, can dsregard them and reverse the |udgment. (Coer
v. Ctcd States, 173 . S., 79 (1899) ; Unted States v. Cark, 96 U. S., 37
(1877 1 : Conner v. Unted State . 1 1 Fed., 16 (C. C. . 1, 1905) ; ef. rk v.
Unted State . 103 U. S., 9, 50 (1890).) The cases cted by the defendant contan
nothng to the contrary snce they nvove cases where the proper motons were
not made at the tra to rase the queston of ack of evdence.
In a noncanceabe heath and accdent pocy the premum remans eve
throughout the fe of the pocy (e ce; t erhaps for a read|ustment, ncuded
n the pocy, at a certan age, after whch the premum s agan eve unt the
e praton of the pocy) even though the rsk Insured aganst ncreases wth
the age of the nsured and even though the cam costs n the ater years of
the pocy are, therefore, correspondngy greater than those of the earer years.
It foows, therefore, that n each of the earer years of a noncanceabe pocy
the net annua premum coected e ceeds the cost of the nsurance for those
years, whe n each of the ater years, the cost e ceeds the net annua pre-
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387
20 (b), rt. 20 (b)- .
mum. Therefore, the addtona reserve for noncanceabe heath and accdent
poces s set up and used to suppement the net annua premums of such
poces n the ater years to the e tent that the prospectve cost n those years
e ceeds the net annua premums. ( qutabe Lfe ssurance Socety, 33
. T. ., 708 (1935).)
onathan Sharp, a wtness for the pantff, n e panng the workngs of ths
reserve, testfed as foows:
The smpest way to consder the reserve shown on ne 25 s to consder
a smpe noncanceabe contract, the cost of nsurance for the frst year beng
1, the second 2, the thrd 3, and the fourth , or a tota of 10. You have
an ncreasng cost of nsurance on the average. If those premums are pad
1 the frst year, 2 the second. 3 the thrd, and the fourth, there woud
be no addtona reserve requred, but f the premums are pad 2.50 the frst
year, 2.50 the second year, 2.50 the thrd, and 2.50 the fourth, then 1.50
has to be set asde as an addtona premum In advance or unearned n the
frst year, and 50 cents n the second, and they are used n the thrd and fourth
years to make up the dfference.
ere t s seen that f the pocy Is a noncanceabe eve premum pocy,
the annua premum contans, on a gven date, two unearned portons, e. g.,
the porton of actua cost for the perod for whch the premum s pad
proportoned to the part of the perod whch has not yet e pred, and that
porton of the premum, over and above the actua cost of nsurance for the
perod for whch the premum s pad, whch represents the amount whch must
be set asde n order to meet the e cess of cams n ater years over the eve
premum then coected. In the above e ampe, suppose the 2.50 eve premum
s pad on uy 1, 1925. On December 31, 1925, 50 cents of the 1 whch the
nsurance for a year actuay costs s unearned, snce ony one-haf the pro-
tecton has yet been gven. Ths s the pro rata unearned premum reserve
whch s shown on ne 25 of the annua statement. owever, there s another
sum whch s aso unearned, . e., the 1.50 whch was coected as part of the
premum but whch s n e cess of the actua cost of the nsurance and must be
put nto the addtona reserve for noncanceabe heath and accdent nsurance
to pay the e cess cost above the premum coected n the thrd and fourth years
of the ustraton. Ths s shown on ne 25 /| of the annua statement.
In the case at bar, the pro rata unearned premum reserve merey repre-
sented the amount of the premums coected whch had not been earned because
the perod for whch protecton had been bought had not yet entrey eapsed.
The addtona reserve represented the e tra amount ncuded n the premum,
made necessary by the fundamenta prncpes of noncanceabe (or guaranteed
renewabe) nsurance, to make up what e perence had shown to be the e cess
of the cost of the nsurance n ater years over the eve premum coected
n those years. The entre premum of a noncanceabe heath and accdent
nsurance pocy coud not be whoy earned at the end of the perod for whch
t was pad and be used by the pantff n any way t peased, for by the very
nature of the nsurance a porton of the premum represents payment now for
future coverage at a tme when the premum s not suffcent to pay the cost of
the nsurance.
The reason that ths reserve must be set up s that the pantff has guaranteed
not to ncrease the premum as the cost of the nsurance ncreases, and to
renew the pocy automatcay on the payment of each succeedng eve premum.
Wthout ths guarantee the pocy woud have been a smpe nonrenewabe
accdent and heath pocy, on whch there woud have been no need for an
addtona reserve snce the premum coud have been rased at the end of each
perod to correspond wth the rsk and cost of the Insurance for the comng
perod, and thus woud have been whoy earned at the e praton of the
perod. The dfference s e acty that whch e sts between a 1-year term
pocy of fe nsurance and a renewabe term pocy wth eve premum. (See
uebner, Lfe Insurance (1923), 8, et scq.)
The statements In the concusons of aw suggest that, as a matter of fact,
the tota premum coected n any perod s never nadequate to pay the cost
of the nsurance for that year, that the pantff guaranteed nothng more than to
keep the pocy ave for the ne t three months, and that the pro rata unearned
premums were n fact the ony porton of the premums unearned. We do not
beeve these statements can be harmonzed wth the uncontradcted evdence
and the nature of noncanceabe heath and accdent nsurance. (See Crag,
The ctuara ass for Premums and Reserves n Persona ccdent and
eath Insurance (1931), 17 Proceedngs of the Casuaty ctuara Socety, 51,
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20 (b), rt. 20 (b)- .
388
66-67; Lard, Non-Canceabe ccdent and eath Insurance Underwrtng
Probems (1921), 7 d.. 302. 316-318; Maverck, Rates and Reserves for Non-
Canceabe eath and ccdent Poces (1021), 3.) In so far as the concu-
sons of aw hod that the addtona reserve for noncanceabe poces are not,
as a matter of aw, to be ncuded In the phrase unearned premums n
secton 2 6(b)5 of the Revenue ct of 1926, they are n our opnon erroneous.
Uness the contrary appears, statutory words are presumed to be used n ther
ordnary and natura meanng. ( evernp v. an oaqun Co., 297 U. S.. 96
(1936) ; DcOanay v. Lcdcrer, 250 U. S 376 (1919) T. I). 2876, C. . 1. 98 (1919) . )
nd where the appcabe secton deas wth a partcuar trade or busness, as
nsurance, the technca nsurance terms must be consdered to be used n the
sense n whch such terms are generay used or understood In the nsurance
busness. (Traveers qutabe Insurance Co., 22 . T. ., 78 (1931) ; see G. C. M.
2318, C. . I-2. 80, 81 (1927) ; earngs before the Senate Fnance Commttee,
on . R. 82 5, S ty-seventh Congress, frst sesson (1921), 39 .)
The uncontradcted ora testmony In ths case shows that n the nsurance
busness the term unearned premums ncudes more than the pro rata por-
ton, shown on ne 25, and specfcay ncudes the reserve for noncanceabe
heath and accdent poces, shown on ne 25 . efore Congress passed the
Revenue ct of 1921 ( 2 Stat., 227), nsurance authortes had pubcy recognzed
that ths reserve was a part of unearned premums. (See, e. g.. Lard. Maverck,
supra.) It thus appears that at the tme when the statute was frst enacted t
was we understood that ths partcuar reserve was ncuded n the technca
term unearned premums used by Congress.
That the term was so understood appears even more ceary from an e am-
naton of the bank of the Natona Conventon of Insurance Commssoners,
whch s made the test of gross ncome by secton 2 6(b) of the Revenue ct of
1921, supra, and the correspondng secton of each successve ct. t the tme the
Revenue ct of 1921 was adopted, the bank contaned ony ne 25 for the entry
of unearned premums. In 1922, ne 25 was added to provde a space for
segregatng the reserve whch was ony necessary for noncanceabe heath and
accdent poces. (See Proceedngs of the Natona Conventon of Insurance
Commssoners (1922), 1, 50.) The ordnary canceabe poces had no unearned
premum e cept the pro rata reserve and needed no ne 25 reserve. It s sgnf-
cant that the new ne was numbered 25 , ndcatng that t was a subdvson of
ne 25, and that t was denomnated an addtona reserve. To make t even
cearer that n fndng premums earned the pro rata reserve of ne 25 and
the addtona reserve of ne 25 shoud be deducted, e pct nstructons to that
effect were put on page 8 of the bank deang wth the computaton of premums
earned. (See Proceedngs of the Natona Conventon of Insurance Comms-
soners (192 ), 175, 190.) The fact that there was no specfc ne showng ths
partcuar tem separatey at the tme the Revenue ct of 1921 was enacted does
not mean that Congress dd not ntend to ncude ths reserve n the term un-
earned premums as then understood. ( ome Tte Insurance Co. v. Unted
States, 50 Fed. (2d), 107, 111 (C. C. . 2, 1931).) When the Revenue ct of
1926 reenacted secton 2 6(b) provdng that gross ncome shoud be com-
puted on the bass of the statement of the Natona Conventon of Insurance
Commssoners, the bank, as shown above, e pressy provded for the deducton
of the addtona reserve for noncancenbe heath and accdent nsurance n
arrvng at earned premums. Congress, n reenactng ths secton, must have
been referrng to ths current statement ncudng the deducton of ths reserve.
The cose anaogy of noncanceabe heath and accdent nsurance, where the
rsk Increases and the premum remans constant, to renewabe term eve
premum fe nsurance has aready been noted. In Traveers qutabe Insurance
Co., supra, a fe nsurance company was ta ed under secton 2 6 of the Revenue
cts of 1921 and 192 (dentca wth the same secton of the 1926 ct) as an
nsurance company, other than fe or mutua, as t dd not come wthn the defn-
ton of a fe nsurance company set out n secton 2 2 so as to be ta ed as such
under secton 2 2-2 5. The oard of Ta ppeas hed that ts fe nsurance
reserves, but up from the e cess of the eary eve premums over the cost
of the nsurance to compensate for the ater e cess of cost over premum, precsey
as the noncanceabe heath and accdent reserves are cacuated, were .unearned
premums wthn the meanng of secton 2 6(b)5 and shoud be added to the
pro rata unearned premum reserve for ordnary canceabe casuaty poces.
The queston presented was anaogous to the queston here, and the Commssoner
announced hs forma acquescence n the decson. (C. . -2, 71 (1931).)
We agree wth the concuson of the oard that the hodng s In no way
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389
20 (b), rt. 20 (b)- .
nconsstent wth the wordng or the purpose of that secton secton 2 6
and s economcay sound. The decson and reasonng are drecty appcabe
here.
The defendant, however, contends that the addtona reserve for noncan-
ceabe heath and accdent poces s not to be added to unearned premums In
computng gross Income, because Congress n the Revenue ct of 1926 made
no provson for the deducton from gross premums of nsurance companes,
other than fe or mutua, of the net nddton to reserve funds requred by aw,
whch had been aowed to a nsurance companes pror to the Revenue ct
of 1921.
Cose e amnaton of the provsons of the Revenue ct of 1921 reatng to
Insurance (whch were reenacted n the Revenue cts of 192 and 1920), and
of ther egsatve hstory, dscoses that no departure was made from the
prevous system of ta ng ony the earned premums of nsurance com-
panes. Ths had prevousy been accompshed by ncudng a premums n
gross ncome and aowng the unearned porton represented by the net addton
to reserve funds to be deducted. The new statute smpy contnued the same
system, as far as nsurance companes other than fe or mutua were concerned,
by defnng underwrtng ncome us premums earned and provdng for the
computaton of those premums n secton 2 0(b)5 by subtractng from gross
premums the unearned premums whch were st represented by the same
reserves. (Utah ome Fre Insurance Co. v. Commssoner, 6 Fed. (2d),
763 (C. C. . 10, 1933), certorar dened, 290 U. S., 679 (1933).) Secton 2 G(b)5
n no way prevents the deducton of the net addton to reserve funds requred
by aw f the addton represents unearned premums.
Furthermore, any contenton of the defendant that secton 2 6(b)5 prevents
the deducton of the net addton to reserve funds requred by aw proves too
much. The pro rata unearned premum reserve s the orgna basc reserve fund
requred by aw for a types of Insurance. (Maryand Casuaty Co. v. Unted
States, 251 U. S., 3 2, 3 8 (1920) ; cf. Centra Natona Fre Insurance Co., 22
. T. ., 105 (1931).) The defendant s argument woud prevent ths reserve
from beng deducted, yet the pro rata premum reserve Is unquestonaby de-
ductbe from gross premums to fnd premums earned.
Fnay, the defendant proposes that the addtona reserve on noneaneenbe
heath and accdent poces can not be unearned premums because f a pocy
s canceed by an nsured he receves no surrender vaue and the pantff keeps
the e cess reserve accumuated.
Whether a premum s consdered earned or unearned depends upon the
nature of the rsk and pocy nvoved. ( mercan Tte Co., 29 . T. ., 79
(1933), affrmed 76 Fed. (2d), 332 (C. C. . 3, 1935) Ct. D. 992, 0. . I -2,
25 (1935) .) Fre and ordnary casuaty nsurance premums become fuy
earned as soon as the perod for whch the premum was pad has e pred,
for the rsk e pres at the same tme; but a tte Insurance premum s fuy
earned the moment t s pad athough the rsk contnues ndefntey. ( mer-
can Tte Co., supra.) nd marne nsurance premums are often not con-
sdered earned unt the entre rsk has e pred. (See Mass. Gen. Laws (Ter.
ed., 1 32), ch. 175, secton 10; uebner, Property Insurance (1927), 335.)
The surrender vaue of a fe nsurance pocy s never the fu vaue of the
Insurance reserve but s dmnshed by a surrender charge, and the payment
on canceaton of a fre nsurance pocy s not the tota of the pro rata
unearned premum but that amount mnus the customary monthy short rate.
(See Mass. Gen. Laws (Ter. ed., 1932), ch. 175, sectons 99, 1 .) Thus, the
unearned premum can not be tested by what the company must return
on canceaton.
Congress s ony nterested n determnng what part of a company s gross
ncome shoud be treated as net ncome for the purposes of ta aton. (McCoach
v. Insurance Co. of North merca, 2 U. S., 585.) In genera, premum ncome
Is not such, and ts ncuson n gross ncome s ony ustfed by the deductons
aowed. (See earngs before the Commttee on Ways and Means on the
Revenue ct of 1918, S ty-ffth Congress, second sesson, Part 1 (1918),
811.) The addtona reserve for noncanceabe heath and accdent poces,
whether returnabe to the nsured or not, Is not avaabe for the use of the
genera purposes .of the pantff. It s hed as a abty to provde for the
payment or rensurance of specfc contngent nsurance abtes proven by
e perence to be a part of the cost of ths partcuar type of nsurance n the
future years. When an nsured cances hs pocy, or when the pantff re-
nsures ts rsks or pays a cam, the sums represented by the reserve on the
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20 (b), rt. 20 (b)- .
390
canceed pocy or the cams, or the tota reserve n the case of rensurance,
no onger reman n the reserve but become a part of gross Income wthn
the meanng of the statute. (Cf. Centra Natona Fre Insurance Co., supra;
Unon Underwrters of New York et a., . T. ., 72 (1926).) nd the
tme that portons of premums whch have been set asde n true nsurance
reserves can be ncuded n gross ncome s ony where t s ceary shown
that subsequent busness condtons have reeased the amount of them to the
free benefca use of the company n a rea, and not n a mere bookkeepng
sense. (Maryand Casuaty Co. v. Unted States, supra, at 353.)
s ong as these reserve funds must be hed to provde for e pected n-
surance abtes n the future on these noncanceabe heath and accdent
poces and are not to bo used for the genera purposes of the company, they
are not earned premums wthn the meanng of Congress and not ncudbe
n gross ncome. The test s not whether the part of the premum set asde
n the reserve for noncanceabe heath and accdent nsurance beongs to
the company n the event of canceaton or apsng of the pocy, but whether
that amount s such a part of the company s gross ncome as Congress con-
sdered shoud be treated as net ncome for the purposes of ta aton. (Mc.Coaeh
v. Insurance Co. of North merca; supra.) We hod that t s not.
The practcay unbroken admnstratve practce of aowng the ncuson of
ths reserve as unearned premums In secton 2 6(b)5, both u the case of the
pantff and as generay conceded by the defendant n ts answer to the
moton to reverse and remand, pus the reenactment of the reevant portons
of the statute eght tmes, and the Commssoner s acquescence n the anaogous
case of Traveers qutabe Insurance Co., supra, shoud sette the case un-
questonaby. (See aggar v. everng, 308 U. 8., 389 (19 0) Ct. D. 1 33,
C. . 19 0-1. 237 ; everng v. Wshre O Co., 308 U. S., 90, 100 (1939) Ct.
D. 1 2 , C. . 1939-2, 213 ; aska Steamshp Co. v. Unted States, 290 U. S.,
256. 2(52 (1933) ; dcard s Lessee v. Darby. 12 Wheat., 206, 210 U. S.. 1827.)
The pantff s ceary entted to ncude the addtona reserve for non-
canceabe heath and accdent poces, shown on ne 23 6 of ts annua state-
ment, n unearned premums n computng ts earned premums n
accordance wth secton 2 6(b)5 of the Revenue ct of 1926.
The ony queston whch remans s whether the Commssoner was correct
n assessng a defcency on the ground that the pantff shoud have used
as the amount for the addtona reserve at the end of 1925 the 900,890 whch
the e perence of 1927-1929 ndcated woud have been the proper amount of
the reserve at that tme f the subsequent e perence had been known, rather
than the 750,000 whch was the actua amount aocated to the reserve on
the bass of the 1921 e perence, the ony e perence then known. We thnk
the Commssoner was wrong.
It Is stpuated that the Commssoner used the fgure of 750,000 n com-
putng the pantff s ta for 1925. The effect of substtutng, n 1930, the sum
of 900,890 n pace of 750,000 as the reserve hed on December 31, 1925,
n computng the 1926 ta s to ncude n premums earned for 1926 the
dfference between those two amounts, or 150,890, representng an addtona
ta pus nterest of 23, 28.29. Ths 150,890 was a part of the actua add-
ton made to the reserve funds between December 31, 1925. and December
31, 1926, based on the e perence of 1921. The reserves of 1925 and 1926
were both accepted as proper by the Commssoner and the varous State
nsurance departments. That the fund as of December 81, 1925, shoud have
amounted to 900,890 was not known and coud not have been known unt
1930. ny amount hed n the reserve between 1925 and 1930, as shown above,
s not earned premums wthn the meanng of the statute but s un-
earned premums. Ths 150,890 was so hed n the reserve, and s, therefore,
unearned premums. The Commssoner had no rght to ncude t n the
pantff s gross ncome.
The addtona reserve for noncanceabe heath and accdent poces s
propery ncudbe wthn the term unearned premums as used n secton
2 6(b)5 of the Revenue ct of 1926. The pantff In 1926 used the proper
fgure for sad addtona reserve as of December 31, 1925, In computng the
unearned premum n accordance wth secton 2 6(b)5. Therefore, the de-
fcency of 23, 28.29 assessed by the Commssoner because he Incuded the
150,890 above referred to n the pantff s gross ncome as earned premums
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391
275, 276, rt. 275-2.
for 1926 was erroneous. The dstrct court shoud have granted the pantff s
moton for |udgment.
In the vew we take of the constructon of secton 2 6(b)5 of the Revenue
ct of 1926, and n the ght of the defendant s answer to the moton t s not
necessary to consder the pantffs moton to reverse and remand for a new
tra to estabsh the admnstratve practce, and the moton s accordngy
dened.
The |udgment of the dstrct court s reversed and the cause remanded to
that court wth drecton to enter |udgment for the pantff In the sum of
23, 28.29 wth nterest from uy 15,1931.
SUPPL M NT L. SS SSM NT ND COLL CTION OF D FICI NCI S.
S CTIONS 275 ND 276. P RIOD OF LIMIT TION
UPON SS SSM NT ND COLL CTION.
rtce 275-2: Perod of mtaton upon 19 1-23-10738
coecton of ta . Ct. D. 1518
( so Secton 292.)
INCOM T R NU CT OF 1917 D CISION OF SUPR M COURT.
1. Sut ond Power of Coector to Reease Obgaton.
coector of nterna revenue who accepted a surety bond
fed wth hm by a ta payer to accompany hs cam for abate-
ment of addtona ncome ta for the year 1917, assessed n 1920,
dd not have power to reease the obgaton of the bond.
2. Sut ond Labty of Surety for Interest and Damages
ffect of State Statute F ng Intebest Rate.
Where a surety bond s condtoned on the payment of ta pus
nterest and ony the ta s pad, the surety s abe not ony for
nterest on the unpad ta to the date of re|ecton of the cam
for abatement but aso for damages, e pressed n terms of n-
terest, for nonpayment of the amount found to be due, the amount
of such damages to be determned by the court. Whe a State
statute f ng the rate of nterest at 6 per cent s not controng,
t s, under the crcumstances of the case, a sutabe rate.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (116 Fed. (2d), 2 7), affrmed.
Supreme Court of the Unted States.
The Roya Indemnty Co., pettoner, v. The Unted States of merca.
61 S. Ct., 995.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
May 26, 19 1.
01 INION.
Mr. ustce Stone devered the opnon of the Court.
coector of nterna revenue, who had accepted a surety bond fed wth
hm by a ta payer to accompany hs cam for abatement of ncome ta ,
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Sf 275, 276, rt. 275-2.
392
consented to termnaton of a abty upon the bond and surrendered t
before ts obgaton was fuy satsfed. The questons for decson are whether
the coector had power to reease the obgaton of the bond and, f not, whether
the Unted States s entted to nterest on the amount of ts cam aganst
the surety.
Upon the Commssoner s assessment n 1920 of addtona ncome ta es n
the sum of 29,128, asserted to be due from the ta payer for 1917, the ta payer
fed a cam for abatement of the assessment, and to secnre suspenson of
coecton of the ta , e ecuted a bond to the coector n the sum of 38,000
wth pettoner as surety, condtoned upon payment on May 2, 1923, of the ta
wth nterest. The Commssoner aowed the cam n abatement n part
but re|ected t to the e tent of 8,223.3S, on whch nterest had then accrued
n the sum of ,109.07. On demand of the Commssoner on ugust 5,
1920, for the prncpa amount of the ta wth nterest to the date of demand,
pettoner pad ony the prncpa amount of the ta to the coector by draft
of December 17, 1920, bearng the notaton on ts face that t was n fu
payment of the ta and of a abty on the bond. The coector coected
the draft and surrendered the bond to pettoner wth the statement that a
abty on t had termnated.
In the present sut on the bond the dstrct court hed that the coector was
wthout authorty to reease the bond and gave |udgment for the sum of
,109.07 found by the Commssoner to be the nterest on the unpad ta to
the date of the re|ecton of the cam for ts abatement, but refused to
aow nterest accrung subsequent to that date. On appea the crcut court
of appeas rued that under secton 370 of the New York Genera usness
Law, nterest at 6 per cent shoud be added to the unpad baance found to
be due on the bond and modfed the |udgment accordngy. (110 Fed. (2d),
2 7.) We granted certorar pr 7. 19 1, because of the mportance of
the questons presented, and of a confct of the decson beow wth that of
the Crcut Court of ppeas for the Thrd Crcut n enemann Chemca
Co. v. Unted States (92 Fed. (2d), 002).
It s not dened that the coector had authorty to accept the bond, that t
created a new cause of acton dstnct from that on the ta payer s obgaton,
and that If t has not been reeased, the Unted States has authorty to sue
upon t (see Unted States v. ohn arth Co.. 279 U. S., 370; tttf States Stee
Co. v. Unted States. 287 U. S.. 32; Unted States v. Woper, 86 Fed. (2d). 715;
Unted States v. Oswego Fas Corporaton. 113 Fed. (2d), 322). nd t s
conceded that, as the bond was condtoned on the payment of the ta es wth
nterest, pettoner s ndebted to the Government upon t for the amount of
the nterest whch had accrued at the tme of the re|ecton of the cam n
abatement. (See otany Worsted Ms v. Unted States, 278 U. S., 282 TCt. I).
39, C. . III-1, 279 (1929) ; ugh son v. Unted States, 59 Fed. (2d), 17,
19; Unted States v. Stenberg, 100 Fed. (2d), 12 , 126.) Respondent s con-
tentons are that the baance of nterest then due was reeased by the coector
ard that n any case t was not bound to pay nterest on that baance.
Power to reease or otherwse dspose of the rghts and property of the
Unted States s odged In the Congress by the Consttuton. ( rtce I , sec-
ton 3, cause 2.) Subordnate offcers of the Unted States are wthout that
power, save ony as t has been conferred upon them by ct of Congress or Is to
he mped from other powers so granted. (Whtesde v. Unted States. 93 U. S.,
2 7, 256-257; art v. Unted States. 95 U. S., 316, 318; awkns v. Unted States,
96 U. S., 689, 691; Utah Power d Lght Co. v. Unted States, 2 3 U. S. 389, 09;
Wther Nat. ank v. Unted States, 29 U. S., 120, 123-12 ; cf. Unted States v.
Shnw. 300 U. S., 95, 501; Rtter v. Unted States. 28 Fed. (2d), 205; Unted
States v. Gobe Indemnty Co., 9 Fed. (2d), 576.) Coectors of nterna revenue
are subordnate offcers charged wth the mnstera duty of coectng the ta es.
(R. S., secton 3183; rskne v. ohnbach, 1 Wa., 013, 610: ardy v. Woodcock,
137 U. S., 3, 6; Moore Ice Cream Co. v. Rose, 289 U. S., 373, 380, 381.) There
s no statute n terms authorzng them to remt ta es, to pass upon the cams
for abatement of ta es or to reease any obgaton for ther payment. Ony the
Commssoner, wth the consent of the Secretary of the Treasury, s authorzed to
compromse a ta defcency for a sum ess than the amount awfuy due.
(R. S., sectons 3220. 3229 ; 26 U. S. C, 1661; Treasury Reguatons 5, artce
1011 (1918 ct) ; otany Worsted Ms v. Unted States, supra, 288; Loery t
Sons v. Commssoner, 31 Fed. (2d), 652, 65 .)
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393
275,276, rt. 275-2.
There s thus no bass In the statutes of the Unted States for mpyng an
authorty In a coector to reenre a bond for the payment of the ta whch the
Commssoner aone s permtted to reduce by way of compromse when the
Secretary of the Treasury consents. enemann Chemca Co. v. Unted States,
supra, and remerton v. Unted States (9 Fed. Supp., 503), to the contrary,
pany rest upon a msappcaton of the rung n Unted States v. e ander
(110 U. S., 325), whch sustaned the reease of a bond for ta es by the Secretary
of the Treasury whch had been specfcay authorzed by an ct of Congress.
The dstrct court re|ected the Government s cam for Interest upon the
baance found due upon the bond as a demand for nterest on nterest whch
has generay been hed not to e an approprate measure of damages for the
deayed payment of nterest aone. (See Cherokee Naton v. Unted States, 270
D. 8., 76. )0.) In any case t thought that the aowance of nterest woud
be nequtabe because of the coector s return of the bond to pettoner and
the Government s deay n brngng the sut. ut, as the court of appeas hed,
the obgaton of pettoner to pay the nterest accrued on the prncpa amount
of ta under the appcabe provsons of the Revenue ct was not damage
assessed aganst pettoner for ts nonpayment of nterest. Pettoner s obga-
ton was contractua to pay an amount found to be due from the ta payer and
the sut aganst t s for a debt c contractu, due and owng n conformty to
the terms of the bond. See Unted States v. ohn urth Co., supra; (utf
States Stee Co. v. Unted States, supra.
sut upon a contractua obgaton to pay money at a f ed or ascertanabe
tme s n sut to recover damage for ts breach, ncudng both the prncpa
amount and nterest by way of damage for deay n payment of the prncpa,
after the due date. nd n the absence of any controng statutory reguaton
the tra court s as competent to determne the amount of Interest for deay
as any other tem of damage. (Unted States v. Unted States Fdety Co.,
236 U. S., 512. 528: Young v. Oodhc. 15 Wa., 562. 565; Maryand Casuaty Co. v.
Unted States, 76 Fed. (2d), 62(1; Unted States v. Wagner. t3 Fed. (2d). 77;
Unted States v. amton. Of Fed. (2d), 878: Massachusetts and n a f In .
Co. v. Unted Stars. 97 Fed. (2d), 879, 881.)
ut the rue governng the nterest to he recovered as damages for deayed
payment of a contractua obgaton to the Unted States s not controed by-
State statute or oca common aw. In the absence of an appcabe Federa
statute t s for the Federa courts to determne, accordng to ther own crtera,
the approprate measure of damage, e pressed In terms of nterest, for non-
payment of the amount found to be due. ( oard of Commssoners, ackson
County, v. Unted States, 308 U. S., 3 3, 350, 352: Young v. Oodhc, supra, 565;
cf. ngs v. Unted Sates. 232 II. S., 261. 2S , et scq.)
The present sut Is at aw for the recovery of an amount due and owng
whch pettoner has contracted to pay. To such a case equtabe rues reatng
to nterest recoverabe n suts for an accountng, or for the recovery of quas
contractua obgatons arsng from payment of money by mstake, are napp-
cabe. (Unted States v. Unted States Fdety Co., supra, 528; cf. Redfed
v. Ystayfera Iron Co., 110 U. S., 17 . 176; Unted States v. Sanborn. 135 U. S.,
271, 281 ; Redfed v. artcs, 139 U. S., 69 , 702.) ere responsbty for deay
n payment rests qute as much upon the debtor, who s chargeabe wth know-
edge of ts own obgaton and the breach of It, as upon the credtor. nd n
the meantme the debtor has had the use of the money, of whch ts defaut
has deprved the credtor. Interest upon the prncpa sum from the date
of defaut, at a far rate, Is therefore an approprate measure of damage for
the deay n payment. (Unted States v. Unted States Fdety Co.. supra,
828; Massachusetts ondng Insurance Co., supra; Unted States v. Wagner,
supra; Maryand Casuaty Co. v. Unted States, supra.) Whe the New York
statute f ng the rate of nterest s not controng, the aowance of nterest
does not confct wth any State or Federa pocy and we thnk that n the
crcumstances of ths case a sutabe rate s that prevang n the State where the
obgaton was gven and to be performed. (See Young v. Oodbe, supra, 565;
oard of Commssoners, ackson County, v. Unted States, supra, 352.)
ffrmed.
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322, rt. 322-7. 39
SUPPL M NT M. INT R ST ND DDITIONS TO T T .
S CTION 292. INT ST ON D FICI NCI S.
R NU CT OF 1917.
Labty of surety on a bond for nterest and damages e pressed
n terms of nterest. (See Ct. D. 1518, page 391.)
SUPPL M NT O. O RP YM NTS.
S CTION 322. FUNDS ND C DITS.
rtce 322-7: Lmtatons upon the credtng 19 1-23-10737
and refundng of ta es pad. Ct. D. 1517
INCOM T R NU CT OF 1926 UDICI L COD D CISION OF
supreme court.
1. Sut Recovery of Overpayment of Ta Lmtaton Perod.
I a sut to recover au nterna revenue ta aeged to have
been erroneousy or egay assessed or coected, the specfc
perod of mtaton of fve years after payment of the ta , or
two years after dsaowance of cam for refund or credt, pro-
vded n secton 1113(a) of the Revenue ct of 1926, s appcabe,
not the genera 0-year mtaton perod provded n secton 2 (20)
of the udca Code.
2. ccount Stated.
ven though the perod of mtaton specfed In secton 2 (20)
of the udca Code appes to an account stated, a certfcate
of overassessment notng that a porton of a cam for refund s
barred by the statute of mtatons, wth whch was ncosed
a check for the baance of the cam, does not consttute an
account stated as to the porton sad to be barred.
3. Case Dstngushed.
omct Teer Co. v. Unted States (1931) (283 U. S., 258
Ct. D. 33 . C. . -, 328 (1931) ) dstngushed.
. D| tson Reverskd.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (1938) (97 Fed. (2d), 387), reversed.
Supreme Court of the Unted States.
The Unted States of merca, pettoner, v. The . S. reder Co., respondent.
61 S. Ct., 1007.
On wt o certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut
May 26, 19 1.
opnon.
Mr. ustce Murphy devered the opnon of the Court.
In 1921, respondent fed ts ncome ta return for 1920, dscosng ta abty
of 52, 81.97 whch t pad n fu. Thereafter, and pror to une 15, 1926, t
e ecuted a waver e tendng unt December 31, 1926, the tme for audt and
possbe addtona assessment of ta es. On uy 26, 1926, respondent pad a
defcency assessment of 1,362.50. most three years ater, on March 23, 1929,
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322, rt. 322-7.
respondent fed a cum for refund of 53,S . 7, the entre amount of ta es pad
for 1920.
The Commssoner found that respondent had overpad ts 1920 ta es n the
sum of 1 ,833.68. In October, 1 I2 , he sent respondent a certfcate of over-
assessment whch noted that there had been an overpayment n that amount but
that 13, 71.18 was barred by statute of mtatons. ccompanyng the cer-
tfcate was a check for the dfference, 1,302.50, whch respondent apparenty
accepted. In thus computng the refund owng to respondent, the Commssoner
assumed that subsectons (b) (1), (b) (2), and (g) of secton 28 of the Revenue
ct of 1926 ( Stat.. 9, 66, 67) authorzed hm to remt ony that part of the
1920 ta whch was pad n 1926.
On March 7, 1932, respondent brought the present acton n a Unted States
dstrct court to recover the sum wthhed. t the cose of the tra, pettoner
moved for |udgment on the ground that the acton was barred by secton 1113(a)
of the Revenue ct of 1926 ( Stat., 9, 116). The dstrct court granted the
moton and entered |udgment for pettoner. (30 Fed. Supp., 722.) The crcut
court of appeas reversed, one |udge dssentng, hodng that the genera 6-vear
mtaton n secton 2 (20) of the udca Code 28 U. S. C, secton 1(20)
rather than the mtatons n secton 1113(a) determned the tmeness of
respondent s acton. (97 Fed. (2d), 387.)
The cause was returned to the dstrct court. Over the renewed contenton
of pettoner that the acton was barred by secton 1113(a), the dstrct court
proceeded to the merts. It hed, In effect, that secton 28 (b)2 dd not mt
the refund sanctoned by secton 28 (g) to the porton of the ta pad wthn
four years of respondent s cam, and entered udgment as prayed n the com-
pant. (30 Fed. Supp., 72 .) The crcut court of appeas affrmed, acceptng
as the aw of the case ts earer decson that the acton was tmey, despte
pettoner s argument to the contrary. (117 Fed. (2d), 133.) On pr 1 , 19 1,
we granted certorar. ( U. S., .)
Reyng prncpay on onot-Teer t Co. v. Unted State (283 U. S., 258),
respondent mantans that Its acton was commenced we wthn the appcabe
perod of mtaton. Further, respondent contends that both courts beow
correcty refused to regard secton 28 ( )2 as a mtaton on the Commssoner s
duty to make refunds under secton 28 (g). We fnd It unnecessary to e amne
the atter contenton, for we nre of opnon that respondent sued too Into.
In so far as matera here, secton 1113(a) provdes: No sut
or proceedng for the recovery of any nterna-revenue ta aeged to have
been erroneousy or egay assessed or coected sha be begun
after the e praton of fve years from the date of the payment of such ta
uness such sut or proceedng s begun wthn two years after the
dsaowance of the part of such cam to whch such sut or proceedng reates.
Undoubtedy, respondent has faed to begn Its acton wthn ether of the
perods specfed n secton 1113(a). (See Unted States v. . S. reder Co.,
97 Fed. (2d), 387, 388.) The sut was not Insttuted unt March 7, 1932, a-
though the ast ta payment was made on uy 26, 1926, and the cam for
refund was dsaowed In October, 1929. ut as aready stated, the court beow
Sec. 28 . (a) Where there has been an overpayment of any Income, war-profts, or
e cess-profts ta mposed by specfed cts, the amount of such overpayment sha
(sub|ect to enumerated condton be refunded Immedatey to the ta payer.
(b) cept as provded n subdvsons (g) of ts secton
(1) No such credt or refund sha be aowed or nnde after four years from
the tme the ta was pad n the case of a ta mposed by any pror ct, uness before the
e praton of such perod a cam therefor Is ted by the ta payer; and
(2) The amount of the credt or refund sha not e ceed the porton of the ta pad
durng the four years Immedatey precedng the fng of the
eam.
(g) If the ta payer ha , on or before une r . 1926. fed such a waver n
respect of the ta es due for the ta abe year 1020 or 1021, then such credt or refund
reatng to the ta es for the ta nbe year 1920 or 1021 ha he aowed or made If cam
therefor Is fed ether on or before pr 1, 1927 or wthn four years from the tme the
ta was pad.
1 It houd be noted that ths acton seeks recovery of money whch was pad In 1921.
We assume, so far as ths decson Is concerned, thnt the phrase such ta n the quoted
anguage refers to the tota ta for the year n queston whenever determned and
assessed; or stated dfferenty, that payment wthn the meanng of ths statute does
not occur unt the entre ta for 1020 a pad. Incudng defcency assessments made
aevern years ater. Compare tnon Trust Co. v. ntrd states (TO Fed. (2d), 629).
We assume aso that the Commssoner s refusa In 1920 to make the refund was a
dsaowance of respondent s cam. Con|wre omrt- I eUer rf Co v. t nted States
(283 U. S., 258, 205) wth f nted Mate v. Uertesen t Petersen ngneerng Co. (306
U. S., 276. 280).
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322, rt. 322-7.)
396
hed that the acton was not barred because the Tucker ct (2 Stat., 505),
ater Incorporated In secton 2 (20) of the udca Code, rather than secton
1113(a) prescrbed the perod wthn whch respondent was bound to brng
sut. We vew the statutes dfferenty.
Secton 2 (20) gves the dstrct courts ursdcton concurrent wth the
Court of Cams of certan suts aganst the Unted States. To equate the
rght thus conferred to the e stng rght to sue In the Court of Cams (see
28 U. S. C, secton 262), the statute provdes: No sut aganst the Government
of the Unted States sha be aowed under ths paragraph uness the same
sha have been brought wthn s years after the rght accrued for whch
the cam s made.
We thnk the quoted anguage was ntended merey to pace an outsde
mt on the perod wthn whch a suts mght be Intated under secton
2 (20). Ceary nothng In that anguage precudes the appcaton of a df-
ferent and shorter perod of mtaton to an Indvdua cass of actons even
though they are brought under secton 2 (20). Phrasng the condton nega-
tvey, Congress eft t open to provde ess beray for partcuar actons
whch, because of speca consderatons, requred dfferent treatment. (See
Chrste-Street Commsson Co. v. Unted States, 136 Fed., 326, 332-333.)
Secton 1113(a) s precsey that type of provson. Recognzng that suts
aganst the Unted States for the recovery of ta es mpeded effectve admns-
traton of the revenue aws. Congress aowed ony fve years from payment
of the ta for the commencement of such actons, uness specfed crcumstances
e tended the perod. That ths specfc provson s entrey consstent wth
the genera provson In secton 2 (20) s pan. Indeed, the mtaton In
secton 1113(a) has no meanng whatever uness the mtaton n secton
2 (20) s construed not to govern proceedngs for the recovery of nterna-
revenue ta aeged to have been erroneousy or Iegay assessed or coected.
omct-Teer t Co. v. Unted States, supra, does not remove the bar of
secton 1113(a) here. There we hed under the pecuar facts dscosed that
the ta payer coud evade the mtatons of that secton by groundng ts
acton on a subsequent account stated rather than on the orgna, wrongfu
overassessment. ut the nstant case s pany dstngushabe, for, assumng
that famar doctrnes of contracts furnsh the test (Daube v. Unted States,
289 U. S., 367, 370), we are unnbe to fnd the requstes of an account stated
In the transactons on whch respondent rees.
To estabsh an account stated, respondent must show that a baance was
struck n such crcumstances as to mport a promse of payment on the one
sde and acceptance on the other. (R. . Stearns Co. v. Unted States, 291
U. S., 5 , 65: sec aso, Toatd v. Sprague, 12 Pet., 300, 325; Nutt v. Unted States,
125 U. S., 650.) ut pany, no such promse s a |ust or reasonabe nference
from the certfcate of overassessment devered to ths ta payer, f the cer-
tfcate s nterpreted n the settng of the occason. (R. . Stearns Co. v.
Unted States, supra.) In fact, a contrary nference s the ony egtmate sup-
poston respondent coud make. t most, respondent coud assume that the
Unted States promsed to pay 1,362.50; the check was there n fufment.
Obvousy, refusa to refund the baance dd not and coud not mpy a promse
to pay the amount wthhed.
cceptance by respondent, another essenta of an account stated, s equay
uckng. y acceptng the check for 1,362.50 respondent agreed ony to a
parta account stated (compare Sturm v. oker, 150 U. S., 312, 8 0), thereby con-
vertng that much of the statement nto an account setted. The nsttuton
of ths sut s ampe proof that respondent never ntended to accept the certfcate
n ts entrety as a correct computaton of the amount whch t camed was due.
We concude that respondent s sut s barred by the mtatons of secton
1113(a). The |udgment Is reversed, and the cause s remanded wth drectons
to dsmss the petton.
It s so ordered.
pparenty the appcabty of a epecfc mtaton Instead of the genera Tucker ct
mtatun as not been chaenged for 38 years. (See Uhrtte-Strcet Commsson Co. r.
Unted Rtat n. 130 Fed. 32(.) The specfc mtaton has been nssumed to appy n numer-
ous cases. (See, e. g., Unted States v. erteUen d Petersen ngneerng Co., 806 D. 8.,
276 ; ates Mff|. Co. v. Unted States, 303 U. S., 567; . . Stearns Co. v. Unted States,
291 U. S., 5 ; Daube v. Unted States, 289 D. S., 807.)
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397
IS 322, rt. 322-7.
rtce 322-7: Lmtatons upon the credt- 19 1-2 -107
ng and refundng of ta es pad. I. T. 3 83
R NU CT OF 193 .
Where Federa ncome ta defcences for the years 193 and
1985 were pad on February 28, 1938, and cams for refund of the
defcences and nterest thereon were fed on February 29, 19 0
(the year 19 0 beng a eap year), such cams were fed wthn the
2-year perod of mtaton prescrbed by secton 322(b) 1 of the
Revenue ct of 193 .
dvce s requested whether certan cams for refund fed on
February 29, 19 0, wth respect to Federa ncome ta defcences for
the years 193 and 1935, were fed wthn the 2-year perod of m-
taton prescrbed by secton 322 (b) of the Revenue ct of 193 .
The ncome ta defcences for the years 193 and 1935, as to whch
cams for refund were fed, were pad on February 28, 1938. Cams
for the refund of these defcences and nterest thereon were fed on
February 29, 19 0. In vew of the fact that the year 19 0 was a eap
year, the ssue nvoved s whether the e tra day. February 29. 19 0,
shoud be regarded as wthn two years from the tme the ta was
pad, as provded n secton 322(b) 1 of the Revenue ct of 193 ,
reatng to the perod of mtaton on aowance of refunds and
credts.
The Unted States Supreme Court n urnet v. Wngham Loan
Trust Co. (282 U. S., 37, Ct. D. 292, C. . -, 258 (1931)) enunc-
ated the prncpe that n reckonng the perod of mtaton after
the happenng of an event (payment of the ta defcences on Febru-
ary 28,1938, n the nstant case), the day on whch the event happened
shoud be e cuded from the computaton. ccordngy, the 2-year
perod of mtaton here nvoved dd not begn to run unt March 1,
1938.
The term year, when used to desgnate the statutory perod of
mtaton, means caendar year uness some other meanng s
ceary ndcated. Caendar year n turn means a 12-month
perod regardess of whether t contans 365 or 366 days. The
nterventon of February 29 durng a eap year has been hed not to
change the day of the month for e praton of a perod of mtaton
defned n terms of years. Peope v. , 2 Ca. pp. (2d). 1 1,
37 P. (2d), 8 9; parte ohnson, 53 rz., 161, 87 P. (2d) 107;
Rce et a. v. ar, 158 y., 680, 166 S. W., 180; Dougas v. caca
Mutua Lfe Insurance Co., Te . Cv. pp., 118 S. W. (2d), 6 3.)
The 2-year perod of mtaton for fng cams after payment of
the ta es n the nstant case dd not e pre unt March 1, 19 0. or,
n other words, the cams were requred to be fed on or before the
ast day of February, 19 0. Snce the ta payer s cams for refund
coverng the ta es n queston for the years 193 and 1935 were fed
on February 29, 19 0, such cams were fed wthn the 2-year perod
of mtaton prescrbed by secton 322(b) 1 of the Revenue ct of 193 .
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MPLOYM NT T S.
INT RN L R NU COD .
C PT R 9, SU C PT R . F D R L INSUR NC CONTRI UTIONS
CT.
Secton 1 26: Defntons. 19 1-1O-1063O
Reguatons 106, Secton 02.20 : Who are S. S. T. 11
empoyees.
( so Subchapter C (Federa Unempoyment Ta ct),
Secton 1607; Reguatons 107, Secton 03.20 .)
Coectors performng servces for the M Pubshng Co. are em-
poyees of that company for purposes of the ta es mposed by Sub-
chapters and C, Chapter 9, of the Interna Revenue Code, as
amended by the Soca Securty ct mendments of 1939.
dvce s requested whether coectors performng servces for the
M Pubshng Co. are empoyees of that company for purposes of the
ta es mposed by Subchapters and C, Chapter 9, of the Interna
Revenue Code, as amended by the Soca Securty ct mendments
of 1939.
The M Pubshng Co. (herenafter caed the company) s engaged
n the busness of pubshng varous perodcas and ts representa-
tves take orders for subscrptons. arge voume of subscrptons s
sod on an nstament contract bass, coectons upon the nstament
subscrpton contracts beng made by coectors at ntervas agreed
upon wth the subscrber, usuay monthy.
The contract between a coector and the company s on a standard
form desgnated as a coector s appontment, whch provdes that
the ndvdua sha fe a bond; that he w coect ony n the dstrct
assgned to hm; that the company w pay a weeky commsson vary-
ng n percentage n accordance wth the number of days per week
devoted to coecton work; and that the coector sha submt a coec-
ton report for each day s work durng the week. Provson s aso
made for payment of commssons on subscrptons secured by the
coector. The company reserves the rght to revoke the appontment
at any tme. The coector s appontment contans none of the
detas of the work to be performed, nor any of the responsbtes of
the coector wth respect thereto. It s apparent, therefore, that the
wrtten contract s not ntended to embody a of the detas of the
reatonshp between the partes.
The detas of the arrangements for the dutes of partcuar co-
ectors dffer n varous ocates and are dependent upon the pro -
mty of branch offces of the company, the popuaton of the partcuar
terrtory, and smar factors. Generay, t appears that the coectors
are assgned to varous dstrcts and operate ether drecty or n-
(398)
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399
Regs. 106, 02.20 .
drecty from the company s branch offces. ach coector s gven a
number of subscrpton contracts to coect, whch are arranged n
routes for convenence n coectng. In rura areas an ndvdua may
have a more or ess permanent route, but n metropotan areas routes
are assgned to dfferent coectors at w. In some nstances the sub-
scrpton contracts are maed to the coectors and remttances and
reports are made by ma. In many cases, however, the coectors
operate out of the branch offces, reportng at a specfed tme each
mornng for assgnments of routes and for the recept of contracts
on whch coectons are to be made. Tardness or faure to report
resuts n reprmands and threatened dsmssa. t the cose of the
day, or at specfed ntervas, the coectors report personay to the
The coectors are requred to coect a certan percentage on the
contracts each month, faure to do so resutng n dscharge. In
many cases such coectons requre a of the coector s tme. Co-
ectors are dscouraged and sometmes forbdden to engage n any
other occupatons, partcuary coecton work. The company mas
out etters of nstructons at reguar ntervas, the. contents consstng
of crtcsm of the coector s work, requests that specfc tasks be
performed, and nstructons on ncdenta matters, such as verfcaton
of subscrptons and nspecton of magaznes, posta matters, etc. The
company customary requres the attendance of coectors at con-
ferences for the purpose of group nstructon. The coectors are
responsbe for cang upon those ndvduas whose contracts have
e pred n order to obtan renewa subscrptons. The coectors do
not have drawng accounts to meet e penses nor are they furnshed
wth means of transportaton. In connecton wth ther work the co-
ectors are hed out to the pubc as representatves of the company.
The present ssue s whether or not the degree of contro refected
n the foregong facts s suffcent to estabsh the ega reatonshp
of empoyer and empoyee.
Generay the reatonshp of empoyer and empoyee e sts
when the person for whom servces are performed as the rght to
contro and drect the ndvdua who performs the servces, not ony
as to the resut to be accompshed by the work but aso as to the
detas and means by whch that resut s accompshed. That s, an
empoyee s sub|ect to the w and contro of the empoyer not ony as
to what sha bs cone but Ttow t sha be done. In ths connecton, t
s not necessary that the empoyer actuay drect or contro the man-
ner n whch the servces are performed; t s suffcent f he has the
rght to do so. The rght to dscharge s aso an mportant factor n-
dcatng that the person Possessng that rght s an empoyer. Other
factors characterstc of an empoyer, but not necessary present n
every case, are the furnshng of toos and the furnshng of a pace to
work to the ndvdua who performs the servces. Whether the re-
atonshp of empoyer and empoyee e sts w n doubtfu cases be
determned upon an e amnaton of the partcuar facts of each case.
(Secton 02.20 , Reguatons IOC; secton 03.20 , Reguatons 107.)
It s apparent from a consderaton of the facts and the pertnent
reguatons that the M Pubshng Co. has the rght to and does e er-
cse drecton and contro over the detas and means by whch the
servces of the coectors are performed. It s therefore hed that the
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Regs. 106, 02.20 .
00
coectors are empoyees of the M Pubshng Co. for the purposes of
Subchapters and C, Chapter 9, of the Interna Revenue Code, aa
amended by the Soca Securty ct mendments of 1939.
Secton 1 26: Defntons. 19 1-11-106 6
Reguatons 106, Secton 02.20 : Who are em- S. S. T. 12
poyees.
( so Secton 02.213; Subchapter C (Federa
Unempoyment Ta ct), Secton 1607: Reg-
uatons 107, Sectons 03.20 and 03.213.)
Indvduas performng servces for the M Company n the con-
structon of a Federa pro|ect under a cost-pus-a-f ed-fee
contract wth the Unted States Navy Department are empoyees
of that company for purposes of the ta es mposed by Sub-
chapters and C of Chapter 9 of the Interna Revenue Code,
as amended by the Soca Securty ct mendments of 1939.
dvce s requested whether ndvduas performng servces for
the M Company n the constructon of a Federa pro|ect under a
cost-pus-a-f ed-fee contract wth the Unted States Navy De-
partment are empoyees of that company for purposes of the ta es
mposed by Subchapters and C, Chapter 9, of the Interna Reve-
nue Code, as amended by the Soca Securty ct mendments of
1939.
The M Company (herenafter caed the company) s engaged n
genera constructon and budng actvtes and operates an nde-
pendent busness enterprse. It has agreed wth the Navy Depart-
ment to construct certan budngs at a nava tranng staton.
Under the terms of the contract, the company agrees to construct or
otherwse accompsh the competon of the budngs; to furnsh a
pans and specfcatons whch may be determned by the Navy De-
partment to be necessary, such pans and specfcatons to be sub|ect
to the approva of the contractng offcer of the Department; to pro-
vde a pant and equpment as may be requred; and to furnsh a
servces and abor, ncudng persona servces of every character,
e cept such as may be furnshed by the Government, and a ma-
teras and suppes requred to compete the pro|ect. The Navy
Department reserves the rght to nspect materas and suppes, as
we as the competed work, and, through the contractng offcer,
may make changes n approved drawngs and/or specfcatons.
Where such change resuts n a matera ncrease or decrease n the
work to be done by the company, or the tme requred for ts per-
formance, an equtabe ad|ustment of the f ed fee to be pad to the
company s to be made and the orgna contract s to be modfed
n wrtng accordngy. Furthermore, the Department may term-
nate the contract at any tme upon the refusa, negect, or faure of
the company to prosecute the work wth promptness and dgence.
The company agrees to keep accurate records and books of account
showng the costs of a tems of abor, materas, equpment, sup-
pes, servces, and charges ncurred n competng the work.
The Navy offcer n charge may attend meetngs of the board of
drectors of the company to secure nformaton reatve to any matter
wthn the purvew of the contract. No person may be assgned by
the company to certan enumerated postons carryng supervsory
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01
(Regs. 100, 5 02.20 .
powers unt there s submtted to the contractng offcer a statement
of the quafcatons and e perence of the ndvdua proposed for
such assgnment and such assgnment s approved by the contractng
offcer.
The Government agrees to pay to the company the actua net
cost of the materas furnshed and of the servces performed n the
competon of the pro|ect and a fee of 500a; doars. The contract,
n specfyng the tems whch may be a part of the actua cost, sts
the net amount of any State or oca ta es, fees, or charges, whch the
company may be requred to pay on or for any pant, equpment,
process, organzaton, materas, or personne under any appcabe
vad aw or reguatons ssued by competent authorty. Payment
to the company s by Government check payabe upon recept of
requstons accompaned by certfed and approved pay ros, n-
voces, bs, or other substantatng documents and ssuance of
vouchers to be sgned by the company.
It s apparent from the terms of the contract that the Navy De-
partment has contracted for the accompshment of a partcuar |ob,
and that the M Company, whch s engaged n genera constructon
and budng actvtes, s actng as an ndependent contractor wth
respect to the pro|ect here nvoved. It s therefore hed that the
ndvduas n queston are empoyees of the M Company for the
purposes of Subchapters and C, Chapter 9, of the Interna Reve-
nue Code, as amended by the Soca Securty ct mendments of
1939. (See generay S. S. T. 320, C. . 193 -2, 321, and the rungs
cted theren.)
Secton 1 26: Defntons. 19 1-22-10726
Reguatons 106, Secton 02.20 : Who are S. S. T. 16
empoyees.
( so Subchapter C (Federa Unempoyment Ta ct),
Secton 1607; Reguatons 107, Secton 03.20 .)
Men engaged by the M Coa Co. to store coa devered to cus-
tomers are empoyees of that company for purposes of the ta es
Imposed by Subchapters and C, Chapter 9, of the Interna Rev-
enue Code, as amended by the Soca Securty ct mendments
of 1939.
dvce s requested whether men engaged by the M Coa Co. to
store coa devered to customers are empoyees of that company for
Federa empoyment ta purposes.
The M Coa Co. s engaged n the reta dstrbuton of coa.
When a customer submts an order, he s requested to ndcate
whether he. desres that a man be sent wth the devery to effect a
transfer of the coa from the curb to the customer s bn. If the
customer desres ths servce, he s advsed that he w be requred
to pay for the necessary abor at the rate of cents per ton, and s
requested to sgn a statement authorzng the company to charge
such amount to hs account.
ach mornng t s customary for a number of men to congregate
at the company s yards for work. When an order s receved by
the company, the man seected to store the coa s presented wth
a sp for the customer to sgn upon competon of the work, and s
transported by company truck to the customer s premses. fter
the coa s dumped at the curb, the man sent by the company stores
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Regs. 106, 02.205.
02
the coa n the customer s bn and returns to the coa yard wth the
customer s sgned statement, where he s pad n cash. The com-
pany pays the cost of the coa storer s transportaton back to the
coa yard and aso the cost of any teephone cas made to the yard.
In case the coa storer does not own a shove and bucket to be used
n storng the coa, they are furnshed by the company. Where a
cash customer fas to pay the coa storer, or fas to sgn a state-
ment authorzng payment by the company at such customer s e -
pense, the company nevertheess pays the storer the amount agreed
upon.
On the bass of the facts presented, t s the opnon of the ureau
that the men engaged by the M Coa Co. to store coa devered
to customers are empoyees of that company for purposes of the
ta es mposed by Subchapters and C, Chapter 9, of the Interna
Revenue Code, as amended by the Soca Securty ct mendments
of 1939.
Secton 1 26: Defntons.
Reguatons 10G, Secton 02.205: Who are empoyers.
Status of essee of one of the departments n the N Department
Store. S. S. T. 20 (C. . -2, 02) revoked. (See S. S. T. 09,
page 15.)
Secton 1 26: Defntons. 19 1-9-10621
Reguatons 106, Secton 02.205: Who are S. S. T. 10
empoyers.
( so Subchapter C (Federa Unempoyment Ta
ct), Secton 1607; Reguatons 107, Secton
03.205; and Soca Securty ct, Secton 907;
Reguatons 90, rtce 20 .)
Servces performed by a father-n-aw n the empoy of hs son-
n-aw n the communty property State of Te as are not e cepted
from empoyment by sectons 1 26(b) and 1007(c)5 of the
Interna Revenue Code, as amended.
S. S. T. 256 (C. . 193S-1, 25) revoked.
The queston s presented whether servces performed by a father-
n-aw n the empoy of hs son-n-aw n the communty property
State of Te as are e cepted from empoyment for Federa em-
poyment ta purposes.
Sectons 1 26(b) and 1607(c)5, Subchapters and C, respec-
tvey, of Chapter 9 of the Interna Revenue Code, as amended by
the Soca Securty ct mendments of 1939, e cept from empoy-
ment :
Servce performed by an ndvdua n the empoy of hs son, daughter, or
spouse, and servce performed by a chd under the age of 21 n the empoy of
hs father or mother .
In S. S. T. 256 (C. . 1938-1, 25) t was hed that for the purpose
of Ttes III and I of the Soca Securty ct a husband and wfe
domced n the State of Te as are deemed to be the |ont empoyers
of a ndvduas empoyed by each n the producton of communty
ncome. It s urged that an appcaton of S. S. T. 256 n the nstant
case shoud resut n the concuson that the servces of the father-n-
aw are performed n the empoy of hs daughter as we as n the
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03
Regs. 106, 02.208.
empoy of hs son-n-aw and. consequenty, that the famy em-
poyment e cepton quoted above shoud appy.
Generay, questons as to the dentty of an empoyer or as to
whether an empoyment reatonshp e sts are resoved by ascer-
tan g whether the person performng the servces s sub|ect to the
drecton and contro of the person for whom the servces are per-
formed. ( rtce 20.5. Reguatons 90; artce 3. Reguatons )1;
secton 02.20 , Reguatons 106; secton 03.20 , Reguatons 107.)
Under the communty property aw n force n the State of Te as,
both the husband and the wfe durng coverture may he possessed ot
separate property, both rea and persona, each havng the soe man-
agement, contro, and dsposton of such separate property. ow-
ever, a property acqured by ether the husband or wfe durng
marrage, other than separate property, s deemed to be the com-
munty property of the husband and wfe. y statute the husband
has the soe rght durng marrage to dspose of the communty
property and to manage and contro t. The wfe s separate property
s not abe for the debts ncurred by the husband n the manage-
ment of the communty property.
On the bass of the Te as aw pertanng to the rghts of the hus-
band n hs separate and communty property, t s hed that for
Federa empoyment ta purposes the husband s the soe empoyer
of the empoyees engaged by hm n connecton wth hs separate
property and n connecton wth the communty property managed
by hm. It s kewse hed that the empoyees engaged by the wfe
n the management of her separate property are her empoyees. In-
asmuch as the concusons reached are contrary to S. S. T. 256, supra,
that rung s revoked.
In the nght of the foregong, t s the opnon of ths offce that
as the husband aone s charged wth the management of the com-
munty property and the wfe s separate estate s not abe for debts
ncurred by the husband n the management of the communty prop-
erty, servces performed by the wfe s father n connecton wth a
communty busness managed by the husband do not come wthn
the famy empoyment e cepton. Labty for the Federa em-
poyment ta es s, therefore, ncurred wth respect to the wages for
such servces.
Secton 1-12G: Defntons. 19 1-23-1073
Reguatons 100, Secton 02.208: grcutura S. S. T. 17
abor.
( so Subchapter C (Federa Unempoyment Ta ct),
Secton 1607; Reguatons 107, Secton 03.208.)
Servces performed by empoyees of te M Wuter Co. n con-
necton w te operaton or mantenance of (s dtches, canas,
reservors, or waterways, whch are used party or whoy for sup-
pyng or storng water for both domestc and fannng purposes,
are not e cepted from empoyment as agrcutura abor for
purposes of Subchapters and C, Chapter 0, of the Interna Reve-
nue Code, as amended by the Soca Securty ct mendments of
1939.
The queston s presented whether servces performed by em-
poyees of the M Water Co. rendered n connecton wth the opera-
ton and mantenance of ts dtches, canas, reservors, or waterways
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Regs. 106, 02.208.
0
used for suppyng or storng water for both domestc and farmng
purposes consttute agrcutura abor for empoyment ta pur-
poses.
The M Water Co. s a nonproft, mutua corporaton whose fac-
tes are used for furnshng water to stockhoder-farmer members
prmary for rrgaton purposes. In some nstances the company
suppes water for domestc use, such water beng pumped by an
automatc pumpng pant. Meters nstaed for such purpose gauge
the amounts of water so pumped n order that a speca charge may
be made therefor. Some of the members purchase water from the
corporaton for domestc use ony and receve ther rrgaton water
suppy from other sources.
Secton 1 26(h) of Subchapter , Chapter 9, of the Interna Reve-
nue Code, provdes n part as foows:
grcutura abor. The term agrcutura abor ncudes a servces
performed

(3) In connecton wth the operaton or mantenance of dtches,
canas, reservors, or waterways used e cusvey for suppyng and storng
water for farmng purposes.
Secton 1607(1) of Subchapter C, Chapter 9, of the Interna Reve-
nue Code, as amended, contans dentca provsons.
It s the opnon of the ureau that the servces contempated by
the above-quoted provsons of secton 1 26(h)3 and the correspondng
provsons of secton 1607(1)3 of the Code, as amended, ncude ony
those servces performed n connecton wth the operaton and man-
tenance of factes whch are used soey and e cusvey for the sup-
pyng and storng of water for farmng purposes. There s nothng
n the wordng of the statute to support an nference that the term
farmng purposes was ntended to ncude wthn ts meanng the
term domestc purposes. It s cear that the M Water Co. has made
speca provsons for ts domestc consumers, and that t s not the
ntent of the company that the water t suppes be used soeh for
farmng purposes.
Upon the bass of the facts presented and n vew of the foregong
provsons of aw, t s hed that servces performed by empoyees of
the M Water Co. n connecton wth the operaton or mantenance of
ts dtches, canas, reservors, or waterways, whch are used party or
whoy for suppyng or storng water for domestc purposes, are not
e cepted from empoyment as agrcutura abor for purposes
of Subchapters and C, Chapter 9, of the Interna Revenue Code, as
amended. owever, f any dtches, canas, etc. operated by the com-
pany are used e cusvey tor suppyng or storng water for farmng
purposes, servces performed by empoyees of the company n connec-
ton wth the operaton or mantenance thereof consttute agrcutura
abor for purposes of the above-mentoned provsons of aw.
Secton 1 26: Defntons.
Reguatons 106, Secton 02.208: grcutura abor.
Processng, gradng, and bang of cgar eaf wrapper tobacco.
S. S. T. 382 (C. . 19 0-1, 218) revoked, and S. S. T. 219 (C. .
1937-2, 12) renstated. (See S. S. T. 18, page 16.)
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05
Regs. 106, 02.21 .
Secton 1 26: Defntons.
Reguatons 106, Secton 02.213: Unted States and
nstrumentates thereof.
Indvduas performng servces for the M Company n the con
structon of a Federa pro|ect. (See S. S. T. 12. page 00.)
Secton 1 26: Defntons. 19 1-21-10723
Reguatons 106, Secton 02.21 : States and S. S. T. 15
ther potca subdvsons and nstrumen-
tates.
, In performng servces as attorney n the coecton of denquent
ta es, s not an offcer or an empoye ; of the State of Tennessee or a
potca subdvson thereof wthn the meanng of secton 1 2(S(b)7,
Subchapter , Chapter 9, of the Interna Revenue Code, as amended
by the Soca Securty ct mendments of 1939.
dvce s requested whether servces performed by as attorney of
Y County n the State of Tennessee n the coecton of denquent
ta es are e cepted from empoyment under secton 1 26(b)7, Sub-
chapter , Chapter 9, of the Interna Revenue Code, as amended
by the Soca Securty ct mendments of 1939.
Secton 1588 of the Code of Tennessee provdes that after the
pubcaton of notce to denquent ta payers, and between the dates
cf February 1 and March 1, the county trustee sha dever the de-
nquent sts showng a unpad and ta es to an attorney chosen by
hm wth the approva of the county |ud |e, or charman of the county
court; that t sha be the duty of the county trustee and the county
|udge, or charman, to cause such attorney to prepare and fe suts
n the chancery or crcut court for the coecton of a denquent
and ta es and a arrears of ta es due the State, county, and munc-
paty; and that t sha be the duty of the proper muncpa offcers
to furnsh the county trustee or hs attorney certfed sts of den-
quent ta es, uness otherwse provded. Secton 1590 of the code,
as amended, provdes that upon the fng of suts to enforce the ta
en, an addtona penaty of 5 per cent upon a denquent and
ta es sha accrue and s mposed upon the amount due from any
defendant to the State, count -, or muncpaty, whch penaty sha
be devoted to the e pense of prosecutng the suts and sha be a-
owed to the attorney fng the suts as compensaton for hs servces.
Secton 1591 of the code, as amended, provdes n part that the at-
torney desgnated by the trustee wth the approva of the county
|udge sha, after February 1 and not ater than March 1. fe suts
n the crcut or chancery court of the county for the coecton of
denquent and ta es due the State, county, and muncpaty, as
we as the nterest, penates, and costs attached to and a part of
such ta es, whch ta es, nterest, penates, and costs are decared
a en upon the and. For the enforcement of ths en, the suts
sha be brought n the name of the State, n ts own behaf, and
for the use and beneft of the county and of any muncpaty cert-
fyng the sts of denquent ta es.
s appontment as attorney for the coecton of denquent ta es
was made oray by the county trustee of Y County and approved
oray by the county |udge. The terms and condtons of hs empoy-
ment are n accordance wth the provsons of the Code of Tennessee.
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Regs. 106, 02.216.1
0(5
t the tme of hs appontment dd not take an oath of offce nor
was he requred to gve a bond for the fathfu performance of hs
dutes. In connecton wth hs dutes, t s necessary for to appear
n court, confer wth ta payers, send out etters requestng payment
of ta es, and make quartery reports to the audtor of Y County of
the coectons made through hs offce. s aowed to conduct the
suts fed by hm wthout any detaed drecton from offcas of the
State or a potca subdvson thereof. The Tennessee statutes re-
qure the attorney coectng denquent ta es to fe sut aganst every
denquent ta payer certfed to hm, but after sut s fed, ts conduct
s wthn the attorney s dscreton, e cept that under secton 16 /7 of
the Tennessee Code, compromse of denquent ta es s not wthn the
attorney s power but s eft to the commssoner of fnance and ta a-
ton wth the approva of the governor and attorney genera.
s offce as attorney for the coecton of denquent ta es s n the
Y County Pubc udng and Court ouse. Ths offce, together
wth the furnture and f tures and the books contanng the names
of denquent ta payers, s furnshed by the county. other offce
e penses, ncudng the saary of one cerk, are borne by . e
f es the amount of the cerk s compensaton and determnes hs dutes.
s aso engaged n the genera practce of aw and mantans an
offce at hs own e pense for such purpose.
Secton 1 20(b) 7 of Subchapter of Chapter 9 of the Interna
Revenue Code, as amended, provdes n part:
The term empoyment means any servce e cept

(7) Servce performed In the empoy of a State, or any potca subdvson
thereof, or any nstrumentaty of any one or more of the foregong whch Is
whoy owned by one or more States or potca subdvsons; and any servce
performed n the empoy of any nstrumentaty of one or more States or potca
subdvsons to the e tent that the Instrumentaty s, wth respect to such servce,
mmune under the Consttuton of the Unted States from the ta mposed by
secton 1 10:
On the bass of the presented facts, t s hed that s not an offcer
or an empoyee of the State of Tennessee or a potca subdvson
thereof for the purpose of the e cepton from empoyment con-
taned n secton 1 26(b)7, Subchapter , Chapter 9, of the Interna
Revenue Code, as amended.
Reguatons 106. Secton 02.216: Raroad 19 1-1-10552
ndustry empoyees and empoyee repre- T. D. 5030
sentatves under Secton 1532 of the In-
terna Revenue Code.
TITL 28 INT RN L R NU . C PT R I, SU C PT R D, P RT 02.
Reguatons 106 amended to conform to certan provsons of
the ont Resouton approved une 11, 19 0, the ct approved
ugust 13, 19 0, and the ct approved October 10, 19 0.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, I). C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 106 Part 02, Tte 26, Code of
Federa Reguatons, 19 0 Sup. , reatng to the empoyees ta and
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07
Regs. 106, 02.216.
the empoyers ta under the Federa Insurance Contrbutons ct
(53 Stat, 175. 1381; 26 U. S. C, Sup. , 1 00 to 1 32, ncusve),
to secton 3 of the ont Resouton approved une 11, 19 0 (Pubc
Resouton No. 81, Seventy-s th Congress, thrd sesson), sectons
1. 3, , and 6 of the ct approved ugust 13, 19 0 (Pubc, No. 76 ,
Seventy-s th Congress, thrd sesson), and secton 27 of the ct
approved October 10, 19 0 (Pubc, No. 833, Seventy-s th Congress,
thrd sesson), such reguatons are amended by nsertng mmed-
atey precedng secton 02.216 thereof the foowng:
Secton 3 of the ont Resouton approved une 11, 19 0 (I ubc Reso-
uton No. 81, Seventy-stn Congress, Thrd Sesson).
Subsecton (b) of secton 1532 of the Interna Revenue Code, ap-
proved February 10, 1939 (53 Stat. 1), s hereby amended by subst-
tutng for the second provso theren the foowng: Provded, how-
ever, That an ndvdua sha not be deemed to be In the empoyment
reaton to a carrer uness durng the ast pay-ro perod n whch
he rendered servce to t he was wth respect to that servce In the
servce of an empoyer n accordance wth subsecton (d) of ths
secton.
Subsecton (d) of secton 1532 of sad Code s hereby amended by
changng the perod at the end thereof to a coon and addng t 1 foow-
ng: Frodcd further, That an ndvdua not a ctzen or resdent of the
Unted States sha not be deemed to be n the servce of an empoyer
when renderng servce outsde the Unted States to an empoyer who
s requred under the aws appcabe n the pace where the servce
s rendered to empoy theren, n whoe or In part, ctzens or res-
dents thereof; and the aws appcabe on ugust 29, 1935, In the
pace where the servce s rendered sha be deemed to have been
appcabe there at a tmes pror to that date.
The n-mendments n ths secton sha operate n the same man-
ner and have the same effect as If they had been part of the Interna
Revenue Code when that Code was enacted on February 10, 1939
.
Sectons 1, 3, , and 6 of the ct approved ugust 13, 19 0 (Tubc. No.
78 , eventy-s th Congress, Thrd Sesson).
That secton 1532(a) of the Interna Revenue Code
are amended, effectve as of the date of ts enact-
ment, by addng at the end of such secton the foowng
new sentence: The term empoyer sha not ncude any company
by reason of ts beng engaged n the mnng of coa, the suppyng
of coa to an empoyer where devery s not beyond the mne tppe,
and the operaton of equpment or factes therefor, or n any of
such actvtes.
Sec. 3. secton 1532(b) of the Interna Revenue Code
are amended. as of the date of ts enactment, by addng at the
end of such secton the foowng new paragraph:
The term empoyee sha not ncude any ndvdua whe such
ndvdua s engaged n the physca operatons consstng of the mnng
of coa, the preparaton of coa, the handng (other than movement by
ra wth standard raroad ocomotves) of coa not beyond the mne
tppe, or the oadng of coa at the tppe.
Sec. . (a) The aws hereby e pressy amended sha oper-
ate as f each amendment heren contaned had been enacted as a part
of the aw It amends, at the tme of the orgna enactment of such aw.

Sw. 6. Nothng contaned n ths ct, nor the. acton of Congress n
adoptng t, sha be taken or consdered as affectng the queston of what
carrers, companes, or ndvduas, other than those n ths ct spe-
cfcay provded for, are Incuded n or e cuded from the provsons of
the varous aws to whch ths ct Is an amendment.
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Regs. 106, 02.227.1
08
Secton 27(a) of tbo ct approved October 10, 1 0 (Pubc. No. 883,
Seventy-s th Congreaa, Thrd SchhIoh).
Sub ecton (e) of secton 1532 of the Interna Revenue Code a umended
by addng thereto the foowng sentence: For the purpose of deter-
mnng the amount of ta es under sectons Iftf ) and 1520, compensaton
earned n the servce of a oca odge or dvson of a rawuy-abor-
organzaton empoyer sha be dsregarded wth respect to any caendar
month f the amount thereof s ess than 3 and (1) such compensaton
s earned before pr 1,10 0, and the ta es thereon under such sectons
are not pad before uy 1, 19 0, or (2) such compensaton s earned
after March 31, 19 0.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 1 29 and 3791 of the Interna Revenue Code (53 Stat., 178, 67;
26 U. S. C, Sup. , 1 29, 3791), secton 3 of the ont Resouton
approved une 11,19 0 (Pubc Resouton No. 81, Seventy-s th Con-
gress, thrd sesson), sectons 1, 3, , and 6 of the ct approved ugust
13, 19 0 (Pubc, No. 76 , Seventy-s t Congress, thrd sesson), and
secton 27 of the ct approved October 10, 19 0 (Pubc, No. 833,
Seventy-s th Congress, thrd sesson).)
Gut T. kverno,
Commssoner of Interna Revenue.
pproved December 27, 19 0.
khukkt . Gaston,
. ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster December 30, 19 0, 10.57 a. m.)
Secton 1 26: Defntons. 19 1-15-10680
Reguatons 106, Secton 02.227: Wages. S. S. T. 13
( so Subchapter C (Federa Unempoyment Ta ct),
Secton 1607; Reguatons 107, Secton 03.227.)
Transportaton aowances pad to empoyees of the M Company
whe workng on a Federa pro|ect consttute wages for pur-
poses of Subchapters and C, Chapter 9, of the Interna Revenue
Code, as amended by the Soca Securty ct mendments of 1939.
The queston s presented whether amounts pad to empoyees of
the M Company as transportaton aowances whe workng on a
Federa pro|ect consttute wages for empoyment ta purposes.
It s tne practce of the M Company to make aowances to em-
poyees to cover the e pense of transportaton to and from Federa
pro|ects where suffcent sked abor s not avaabe n the m-
medate vcnty. n agreement between representatves of the Gov-
ernment and certan abor unons authorzes the payment of such
aowances, as foows:
The transportaton rembursement to the contractor sha be n a fat amount
for a trudes concerned at cents per day per man, and the workmen sha
be rembursed for ths transportaton n checks entrey separate from the pay
ro.
Sub|ect to mtatons not here appcabe, the term wages s
defned n sectons 1 26(a) and 1607(b) of Subchapters and C.
Chapter 9, of the Interna Revenue Code, as amended, to mean u a
remuneraton for empoyment, ncudng the cash vaue of a re-
muneraton pad n any medum other than cash. Secton
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0 )
IRfRR. 100.
02.227(h)2 of Reguatons 10f , ssued pursuant to Subchapter ,
Chapter 0, of (e Code, as amended, provdes, under the headng
Traveng e penses, tat amounts pud to traveng saesmen or
other empoyees as aowance or rembursement for traveng or oer
e penses ncurred n the busness of the empoyer consttute wages
ony to the e tent of the e cess of such amounts over such e cuses
actuay ncurred ard accounted for by the empoyee to the empoyer.
Secton 03.227(b)2 of Reguatons 107, ssued pursuant to Sub-
chapter C, Chapter 9, of the Code, as amended, contans dentca
provsons.
The amounts e pended by the empoyees of the M Company for
transportaton to and from the pro|ect n queston may not be con-
sdered as traveng e penses wthn the meanng of that term
as used n Reguatons 10(5 and 107, snce that term reates ony
to e penses ncurred by the empoyee n the busness of the empoyer.
In the nstant case, any amounts e pended by the empoyees for
transportaton to and from the pro|ect do not represent e penses
ncurred n the busness of the empoyer but represent persona
e penses ncurred by the empoyees. (See S. M. 10 8, ( . 1 . 1, 101
0919); ppea of Frank. II. Suvan, 1 . T. ., 93.) ccordngy,
t s hed that the transportaton aowances pad to the empoyees
of the M Company consttute wages for purposes of Subchapters
and C, Chapter 9, of the Interna Revenue Code, as amended by
the Soca Securty ct mendments of 1939.
C PT R 9. SU -C PT R .- MPLOYM NT Y C RRI RS.
Rnrm. ToNs 100. 19 1-1-10553
( so Carrers Ta ng ct of 1937.) T. D. 5029
TITUS M INT RN L R NI . II PT R I. M CII PT R D, P RT 10.
Reguatons WO, (rd mrh reguatons us mue appcabe to
the Interna Revenue Onde by Treasury I k-IhIo 8 5 C. . 1IMI 1
(Pan 1), 3: 0 . amended.
empnn from tn non under the Carrers Ta ng rt of
1037 and uhchapter of Chapter 0 of the Interna Revenue
Code of eernn cnn mnton earned In (he servce of a oca odge
or dvson of h raway abor organzaton empoyer.
Treasury Department,
Offce of Commssoner of Interna evenuf,,
Washngton, I). C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 100 Part 10. Tte 2(5 Code
of Federa Reguatons , reatng to the empoyers ta , empoyees
ta , and empoyee representatves ta under the Carrers Ta ng
ct of 1937 (50 Stat., 35; 5 U. S. C, Sup. . 2G1 to 273, ncu-
sve), and such reguatons as made appcabe to the Interna
Revenue Code (53 Stat., Part 1; 26 II. S. C., Sup. ) by Treasury
Decson 885 C. . 1939-1 (Part. 1), 390 Chapter I, note. Tte
26, Code of Federa Reguatons, 1939 Sup. , to secton 27 of the ct
0 S - 1 1
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Regs. 100.
10
approved October 10, 19 0 (Pubc, No. 833, Seventy-s th Congress,
thrd sesson), each of such reguatons s amended as foows:
(1) Immedatey precedng artce 1 secton 10.1, Tte 26, Code
of Federa Reguatons , the foowng s nserted:
Sectons 1 and 27 of the ct approved October 10, 1 1 0 (Pubc, No. 833,
Seventy-s th Congress, Thrd Sesson).
That sectons 27 sha be effectve as of uy
1, 19 0
Seo. 27. (a) Subsecton (e) of secton 1532 of the Interna Revenue
Code s amended by addng thereto the foowng sentence: For the
purpose of determnng the amount of ta es under sectons 1500 and
1520, compensaton earned n the servce of a oca odge or dvson
of a raway-abor-organzaton empoyer sha be dsregarded wth
respect to any caendar month f the amount thereof s ess than 3
and (1) such compensaton s earned before pr 1, 19 0, and the ta es
thereon under such sectons are not pad before uy 1, 19 0, or
(2) such compensaton Is earned after March 31,19 0.
(b) For the purpose of determnng the amount of ta es under
sectons 2(a) and 3(a) of the Carrers Ta ng ct of 1937, compen-
saton earned In the servce of a oca odge or dvson of a raway-
abor-organzaton empoyer sha be dsregarded wth respect to any
caendar month f the amount thereof s ess than 3 and the ta es
thereon under such sectons are not pad before uy 1, 19 0.
(2) Immedatey foowng the provsons of aw under the cap-
ton Secton 1(e) of the ct precedng artce 5 secton 10.5,
Tte 26, Code of Federa Reguatons , the foowng s nserted:
Secton 27 of the ct approved October 10. 10 0 (Pubc, No. 833,
Seventy-s th Congress, Thrd Sesson).
(a) Subsecton (e) of secton 1532 of the Interna Revenue Code s
amended by addng thereto the foowng sentence: For the purpose of
determnng the amount of ta es under sectons 1500 and 1520, compen-
saton earned n the servce of a oca odge or dvson of a raway-
ahor-orgnnzaton empoyer sha be dsregarded wth respect to any
caendar month f the amount thereof s ess than 3 and (1) such com-
pensaton s earned before pr 1, 19 0, and the ta es thereon under such
sectons are not pad before uy 1, 19 0, or (2) such compensaton Is
earned after March 31, 19 0.
(b) For the purpose of determnng the amount of ta es under sectons
2(a) and 3(a) of the Carrers Ta ng ct of 1937, compensaton enrned n
the servce of a oca odge or dvson of a raway-abor-organzatou
empoyer sha be dsrgarded wth respect to any caendar month f the
amount thereof s ess than . 3 and the ta es thereon under such sectons
are not pad before uy 1, 19 0.
(3) rtce 5 secton 10.5, Tte 26, Code of Federa Reguatons
s amended by strkng out the parenthetca cross reference at the end
of such artce and nsertng n eu thereof the foowng:
(See artce 7 secton 10.7, Tte 26, Code of Federa Reguatons , reatng to
when compensaton s earned. See aso artce 201 secton 10.201 of such
Tte 26, 19 0 Sup. , artce 301 secton 10.301 of such Tte 20, and 19 0 Sup. ,
and artce 01 secton 10. 01 of such Tte 261. reatng to the amount of
compensaton Incuded for the purpose of determnng the empoyees tn , the
empoyers ta , and the empoyee representatves ta , respectvey.)
( ) Immedatey precedng artce 201 secton 10.201, Tte 26,
Code of Federa Reguatons , the foowng s nserted:
Sucton 27 of the ct approved Octob-r 10, 19 0 (Pubc, No. 833,
Seventy-s th Congress, Thrd Sesson).
(a) For the purpose of determnng the amount of ta es
under sectons 1500 of the Interna Revenue Code , compen-
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11
Regs. 100.
saton earned n the servce of a oca odge or dvson of a raway-
abor-orgnzaton empoyer sha he dsregarded wth respect to any
caendar month f the amount thereof s ess than 3 and (1) such com-
pensaton Is earned before pr 1, 19 0, and the ta es thereon under
such sectons are not pad before uy 1, 19 0, or (2) such compensaton
s earned after March 31, 19 0.
(b) For the purpose of determnng the amount of ta es under sectons
2(a) of the Carrers Ta ng ct of 1937, compensaton earned
n the servce of a oca odge or dvson of a raway-abor-organzaton
empoyer sha be dsregarded wth respect to any caendar month f the
amount thereof s ess than 3 and the ta es thereon under such sectons
are not pad before uy 1, 19 0.
(5) rtce 201 secton 10.201, Tte 26, Code of Federa Regua-
tons s amended to read as foows:
bt. 201 Sec. 10.201, Tte 26, Code of Federa Reguatons, 19 0 Sup. .
ea ure of empoyees ta . (a) cept as provded n paragraph (b) of ths
artce, the empoyees ta s measured by the amount of compensaton earned
by an ndvdua as an empoyee for servces rendered to one or more empoyers
on and after anuary 1, 1937, e cudng, however, the amount of such compen-
saton n e cess of 300 whch s earned by the empoyee for servces performed
durng any one caendar month. (For provsons reatng to compensaton, see
artce 5 secton 10.5, Tte 26, Code of Federa Reguatons, and 19 0 Sup. and
artces 6 and 7 sectons 10.6 and 10.7 of such Tte 26 .)
(b) If the amount of compensaton earned n any caendar month by an nd-
vdua as an empoyee n the servce of a oca odge or dvson of a raway-abor-
organzaton empoyer s ess than 3, such amount sha be dsregarded for the
purpose of determnng the empoyees ta , provded:
(1) such compensaton s earned before pr 1. 19 0, and the ta es
thereon are not pad to the coector before uy 1, 19 0, or
(2) such compensaton s earned after March 31, 19 0.
(6) Immedatey precedng artce 301 secton 10.301, Tte 26,
Code of Federa Reguatons , the foowng s nserted:
Secton 27 of the ct approved October 10, 1D 0 (Pubc, No. 833,
Seventy-s th Congress, Thrd Senson).
(a) For the purpose of determnng the amount of ta es
under sectons 1520 of the Interna Revenue Code , compensa-
ton earned n the servce of a oca odge or dvson of a raway-abor-
organzaton empoyer sha be dsregarded wth respect to any caendar
month If the amount thereof s ess than 3 and (1) such compensaton s
earned before pr 1, 19 0. and the ta es thereon under such sectons
are not pad before uy 1,19 0, or (2) such compensaton Is earned after
March 31, 19 0.
(b) For the purpose of determnng the amount of ta es under sec-
tons 3(a) of the Carrers Ta ng ct of 1937, compensaton
earned n the servce of a oca odge or dvson of a raway-abor-organ-
Izaton empoyer sha be dsregarded wth respect to any caendar month
f the amount thereof s ess than 3 and the ta es thereon under such
sectons are not pad before uy 1, 19 0.
(7) rtce 301 secton 10.301, Tte 26, Code of Federa Regua-
tons s amended by addng at the end thereof the foowng new
paragraph:
If the amount of compensaton earned In any caendar month by an ndvdua
as an empoyee n the servce of a oca odge or dvson of a raway-abor-
organzaton empoyer s ess than 3, such amount sha be dsregarded for the
purpose of determnng the empoyers ta , provded:
(1) such compensaton s earned before pr 1, 19 0, and the ta es thereon
are not pad to the coector before uy 1, 19 0, or
(2) such compensaton Is earned after March 31, 19 0.
(Ths Treasury decson s ssued under the authorty contaned n
secton 12 of the Carrers Ta ng ct of 1937 (50 Stat., 0; 5 U. S. C,
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Rega. 107, 03.205.)
12
Sup. , 272), sectons 1535 and 3791 of the Interna Revenue Code
(53 Stat, 183, 67; 26 U. S. C, Sup. , 1535, 3791), and secton 27 of
the ct approved October 10, 19 0 (Pubc, No. 833, Seventy-s th
Gut T. everno,
Commssoner of Interna Revenue.
pproved December 27, 19 0.
erbert . Gaston,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster December 30, 19 0, 10.57 a. m.)
C PT R 9, SU C PT R C F D R L UN MPLOYM NT T CT.
Secton 1607: Defntons.
Reguatons 107, Secton 03.20 : Who are empoyees.
Coectors performng servces for the M Pubshng Co. (See
S.S.T. 11, page 398.)
Secton 1607: Defntons.
Reguatons 107, Secton 03.20 : Who are empoyees.
Indvduas performng servces for the M Company n the con-
structon of a Federa pro|ect. (See S. S. T. 12, page 00.)
Secton 1G07: Defntons.
Reguatons 107, Secton 03.20 : Who are empoyees.
Men engaged n storng coa. (See S. S. T. 16, page 01.)
Secton 1607: Defntons.
Reguatons 107, Secton 03.205: Who are empoyers.
Status of essee of one of the departments n the N Department
Store. S. S. T. 20 (C. . -2, 02) revoked. (See S. S. T. 09,
page 15.)
Secton 1607: Defntons.
Reguatons 107, Secton 03.205: Who are empoyers.
Famy empovment n the communty property State of Te as.
. S. T. 256 (C. . 1938-1, 25) revoked. (See S. S. T. 10, page 02.)
Secton 1607: Defntons. 19 1-17 -10695
Reguatons 107, Secton 03.205: Who are S. S. T. 1
empoyers.
Meanng of the term caendar week as used n secton 1607(a),
Subchapter C, Chapter 9, of the Interna Revenue Code, as
amended.
dvce s requested as to the meanng of the term caendar
week n secton 1607(a) of the Interna Revenue Code, as amended
by secton 61 of the Soca Securty ct mendments of 1939. In
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13 Regs. 107, 03.216.
the nqury presented, the ta payer states that hs pay ro perod
begns on Saturday and ends on the foowng Frday.
becton 1607(a) of the Code, as amended, provdes as foows:
The term empoyer does not Incude any person uness on each of some
20 days durng the ta abe year, each day beng n a dfferent caendar week,
the tota number of ndvduas who were empoyed by hm n empoyment
for some porton of the day (whether or not at the same moment of tme) was
8 or more.
The term caendar week n secton 1607(a) of the Code, as
amended, means a perod of seven successve davs begnnng wth
Sunday and endng at the cose of the foowng Saturday. The be-
gnnng and endng of the empoyer s weeky pay ro perod are
mmatera.
For the purpose of secton 1607(a) of the Code, as amended, a
day durng a ta abe (caendar) year s n a separate caendar
week, even f such caendar week does not fa whoy wthn the
caendar year.
Secton 1607: Defntons.
Reguatons 107, Secton 03.208: grcutura abor.
Servces performed by empoyees of the M Water Co. n the man-
tenance of ts factes used party or whoy for suppyng or storng
water for domestc purposes. (See S. S. T. 17, page 03.)
Secton 1607: Defntons.
Reguatons 107, Secton 03.208: grcutura abor.
Processng, gradng, and bang of cgar eaf wrapper tobacco.
S. S. T. 382 (C. . 19 0-1, 218) revoked, and S. S. T. 219 (C. .
1937-2, 12) renstated. (See S. S. T. 18, page 16.)
Secton 1607: Defntons.
Reguatons 107, Secton 03.213: Unted States and
nstrumentates thereof.
Indvduas performng servces for the M Company n the con-
structon of a I1 edera pro|ect. (See S. S. T. 12, page 00.)
Reguatons 107 (as amended), Secton 19 1-1-1055
03.216: Raroad ndustry empoyees T. D. 5031
and empoyee representatves under the
Raroad Unempoyment Insurance ct.
TITL 26 INT RN L R NU . C PT R I, SU C PT R D, P RT 03.
Reguatons 107 amended to conform to certan provsons of the
ct approved ugust 13, 19 0.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 107 Part 03, Tte 26, Code of
Federa Reguatons, 19 0 Sup. , reatng to the e cse ta on em-
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Regs. 107, 03.227.
1
poyers under the Federa Unempoyment Ta ct (53 Stat., 183,
1387; 26 U. S. C, Sup. , 1600 to 1611, ncusve), to sectons 1, 3, ,
and 6 of the ct approved ugust 13, 19 0 (Pubc, No. 76 , Seventy-
s th Congress, thrd sesson), such reguatons are amended by nsert-
ng mmedatey precedng secton 03.216 thereof the foowng:
Sectons 1, 3, , and 6 of the ct approved ugust 13. fMO (Pubc. No. 7C ,
Seventy-s th Congress, Thrd Sesson).
That secton 1(a) of the Raroad Unempoyment Insurance
ct are amended, effectve as of the date of Its enactment, by
addng at the end of such secton the foowng new sentence:
The term empoyer sha not ncude any company by reason of ts
beng engaged n the mnng of coa, the suppyng of coa to an empoyer
where devery s not beyond the mne tppe, and the operaton of equp-
ment or factes therefor, or n any of such actvtes.
Sec. 3. secton 1(d) of the Raroad Unempoyment Insur-
ance ct are amended, as of the date of ts enact-
ment, by addng at the end of such secton the
foowng new paragraph:
The term empoyee sha not ncude any ndvdua whe such
ndvdua s engaged n the physca.operatons consstng of the mnng
of coa, the preparaton of coa, the handng (other than movement by
ra wth standard raroad ocomotves) of coa not beyond the mne
tppe, or the oadng of coa at the tppe.
Sec. . (a) The aws hereby e pressy amended sh: operate
as f each amendment heren contaned bad been enacted as a part of
the aw t amends, at the tme of the orgna enactment of such aw.

Sec. 6. Nothng contaned n ths ct, nor the acton of Congress n
adoptng t. sha be taken or consdered as affectng the queston of
what carrers, companes, or ndvduas, other than those n ths ct
specfcay provded for, are ncuded n or e cuded from the provsons
of the varous aws to whch ths ct s an amendment
(Ths Treasury decson s ssued under the authorty contaned
n sectons 1609 and 3791 of the Interna Revenue Code (53 Stat., 188,
67; 26 U. S. C, Sup. , 1009, 3791), and sectons 1, 3, , and 6 of the
ct approved ugust 13, 19 0 (Pubc, No. 76 , Seventy-s th Con-
gress, thrd sesson).)
Guy T. eyerng,
Commssoner of Interna Revenue.
pproved December 27, 19 0.
erbert . Gaston,
ctng Secretay of the Treasury.
(Fed wth the Dvson of the Federa Regster December 30, 10 0, 10.58 a. m.)
Secton 1607: Defntons.
Reguatons 107, Secton 03.227: Wages.
Transportaton aowances pad to empoyees of the M Company.
(See S.S.T. 13, page 08.)
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15
Regs. 91, 90, rts. . 20 .
T S UND R SOCI L S CURITY CT.
Sectons 811 and 907: Defntons. 19 1-8-10613
Reguatons 91 and 90, rtces and 20 : Who S. S. T. 09
are empoyers.
( so Interna Revenue Code, Chapter 9, Subchap-
ter (Federa Insurance Contrbutons ct), Sec-
ton 1 26; Reguatons 106, Secton 02.205; and
Subchapter C (Federa Unempoyment Ta ct),
Secton 1607; Reguatons 107, Secton 03.205.)
The N Department Store Is the empoyer for soca securty
and empoyment ta purposes of the empoyees n a department
eased by t to the M Company. S. S. T. 20 (C. . -2, 02
(1936)) revoked.
In S. S. T. 20 (C. . -2, 02 (1936)) t was hed that the
M Company, the essee of one of the departments n the N Depart-
ment Store, was the empoyer of the empoyees n such depart-
ment and was sub|ect to the ta mposed by secton 901, Tte I of
the Soca Securty ct. The foowng facts appear n S. S. T. 20:
Under the terms of an agreement between the M Company and the N Depart-
ment Store, the M Company eases space wthn the N Department Store for the
purpose of operatng a certan department. In consderaton thereof the M
Company pays a percentage of ts saes to the N Department Store. Generay,
the M Company hres ts own saes peope and managera hep and pays ther
remuneraton. Under the terms of the agreement, the empoyees of the M
Company must conform to the rues and reguatons of the N Department
Store. t a tmes the M Company has at east 10 persons workng n the
department operated by t. The queston presented s whether the M Com-
pany or the N Department Store shoud be treated as the empoyer of the
partcuar empoyees.
ddtona nformaton regardng the reatonshp between the
51 Company and the N Department Store and of the crcumstances
under whch the empoyees n the eased department perform servces
has been submtted. It s stated that the M Company s advertsng
s sub|ect to the N Department Store s approva both as to te t and
the advertsng medum. Porter servce, cashers, wndow trmmers,
teephone servce, customers devery servce, saes books, and other
equpment and factes are furnshed by the N Department Store.
of the M Company s records, ncudng saes sps, may be n-
spected by the N Department Store, and t has the rght to pass
upon a credt saes made by the M Company. saes, whether
cash or credt, are made n the name of the N Department Store
and the recepts therefrom are requred to be turned over mmedatey
to the N Department Store, whch mantans records of a such
funds and of a amounts whch t dsburses upon the M Company s
authorzaton.
The M Company submts ts pay ros to the N Department Store,
whch, n turn, pays the ndvduas engaged by the M Company
out of funds hed by t. Wages pad to empoyees n the eased de-
partment are the same as those pad to smar empoyees n other
departments, and such empoyees are egbe to partcpate n a
prveges and benefts afforded to the empoyees of the N Department
Store. In the event of a shortage of cerks n another of ts depart-
ments, the N Department Store may assgn a cerk temporary
from the eased department to such other department, or, f neces-
sary, cerks from ts reguar departments may be assgned to the
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Regs. 91, 90, rts. 6, 206(1). 16
eased department. Upon notce to the M Company by the N De-
partment Store of a voaton of the rues and reguatons of the
store by any empoyee n the eased department, the M Company
may be requred to dscharge the partcuar empoyee. con-
troverses or ad|ustments between customers and the M Company or
the empoyees n ts department are sub|ect to fna settement by the
N Department Store. There s no ndcaton to customers that the
department s eased to the M Company by the N Department Store.
s a resut of the further nformaton submtted, the queston of
whether the essor, the N Department Store, or the essee, the M
Company, s the empoyer of the ndvduas performng servces
n the eased department has been reconsdered.
Generay the reatonshp of empoyer and empoyee e sts
when the person for whom servces are performed has the rght
to contro and drect the ndvdua who performs the servces, not
ony as to the resut to be accompshed by the work but aso as to
the detas and means by whch that resut s accompshed. That
s, an empoyee s sub|ect to the w and contro of the empoyer not
ony as to what sha be done but how t sha be done. In ths
connecton, t s not necessary that the empoyer actuay drect or
contro the manner n whch the servces are performed; t s suffcent
f he has the rght to do so. The rght to dscharge s aso an
mportant factor ndcatng that the person possessng that rght s
an empoyer. Other factors characterstc of an empoyer, but not
necessary present n every case, are the furnshng of toos and the
furnshng of a pace to work to the ndvdua who performs the
servces. ( rtce 205, Reguatons 90; artce 3, Reguatons 91;
secton 02.20 , Reguatons 106; secton 03.20 , Reguatons 107.)
It s apparent from a consderaton of the facts and the pertnent
reguatons that the prmary rght of drecton and contro over
the performance of servces by the empoyees n the eased department
s retaned and e ercsed by the N Department Store. In e ercsng
such contro, the N Department Store s not actng as an agent of
the M Company but s actng on ts own behaf as prncpa. In vew
of the foregong, t s hed that the N Department Store s the em-
poyer for soca securty and empoyment ta purposes of the
empoyees performng servces n the department eased by the N
Department Store to the M Company. ccordngy, S. S. T. 20,
supra, s revoked.
Sectons 811 and 907: Defntons. 19 1-25-10753
Reguatons 91 and 90, rtc es 6 and 206(1): S. S. T. 18
grcutura abor.
( so Interna Revenue Code, Chapter 9, Subchapter
(Federa Insurance Contrbutons ct), Secton
1 26; Reguatons 106, Secton 02.208; and Subchap-
ter C (Federa Unempoyment Ta ct), Secton
1607; Reguatons 107, Secton 03.208.)
Servces performed by empoyees of the M Company on farms
owned by that company n connecton wth the processng, gradng,
and bang of cgar eaf wrapper tobacco for market consttute
agrcutura abor wthn the meanng of sectons 811 (b) and
907(c)I of the Soca Securty ct, secton 1 26(h) of the Fed-
era Insurance Contrbutons ct, and secton 1607(1) of the Federa
Unempoyment Ta ct.
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17
Regs. 90, rt. 20 .
S. S. T. 382 (C. . 19 0-1, 218) revoked and S. S. T. 219
(O. . 1937-2, 12) renstated.
The queston s presented whether the servces performed by
empoyees of the M Company on farms owned by that company n
connecton wth the processng, gradng, and bang of cgar eaf
wrapper tobacco for market consttute agrcutura abor wthn
the meanng of sectons 811 (b) and 907(c) 1 of the Soca Securty
ct, whch e cept agrcutura abor from empoyment.
In S. S. T. 219 (C. . 1937-2, 12) t was hed that the servces
performed by empoyees of the M Company n ts warehouses n
connecton wth the fermentng, gradng, and bang of cgar eaf
wrapper tobacco grown on farms owned by the company consttute
agrcutura abor, wthn the meanng of sectons 811 (b) and
907(c) of the Soca Securty ct. owever, on reconsderaton of
ths queston after the submsson of addtona nformaton, a con-
trary concuson was reached, and S. S. T. 219, supra, was
accordngy modfed by S. S. T. 382 (C. . 19 0-1, 218).
Further addtona nformaton has now been presented reatng
to the nature of the servces performed by the empoyees n connec-
ton wth the above-mentoned actvtes, the manner n whch such
actvtes a e ordnary carred on, and the crcumstances and
condtons under whch the company conducts such actvtes. Ths
nformaton, consdered n con|uncton wth that prevousy sub-
mtted, ndcates that the processng, gradng, and bang of the
cgar eaf wrapper tobacco produced on the farms of the company
are carred on as an ncdent to ordnary farmng operatons wthn
the meanng of artce 6 of Reguatons 91, reatng to Tte III
of the Soca Securty ct, and artce 206(1) of Reguatons 90,
reatng to Tte I of that ct.
In vew of the foregong, t s hed that servces performed by
empoyees of the M Company n connecton wth the processng,
gradng, and bang of cgar eaf wrapper tobacco produced on ts
farms consttute agrcutura abor wthn the meanng of sec-
tons 811 (b) and 907(c) 1 of the Soca Securty ct and sectons
1 26(h) and 1607(1) of the Interna Revenue Code, as amended.
ccordngy, S. S. T. 382, supra, s revoked and S. S. T. 219, supra,
s renstated.
The concuson reached above s equay appcabe to the status
of such servces under secton 1 26(h) of the Federa Insurance Con-
trbutons ct and secton 1607(1) of the Federa Unempoyment
Ta ct.
Secton 907: Defntons.
Reguatons 90, rtce 20 : Who are empoyers.
Famy empoyment n the communty propertv State of Te as.
S. S. T. 256 (C. . 1938-1, 25) revoked. (See S. S. T. 10, page 02.)
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Regs. 91, rt. 13.
18
TITL III T S WIT R SP CT TO MPLOYM NT.
Reguatons 91, rtce 13: mpoyees and 19 1-1-10555
empoyee representatves under the Car- T. D. 5027
rers Ta ng ct of 1937.
TITL 26 INT RN L R NU C PT R I, SU C PT R D, P RT 01.
Reguatons 91, and such reguatons as made appcabe to the
Interna Revenue Code by Treasury Decson 885 C. . 1939-1 (Part
1), 396 , amended to conform to certan provsons of the ont Res-
outon approved une 11, 19 0, and of the ct approved ugust 13,
10 0.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 91 Part 01, Tte 26, Code of Fed-
era Reguatons , reatng to the empoyees ta and the empoyers ta
under Tte III of the Soca Securty ct ( 9 Stat., 636; 2 U. S. C,
Sup. , 1001 to 1011, ncusve), and such reguatons as made app-
cabe to the Interna Revenue Code (53 Stat, Part 1; 26 U. S. C, Sup.
) by Treasury Decson 885 C. . 1939-1 (Part 1), 396 Chapter I,
note, Tte 26, Code of Federa Reguatons, 1939 Sup. , to secton 3 of
the |ont Resouton approved une 11, 19 0 (Pubc Resouton No.
81, Seventy-s th Congress, thrd sesson), and to sectons 1, 3, , and 6
of the ct approved ugust 13, 19 0 (Pubc, No. 76 , Seventy-s th
Congress, thrd sesson), each of such reguatons s amended as
foows:
(1) Immedatey precedng artce 13. as amended by Treasury De-
cson 801 C. . 1938-1,378| secton 01.13, Tte 26, Code of Federa
Reguatons , the foowng s nserted:
Secton 3 of the ont Resouton approved une 11, 1910 (Pubc Resouton
No. 81, Seventy-s th Congress, Thrd Sesson).
Subsecton (b) of secton 1532 of the Interna Revenue Code, approved
February 10, 1939 ( 53 Stat. 1), s hereby amended by substtutng for
the second provso theren the foowng: Provded, however, That an
ndvdua sha not be deemed to be n the empoyment reaton to a
carrer uness durng the ast pay-ro perod n whch he rendered servce
to t he was wth respect to that servce n the servce of an empoyer
n accordance wth subsecton (d) of tn s secton.
Subsecton (d) of secton 1532 of sad Code s hereby amended by
changng the perod at the end thereof to a coon and addng the foow-
ng : Provded further, That an ndvdua not a ctzen or resdent of the
Unted States sha not be deemed to be n the servce of an empoyer
when renderng servce outsde the Unted States to an empoyer who s
requred under the aws appcabe n the pace where the servce s
rendered to empoy theren, n whoe or n part, ctzens or resdents
thereof; and the aws appcabe on ugust 29, 1935, n the pace where
the servce s rendered sha be deemed to have been appcabe there at
a tmes pror to that date.
The amendments n ths secton sha operate n the same manner and
have the same effect as f they had been part of the Interna Revenue
Code when that Code was enacted on February 10, 1939, and as f they
had been part correspondngy of subsectons (b) and (d) of the Carrers
Ta ng ct of 1937 ( 50 Stat. 35) when that ct was enacted on une
29, 1937.
Sectons 1, 3, , and 8 of the ct approved ugust 13, 10 0 (Pubc. No. 7C ,
Seventy-s th Congress, Thrd Sesson).
That secton 1(a) of the Carrers Ta ng ct of 1937, sec-
ton 1532(a) of the Interna Revenue Code, are amended,
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19
Regs. 91, rt. 13.
effectve In the case of each such ct as of the date of ts enactment, by
addng at the end of each such secton the foowng new sentence: The
term empoyer sha not ncude any company by reason of ts beng
engaged n the mnng of coa, th suppyng of coa to an empoyer where
devery s not beyond the mne tppe, and the operaton of equpment
or factes therefor, or n any of such actvtes.
Sec. 3. secton 1(b) of the Carrers Ta ng ct of 1037. sec-
ton 1532(b) of the Interna evenue Code, are amended, n
the case of each such ct as of the date of ts enactment, by addng at
the end of each such secton the foowng new paragraph:
The term empoyee sha not Incude any ndvdua whe such
Indvdua s engaged n the physca operatons consstng of the mnng
of coa, the preparaton of coa, the handng (other than movement by
ra wth standard raroad ocomotves) of coa not beyond the mne
tppe, or the oadng of coa at the tppe.
Sec. . (a) The aws hereby e pressy amended sha oper-
ate as f each amendment heren contaned had been enacted as a part
of the aw t amends, at the tme of the orgna enactment of such
aw.

Sec. 6. Nothng contaned n ths ct. nor the acton of Congress n
adoptng t, sha be taken or consdered as affectng the queston of
what carrers, companes, or ndvduas, other than those n ths ct
specfcay provded for, are ncuded n or e cuded from the prov-
sons of the varous aws to whch ths ct s an amendment.
(2) rtce 13, as amended by Treasury Decson 801 supra sec-
ton 01.13, Tte 26, Code of Federa Reguatons , s amended to read
as foows:
bt. 13 Sec. 01.13, Tte 26, Code of Federa Reguatons, 10 0 Sup. . m-
poyees and empoyee representatves under the Carrers Ta ng et of 19. and
Subchapter of Chapter ) of the Interna Revenue Code. Servces performed
by an ndvdua as an empoyee or as an empoyee representatve, as those
terms are defned n secton 1 of the Carrers Ta ng ct of 1037, as amended
and modfed, and secton 1532 of the Interna Revenue Code, as amended, are
e cepted. (See aso artces 3 and of Reguatons 100 sectons 10.3 and 10. ,
Tte 26, Code of Federa Reguatons, and 19 0 Sup. , reatng to who are em-
poyees and empoyee representatves. )
(3) rtce 506, added by Treasury Decson 801 supra secton
01.506, Tte 26, Code of Federa Reguatons , s amended by addng
at the end thereof the foowng new sentence:
See, however, artce 707 of Reguatons 100 secton 10.707, Tte 26, Code of
Federa Reguatons. 19 0 Sup. , reatng to the treatment under the ct ap-
proved ugust 13, 19 0 (Pubc, No. 761. Seventy-s th Congress, thrd sesson),
of ta es wth respect to certan servces performed n the empoy of carrers by
raroad.
(Ths Treasury decson s ssued under the authorty contaned n
secton 808 of the Soca Securty ct ( 9 Stat., 638; 2 U. S. C, Sup.
, 1008), sectons 1 29 and 3791 of the Interna Revenue Code (53
Stat., 178, 67 ; 26 U. S. C, Sup. , 1 29, 3791), secton 3 of the ont
Resouton approved une 11, 19 0 (Pubc Resouton No. 81, Sev-
enty-s th Congress, thrd sesson), and sectons 1, 3, , and 6 of the
ct approved ugust 13, 19 0 (Pubc, No. 76 , Seventy-s th Con-
gress, thrd sesson).)
Guy T. everng,
Commssoner of Interna Revenue.
pproved December 27, 19 0.
erbert . Gaston,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster December 30, 19 0, 10.56 a. m.)
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Regs. 90, rt. 206(8) .
20
TITL I . T ON MPLOY RS OF IG T OR MOR .
Reguatons 90, rtce 206(8): mpoyees 19 1-1-10556
and empoyee representatves urraer the T. D. 5028
Raroad Unempoyment Insurance ct.
TITL 26 INT RN L R NU . C PT R L. SU C PT R D, P RT 00.
Reguatons 90, as made appcabe to the Interna Revenue Code
by Treasury Decson 885 C. . 1939-1 (Part 1), 396 , amended to
conform to certan provsons of the ct approved ugust 13, 19 0.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 90 Part 00, Tte 26, Code of
Federa Reguatons, and 1939 Sup. and 19 0 Sup. ony as made
appcabe to the Interna Revenue Code (53 Stat., Part 1; 26 U. S. C,
Sup. ) by Treasury Decson 885 C. . 1939-1 (Part 1), 396
Chapter I, note, Tte 26, Code of Federa Reguatons, 1939 Sup. ,
to sectons 1,3, , 6, and 7 of the ct approved ugust 13,19 0 (Pubc,
No. 76 , Seventy-s th Congress, thrd sesson), such reguatons,
whch reate to the Federa unempoyment ta for the caendar year
1939, are amended as foows:
(1) The provsons of aw under the capton Secton 1, as amended,
of the Raroad Unempoyment Insurance ct mmedatey pre-
cedng artce 206(8), added by Treasury Decson 931 C. . 1939-2,
312 secton 00.20G(8), Tte 26, Code of Federa Reguatons, 1939
Sup. , are strcken out, together wth the capton, and the foowng
s nserted n eu thereof:
Secton 1 of the Raroad Unempoyment InRrance ct, as amended by the ct
approved une 20, 1939 (53 Stat, 8 3).
For the purposes of ths ct, e cept when used n amendng
the provsons of other cts
(a) The term empoyer means any carrer (as defned n sub-
secton (b) of ths secton), and any company whch s drecty or
ndrecty owned or controed by one or more such carrers or under
common contro therewth, and whch operates any equpment or fac-
ty or performs any servce (e cept truckng servce, casua servce,
and the casua operaton of equpment or factes) n connecton wth
the transportaton of passengers or property by raroad, or the recept,
devery, eevaton, transfer n transt, refrgeraton or cng, storage,
or handng of property transported by raroad, and any recever,
trustee, or other ndvdua or body, |udca or otherwse, when n the
possesson of the property or operatng a or any part of the busness
of any such empoyer: Provded, however, That the term empoyer
sha not ncude any street, uterurban, or suburban eectrc raway,
uness such raway Is operatng as a part of a genera steam-ra-
road system of transportaton, but sha not e cude any part of
the genera steam-raroad system of transportaton now or here-
after operated by any other motve power. The Interstate Commerce
Commsson s hereby authorzed and drected upon request of the
oard, or upon compant of any party nterested, to determne after
hearng whether any ne operated by eectrc power fas wthn the
terms of ths provso. The term empoyer sha aso ncude raroad
assocatons, traffc assocatons, tarff bureaus, demurrage bureaus,
weghng and nspecton bureaus, coecton agences, and other asso-
catons, bureaus, agences, or organzatons controed and mantaned
whoy or prncpay by two or more empoyers as herenbefore de-
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21
Regs. 90, rt. 206(8).
fned and engaged In the performance of servces In connecton wth
or ncdenta to raroad transportaton; and raway abor organza-
tons, natona n scope, whch have been or may be organzed n
accordance wth the provsons of the Raway Labor ct, and ther
State and Natona egsatve commttees and ther genera com-
mttees and ther nsurance departments and ther oca odges and
dvsons, estabshed pursuant to the consttuton and byaws of such
organzatons.
(b) The term carrer means an e press company, seepng-car
company, or carrer by raroad, sub|ect to part I of the Interstate
Commerce ct.
(c) The term company Incudes corporatons, assocatons, and
|ont-stock companes.
(d) The term empoyee (e cept when used In phrases estabshng
a dfferent meanng) means any ndvdua who s or has been (1) n
the servce of one or more empoyers for compensaton, or () an em-
poyee representatve. The term empoyee sha ncude an empoyee
of a oca odge or dvson defned as an empoyer n secton 1(a) ony
f he was n the servce of a carrer on or after ugust 29, 1935. The
term empoyee ncudes an offcer of an empoyer.
(e) n ndvdua s n the servce of an empoyer whether hs servce
s rendered wthn or wthout the Unted Sates f he s sub|ect to the
contnung authorty of the empoyer to supervse and drect the manner
of rendton of hs servce, whch servce he renders for compensaton:
Provded, however, That an ndvdua sha be deemed to be n the
servce of an empoyer not conductng the prncpa part of ts busness
n the Unted States ony when he s renderng servce to t n the Unted
States: Provded further. That an ndvdua not a ctzen or resdent of
the Unted States sha not be deemed to be n the servce of an empoyer
when renderng servce outsde the Unted States to an empoyer who s
requred under the aws appcabe n the pace where the servce s
rendered to empoy theren, n whoe or n part, ctzens or resdents
thereof.
(f) The term empoyee representatve means any offcer or offca
representatve of a raway abor organzaton other than a abor organ-
zaton ncuded n the term empoyer as defned n secton 1(a) who
before or after ugust 29, 19. 5, was n the servce of an empoyer as de-
fned In secton 1(a) and who s duy authorzed and desgnated to rep-
resent empoyees n accordance wth the Raway Labor ct, and any
ndvdua who s reguary assgned to or reguary empoyed by such
offcer or offca representatve n connecton wth the dutes of hs offce.

(I) The term compensaton means any form of money remunera-
ton, ncudng pay for tme ost but e cudng tps, payabe for servces
rendered as an empoyee to one or more empoyers, or as an empoyee
representatve: Provded, however. That n computng the compensaton
payabe to any empoyee wth respect to any caendar month, no part of
any compensaton n e cess of 300 sha be recognzed.

(r) The term oard means the Raroad Retrement oard,
(s) The term Unted States , when used n a geographca sense,
means the States, aska, awa, and the Dstrct of Coumba.

Sectons 1, 3, , and 6 of the ct approved ugust 13, 10 0 (Pubc, No. 76 ,
Seventy-s tu Congress, Thrd Sesson).
That secton 1(a) of the Raroad Unempoyment Insurance
ct are amended, effectve as of the date of ts enactment, by
addng at the end of such secton the foowng new sentence:
The term empoyer sha not ncude any company by reason of ts
beng engaged n the mnng of coa, the suppyng of coa to an empoyer
where devery s not beyond the mne tppe, and the operaton of equp-
ment or factes therefor, or n any of such actvtes.
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Regs. 90, rt. 206(8).
22
Sec. 3. secton 1(d) of the Raroad Unempoyment Insur-
ance ct are amended, as of the date of ts enact-
ment, by addng at the end of such secton the fo-
owng new paragraph:
The term empoyee sha not ncude any Indvdua whe such
ndvdua s engaged n the physca operatons consstng of the mnng
of coa, the preparaton of coa, the handng (other than movement by
ra wth standard raroad ocomotves) of coa not beyond the mne
tppe, or the oadng of coa at the tppe.
Sec. . (a) The aws hereby e pressy amended sha oper-
ate as f each amendment heren contaned had been enacted as a part
of the aw t amends, at the tme of the orgna enactment of such aw.

Sec. 6. Nothng contaned n ths ct, nor the acton of Congress n
adoptng t, sha be taken or consdered as affectng the queston of what
carrers, companes, or ndvduas, other than those n ths ct specfcay
provded for, are ncuded n or e cuded from the provsons of the
varous aws to whch ths ct s an amendment
(2) rtce 206(8), added by Treasury Decson 931 supra sec-
ton 00.200(8), Tte 26, Code of Federa Reguatons, 1939 Sup. , s
amended to read as foows:
rt. 200(8) Sec. 00.200(8), Tte 26, Code of Federa Reguatons, 19 0 Sup. .
mpoyees and empoyee representatves under the Raroad Unempoyment Insur-
ance ct. Servces performed on or after uy 1, 1939, by an ndvdua as an
empoyee or as an empoyee representatve, ns those terms are defned n
secton 1 of the Raroad Unempoyment Insurance ct, as amended, are e cepted.
(3) Immedatey precedng artce 211(1), added by Treasury Dec-
son 953 C. . 1939-2, 297 secton 00.211(1), Tte 26, Code of
Federa Reguatons, 1939 Sup. , as amended by Treasury Decson
5022 C. . 19 0-2, 275 secton 00.211(1) of such Tte 26, 19 0
Sup. , the foowng s nserted:
Secton 7(b) of the ct approved Rst IS, 1(1 0 (Pubc, No. 70 ,
Sevent|-s th Congress, Thrd Sesson).
Notwthstandng the provsons of secton 1601(a)(3) of the Interna
Revenue Code, the credt aowabe under secton 1601(a) aganst the
ta mposed by secton 1G0O for the caendar year 1UI19 sha not be
dsaowed or reduced by reason of the payment nto a State unempoy-
ment fund after anuary 31, 19 0, of contrbutons wth respect to
servces affected by ths ct performed durng the perod uy 1, 1939,
to December 31, 1939, ncusve, wth respect to whch servces amounts
have been pad as contrbutons under the Raroad Unempoyment Insur-
ance ct pror to the date of enactment of ths ct: Provded, That ths
subsecton sha be appcabe ony f the contrbutons wth respect to
such servces are pad nto the State unempoyment fund before the
nneteth day after the date of enactment of ths ct.
( ) rtce 211(1) (b), added by Treasury Decson 953 supra
secton 00.211(1)(6), Tte 26, Code of Federa Reguatons, 1939
Sup. , as amended by Treasury Decson 5022 supra secton
00.211(1) (b) of such Tte 26, 19 0 Sup. , s amended by nsertng
mmedatey foowng paragraph (2) thereof the foowng new
paragraph:
(See. however, secton 7(b) of the ct approved ugust 13, 19 0 (Pubc, No.
76 , Seventy-s th Congress, thrd sesson), for a speca provson reatng to
credt for certan contrbutons pad wth respect to certan servces affected by
such ct; and see sectons 1, 3, , and 6 of such ct quoted mmedatey precedng
artce 206(8) secton 00.206(8), Tte 26, Code of Federa Reguatons, 19 0
Sup. , reatng to such servces.)
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23
Regs. 100.
(5) Immedatey foowng the provsons of aw under the capton
Secton 905(a) of the ct precedng artce 502 secton 00.502,
Tte 26, Code of Federa Reguatons , the foowng s nserted:
Secton 7(a) of the ct approved ugust 1 . 10 0 (Tubc, No. 7C ,
Seventy-s th Congress, Thrd Sesson).
Notwthstandng the provsons of secton 1005(b) of the Interna Reve-
nue Code, no nterest sha, durng the perod February 1, 1 ) (), to the
e /hty-nnth day after the date of enactment of ths ct, Incusve, accrue
by reason of denquency In the payment of the ta mposed by secton
1000 wth respect to servces affected by ths ct performed durng the
perod uy 1, 1939, to December 31, 1939, ncusve, wth respect to whch
servces amounts have been pad as contrbutons under the Raroad
Unempoyment Insurance ct pror to the date of enactment of ths ct.
(6) rtce 502 secton 00.502, Tte 26, Code of Federa Regua-
tons s amended by addng at the end thereof the foowng new para-
graph :
(See, however, secton 7(a) of the ct approved ugust 13, 19 0 (Pubc, No.
70 . Seventy-s th Congress, thrd sesson), for a speca provson reatng to
nterest on the ta wth respect to certan servces affected by such ct; and see
sectons 1, 3, , and 0 of such ct quoted mmedatey precedng artce 206(8)
secton 00.206(8), Tte 26, Code of Federa Reguatons, 19 0 Sup. , reatng
to such servces.)
(Ths Treasury decson s ssued under the authorty contaned n
sectons 1609 and 3791 of the Interna Revenue Code (53 Stat., 188,
67 ; 26 U. S. C, Sup. , 16C9.3791), and sectons 1, 3, , 6, and 7 of the
ct approved ugust 13,1910 (Pubc, No. 76 , Seventy-s th Congress,
thrd sesson).)
Gut T. everno,
Commssoner of Interna Revenue.
pproved December 27, 19 0.
erbert . Gaston,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster December 30, 19 0, 10.56 a. m.)
C RRI RS T ING CT OF 1937.
Reguatons 100.
empton from ta aton of certan compensaton earned n the
servce of a oca odge or dvson of a raway abor organzaton
empoyer. (See T. 1). 5029, page 09.)
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MISC LL N OUS T RULINGS.
ST T T .
INT RN L R NU COD .
Reguatons 80 (1937), rtce 13: Property 19 1-10-10633
of decedent at tme of death. T. D. 50 2
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 80.
ST T T .
rtce 13, Reguatons 80 (1937 edton), amended. onds, notes,
and certfcates of ndebtedness of the Unted States, ssued on or
after March 1, 19 1, benefcay owned by nonresdent aens not
engaged n busness n the Unted States, ncuded n gross estate.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 13 of Reguatons 80, 1937 edton secton 80.13, Tte 26,
Code of Federa Reguatons , as made appcabe to the Interna
Revenue Code (53 Stat., Part 1) by Treasury Decson 885, approved
February 11, 1939 C. . 1939-1 (Part 1), 396 Chapter I, note. Tte
20, Code of Federa Reguatons, 1939 Sup. , s amended as heren
ndcated.
In eu of the ast sentence of artce 13, whch reads:
owever, n case the decedent was a nonresdent aen not engaged n busness
n the Unted States, bonds, notes, and certfcates of ndebtedness of the Unted
States, benefcay owned by such aen, shoud not be ncuded.
the foowng s substtuted:
In case the decedent was a nonresdent aen not engaged n busness n the
Unted States, bonds, notes, and certfcates of ndebtedness of the Unted States,
benefcay owned by such aen shoud not be ncuded; however, bonds, notes,
and certfcates of ndebtedness of the Unted States, ssued on or after March 1,
10 1, whch such decedent benefcay owned, shoud be ncuded n the gross
estate.
(Ths Treasury decson s ssued under the authorty contaned n
the foowng sectons of aw: Sectons 811, 937, and 3791 of the
Interna Revenue Code (53 Stat., 120, 1 3, and 67 (26 U. S. C, Sup.
, sectons 811, 937, 3791)).)
Guy T. evertng,
Commssoner of Interna Revenue.
pproved March 1,19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 3, 19 1, 3.52 p. m.)
( 2 )
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25 Regs. 80 (15)37), rts. 11, 13.
Reguatons 80 (1937), rtce 11: Optona 19 1-22-10727
vauaton date. T. D. 50 7
rtce 13: Property of decedent at tme
of death.
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 80.
ST T T .
rtces 11 and 13, Reguatons 80 (1937 dton), amended.
Optona vauaton of gross estate.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, . C.
To Coectors of Interna Revenue and Others Concerned:
rtce 11, and artce 13 (as amended by Treasury Decson 50 2,
approved March 1, 19 1 page 2 , ths uetn ) of Reguatons 80,
1937 dton sectons 80.11 and 80.13, Tte 26, Code of Federa
Reguatons , and those artces as made appcabe to the Interna
Revenue Code (53 Stat., Part 1) by Treasury Decson 885, ap-
proved February 11, 1939 C. . 1939-1 (Part 1), 396 Chapter
1, note, of such Tte 26 , are amended as heren ndcated.
In eu of the s th, seventh, eghth, nnth, tenth, and eeventh
paragraphs of artce 11, the foowng s substtuted:
In vaung the gross estate under the optona vauaton method, a of the
property nterests e stng at the date of death whch are a part of the gross
estate as determned under the subdvsons of secton 302, as amended, con-
sttute the property to be vaued as of one year after the date of the decedent s
death, or as of the date of the decedent s death, or as of some ntermedate
date. Such property s herenafter referred to as ncuded property. In-
cuded property as of the date of the decedent s death remans ncuded
property for the purpose of vaung the gross estate under the optona vau-
aton method even though t s changed n form durng the optona vauaton
perod by beng actuay receved, or dsposed of, n whoe or n part, by the
estate. owever, property earned or accrued (whether receved or not) after
the decedent s death and durng the optona vauaton perod wth respect to
any property nterest e stng at the date of death, whch does not represent
a form of ncuded property tsef or the recept thereof, s to be e cuded
n vaung the gross estate at the subsequent vauaton date and s herenafter
referred to as e cuded property. mong the tems of ncuded property
to be vaued n accordance wth these prncpes are the foowng:
1. Ivtere t-oearng obgatons. Interest-bearng obgatons, such as bonds
and notes, may, at the date of death, comprse two eements of ncuded prop-
erty, the prncpa of the obgaton tsef and nterest accrued to the date of
death, and each s to be separatey vaued as of the appcabe vauaton date.
The bond or note s to be vaued as of the appcabe vauaton date wthout
regard to accrued nterest. Interest accrued after the date of death and pror
to the subsequent vauaton date consttutes e cuded property. owever,
any part payment of prncpa made between the date of death and the sub-
sequent vauaton date, or any advance payment of nterest for a perod after
the subsequent vauaton date made durng the optona vauaton perod whch
has the effect of reducng the vaue of the prncpa obgaton as of the subse-
quent vauaton date, w be ncuded n the gross estate, and vaued as of the
date of such payment.
2. Leased property. The prncpes appcabe wth respect to nterest-bearng
obgatons aso appy to eased reaty or personaty ncuded n the gross
estate wth the obgaton to pay rent reserved. oth the reaty or personaty
tsef and the rents accrued to the date of death consttute ncuded property,
and each s to be separatey vaued as of the appcabe vauaton date. ny
rent accrued after the date of death and pror to the subsequent vauaton date
s e cuded property. The prncpe appcabe wth respect to nterest pad
n advance aso appes to advance payments of rent
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Regs. 80 (1937), rts. , 13. 26
3. Nonnterest-bearng obga- ons. In the ease of nonnterest-bearng obga-
tons sod at a dscount, such as Treasury bs, the prncpa obgaton and the
dscount amortzed to the date of death are property nterests e stng at tbe
date of death and consttute ncuded property. The obgaton tsef s to
be vaued thereafter at the subsequent vauaton date wthout regard to any
further ncrease n vaue due to amortzed dscount. The addtona dscount,
amortzed after death and durng the optona vauaton perod s the equva-
ent of nterest accrung durng that perod and s, therefore, not to be ncuded
n the gross estate under the optona vauaton method.
. Stock of a corporaton. Shares of stock n a corporaton and dvdends
decared to stockhoders of record on or before the date of the decedent s death
and not coected at the date of death consttute ncuded property of the
estate. Ordnary dvdends out of earnngs and profts, whether n cash or n
shares of the corporaton or n other property, decared to stockhoders of
record after the date of the decedent s death are e cuded property and are
not to be vaued under the optona vauaton method. If, however, dvdends
are decared to stockhoders of record after the date of the decedent s death
wth the effect that the shares of stock at the subsequent vauaton date do
not reasonaby represent the same ncuded property of the gross estate as
e sted at the date of the decedent s death, such dvdends are ncuded prop-
erty e cept to the e tent that such dvdends are out of earnngs of the cor-
poraton after the date of the decedent s death. For e ampe, f a corporaton
makes a dstrbuton n compete or parta qudaton to stockhoders of
record durng the optona vauaton perod, the amount of such dstrbuton
receved on stock ncuded n the gross estate s tsef ncuded property,
e cept to the e tent that the dstrbuton was out of earnngs and profts snce
the date of the decedent s death. nother e ampe s where a corporaton,
n whch the decedent owned 50 per cent of the shares and whch possessed at
the date of the decedent s death accumuated earnngs and profts equa to ts
pad-n capta, dstrbuted a of ts accumuated earnngs and profts as a cash
dvdend to sharehoders of record durng the optona vauaton perod. In such
a case the amount of the dvdends receved on stock ncudbe n the gross
estate w be ncuded n the gross estate under the optona vauaton method.
The operaton of ths artce may be further ustrated by the foowng
e ampe n whch the death of the decedent w be taken to have occurred on
anuary 1, 10 0:
Descrpton.
Subsequent
vauaton
date.
aue un-
der opton.
aue at
dae of
death.
Mar. 1,19 0
1,000.00
1,000.00
Feb. 1,19 0
10.00
10.00
Feb. 1,19 0
6.87
6.67
an. 1,19 1
11,000.00
12,000.00
Feb. 1,19 0
300.00
300.00
Feb. 1,19 0
200.00
200 00
an. 1,19 1
7,500.00
80,000.00
an. 10,19 0
1,000.00
1,000.00
ond, par vaue 1,000, bearng nterest at per cent payabe quar-
tery on Feb. 1. May 1, ug. 1, and Nov. 1. ond dstrbuted
to ecatee on Mar. 1, 19 0. _
Interest coupon of 10 attached to bond and not cashed at date
of death athough due and payabe Nov. 1, 1939. Cashed
by e ecutor on Feb. 1, 19 0 ...
Interest accrued from Nov. 1,1939, to an. 1,19 0
Rea estate. Not dsposed of wthn year foowng death. Rent
of 300 due at the end of each quarter, Feb. 1, May 1, ug. .and
Nov. I
Rent due for quarter endng Nov. 1, 1939, but not coected
unt Feb. 1,19 0
Rent accrued for November and December, 1939 ,
Common stoek, Corporaton, 500 shares, not dsposed of wthn
year foowng decedent s death _
Dvdend of 2 per share decared Dec. 10, 1939. payabe on
an. 10,19 0, to hoders of record on Dec. 30,1939
In eu of the second sentence of the ast paragraph of artce 11,
the foowng s substtuted:
Interest and rents accrued at the date of the decedent s death and dvdends
decared to stockhoders of record on or before the date of the decedent s death
and not coected at such date sha be separatey shown.
In eu of the s th, seventh, and eghth paragraphs of artce 13,
the foowng s substtuted:
Interest and rents accrued at the date of the decedent s death and dvdends
decared to stockhoders of record on or before the date of the decedent s death
and not coected at such date consttute part of the gross estate.
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27 Regs. 80 (1937), rts. 25, 26, 27.
(Ths Treasury decson s ssued under the authorty contaned
n the foowng sectons of aw: Sectons 811, 937, and 3791 of the
Interna Revenue Code (53 Stat., 120, 1 3, and G7, 26 IT. S. C, Sup.
, 811, 937, 3791); secton 302 of the Revenue ct of 1926 ( Stat.,
70, 26 U. S. C, 11) as amended by secton 202 of the Revenue ct
of 1935 ( 9 Stat., 1022, 26 U. S. C, Sup. , 811); secton 110 of the
Revenue ct of 1926 ( Stat., I, 26 U. S. C, 1691(a) (1)); acton
03 of the Revenue ct of 1932 ( 7 Stat., 2 5, 26 U. S. C, 537); and
secton 1108(a) of the Revenue ct of 1926, as amended by secton
605 of the Revenue ct of 1928 and by secton 506 of the Revenue
ct of 193 ( Stat, 11 , 5 Stat., 87 , 8 Stat, 757, 26 U. S. C,
1691(b)).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved May 22, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster May 2 , 19 1, 12.17 p. m.)
Reguatons 80 (1937), rtce 25: Ta abe 19 1-3-1057C
nsurance. T. D. 5032
rtce 26: Insurance n favor of the estate.
rtce 27: Insurance recevabe by other
benefcares.
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 80.
ST T T .
rtces 25, 26, and 27, Reguatons 80 (1937 edton), amended.
Proceeds of nsurance upon the fe of the decedent ncudbe n
hs gross estate.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 25. artce 26 (as amended by Treasury Decson 868, ap-
proved October 2 . 1938 C. . 1938 2, 355 ), and artce 27 of Regu-
atons 80, 1937 edton sectons 80.25, 80.26, and 80.27, Tte 26. Code
of Federa Reguatons , and those artces as made appcabe to
the Interna Revenue Code (53 Stat., Part 1) by Treasury Decson
885, approved February 11, 1939 C. . 1939-1 (Part 1), 396 Part
65, Subpart , Tte 26, Code of Federa Reguatons, 1939 Sup. ,
are amended as heren ndcated.
In eu of the second paragraph of artce 25, whch reads:
The term nsurance refers to fe nsurance of every descrpton, Incudng
death benefts pad by fraterna benefca socetes, operatng under the odge
system. Insurance s consdered to have been taken out by the decedent, whether
or not he made the appcaton, f he acqured the ownershp of, or any ega nc-
dent thereof n, the pocy; but n the case of a decedent dyng before November
7, 193 (the date of approva of the 193 edton of Reguatons 80), the provsons
of the second paragraph of artce 25 of Reguatons 70 (1929 edton) w contnue
to appy. Lega ncdents of ownershp n the pocy ncude, for e ampe: The
rght of the nsured or hs estate to ts economc benefts, the power to change the
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Regs. 80 (1937), rts. 25, 26, 27. 28
benefkary, to surrender or cance the pocy, to assgn t, to revoke an assgnment,
to pedge t for a oan, or to obtan from the nsurer a oan aganst the surrender
vaue of the pocy, etc.
the foowng s substtuted:
The term nsurance refers to fe nsurance of every descrpton, ncudng
death benefts pad by fraterna benefca socetes operatng under the odge
system. Insurance recevabe by benefcares other than the estate Is consdered
to have been taken out by the decedent where he pad, ether drecty or ndrecty,
a the premums or other consderaton wherewth the nsurance was acqured,
whether or not he made the appcaton. Such nsurance s not consdered to have
been so taken out, even though the appcaton was made by the decedent, f no
part of the premums or other consderaton was pad ether drecty or ndrecty
by hm. Where a porton of the premums or other consderaton was actuay pad
by another and the remanng porton by the decedent, ether drecty or ndrecty,
such nsurance s consdered to have been taken out by the atter n the proporton
that the payments therefor made by hm bear to the tota amount pad for the
nsurance.
Lfe Insurance not ncudbe n the gross estate under the provsons of subd-
vson (g) of secton 302 and artce 26, 27, or ths artce of these reguatons may,
dependng upon the facts of the partcuar case, be ncudbe under some other
subdvson of secton 302 and the artces of these reguatons pertanng thereto,
such as subdvson (c) n the case of nsurance taken out by the decedent pror
to the date of Treasury Decson 5032 and aso transferred by hm pror to such date
In contempaton of death.
rtce 26 (as amended by Treasury Decson 868, approved October
2 ,1938), whch reads
rt. 26. Insurance n favor of the estate. The provson requrng the ncuson
n the gross estate of a nsurance recevabe by the e ecutor, wthout any e emp-
tou, appes to poces made payabe to the decedent s estate or hs e ecutor or
admnstrator, and a nsurance whch s n fact recevabe by, or for the beneft
of, the estate. It ncudes nsurance taken out to provde funds to meet the estate
ta , and any other ta es or charges whch are enforceabe aganst the estate. The
manner n whch the pocy s drawn s mmatera so ong as there s an obgaton,
egay bndng upon tho benefcary, to use the proceeds n payment of such ta es or
charges. If the decedent took out nsurance n favor of another person or corpo-
raton as coatera securty for a oan or other accommodaton, the nsurance s
consdered to be recevabe for the beneft of the estate. The amount of the oan
outstandng at decedent s death w be deductbe n determnng the net estate,
and the Interest thereon w be deductbe n accordance wth the provsons of
artce 30.
s amended to read as foows:
rt. 26. Insurance n favor of the estate. The statute requres the ncuson n
the gross estate of a nsurance recevabe by the e ecutor or admnstrator or pay-
abe to the decedent s estate, and a nsurance whch s n fact recevabe by, or
for the beneft of, the estate. It ncudes nsurance effected to provde funds to
meet the estate ta , and any other ta es, debts, or charges whch are enforceabe
aganst the estate. The manner n whch the pocy s drawn s mmatera so
ong as there s an obgaton, egay bndng upon the benefcary, to use the pro-
ceeds n payment of such ta es, debts, or charges. The fu amount of the proceeds
so recevabe, wthout the beneft of any e empton, forms a part of the gross
estate, though a the premums or other consderaton wherewth the nsurance
was acqured may have been pad by a person other than the decedent. If the
decedent procured nsurance n favor of another person or corporaton as co-
atera securty for a oan or other accommodaton, the nsurance s consdered to be
recevabe for the beneft of the estate. The amount of the oan outstandng at
decedent s death w be deductbe n determnng the net estate, and the nterest
thereon w be deductbe n accordance wth the provsons of artce 36.
rtce 27, whch reads
rt. 27. Insurance recevabe by other benefcares. The statute requres the
Incuson n the gross estate of the decedent of the proceeds of any pocy, or the
aggregate proceeds of a poces, not recevabe by or for the beneft of decedent s
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29 Regs. 80 (1937), rts. 25, 26, 27.
estate, to the e tent that such proceeds e ceed 0,000, regardess of when the
pocy was or the poces were ssued, f the decedent possessed at the tme of hs
death any of the ega ncdents of ownershp.
The estate s entted to ony one e empton of 0,000 upon nsurance recevnbe
by benefcares other than the estate. For e ampe, f the decedent eft fe nsur-
ance payabe to three such benefcares n amounts of 10,000, 0,000, and 50,000
(tota, 100,000), the fu amount shoud be sted on the return and therefrom
subtracted the 0,000 e empton as provded n the approprate schedue of Form
706. The word benefcares, as used n reference to the 0,000 e empton,
means persons entted to the actua en|oyment of the nsurance money.
s amended to read as foows:
rt. 27. Insurance recevabe by other benefcares. The amount n e cess of
0,000 of the aggregate proceeds of a nsurance on the decedent s fe not recev-
abe by or for the beneft of hs estate must be ncuded n hs gross estate as
foows:
(1) To the e tent to whch such Insurance was taken out by the decedent
upon hs own fe (see artce 25) after anuary 10,19 1, the date of Treasury
Decson 5032, and
(2) To the e tent to whch such nsurance was taken out by the decedent
upon hs own fe (see artce 25) on or before anuary 10, 9 1, and wth
respect to whch the decedent possessed any of the ega Incdents of owner-
shp at any tme after such date or, In the case of a decedent dyng on or
before such date, at the tme of hs death.
Lega ncdents of ownershp n the pocy ncude, for e ampe, the rght of
the nsured or hs estate to ts economc benefts, the power to change the
benefcary, to surrender or cance the pocy, to assgn t, to revoke an assgn-
ment, to pedge t for a oan, or to obtan from the nsurer a oan aganst
the surrender vaue of the pocy, etc. The nsured possesses a ega ncdent
of ownershp f hs death s necessary to termnate hs nterest n the nsur-
ance, as, for e ampe f the proceeds woud become payabe to hs estate, or
payabe as he mght drect, shoud the benefcary predecease hm.
T e estate s entted to ony one e empton of 0,000 upon Insurance
recevabe by benefcares other than the estate. For nstance, f the decedent
eft fe nsurance otherwse ncudbe under the provsons of ths artce and
payabe to three such benefcares In amounts of 10,000, 0,000, and 50,000
(tota, 100,000), the fu amount shoud be sted on the return and therefrom
subtracted the 0,000 e empton as provded n the approprate schedue of
Form 700. The word benefcnres, as used n reference to ths 0,000
e empton, means persons entted to the actua en|oyment of the nsurance
money.
ampe: Insurance on the fe of the decedent who ded after the date of
Treasury Decson 5032 totaed 200,000. It was payabe to hs son as
benefcary and the decedent never possessed any of the ega ncdents of owner-
shp theren. Premums aggregatng 100,000 were pad for the nsurance, of
whch the decedent pad 50,000 before the date of Treasury Decson 5032 and
30,000 after that date. The remanng premums of 20,000 were pad by
the son. The e tent to whch the nsurance was taken out by the decedent
after the date of the Treasury decson s the proporton of 200,000 that the
amount of the premums pad by hm after such date, 30,000, bears to the
tota amount of the premums pad for the nsurance, 100,000. Such proporton
s three-tenths of 200,000, or 60,000. s the decedent possessed none of the
ega ncdents of ownershp n the Insurance at any tme after the date of
the Treasury decson, 100,000 of the nsurance, the e tent to whch t was
/ 50,000
taken out by the decedent before such date ( 00000 200,000), Is e cuded
from the gross estate. The amount of 0,000, the e tent to whch the nsurance
was not taken out by the decedent (- -r 200,000), Is aso e cuded from
100,000
the gross estate. The amount of the nsurance taken out by the decedent after
the date of the Treasury decson, 00,000, s reduced by 0,000, the speca
nsurance e empton, and the amount of the nsurance ncuded n the gross
estate s 20,000.
(Ths. Treasury decson s ssued under the authorty contaned n
the foowng sectons of aw: Sectons 811, 937, and 3791 of the
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Regs. 80 (193 ), rt. 25.
30
Interna Revenue Code (53 Stat., 120, 1 3, and 67); secton 302 of
the Revenue ct of 1926 ( Stat., 70, 26 U. S. C, 11); secton 1101
of the Revenue ct of 1926 ( Stat., I, 26 U. S. C, 1691(a)) ;
secton 03 of the Revenue ct of 1932 ( 7 Stat., 2 5, 26 U. S. C,
537); and secton 1108(a) of the Revenue ct of 1926, as amended
by secton 605 of the Revenue ct of 1928 and by secton 506 of the
Revenue ct of 193 ( Stat., 11 , 5 Stat., 87 , 8 Stat., 757, 26
U. S. C, 1691(b)).)
Gut T. e.verng,
Commssoner of Interna Revenue.
pproved anuary 10,19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster anuary 13, 19 1, 11. 5 a. m.)
TITL III. ST T T . (1926)
S CTION 302(g), S M ND D.
Reguatons 80 (193 ), rtce 25: Ta abe 19 1-11-10638
nsurance. Ct. D. 1 91
ST T T R NU CT OF 1 )2 . S M ND D D CISION OP SUPR M
COURT.
1. Gross state Insurance Snge Premum Pocy and nnu-
ty Contract Purchased by Unnsurabe Transfer to Take
ffect n Possesson or n|oyment at or fter Death.
Proceeds of a snge premum fe nsurance pocy purchased by
decedent at the age of 80 n con|uncton wth a snge premum
annuty contract are not amounts recevabe as nsur-
ance wthn the meanng of secton 302(g) of the Revenue ct
of 1926, as amended. though the two contracts were n a
forma respects treated as dstnct transactons, the Insurance
pocy woud not have been ssued wthout the annuty contract, and
the two must be consdered together. So consdered, they whoy
fa to spe out any eement of nsurance rsk. The amounts
recevabe by the benefcary are ta abe under secton 302(c) of
the Revenue ct of 1926, as amended, as a transfer to take effect
n possesson or en|oyment at or after death.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (110 Fed. (2d), 73 ), affrmng decson of the Unted
States oard of Ta ppeas (1939) (39 . T. ., 113 ), reversed.
Supreme Court of the Unted States.
Ouy T. cverng, pettoner, v. dyth Le erse and ankers Trust Co.,
respondents.
61 S. Ct., 6 6.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
March 3, 19 1.
OPINION.
Mr. ustce Mukphy devered the opnon of the Court.
Less than a month before her death In 1936, decedent, at the age of 80,
e ecuted two contracts wth the Connectcut Genera Lfe Insurance Co. One
was an annuty contract n standard form enttng decedent to annua payments
of 589.80 as ong as she ved. The consderaton stated for ths contract was
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31 Regs. 80 (193 ), rt. 25.
,179. The other contract was caed a Snge Premum Lfe Pocy Non
Partcpatng and provded for a payment of 2. ,000 to decedent s daughter,
respondent Le Gerse, at decedent s death. The premum specfed was 22,9 11.
Decedent pad the tota consderaton, 27,125. at the tme the contracts were
e ecuted. She was not requred to pass a physca e amnaton or to answer
the questons a woman appcant normay must answer.
The nsurance pocy woud not have been ssued wthout the annuty
contract, but n a forma respects the two were treated as dstnct transactons.
Nether contract referred to the other. Independent appcatons were fed for
each. Nether premum was computed wth reference to the other. Premum
payments were reported separatey and entered n dfferent accounts on the
company s books. Separate reserves were mantaned for nsurance and
unuuntes. ach contract was n standard form. The nsurance pocy
contaned the usua provsons for surrender, assgnment, optona modes of
settement, etc.
Upon decedent s death, the face vaue of the nsurance contract became
payabe to respondent Le Gerse, the benefcary. Thereafter, a Federa estate
ta return was fed whch e cuded from decedent s gross estate the proceeds
of the nsurance pocy. The Commssoner notfed respondents ankers
Trust Co. and Le Gerse, as e ecutors of decedent s estate, that he proposed
to ncude the proceeds of ths pocy n the gross estate and to assess a
defcency. Sut n the oard of Ta ppeas foowed, and the Commssoner s
acton was reversed. (39 . T. ., 113 .) The crcut court of appeas affrmed.
(110 Fed. (2d), 73 .) We brought the case here because of confct wth
Commssoner v. eer (113 Fed. (2d), 833) and cverng v. Tyer (111 Fed.
(2d), 22; 311 U. S., ).
The utmate queston s whether the nsurance proceeds may be Incuded
n decedent s gross estate.
Secton 302 of the Revenue ct of 1926 ( Stat., 9, 70; as amended, 7 Stat,
1G9, 279; 8 Stat., 680, 752) provdes: The vaue of the gross estate of the
decedent sha be determned by ncudng the vaue at the tme of hs death
of a property, rea or persona, tangbe or ntangbe (g) To the
e tent of the amount recevabe by the e ecutor as Insurance under poces
taken out by the decedent upon hs own fe; and to the e tent of the e cess
over 0,000 of the amount recevabe by a other benefcares as nsurance
under poces taken out by the decedent upon hs own fe. Thus the basc
queston s whether the amounts receved here are amounts recevabe as
nsurance wthn the meanng of secton 302(g).
Conventona ads to constructon are of tte assstance here. Secton
302(g) frst appeared n dentca anguage n the Revenue ct of 1918 as
secton 02(f). ( 0 Stat., 1057, 1098.) It has never been changed.1 None
of the cts has ever defned nsurance. Treasury reguatons, nterpretng
the orgna provson, stated smpy: The term nsurance refers to fe
nsurance of every descrpton, ncudng death benefts pad by fraterna
benefca socetes, operatng under the odge system. (Treasury Regua-
tons No. 37, 1921 edton, page 23.) Ths statement has never been ampfed.
The commttee report accompanyng the Revenue ct of 1918 merey noted
that the provson ta ng nsurance recevabe by the e ecutor carfed e stng
aw, and that the provson ta ng nsurance n e cess of 0,000 recevabe
by specfc benefcares was nserted to prevent ta evason. ( ouse Report
No. 707, S ty-ffth Congress, second sesson, page 22 C. . 1939-1 (Fart 2),
86 . ) Subsequent commttee reports do not menton secton 302(g). Tran-
scrpts of commttee hearngs n 1918 and snce are equay unnformatve.
ct of 1921 : 2 Stnt., 227, 270 ; ct of 192 : 3 Stat., 253, 305 ; ct of 1926 : Stat.,
9, 71 ; Code of 1939 : S3 Stat.. 1. 122.
Reguatons No. 63, page 28 ; Reguatons No. 68, page 31 ; Reguatons No. 70, 1026
edton, page 30; Reguatons No. 70, 1929 edton, page 3. ; Reguatons No. 80, pnge 62.
(Insurance paynbe to specfc benefcares does not fa wthn the e stng
provsons defnng gross estate. It has been brought to the attenton of the commttee
that weathy persons have and now antcpate resortng to ths method of defeatng the
estate ta . gents of nsurance companes have openy urged persons of weath to take
out addtona Insurance payabe to specfc benefcares for the reason that such Insurance
woud not be Incuded n the gross estate. bera e empton of 10,000 has been ncuded
and It seems not unreasonabe to requre the ncuson of amounts n e cess of ths sum.
(/rf.. page 22.)
The same comment appears n Senate Report No. 617, S ty-ffth Congress, thrd sesson,
pne 2 (C. . 1930-1 (Tart 2). 117 .
The curous consstency and nadeouacv of secton 302fg) have not escaped notce.
See Pau. Ufe Insurance and The edera state Ta (52 ar. L. Rev., 1037) ; Pau,
Studes n Federa Ta aton, 3d Seres, page 351; Unted States Trust Co. v. ears (29
Fed. Supp., 6 3. 650).
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Regs. 80 (193 ), rt. 25.
32
Necessary, then, the angunge and the apparent purpose of secton 302(g)
are vrtuay the ony bases for determnng what Congress ntended to brng
wthn the scope of the phrase recevabe as nsurance. In fact, n usng
the terra nsurance Congress has dentfed the characterstc that deter-
mnes what transactons are entted to the parta e empton of secton 302(g).
We thnk the far mport of subsecton (g) Is that the amounts must be receved
as the resut of a transacton whch nvoved an actua nsurance rsk at the
tme the transacton was e ecuted. storcay and commony nsurance n-
voves rsk-shftng and rsk-dstrbutng. That fe Insurance s desrabe from
an economc and soca standpont as a devce to shft and dstrbute rsk of oss
from premature death s unquestonabe. That these eements of rsk-shftng and
rsk-dstrbutng are essenta to a fe nsurance contract s agreed by courts and
commentators. See for e ampe: Rtter v. Mutua Lfe Ins. Co. (109 U. S., 139) ;
In re Wash (19Fed. Supp.,507) ; Guaranty Trust Co. v. Commssoner (16 .T. .,
81 ) ; ckerman v. Commssoner (15 . T. ., 635) ; Couch, Cycopeda of Insur-
ance, oume I, secton 61; ance, Insurance, sectons 1-3; Cooey, refs on In-
surance, 2d edton, oume I, page 11 ; uebner, Lfe Insurance, Chapter 1.
ccordngy, t s ogca to assume that when Congress used the words recevabe
as nsurance n secton 302(g), It contempated amounts receved pursuant to a
transacton possessng these features. (Commssoner v. eer, supra ; everng
v. Tyer, supra ; Od Coony Trust Co. v. Commssoner, 102 Fed. (2d), 380 Ct, D.
1 29, C. . 1939-2, 332 ; ckerman v. Commssoner, supra.)
nayss of the apparent purpose of the parta e empton granted n secton
302(g) strengthens the assumpton that Congress used the word nsurance n
ts commony accepted sense. Impct n ths provson s acknowedgment of the
fact that usuay nsurance payabe to specfc benefcares s desgned to shft to
a group of ndvduas the rsk of premature death of the one upon whom the
benefcares are dependent for support. Indeed, the pth of the e empton s par-
tcuar protecton of contracts and ther proceeds ntended to guard aganst |ust
such a rsk. (See Commssoner v. eer, supra; Unted States Trust Co. v.
Sears, 29 Fed Supp., 0 3; ughes, Federa Deat Ta , page 91; Comment. 38
Mch. L. Rev., 526, 528; compare Chase Natona ank v. Unted States, 28 Fed.
Supp., 9 7; In re Wash, supra; Moskowtz v. Davs, 08 Fed. (2d), 818.) ence,
the ne t queston s whether the transacton n sut n fact nvoved an nsur-
ance rsk as outned above.
We can not fnd such an nsurance rsk In the contracts between decedent and
the nsurance company.
The two contracts must he consdered together. To say they are dstnct trans-
actons s to gnore actuaty, for t s conceded on a sdes and was found as a
fact by the oard of Ta ppeas that the nsurance pocy woud not have
been ssued wthout the annuty contract. Faure, even studous faure, n one
contract to refer to the other can not be controng. Moreover, authorty for such
consderaton s not wantng, however unreastc the dstncton between form and
Ubstanee may be. (Commssoner v. eer, supra; everna v. Tyer, supra.
See Wston, Contracts, oume III, secton 628; Pau, Studes n Federa Ta -
aton, 2d seres, page 218; compare Pearson v. eOraw, 308 U. S., 313. )
Consdered together, the contracts whoy fa to spe out any eement of In-
surance rsk. It Is true that the nsurance contract ooks ke an nsurance
pocy, contans a the usua provsons of one, and coud have been assgned or
surrendered wthout the annuty. Certany the mere presence of the customary
provsons docs not create rsk, and the fact that the pocy coud have been
assgned s mmatera snce no matter who hed the pocy and the annuty,
the two contracts, reatng to the fe of the one to whom they were orgnay
Issued, st counteracted each other. It may we be true that f enough peope
of decedent s age wanted such a pocy t woud be ssued wthout the annuty,
or that f the nstant pocy had been surrendered a rsk woud have arsen.
In ether event the essenta reaton between the two partes woud be dfferent
from what t s here. The fact remans t|at annuty and Insurance are oppo-
stes; n ths combnaton the one neutrazes tte rsk customary nherent n
the other. From the company s vewpont, nsurance ooks to ongevty, annuty
to transency. (See Commssoner v. eer, supra; everng v. Tyer, supra;
Od Coonn Trust Co. v. Commssoner, supra; Carro v. qutabe Lfe ssur.
Soc., 9 Fed. Supp., 223; Note, 9 Yae L. ., 9 0; Cohen, nnutes and Transfer
Ta es, 7 an. . . ., 139.)
Leva v. t. ohn (2 8 TT. 8., S0) In not to the contrary. There nothng Indcated
that the one contract woud not have been Issued wthout the other; there was no nceessur|
connecton between the two.
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33 Regs. 80 (193 ), rt. 25.
ere the tota consderaton was prepad and e ceeded the face vaue of
the Insurance pocy. The e cess fnanced oadng and other ncdenta
charges. ny rsk that the prepayment woud earn ess than the amount pad
to respondent as an annuty was an nvestment rsk smar to the rsk as-
sumed by a bank; t was not an nsurance rsk us e paned above. It foows
that the sums payabe to a specfc benefcary here are not wthn the scope
of secton 302(g). The ony remanng queston s whether they are ta abe.
We hod that they are ta abe under secton 302(c) of the Revenue ct
of 1926, as amended, as a transfer to take effect n possesson or en|oyment at
or after death. (See everng v. Tyer, supra; Od Coony Trust Co. v. Com-
mssoner, supra; ernochan v. Unted States, 21) Fed. Supp., 860; Guaranty
Trust Co. v. Commssoner, supra; compare, ather v. es, 208 Fed., 692;
Comment, 38 Mch. L. Rev., 026; Comment, 32 111. L. Rev., 223.)
The |udgment of the crcut court of appeas s reversed.
The Chef ustce and Mr. ustce Roberts thnk the |udgment shoud be
affrmed for the reasons stated n the opnon of the crcut court of appeas.
Reguatons 80 (193 ), rtce 25: Ta abe 19 1-11-10639
nsurance. Ct. D. 1 92
ST T T R NU CT OP 1028, S M ND D D CISION OF SUPR M
COURT.
1. Gross state Insurance Snot.e Premum Pocy and nnu-
ty Contract Purchased by Unnsubau-e.
Proceeds of a snge premum fe nsurance pocy purchased by
decedent at the age of 7 n con|uncton wth a snge premum
annuty contract are not wthn the scope of secton 302(g) of the
Revenue ct of 1926, as amended, as amounts recevabe
as nsurance. The case s not dstngushabe from evernn v.
Le Gerse, decded on the same day Ct. D. 1 91, page 30, ths
uetn 1.
2. Decson ffrmed.
Decson of the Unted Sates Crcut Court of ppeas, Thrd
Crcut (19 0) (113 Fed. (2d), 833), reversng decson of the
Unted States oard of Ta ppeas (1939) (39 . T. ., 10 7),
affrmed.
Supreme Court of the Unted States.
Pus P. eer, and Mareea . eer, pettoners, v. Comms oncr of Interna
Revenue, respondent.
61 S. Ct. 051.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
March 3, 19 1.
OPINION.
Mr. ustce Murphy devered the opnon of the Court.
Ths case s companon to No. 237, everng v. he Oerse, decded ths day
Ct. D. 1 91, page 30, ths uetn . In a matera respects the facts are
ake e cept for the dfferences to be noted. ere the annuty contract pro-
vded for annua payments of 390.8 and cost decedent 3,258.20. The nsur-
ance pocy stpuated for payment of 20,000 to decedent s daughter at deced-
ent s death, and the snge premum was 17,9 1.80. Decedent was 7 at the tme
the contract was e ecuted and ded about two years ater. Proceedng on the
same theory as n the I.e Gerse case, the Commssoner assessed a defcency n
the Federa estate ta whch the oard of Ta ppeas reversed. (39 . T. .,
1017.) The crcut court of appeas n turn reversed the oard of Ta ppeas.
(113 Fed. (2d), 833.) The case s here because of confct wth the Le Gerse
case (110 Fed. (2d). 73 ). (311 U. S., .)
Pettoners contend that ths case s dstngushabe from the Le Gerse case
because here the nsurance company found that the tota consderaton for the
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Regs. 80 (1937), rt. 11.
3
two contracts, whch was 106 per cent of the face vaue of the pocy, was
nadequate. They pont out that the rate for ths combnaton of contracts
was ater ncreased to 108 per cent and fnay to 110 per cent Further, they
contend that absence of physca e amnaton does not estabsh absence of
rsk, and that the oard of Ta ppeas found that there was some rsk to
the nsurance company.
We fnd the dstnctons nsuffcent to requre a dfferent resut.
It s not enough to show that the nsurance company assumed some rsk.
bank assumes a rsk when t accepts a depostor s funds and nvests them.
The nvestment may prove to be an unsafe one, or the bank may have agreed
to pay the depostor a hgher rate of nterest than t can proftaby earn on the
funds t nvests. Indsputaby ths s a rsk. ut t s not an nsurance rsk
n the sense e paned n the Le Gerse case. That the nsurance company sub-
sequenty changed the tota charge for ths partcuar combnaton of contracts
because t was unproftabe does not estabsh the e stence of an nsurance
rsk. Rather, t ustrates strkngy the nterreaton of the two agreements
and emphaszes the effort of the company to remove a possbe nvestment
rsk.
bsence of a physca e amnaton may we be nconcusve as to the e st-
ence of an nsurance rsk. For e ampe, some companes do not requre such
an e amnaton for group nsurance. ut there the rsk as to one s dstrbuted
among the group, an nsurance rsk squarey wthn the defnton stated n
the Le Gerse case. ere the annuty ssued wth the pocy dd more than
substtute for a physca e amnaton. It removed the necessty for any rsk
dstrbuton and competey countervaed a rsk otherwse assumed n the
nsurance pocy.
The fndng by the oard of Ta ppeas that there was some rsk neces-
sary s ambguous n vew of ther fndng that the company annuay earned
from Z to per cent on ts own nvestments. It s therefore reasonabe to
concude that the rsk referred to was a rsk that the funds mght not earn
enough to cover proftaby the annuty payabe to the decedent, or a rsk due to
a mscacuaton of the proper tota consderaton. In ether event t s .not
a fndng of the e stence of an nsurance rsk.
Snce the case s not dstngushabe from evcrng v. Le Gerse, supra, the
|udgment of the crcut court of appeas s affrmed.
The Chef ustce and Mr. ustce Roberts thnk the |udgment shoud be
reversed for the reasons stated n the opnon of the Crcut Court of ppeas
for the Second Crcut n Commssoner v. Le crse (110 Fed. (2d), 73 ).
S CTION 302(|), S DD D Y S CTION 202(a) OF T
R NU CT OF 1935.
Reguatons 80 (1937), rtce 11: Optona 19 1-11-106 0
vauaton date. Ct. D. 1 9
ST T T R NU CTS OP 1926 ND 1935 D CISIONS OF SUPR M
COURT.
1. Gross state Optona auaton Rents, Dvdends, and
Interest Receved Durng Year Foowng Decedent s Death.
Where an e ecutor avas hmsef of the opton e tended by secton
302(|) of the Revenue ct of 1926, as added by secton 202(a) of
the Revenue ct of 1935, to vaue a decedent s gross estate as of one
year after the decedent s death, rents, dvdends, and nterest
receved durng the year are not to be added to the vaue of the prop-
erty to whch they are attrbutabe, for the purpose of determnng
the vaue of the gross estate as of the date one year after death.
2. adty of Reguatons.
rtce 11 of Reguatons SO (1937 edton) can not be sustaned.
3. Decsons Reverses).
Decsons of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (111 Fed. (2d), 78, and 11 Fed. (2d), 1017), reversed.
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35
Regs. 80 (1937), rt. 11.
Supreme Court of the Unted States.
No. 27 . erbert . Maass, as Soe Survvng ecutor of the Last W and
Testament of Ida . Saks, Deceased, pettoner, v. oseph T. Iyyns, Coector
of Interna Revenue for the Thrd Dstrct of New York.
No. 510. state of Cordea Y. bcndroth, Cty ank Farmers Trust Co., as -
ecutor of the Last W and Testament of Cordea Y. bendroth, Deceased,
pettoner, v. Commssoner of Interna Revenue.
No. 511. state of ate Read acque, Cty ank Farmers Trust Co., as ecu-
tor of the Last W and Tentament of ate Read acque, Deceased, pettoner,
v. Commssoner of Interna Revenue.
01 S. Ct, 631.
On pettons for wrts of certorar to the Unted States Crcut Court of ppeas for the
Second Crcut.
March 3, 19 1.
OPINION.
Mr. ustce Roberts devered the opnon of the Court.
In these cases we must decde whether, where an e ecutor avas hmsef
of the opton e tended by the estate ta aw to vaue a decedent s gross estate
as of one year after the decedent s death, rents, dvdends, and nterest receved
durng the year are to be added to the vaue of the property to whch they are
attrbutabe and ncuded In the vaue of the gross estate. The queston arses
under secton 302( ) of the Revenue ct of 1926 as added by secton 202(a) of
the Revenue ct of 1935.1
No. 27 s a sut aganst the coector to recover an overpayment of ta .
The compant aeged that the decedent ded ugust 30, 1936; that n the
estate s return the e ecutors eected to have the vaue of the gross estate de-
termned by vaung t as of one year after the decedent s death; that the
Commssoner ncuded n the estate a sum whch was not n fact the decedent s
property at the tme of her death but represented ncome, namey, rents, dv-
dends, and nterest earned by the estate subsequent to the decedent s death;
that the e ecutors pad the ta and ther cam for r fund was re|ected. The
coector s answer rased no matera ssue of fact. ach party moved for
|udgment on the peadngs. The court dsmssed the compant.2 The crcut
court of appeas affrmed, one |udge dssentng.
In Nos. 510 and 511, the e ecutor of two decedents who ded respectvey
October 9, 1936, and pr 3, 1937, eected n ts returns to have the gross
estates vaued as of one year after death or as of date of dsposton. In each
case the e ecutor coected_ nterest and dvdends upon bonds and stocks form-
ng part of the estate at decedent s death. The sums so coected were not
reckoned n f ng the vaues of the estates, e cept such porton of them as
accrued pror to death. The Commssoner determned defcences due to the
faure to return them. The oard of Ta ppeas affrmed hs acton and the
crcut court of appeas affrmed the oard s decson.
The subsecton has now bepn emboded In the Interna Revenue Code as secton 811 ( )
(53 Stat., 122, 26 U. S. C ., 811 ( ) and s n part as foows:
Optona auaton. If the e ecutor so eects upon hs return the vaue of
the gross estate sha be determned by vaung a the property Incuded theren on the
date of the decedent s death as of the date one year after the decedent s death, e cept that
(1) property ncuded n the gross estate on the date of death and, wthn one year after
the decedent s death, dstrbuted or hod, e changed, or otherwse dsposed
of, sha be ncuded at ts vaue as of the tme of such dstrbuton, sae, e change, or
other dsposton, whchever frst occurs. Instead of ts vaue as of the date one year after
the decedent s death, and (2) nny nterest or estate whch s affected by mere apse of
tme sha be ncuded at Its vaue as of the tme of death (nstead of the ater date) wth
ad|ustment for any dfference n Its vaue as of the ater date not due to mere apse of
tme.
29 Fed. Supp., 000
111 Fed. (2d), 78.
1 . T. .. 1178. four members dssentng.
11 red. (2d), 1017.
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Regs. 80 (1937), rt. 11,
3G
though there was no confct between decsons of crcut courts of ap-
peas, we granted certorar because of the mportance of the queston and the
number of pendng cases In whch t s presented.
It s agreed that the purpose of subdvson ( ) was to mtgate the hardshp
consequent upon shrnkage n the vaue of estates durng the year foowng
death. Congress enacted t n the ght of the fact that, due to such shrnkages,
many estates were amost obterated by the necessty of payng a ta on the
vaue of the assets at the date of decedent s death. bout one year after the
adopton of the subsecton, the Treasury promugated artce 11 of Reguatons)
80 (1937 edton) n whch t rued that nterest bearng obgatons, such
as bonds, emboded two promses, one to pay prncpa, the other to pay Interest,
both a part of the gross estate f the obgaton was owned by the decedent
at hs death. It further rued that n the case of eased rea estate two factors
were to be consdered, the vaue of the reaty and the vaue of the covenant
to pay rent. Wth respect to stocks, t rued that the vaue of the stock and
the vaue of the rght to dvdends thereon were separabe and each consttuted
an eement of vaue to the decedent. The reguaton requred that f, durng the
year subsequent to death, rents, royates, Interest, or dvdends were receved by
the decedent s estate, such porton thereof as had not accrued, or was not
attrbutabe to a perod, pror to death, shoud be returned n fu and reckoned
as part of the gross estate In any case where the e ecutor eected, as permtted
by subsecton (|), to vaue the assets as of one year after the decedent s
death or as of the date of dsposton of any asset. In accordance wth the
reguaton the defcences n the present cases were determned.
In the courts beow, and before the oard of Ta ppeas, the Government
contended that such tems of ncome are n truth payments on account of
prncpa and that, by such payments, the prncpa s reduced so that, when
the capta asset s vaued at the end of the perod, Its true vaue s not
refected uness there be added the nterest, dvdend, or other ke payment
receved by the estate n the nterm. In ths Court, the argument takes a
somewhat dfferent form. Reference s made to the fact that, under the
opton granted, a capta asset s to be vaued ether at the e praton of the
year or at the tme of dsposton and t s urged that, as respects nterest, rent,
or dvdends, a dsposton occurs at the date of the recept of the tem. In
ether aspect the vadty of the contenton depends upon the theory that, for
purposes of estate ta vauaton, the asset conssts- of two eements one the
rght of ownershp the other the rght to receve the ncome. It Is sad that
both of these eements enter Into the vauaton made as of the date of
death and If, n the subsequent perod, the atter emerges n the shape of a
payment that payment s to be attrbutabe to the ncome rght rather than to
the rght of ownershp of the Income-producng property.
On the other hand, the pettoners nsst that the Government s poston Is
unrea and artfca; that t does not comport ether wth economc theory or
busness practce; and that the reguaton s an unwarranted e tenson of the
pan meanng of the statute and can not, therefore, be sustaned. We hod that
the pettoners are rght.
It s not dened that, n common understandng, rents, nterest, and dvdends
are ncome. Under the Revenue cts, f such tems are coected by a decedent s
estate, the e ecutors are bound to return them and pay ta upon them as Income.
In the case of a vng hoder, such recepts arc never treated as on account of
prncpa. Nor does the promse to pay nterest, rents or dvdends ether to a
vng owner of the asset or to hs e ecutor after death, whch has not been
egay separated from the asset of whch t Is an Incdent, have any market
vaue apart from the asset, or bear any Invarabe reaton to the vaue of the
capta asset
It Is true that a bond embodes two promses, one to pay the prncpa at
maturty, the other to pay nterest at Intervas unt maturty. nd the promse
to pay nterest or rent, or the e pectancy of dvdends upon stock, the amount
of such payments, the past and prospectve reguarty of the payments, and other
eements bearng upon the e pectaton of the recept of Income affect the vaue
of any ncome-producng property. ut these eements are not separatey vaued
In apprasng the worth of the asset at any gven tme. It s the unform practce
to vaue the asset as an entrety, takng Into consderaton a the eements that
go to gve t vaue n the market.
The Isrrrt Court for Maryand has decded contrary to the Crcut Court of ppeas
for the Second Crcut: Cark v. Unted States (33 Fed. Supp., 210).
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37 Regs. 80 (1937), rt. 11.
In the apprasa of a decedent s estate, rent or Interest accrued to the date of
death s propery treated as a capta asset. So aso, on the sae of an Interest
bearng securty, t s the unform practce to add to the vaue of the obgaton,
as such, accrued Interest to the date of sae. Snce the statute says that, at the
opton of the e ecutor, a bond may be vaued as of one year subsequent to the
decedent s death, the natura concuson s that the usua method of vauaton
sha be pursued whchever date s seected. The method aways adopted for
vauaton at death s the same used n f ng a sae prce; that s, to take the
market vaue of the bond and add accrued nterest to the date of transfer, at
the rate stpuated n the Instrument. It s not beeved that Congress, n pro-
vdng for two dates of vauaton, Intended that a dfferent method shoud be
foowed f one date were chosen rather than the other.
If Congress ntended the resut for whch the Government contends, namey,
that a dfferent method of vauaton shoud appy at the end of the 1-year
perod than that appcabe as of the date of death, It woud have been a
smpe matter so to state. That Congress had no such ntenton seems cear
from the report of the ouse managers on the conference commttee report
on the b whch emboded the anguage n queston. There an e ampe Is
gven as to how the cacuaton of vaue shoud be made at the end of the
year. In ths e ampe apprecaton and deprecaton n the vaue of bonds,
stocks, and other assets, durng the year, are shown but dvdends or nterest
receved are not Incuded.
s has been sad, the vew we take comports wth standard busness prac-
tce; whereas the theory advocated by the Government Invoves the attrbuton
to nterest payments of a quaty derved from a refned separaton of so-caed
rghts nherent n the ownershp of ncome-producng property. Concedng that
the ownershp of a bond nvoves both the rght to receve prncpa and the
rght to receve ncome, t s a hghy artfca concept that an nterest payment
s a dsposton, pro tanto, of the atter rght by the owner of the obgaton.
Moreover, whe the Consttuton does not forbd doube ta aton, the Intent
to Impose It upon a gven recept s not presumed. We thnk that, f t had
been ntended, Congress unequvocay woud have so decared.
udgments reversed.
Mr. ustce ack and Mr. ustce Dougas are of the vew that ths queston
of statutory constructon s pecuary approprate for admnstratve nter-
pretaton (see Pau, Studes n Federa Ta aton (3d seres), pages 23- 2.r )
and accordngy that the udgments n these cases shoud be affrmed for the
reasons stated n the opnon of the court beow In No. 27 , Saks v. gons
(111 Fed. (2d), 78).
. ept. 1885, Seventy-fourth Congress, frst sesson, pages 10-11 C. . 1039-1 (Tart
2), 660 .
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Regs. 79 (1933), rt. 10.
38
GIFT T .
INT RN L R NU COD .
Reguatons 79 (1936), btce 2: Transfers 19 1-10-10632
reached. T. D. 50 1
TITL 2ft INT RN L R NU . C rT R I, SU C PT R , P RT 85.
GIFT T .
rtce 2, Reguatons 79 (1936 edton), amended. Gfts of ob-
gatons of the Unted States by nonresdent aens not engaged n
busness n the Unted States.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 2 of Reguatons 79,1936 edton secton 85.2, Tte 26, Code
of Federa Reguatons as made appcabe to the Interna Revenue
Code by Treasury Decson 885, approved February 11, 1939 C. .
1939-1 (Part 1), 396 Chapter I, note, of such Tte 26,1939 Sup. , s
hereby amended by strkng out the fourth sentence thereof readng
as foows:
gft of a bond, note, or certfcate of Indebtedness Issued by the Federa Govern-
ment, f made by a nonresdent aen, not engaged n busness n the Unted States,
s not sub|ect to the ta .
and substtutng n eu thereof the foowng:
owever, a gft of a bond, note, or certfcate of Indebtedness Issued by the
Federa Government pror to March 1, 19 1, f made by a nonresdent aen, not
engaged n busness n the Unted States, s not sub|ect to the ta ; but a gft
by any such nonresdent aen of an obgaton of the Federa Government ssued
on or after March 1, 19 1, s sub|ect to the ta .
(Ths Treasury decson s ssued under the authorty contaned n
the foowng sectons of aw: Sectons 1000, 1029, and 3791 of the
Interna Revenue Code (53 Stat, 1 , 157, 67 (26 U. S. C, Sup. ,
1000, 1029, 3791)).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved March 1, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 3, 19 1, 3.52 p. m.)
TITL III. GIFT T . (1932)
S CTION 50 (b). N T GIFTS.
Reguatons 79 (1933), rtce 10: Tota 19 1-11-106 1
amount of gfts. Ct. D. 1 93
GIFT T R NU CT OF 1032 decson of supreme court.
1. Gfts n Trust Separate empton fob ach enefcary.
The donor of property In trust for the beneft of desgnated
benefcares s entted to a separate e empton of 5,000 for each
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39
Regs. 79 (1933), rt. 10.
benefcary, under the provsons of secton 50 (b) of te Revenue
ct of 1932 and artce 11 of Reguatons 79 (1933 ed.).
2. Decsons ffrmed.
Decson of the Unted States Crcut Court of ppeas, Ffth
Crcut (19 0) (111 Fed. (d), 229), reversng decson of the
Unted States oard of Ta ppeas (1939) ( 0 . T. ., 27),
affrmed.
Supreme Court of the Unted States.
Ouy T. everng, Commssoner of Interna Revenue, pettoner, v. Mary M.
utchng .
61 S. Ct., 653.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Ffth Crcut
March 3, 19 1.
OPINION.
Mr. ustce Stone devered the opnon of the Court
The petton for certorar presents the snge queston whether under sec-
ton 50 (b) of the Revenue ct of 1932 ( 7 Stat., 169, 2 7), the donor of
property n trust for the beneft of numerous benefcares s entted to a
snge gft ta e empton or e cuson to the e tent of the frst 5,000 or to
separate e emptons of 5,000 for each benefcary.
Sectons 501(a), 502(1) mpose for each caendar year a ta on the net
amount of the transfers by any ndvdua of property by gft.
y secton 501(b) the ta appes whether the transfer s n trust or other-
wse and whether the gft s drect or ndrect. In the computaton of
the ta ad upon net gfts made durng the caendar year, secton 50 (b)
provdes In the case of gfts (other than of future nterests n property)
made to any person by the donor durng the caendar year the frst 5,000 of
such gfts sha not be ncuded n the tota amount of gfts
made durng such year. nd secton 1111, defnng generay terms used through-
out the Revenue ct, provdes: (a) When used n ths ct (1) The term
person means an ndvdua, a trust or estate, a partnershp, or a corporaton.
t)n December 30, 1935, the ta payer e ecuted a trust ndenture by whch
she transferred, n trust, propery of a vaue of appro matey . 1 5,000 for
a term endng n 1957, uness sooner termnated by the trustees, for the beneft
of her seven chdren, wth gfts over of the share of each chd n event of
the death of that chd before the e praton of the trust. The ta payer n
her gft ta return for 1935 e cuded from the ta abe amount of her gfts
the sum of 5,000 for each chd or a tota of 35,000. The Commssoner
aowed ony a snge deducton of 5,000 n eu of the seven 5,000 deductons
camed by the ta payer and assessed a defcency accordngy. The oard of
Ta ppeas, treatng the trust as the donee rather than the ndvdua bene-
fcares, sustaned the Commssoner s assessment. The Court of ppeas for
the Ffth Crcut reversed. (I Fed. (2d), 229.) We granted certorar Octo-
ber 28, 19 0, to resove a confct of the decson beow and of ke decsons n
other crcuts. (Wech v. Davdson, 102 Fed. (2d), 100 (Frst Crcut) ; Rhen-
strom v. Commssoner, 105 Fed. (2d), 6 2 ( ghth Crcut) ; Mc rer v. Cotn-
mssoner, 108 Fed. (2d). 907 (Thrd Crcut); and n the Court of Cams,
Pezer v. Unted States, 31 Fed. Supp., 770, wth that of the Seventh Crcut
n Ryerson v. Unted States. 11 Fed. (2d), 150.)
It s not doubted that separate gfts, other than of future nterests, made
drecty to the donees wthout the Interventon of a trustee entte the donor
under secton 50 (b), to one 5,000 e cuson for each gft. ut the Govern-
ment argues that here the trustee or the trust s the donee and as there was
ony a snge trust there can be ony a snge statutory deducton from the
tota amount of the gfts. s the statute aows one deducton of the frst 5,000
for each gft made to any person by the donor, the queston for decson
s whether n ths case of a gft n trust for the beneft of the desgnated
benefcares ,the snge trust, or each benefcary, s the person to whom
the gft was made and for whch the deducton s aowed.
The statutory, defnton of person n secton 1111(a)(1) Is of tte ad
n answerng ths queston. The defnton s made generay appcabe to
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Regs. 79 (1933), rt. 10. 0
a of the sectons of the Revenue ct and was carred forward from earer
cts whch contaned no gft ta provsons. (See secton 2(a)(1) of the
1926 Revenue ct, Stat., 9; secton 701(a)(1) of the 1928 Revenue ct,
5 Stat., 878.) The secton means no more than that the word person In
any secton of the ct n whch t occurs may be taken as meanng trust
rather than ndvdua as the conte t may requre. ut secton 50 (b),
aowng the deducton n the case of each gft to any person when apped
to gfts n trust for desgnated benefcares, may be read as referrng ether
to a gft to the trust or a gft to each ndvdua benefcary. ence we must
read the secton n ts settng of the gft ta provsons and n the ght of Its
egsatve hstory, to determne whether, wthn ts meanng, the trust or each
Indvdua benefcary s the donee to whom the gft s made.
The gft ta provsons are not concerned wth mere transfers of ega tte
to the trustee wthout surrender by the donor of the economc benefts of
ownershp and hs contro over them. gft to a trustee reservng to the
donor the economc beneft of the trust or the power of ts dsposton, n-
voves no ta abe gft. It s ony upon the surrender by the donor of the
beneft or power reserved to hmsef that a ta abe gft occurs (Sanford
state v. Commssoner, 308 U. S., 39 Ct. D. 1 26, C. . 1939-2, 3 0 ; Rasqun
v. umphreys, 308 U. S., 5 Ct. D. 1 25, C. . 1939-2, 339 ), and t woud seem
to foow that the benefcary of the trust to whose beneft the surrender
nures, whether made at the tme the trust s created or ater, s the person
or ndvdua to whom the gft s made.
ut for present purposes t s of more Importance that n common under-
standng and n the common use of anguage a gft s made to hm upon
whom the donor bestows the beneft of hs donaton. One does not speak of
makng a gft to a trust rather than to hs chdren who are ts benefcares.
The reports of the commttees of Congress used words n ther natura sense
and n the sense n whch we must take t they were ntended to be used
n secton 50 (b) when, n dscussng secton 501, they spoke of the benefcary
of a gft upon trust as the person to whom the gft s made. Smary they
spoke of gfts effected by transfer of money or property to another as con-
sderaton for the payment of money or other property to a thrd person as a
gft to the thrd person. ( . Rept. No. 70S, Seventy-second Congress, frst ses-
son, pages 27-28 C. . 1939-1 (Part 2), 57 ; S. Rept. No. 605, Seventy-
second Congress, frst sesson, pages 39- 0 C. . 1939-1 (Part 2), 96 .) It s
of some sgnfcance aso that the dena by secton 50 (b) of the e empton
n the case of gfts of future nterests has tte scope for practca opera-
ton uness the gfts to whch the e empton appes Incude those gfts made
to benefcares of a trust snce t Is by resort to the conveyance n trust that
most future nterests are created.
Moreover, the very purpose of aowng a gft ta e empton measured by
the number of donees, woud be defeated f a dstncton were to be taken
between gfts made drecty to numerous donees and a gft made for ther
beneft by way of a snge trust, and we are unabe to dscern n the statute
or ts egsatve hstory any purpose to make such a dstncton. Whe one
ob|ect -of the e empton was to permt sma ta free gfts, and at the same
tme to f the amount suffcenty arge to cover n most cases weddng and
Chrstmas gfts wthout the necessty of keepng accounts and reportng the
gfts ( ouse Report, supra, 29; Senate Report, supra, 1), nevertheess the
statute e tended the e empton n the specfed amount to a gfts, whether
arge or sma, mnde to any person.
In the face of an e empton thus made broady appcabe to a gfts to a
donees and n the absence of some ndcaton of an ntenton to dscrmnate
between gfts made drecty to the donees and those made Indrecty to the
benefcares of a trust, we can hardy assume a purpose to favor one cass
of donees over the other or fnd such a purpose n the words of the statutory
defnton of person whch may ndcate ether the trust or each ndvdua
benefcary of the trust as the person to whom the gft s made. Further,
such an assumpton woud open the way to avod the . ,000 mtaton upon
the aowed e empton, by resort to the smpe e pedent of the creaton by a
snge donor of any number of trusts of 5,000 each for the beneft of a snge
benefcary.1 constructon so dependent upon an artfca meanng of the
1 It wns ths constructon of the statute by the oard of Ta ppeas and by severa
of the Federa courts whch ed to the amendment of secton 501(b) bo as to wthdraw
the e empt on n the case of every gft n trust. (Sec secton r 0f of the 1938 ct, 52 Stat.,
7. S. ept. No. 10 7, Seventy-ffth Congress, thrd sesson, page 1 C. . 19:; -1
(Part 2), 770 .)
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Regs. 79 (1933), rt. 11.
words of the statute and so out of harmony wth the statutory scheme and
purpose s not to he favored.
rtce 11 of Treasury ernatons 79 (1933 edton), ssued under the 1932
ct treats each gft to the benefcary of a trust as entted to the beneft of
the 5,000 deducton uness the gft Is of a future nterest whch secton
50 (b) e cepts from the e empton otherwse aowed. Such we thnk s
the correct constructon of the statute.
It s unnecessary to consder here the queston whether a gft upon trust
for Impersona, pubc or chartabe purposes where there are no desgnated
or ascertanabe frst benefcares s a gft to the trust entted to a snge
5,000 deducton. (See everng v. utrhngs, 111 Fed. (2d), 229, 231.) Nor
do we consder whether the gfts to the benefcares here are of future nterests
whch are e cepted from the beneft of the 5,000 deducton aowed by secton
50 (b). That queston s not presented by the petton for certorar. ut our
udgment w be wthout pre|udce to consderaton of that queston by the
oard of Ta ppeas upon the remand to t f, under the rues and procedure
governng proceedngs before the oard, the Commssoner s free to present
the queston there.
ffrmed.
Reguatons 79 (1933), rtce 11: Future 19 1-11-106 2
nterests n property. Ct. D. 1 95
GIFT T R NU CT OF 1932 D CISION OF SUPR M COURT.
1. Gfts n Trust Future Interests n Property.
Gfts made In trust for the beneft of the donor s then vng
grandchdren and any grandchdren thereafter born durng the
term of the trust, wth drectons to the trustee to accumuate
the trust ncome for 10 years and then to pay the dstrbutve share
of ncome to each then vng grandchd upon reachng 21 years
of age, and wth further drectons for termna on of the trust
21 years after the death of the ast survvor of the named grand-
chdren, were gfts of future nterests n property wthn the
meanng of secton 50 (b) of the Revenue ct of 1932 and artce
11 of Reguatons 79, and are e cuded from the benefts of that
secton.
2. Decson Reversed.
Decson of the Court of Cams (19 0) (31 Fed. Supp., 770)
reversed.
Supreme Court of the Unted States.
The Unted States, pettoner, v. rthur Pezer.
61 S. Ct., 659.
On wrt of certorar to the Court of Cams.
March 3, 19 1. .
OPINION.
Mr. ustce Stone devered the opnon of the Court.
Decson n ths case turns on the queston whether certan gfts of property
n trust for the beneft of severa benefcares are gfts of future nterests
whch, n the omputaton of the gft ta , are, by secton 50 (b) of the 1932
Revenue ct ( 7 Stat., 169, 2 7), dened the beneft, otherwse aowed, of
e cuson from the computaton to the e tent of the frst 5,000 of each gft
made to any person by the donor durng the caendar year.
Sectons 501(a) and 502(1) of the 1932 ct mpose for each caendar year
a ta upon the net amount of transfers by any ndvdua of prop-
erty by gft. For the purpose of computng the ta secton 50 (b) provdes
In the case of gfts (other than of future nterests n property) made to
any person by the donor durng the caendar year, the frst 5,000 of such
gfts sha not be ncuded n the tota amount of gfts
made durng such year.
0 3 1 1 15
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Regs. 79 (1933), rt. 11.) 2
In 1932 the ta payer, respondent here, created a trust for the beneft of hs
eght grandchdren and any other grandchdren who mght afterward be
born durng the term of the trust. The trustee was drected to accumuate
the ncome for a perod of 10 years and thereafter to pay an equa grand-
chd s dstrbutve share of the ncome to each of the named grandchdren
who were then vng and 21 years of age and to pay a ke share of ncome
to each other named grandchd for fe after that chd shoud reach the age
of 21 years. Provson was made whereby grandchdren born after the creaton
of the trust and durng ts fe were to receve ke partcpaton n the
ncome of the trust e cept as to dstrbutons of ncome made pror to the brth
of such after-born grandchdren, and e cept that the after-born grandchdren
shoud be pad ther shares of the ncome durng ther respectve mnortes
after the termnaton of the 10-year accumuaton perod. The trust nstrument
aso made gfts over of the share of the ncome of each grandchd at death,
the detas of whch are not now matera. It was further provded that the
trust shoud termnate 21 years after death of the ast survvor of the named
grandchdren, when the corpus of the trust, wth accumuated ncome, was to
be dstrbuted n equa shares among the survvng grandchdren and the
ssue per strpes of a deceased grandchdren.
Durng the years 1933, 193 , and 1935, the ta payer added further amounts of
property to the 1932 trust. In 193 he aso made gfts drecty to hs three grand-
daughters and created a trust to pay the ncome n equa shares to hs wfe
and three daughters wth gfts over of each share of the corpus of the trust upon
the death of the fe tenant.
T pon cams for refunds of overpad ta es upon the transfers made n the years
1933. 193 , and 1935, the Commssoner recomputed the ta and aowed one 5,000
e cuson ony from the net amounts sub|ect to gft ta gven or added n each year
to each trust. In the present sut, brought n the Court of Cams, respondent
sought to recover overpad ta es for the years n queston on the grounds that the
gfts to the benefcares were gfts of present not future nterests and that the ta -
payer n the computaton of the ta for each year was entted to one e cuson of
5,000 for each benefcary. The court sustaned both contentons and gave |udg-
ment for respondent accordngy. (31 Fed. Supp., 770.) We granted certorar
October 21, 19 0, to resove the confct of the decson beow wth that of the
Seventh Crcut n Ryerson v. Unted States (11 Fed. (2d), 150).
The Government chaenges both grounds of decson beow. It argues that
ony a snge 5,000 e cuson s aowabe under secton 50 (b) from the tota
gfts made to the trust n each caendar year and that f the gfts are deemed to
be made to the named benefcares of the trust no deducton can be aowed n the
case of gfts to the 1932 trust because they were of future nterests for whch
no e cuson s aowed by secton 50 (b).
We have ths day decded the frst queston, n No. 19, Uererng v. utchngs
Ct. D. 1 93, page 38, ths uetn , n whch we hed that n the case of gfts n
trust the benefcares are the persons to whom the gfts are made and that for
purposes of computaton of the ta secton 50 (b) e cudes the frst 5,000 n
vaue of the gft to each benefcary from the ta abe amount of the gfts.made n
the caendar year. For the reasons stated n our opnon n that case we hod
that the frst benefcares of the trusts n ths case are the persons to whom
the gfts were made and that the ta payer s entted to the beneft of the 5,000
e cuson for each gft to such benefcary f t s not of a future nterest.
ut the Government argues here, as t dd beow, that the gfts to the benefcares
of the 1932 trust are of future nterests wthn the meanng of the statute and
Treasury reguatons. Whe the eght named grandchdren are the frst bene-
fcares of the trust, and the persons to whom the gfts were made, none of them
takes any beneft from the trust before the end of the 10-year accumuaton perod
or unt he s 21, whchever ast occurs, and then ony f he survves that event. nd
the queston s whether such a gft s a gft of a future nterest wthn the mean-
ng of secton 50 (h). Respondent, reyng on statutes and udca decsons
of abama, where the trust was created and s beng admnstered, nssts that the
gfts to the named grandchdren are present not future nterests as defned by
abama aw. e argues that as secton 50 (b) does not defne the future
nterests gfts of whch are e cuded from Its benefts, they must be taken to be
future nterests as defned by the oca aw, and t s the oca aw defnton of
future nterests whch must be adopted n appyng the secton. ut as we have
often had occason to pont out, the revenue aws are to be construed n the ght of
ther genera purpose to estabsh a Naton-wde scheme of ta aton unform n ts
appcaton. ence ther provsons are not to be taken as sub|ect to State contro
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Regs. 79 (1933), rt. 11.
or mtaton uness the anguage or necessary Impcaton of the secton nvoved
makes ts appcaton dependent on State aw. urnet v. Uarme, 287 U. S., 103,
110; Morgan v. Commssoner, 309 U. S., 78, 81.)
We fnd no such mpcaton n the e cuson of gfts of future nterests from
the benefts gven by secton 00 (b). In the absence of any statutory defnton of
the phrase we ook to the purpose of the statute to ascertan what s ntended.
It pany s not concerned wth the varyng oca defntons of property nterests
or wth the oca refnements of conveyancng, and there s no reason for supposng
that the e tent of the granted ta e empton was ntended to be gven a corre-
spondng varaton. Its purpose was rather the protecton of the revenue and the
approprate admnstraton of the ta mmunty provded by the statute. It s
ths purpose whch marks the boundares of the statutory command. The com-
mttee reports recommendng the egsaton decared ( . Rept. No. 708. Seventy-
second Congress, frst sesson, page 29 C. . 1939-1 (Part 2), 57 ; S. Rept.
No. 665, Seventy-second Congress, frst sesson, page 1 C. . 1939-1 (Part
2), 98 ):
The term future nterests n property refers to any nterest or estate,
whether vested or contngent, mted to commence n possesson or en|oyment
at a future date. The e empton beng avaabe ony n so far as the donees
are ascertanabe, the dena of the e empton n the case of gfts of future n-
terests s dctated by the apprehended dffcuty, n many nstances, of determn-
ng the number of eventua donees and the vaues of ther respectve gfts.
rtce 11 of Treasury Reguatons 79, 1933 and 1936 edtons, nterpretng
secton 50 (b), decared that future nterests ncude any nterest or estate
whether vested or contngent, mted to commence n use, possesson, or
en|oyment at some future date or tme. Ths defnton stands unchanged n
the reguatons and whe secton 50 (b) was amended by secton 505 of the
1938 Revenue ct so as to wthdraw the beneft of the 5,000 e cuson from
a gfts n trust the secton as amended contnues to wthhod the beneft of
the e cuson from a gfts of future Interests n property.
We thnk that the reguatons, so far as they are appcabe to the present
gfts, are wthn the competence of the Treasury n nterpretng secton 50 (b)
and effect ts purpose as decared by the reports of the Congressona commt-
tees, and that the gfts to the eght benefcares of the 1932 trust were gfts of
future nterests whch are e cuded from the benefts of that secton. ere
the benefcares had no rght to the present en|oyment of the corpus or of the
ncome and uness they survve the 10-year perod they w never receve any
part of ether. The use, possesson, or en|oyment of each donee s thus post-
poned to the happenng of a future uncertan event. The gft thus nvoved
the dffcutes of determnng the number of eventua donees and the vaue
of ther respectve gfts whch t was the purpose of the statute to avod.
We have no occason to consder the defnton of future nterests n other
aspects than those presented by the present case. The |udgment of the court of
appeas w be reversed so far ony as t e cuded the gfts to the 1932 trust
from the computaton of the ta for each of the years n queston.
gft ta revenue act op 1932 decson op supreme court.
1. Guts n Trust Future Interests n Property.
Gfts of trust ncome to a fe tenant wth remander over to re-
mandermen for fe condtoned upon survvorshp, gfts of a sep-
arate equa share of corpus to each of two trustees n the event of
ther |out requests that the trust be termnated, and gfts of corpus
to descendants of deceased son of the grantor condtoned upon sur-
vvorshp, are gfts of future nterests wthn the meanng of sec-
ton 50 (b) of the Revenue ct of 1932 and artce 11 of Regu-
atons 79, nnd are e cuded from the benefts of that secton.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (19 0) (11 Fed. (2d), 150), affrmed.
Reversed.
eot|t|vtons 79 (1933), rtce 11: Future
nterests n property.
19 1-11-106 3
C. D.1 96
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Regs. 79 (1933), rt. 11.

Supreme Court of the Unted States.
oseph Ryerson and dward L. Ryerson, r., as ecutors of the state of
Mary M. Ryerson, pettoners, v. The Unted States of merca.
61 S. Ct, 656.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
March 3, 19 1.
OPINION.
Mr. ustce Stone devered the opnon of the Court.
Ths s a companon case to No. 19, everng v utchngs Ct. D. 1 93,
page 38, ths uetn , and No. 393, Unted States v. Pezer Ct. D. 1 95,
page 1, ths uetn , decded ths day, and t presents the questons decded n
those cases.
The soe queston rased by the petton for certorar s whether, under
secton 50 (b) of the Revenue ct of 1932 ( 7 Stat., 169, 2 7), the donor of
property n trust for numerous benefcares s entted to a snge gft ta
e empton or e cuson to the e tent of the frst 5,000 of the gft or to
separate e emptons of 5,000 for each benefcary. The Government nssts
that If that queston be decded aganst t, t s nevertheess entted to retan the
|udgment beow n ts favor because the gfts to the benefcares were of
future nterests whch, by secton 50 (b), are dened the beneft of the e cuson
otherwse aowed by the secton.
In 193 pettoners testatr transferred two snge premum nsurance poces
on her own fe maturng at a future date, as addtons to two separate trusts,
one created n 1933, the other estabshed n 193 but before the transfer. The
nstrument creatng the frst trust provded that the trustees shoud pay
over one-fourth of the net ncome to Mary Ryor.son Frost, one of the trustees,
for fe, wth remander over for fe to her two daughters f survvng at her
death, wth further remanders over to ther ssue per strpc . The trust
nstrument drected that the remanng three-fourths of the ncome shoud
be accumuated and added to the prncpa of the trust. It provded that the
trust was to termnate upon the death of the ast survvor of three persons,
the frst fe tenant and her two daughters, and was then to be dstrbuted,
the partcuar dstrbuton beng dependent upon contngences whch are not
now matera. The trust nstrument aso contaned numerous provsons for
the termnaton of the trust by |ont acton of the trustees, Donad Mc ay
Frost and Mary Ryerson Frost, who was aso fe tenant, or by the survvor
of ether of them n the case of the death or menta ncapacty of ether.
Other provsons were made for the termnaton of the trust and dstrbuton
of the trust property n the event of the death or menta ncapacty of both,
wthout havng e ercsed ther power of termnaton.
The nstrument creatng the 193 trust provded that upon the death of the
grantor, who was the nsured, who was vng at the tme of the transfer, the
trustees shoud dstrbute the proceeds of the nsurance as foows: If the
wdow of the grantor s son survved the grantor the Income of one-thrd of
the proceeds of the nsurance pocy was to be pad to the son s wdow for
fe wth remanders over to those persons who woud be hers at aw of the
son had he ded at the same tme as the fe tenant. The remanng two-thrds
of the proceeds or a f the son s wdow dd not survve the grantor, were
to go to the descendants of the grantor s son then survvng, wth gfts over
n defaut of such descendants.
In a sut brought by pettoner to recover overpad gft ta es for the year
193 the dstrct court rued that n the computaton of the ta the ta payer
was entted to two e cusons to the e tent of 5,000 each for the gfts made
to Mary Ryerson Frost and Donad Mc ay Frost under the 1933 trust and to
three e cusons under the 193 trust, one for the son s wdow and two for
hs two vng descendants. The Court of ppeas for the Seventh Crcut
reversed (11 Fed. (2d), 150), hodng that the two trusts were the donees
and that a snge e cuson was aowabe for each trust. We granted cer-
torar November 12. 19 0, to resove the confct between the decson beow
and that of the crcut courts of appeas n the Pezer case and the utchngs
case.
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Regs. 79 (1933). rt. 19.
For the reasons stated n our opnon n the utchngs case we hod that
the benefcares of the two trusts were the persons to whom the gfts were
made and that the gfts to them and not to the trusts, as the courts beow
hed, were entted to the beneft of the e cuson aowed by secton 50 (b)
provded the gfts were not of future nterests to whch the secton denes
the beneft of the e cuson.
s the Government has not sought certorar t can not attack the |udgment
beow, but It Is free to sustan t upon any ega ground whch w support t.
LeTue v. ScofcM, 308 U. S., 15, 21, 22.) ven though the udgment beow
was rested upon the erroneous ground that the trusts were persons to whom
the gfts were made wthn the meanng of secton 50 (b), the Government
may ustfy the |udgment here on the ground that pettoners are not entted
to the e cusons camed so far as the gfts were of future nterests.
The gfts of a separate equa share of the corpus of the 1933 trust to each
of the two trustees n the event of ther |ont request that the trust be term-
nated was a gft upon a contngency whch mght never happen. For the rea-
sons stated n our opnon n the Pezer case those gfts were of future nterests
wthn the meanng of secton 50 (b) and consequenty were not entted to
the beneft of the e cuson. Whe a present power of dsposton for one s
own beneft s the equvaent of ownershp (see Curry v. McCandcss. 307 U. S.,
357, 370, et seq., and cases cted), here the |ont power was not for the |ont
beneft of the donees of the power. Its e ercse coud ony opernte for the
beneft of each to the e tent of one-hnf of the trust property and then ony
n the event that both agreed to unte In ts e ercse. In any case use and
en|oyment of any part of the trust fund by ether was postponed unt such
tme as both |oned n the e ercse of the power. The Interests granted to the
trustees upon ther termnaton of the trust shoud therefore have been ncuded
to ther fu e tent n the computaton of the gft ta because they were future
nterests wthn the meanng of secton 50 (b) and artce 11, Treasury Regu-
atons 79. s the pettoners have been aowed one e cuson by the |udg-
ment beow whch s not attacked here It s unnecessary to consder whether
the fe nterest n the ncome gven to Mary Ryerson Frost s a present or
future nterest wthn the meanng of secton 50 (h).
For ke reasons we concude that the gfts to the benefcares of the 193
trust were of future nterests and that the pettoners are entted to no e cu-
son wth respect to them. The gft of ncome to the fe tenant was contngent
upon her survvorshp of the grantor nt a future date. The gfts of the prn-
cpa amount of the proceeds of the pocy to descendants of the deceased son
of the grantor were n part contngent upon ther survvorshp of the son s
wdow and her survvorshp of the grantor or, f she dd not survve hm, then
the gfts of the entre prncpa were contngent upon survvorshp of the
descendants at the grantor s death. Thus a those who mght become entted
to the use and en|oyment of the trust, prncpa and Income, were ascertanabe
ony upon the happenng of one or more uncertan future events, survvorshp
of one or more persons at the death of the donor, and so they were donees
of gfts of future nterests wthn the meanng of secton 50 (b) and the
Treasury reguatons. Consequenty pettoners are not entted to the snge
e cuson whch the court beow aowed. Rut because the Government has
sought no cross-petton attackng the udgment beow, It must be affrmed.
S CTION 506. GIFTS M D IN PROP RTY.
Reguatons 79 (1933), rtce 19: auaton of 19 1-7-10599
property. Ct. D. 1 87
GIFT T R NU CT OP 1032 D CISION O SUPR M COURT.
1. Snge Premum Lfe Insurance Poces aue at Date of
Gft ppcabty of Rkgcatonb.
The vaue at the date of the gft of snge premum fe nsur-
ance poces whch were rrevocaby assgned smutaneousy wth
ssuance, n 193 , s cost to the donor rather than cash surrender
vaue, under the provsons of secton 500 of the Revenue ct of 1932.
rtce 2(5), Reguatons 79, n effect at the tme of the gft, s not
appcabe to snge premum poces.
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Regs. 79 (1933), rt. 19.
6
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (19 0) (110 Fed. (2d), 371), affrmed.
Supreme Court of the Unted States.
Forence Guggenhem, pettoner, v. Martha . Rasqun, dmnstratr of the
state of mon . Rasqun, Deceased.
312 U. S., 25 .
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
February 3, 19 1.
OPINION.
Mr. ustce Dougas devered the opnon of the Court
It Is provded n the Revenue ct of 1932 ( 7 Stat., 169, 2 8) that for gft ta
purposes the amount of a gft of property sha be the vaue thereof at the date
of the gft. (Secton 506.) Ths controversy nvoves the queston of whether
such vaue n case of snge premum fe nsurance poces, whch are rrevo-
caby assgned smutaneousy wth ssuance, s cost to the donor or cash sur-
render vaue of the poces. The case s here on a petton for certorar whch
we granted because of a confct among the crcut courts of appeas1 as respects
the proper method for vauaton of such gfts made pror to 1936.
In December, 193 , pettoner purchased, at a cost of 852, 38.50, snge premum
fe nsurance poces on her own fe n the aggregate face amount of 1,000,000.
t substantay the same tme she assgned them rrevocaby to three of her
chdren. er gft ta return sted the poces at ther asserted cash surrender
vaue of 717,3 .81. The Commssoner determned that the vaue of the
poces was ther cost and assessed a defcency whch pettoner pad. Ths s a
sut for a refund. udgment for pettoner n the dstrct court was reversed by
the crcut court of appeas. (110 Fed. (2d), 371.)
We agree wth the crcut court of appeas that cost rather than cash surrender
vaue s the proper crteron for vauaton of such gfts under secton 506 of
the ct
Cash surrender vaue s the reserve ess a surrender charge. nd In case of
a snge premum pocy the reserve s the face amount of the contract dscounted
at a specfed rate of nterest on the bass of the nsured s e pected fe. If the
pocy s surrendered, the company w pay the cash surrender vaue. It s
asserted that the market for nsurance contracts s usuay the ssung companes
or the banks who w end money on them; that banks w not oan more than
the cash surrender vaue; and that f poces had an actua reazabe vaue n
e cess of ther cash surrender vaue, there woud arse a busness of purchasng
such poces from those who otherwse woud surrender them. From these facts
t s urged that cash surrender vaue represents the amount whch woud be
actuay obtaned for the poces n a wng buyer-wng seer market the
test suggested by Treasury Reguatons 79, artce 19(1), promugated October 30,
1033.
That anayss, however, overooks the nature of the property nterest whch s
beng vaued. Surrender of a pocy represents ony one of the rghts of the
nsured or benefkarv. Pany that rght s one of the substanta ega ncdents
of ownershp. (See Chase Natona ank v. Unted States, 278 U. S.. 327, 335
Ct. D. 0, C. . III-1, 308 (1929) ; ance on Insurance (2d ed.), 5 -56.) ut
In confct wth the decson heow are Commssoner v. anes (10 Fed. (2d), 85
(C. C. . 3)) -. cerng v. Cronn (106 Fed. (2d). 907 (C. C. . 8)) ; Unted States v.
Rr on (11 Fed. (2d). 1.10 (C. C. . 7)), dscussed n Pau, Studes n Federa Ta aton
(3d seres), pages 0. 1 et acq.
rtce 19(9), Treasury Reguatons 79, promugated February 20, 1938, provdes that
repacement cost at the date of the gft s the measure of vaue of a snge premum fe
Insurance pocy.
The Government asserts that none of the poces had a cash surrender vaue pror to
the e praton of one year. In vew of our dsposton of the case we do not stop to
decde whether, n vew of the peadngs and the stpuaton, that poston can be
mantaned here.
rtce 19(1) provded: The vaue of property s the prce at whch such
property woud change hands between a wng buyer and a wng seer, nether beng
under any compuson to buy or to se. Where the property s sod wthn a reasonabe
perod after the date of the gft, and t s shown that the seng prce refects the far
market vaue thereof as of the date of the gft, the seng prce w be accepted as the
amount of the gft. reevant facts and eements of vaue shoud be consdered n
every case.
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Regs. 79(1933), rt. 19.
the owner of a fuy pad fe Insurance pocy has more than the mere rght to
surrender t; he has the rght to retan t for ts nvestment vrtues and to receve
the face amount of the pocy upon the nsured s death. That these atter rghts
are deemed by purchasers of nsurance to have substanta vaue s cear from
the dfference between the cost of a snge premum pocy and ts mmedate or
eary cash surrender vaue n the nstant case over 13r),000. of the economc
benefts of a pocy must be taken nto consderaton n determnng ts vaue for
gft ta purposes. To snge out one and to dsregard the others s n effect to
substtute a dfferent property nterest for the one whch was the sub|ect of the
gft. In ths stuaton as n others (Susquehanna Power Co. v. State Ta Com-
msson, 283 U. S., 291, 296) an mportant eement n the vaue of the property
Is the use to whch t may be put. Certany the pettoner here dd not e pend
852, 38.50 to make an mmedate gft mted to 717,3 .81. Presumptvey the
vaue of these poces at the date of the gft was the amount whch the nsured
had e pended to acqure them. Cost s cogent evdence of vaue. nd here t s
the ony suggested crteron whch refects the vaue to the owner of the entre
bunde of rghts n a snge premum pocy the rght to retan t as we as the
rght to surrender t. Cost n ths stuaton s not market prce n the norma
sense of the term. ut the absence of market prce s no barrer to vauaton.
(Lucas v. e ander, 279 U. S., 573, 579 Ct. D. 76, C. . III-2, 273 (1929) .)
Pettoner, however, argues that cash surrender vaue was made the measure of
vaue by artce 2(5), Treasury Reguatons 79, promugated October 30, 1933,
whch provded that the rrevocabe assgnment of a fe nsurance pocy
consttutes a gft n the amount of the net cash surrender vaue, f any,
pus the prepad nsurance ad|usted to the date of the gft. The argument s
that under ths reguaton the reserve n case of a snge premum pocy covers
the prepad nsurance and represents the entre vaue of the pocy. The regua-
ton s somewhat ambguous. ut n our vew t apped ony to poces upon
whch current premums were st beng pad at the date of the gft, not to snge
premum poces. ccordngy, the probem here nvoves an nterpretaton of
the meanng of vaue n secton 506 unaded by an nterpretatve reguaton.
ffrmed.
Reguatons 79 (19S3), rtce 19: auaton of 19 1-7-1OGO0
property. Ct. D. 1 88
GIFT T R NU CT OF 1932 D CISION OF SDPR M COUUT.
1. Snge Premum Lfe Insurance Poces aue at Date of
Gft.
The vaue, for gft ta purposes, of snge premum fe nsur-
ance poces taken out by the nsured n 1928 and 1929, and assgned
as gfts n 193 , s the cost of repacement of the poces at the dates
of the gfts. The eapse of tme between ssuance and assgn-
ment of the poces does not |ustfy the substtuton of cash sur-
render vaue for repacement cost as the crteron of vaue.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (19 0) (11 Fed. (2d), 150), reversed.
Supreme Court of the Unted States.
The Unted States of merca, pettoner, v. oseph T. Rycrsnn and dward h.
Rycrson, r., as ecutors of the state of Mary If. Ryerson.
312 U. S., 200.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut
February 3, 19 1.
OPINION.
Mr. ustce Dougas devered the opnon of the Court
The queston here s the snme as that n Guggenhem v. Rnsqun, No. 92 Ct. D.
1 87, page 5, ths uetn decded ths day. Consequenty the decson of the
1 In ths connecton It shoud be noted that artce 19(1), supra, note , dd not estabsh
market prce as the soe crteron of vaue.
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Regs. 79 (1933), rt. 19. 8
crcut court of appeas hodng that cash surrender vaue on the dates of the
gfts was the proper method of vaung snge premum fe nsurance poces for
gft ta purposes (11 Fed. (2d), 150) must be reversed, uness the eapse of
tme between the ssuance of the poces and the makng of the gfts cas for a
dfferent resut. The snge premum poces here nvoved were taken out by the
nsured n 1928 and 1929. They were assgned as gfts n December, 193 , when
the nsured was 79 years od. The cost of the poces was ess than ther cash
surrender vaue at the dates of the gfts. ut the cost of repacng the poces
at the then age of the nsured woud have been n e cess of ther cash surrender
vaue. We thnk that such cost of repacement, as hed by the dstrct court,
s the best avaabe crteron of the vaue of the poces for the purposes of
the gft ta . The eapse of tme between ssuance and assgnment of the poces
does not |ustfy the substtuton of cash surrender vaue for repacement cost as
the crteron of vaue. We can not assume wth respondents that at the dates
of the gfts the poces presumaby had no Insurance, as dstngushed from n-
vestment vaue to the donor. ere, as n the case where the ssuance of the
poces and ther assgnment as gfts are smutaneous, cash surrender vaue
refects ony a part of the vaue of the contracts. The cost of dupcatng the
poces at the dates of the gfts Is n absence of more cogent evdence the one
crteron whch refects both ther Insurance and nvestment vaue to the owner
at that tme. (Cf. ance on Insurance (2d ed.), 332-333; Speer v. Phoen
Mutua Lfe Ins. Co., 36 un., 322.) The fact that the then condton of an
nsured s heath mght make hm unnsurabe emphaszes the concuson that the
use of that crteron w resut n pacng a mnmum vaue upon such a gft.
Reversed.
Reguatons 79 (1933), rtce 19: auaton of 19 1-7-10601
property. Ct. D. 1 89
GIFT T R NU CT OF 1932 D CISION OF SUPR M COURT.
1. Snge Premum Lfe Insurance Poces aue at Date or
Gft ueston of Law.
The vaue, for gft ta purposes, of snge premum fe Insur-
ance poces, purchased and rrevocaby assgned as gfts n 1935,
s the cost of dupcatng them at the dates of the gfts rather than
the cash surrender vaue. The queston of what crteron shoud be
empoyed for determnng the vaue of the gfts s a queston of aw,
and the court beow was |ustfed n substtutng ts |udgment of
vaue for that of the oard.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Frst
Crcut (19 0) (115 Fed. (2d), 209), reversng unreported decson
of the Unted States oard of Ta ppeas, affrmed.
Supreme Court of the Unteh States .
Madeene D. Powers, pettoner, v. Commssoner of Interna Revenue.
312 U. S., 259.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Frst Crcut.
February 3, 19 1.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
The ssue In ths case s the same as that n Guggenhem v. Rasqun, No. 92
Ct. D. 1 87, page 5, ths uetn , decded ths dy. Pettoner n November
and December, 193 ), purchased snge premum poces of nsurance on her own
fe and ate n December, 1935, rrevocaby assgned them as gfts. The Com-
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Regs. 79 (1933), rt. 19.
mssoner determned a defcency, camng that the vane of the poces for gft
ta purposes was the cost of dupcatng them at the dates of the gfts, not the
cash surrender vaue as reported by pettoner. The oard of Ta ppeas hed
that the vaue of the gfts was ther cash surrender vaue. The crcut court of
appeas reversed. (115 Fed. (2d), 200.) That |udgment must be. affrmed on
the authorty of Guggenhem v. Rnsqun, supra, uness as camed by pettoner
the court beow was precuded from substtutng ts |udgment of vaue for that
of the oard. ( evcrng v. Rankn, 295 U. S., 123, 131 Ct. D. 9(30, C. . I -1,
100 (1935) .) ut the queston of what crteron shoud be empoyed for
determnng the vaue of the gfts s a queston of aw. (See Lucas v.
e ander, 279 U. S., 573 Ct. D. 70, C. . III-2, 273 (1929) .) ccordngy,
the crcut court of appeas was |ustfed n reversng the decson of the oard
as not n accordance wth aw. (Interna Revenue Code, 1939, secton
11 1(c)(1) ; 53 Stat., 18 .)
ffrmed.
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Regs. 6 (1932), rt. 22.
50
TITL I . M NUF CTUR RS CIS T S. (1932)
S CTION 603. TOIL T PR P R TIONS, TC.
Reguatons 6 (1932), rtce 22: Scope of ta . 19 1-6-10592
Ct. D. 1 85
manufacturers e cse ta revenue act op 1932 decson of court.
1. Ta on Toet Preparatons Mechancs and Paste Smar
to Toet Soap.
product descrbed as a mechancs hand paste, manufactured
and sod under the name of Mone, s a substance smar to
toet soap, s prncpay used and ntended to be used for toet
purpose , and s therefore sub|ect to the ta mposed by secton
603 of the Revenue ct of 1932.
2. Inconsstent Postons.
Snce the manufacturer advertsed ts product for use as a toet
soap, t s not n a poston to deny that t s a toet soap wthn
the meanng of the ta ng statute.
Unted States Crcut Court op ppeas for the Thrd Crcut.
The Mone Manufacturng Co., pantff-appeant, v. The nted States of
merca, defendant-appeee.
The Mone Manufacturng Co., pantff-appeant, v. Water . Rothenscs,
Coector of Interna Revenue for the Frst Dstrct of Pennsyvana, defendant-
appeee.
11 Fed. (2d), 6 7.
ppeas from the Dstrct Court of the Unted States for the astern Dstrct of
Pennsyvana.
September 6, 19 0.
opnon.
Goodrch, Crcut udge: ppeant, pantff beow, nsttuted these two ac-
tons to recover e cse ta es pad upon ts product, Mone. The questons
beng the same e cept for the year nvoved, the actons were consodated and
tred by the court beow wthout a |ury. The tra court found aganst the
pantff. The appcabe statute s the Revenue ct of 1932 (ch. 209, secton
603, 7 Stat, 201).
Pantff s product whch t descrbes as a mechancs hand paste, s a gray
paste of the foowng composton:
Per cent.
brasve (pumce) 20. 3
Soap chps __ 6.88
kane sats 1. 50
O of camphor sassafrassy . 19
Water 71.00
1 There s hereby mposed upon the foowng artces, sod by the manufacturer, producer,
or mporter, a ta equvaent to 10 per centum of the prce for whch ro sod: Perfumes,
essences, e tracts, toet waters, cosmetcs, petroeum |ees, har os, pomades, har dross-
nns, har restoratves, har dyes, tooth and mouth washes (e cept that the rate sha be
5 per centum), dentfrces (e cept that the rate sha be n per centum), tooth pastes (e cept
that the rnte sha he 5 per centum), aromatc cachous, toet soaps (e cept that the rate
sha he 5 per centum), toet powders, and any smar substance, artce, or preparaton,
by whatsoever name known or dstngushed : any of (he above wnch are used or apped
or Intended to be used or apped for toet purposes.
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51
Regs. 6 (1932), rt. 22.
It s found by the tra court that the product Is not a toet soap,1 and the soe
queston for decson now s whether t s a smar substance, artce or prepa-
raton USed or apped or ntended to be used or apped for toet
purposes.
The court beow found that Mone s smar to toet soap n chemca compo-
ston, some physca characterstcs and n use, but that t s not generay n
commerca competton wth toet soaps n that t s ntended to perform the
heaver knds of the same genera functons, of whch the toet soaps perform
the ghter and fner. The court concuded that Mone was a smar substance,
artce or preparaton to toet soap. It was aso found that the preparaton s
prncpay used and ntended to be used for toet purposes, athough t s aso
used and ntended to be used to some e tent as a genera househod ceaner.
ppeant s argument s based on three grounds. It s contended frst that
under the statute two tests must be met for ta abty: (a) the ob|ect ta ed
must ether be, or be smar to, one of the enumerated artces, and (6) t must
be used or ntended to be used for toet purposes. Second, that the fndng of
the court beow that Mone s smar to toet soap Is unsupported by the evdence.
Thrd, that the same s true wth respect to the fndng that Mone s used for
toet purposes.
The frst and the ast pont are easy dsposed of. s to the frst, t seems
cear that the appeant s correct on the constructon of the statute and that
both tests have to be met. s to the thrd, there s no doubt that Mone s used
for toet purposes. The remova of grease and grme from the hands s no ess a
toet functon than the remova of dust or tobacco. ven f we accept pantffs
contenton that the connotaton of toet s to be mted to makng the person
more aurng, certany smpe ceanness s a sne qua non of such aure. It
s mmatera that the sonp may be used for other purposes, for the statute does
not requre that the toet purpose be the soe one. For e ampe, t s common
knowedge that toet soaps n the strct sense may be and are used for aundry
purposes. There s nothng n MeCauahn v. ectrc Storage attery Co. (63 Fed.
(2d , 71.r (C. C. . 3, 1933)) requrng a dfferent concuson.
The more perpe ng queston n the case nvoves the determnaton of what
s a smar substance, artce or preparaton to toet soap. Sharp rf Dohme,
Inc., v. Ladner (82 Fed. (2d), 733 (C. C. . 3, 1936) Ct. D. 973, C. . I -1,
07 (1935) ) s of no assstance here for that case went upon the ground that
the tem sought to be ta ed dd not come wthn the phrase used or apped
or ntended to be used or apped for toet purposes. In Duradcne Co., Inc., v.
tar/rudcr (21 Fed. Supp., 6 (D. C. Md., 1937), affrmed per curam, 95 Fed.
(2d), 999 (C. C. . , 1938), the court, n determnng whether a certan har
preparaton was sub|ect to ta , spoke of smarty n composton and n use.
Fash Chemca Co. v. Unted State (23 Fed. Supp., 0 (Ct. of Cams, 1938))
nvoved the ta abty of a soap ke Mone and n drect competton wth t.
The court there spoke of smarty n substance, and uphed the mposton of
the ta .
Whether one thng s smar to another depends of course on the partcuar
propertes beng compared. Thus ron and mercury are smar n that they are
both metas, but they are dssmar In that one s a sod and the other a qud
at ordnary temperatures. Pantff ponts to varous dssmartes between
Mone and toet soap. It s not smar n fee, te ture or appearance to toet
soap; ts functon s performed to a arge e tent by the mechanca acton of
the abrasve, absent n toet soap; ts chemca composton aso dffers from
toet soap n the amount of akane sats present and the rato of the varous
ngredents. ut we thnk there are suffcent ponts of dentty to sustan the
hodng of the court beow. oth Mone and toet soap do contan anhydrous
soap, akane sats and water; both empoy an agent to mpart a peasant odor to
the product; both produce a ather, and, most mportant, they are desgned to
perform the same prncpa functon, vz, ceansng of the body.
Under the wordng of the statute prncpa use seems to us mportant n de-
termnng smarty. Furthermore, the pantff s advertsements of ts product
typca toet soap, accordng to the testmony for the pantff In the court beow,
woud be composed as foows :
Per cent.
nhydrous soap (10 to 85
kne sats 0. 3 to 1. 5
brasves None.
Desred perfumes are added, gycern s sometmes ncuded and the baance s composed of
water.
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Regs. 6 (1932), rt. 22. 52
contan phrases such as: eaves the hands soft and whte ; kddes ke
t and ts fne ceansng and softenng os are good for ther tender
skn ; keeps hands danty ; protects decate skn a typca cams
generay made for toet soaps. s was sad n Red Star Yeast f Products Co.
v. La udde (83 Fed. (2d), 39 , 396 (C. C. . 7, 1936) Ct. D. 1132, C. . -1,
389 (1936) ), The dstrct court coud hardy be e pected to fnd that the
product was not what appeant sad t was n ts advertsements. (See aso
Pero de Chemca Co. v. Shechan, 108 Fed. (2d), 306, 308 (C. C. . 8, 1939).)
We thnk the pantff can hardy be aowed to te one story to prospectve
customers and a dfferent story to the ta coector. Itacs supped.
The |udgment of the dstrct court s affrmed.
Reguatons 6 (1932), rtce 22: Scope 19 1-25-10752
of ta . Ct. D. 1519
( so Secton 619 and rtce 10.)
manufacturers e cse ta revenue act of 1932 decson of court.
Ta on Toet Preparatons Saes Prce Saes Made Through
Whoy-owned Subsdary Seng and dvertsng Costs to be
Incuded n Determnng Saes Prce.
For the purposes of the manufacturers e cse ta Imposed by sec-
ton 603 of the Revenue ct of 1932, the charge at whch products are
transferred by a manufacturer to hs whoy-owned subsdary s not
a proper bass for the ta where such subsdary s a mere agent
whoy controed by the parent. Manufacturers seng and adver-
tsng e penses are not to be e cuded n determnng the sae prce to
whch the ta Is appcabe, and the acton of Congress n amendng
secton 603 of the Revenue ct of 1932 by secton 3 of the Revenue
ct of 1939 confrms ths vew.
Court or Cams of the Unted States.
The yer Co. v. The Unted States.
38 F. Supp., 28 .
pr 7, 19 1.
opnon.
Whtaker, udge, devered the opnon of the court.
The facts are fuy set out n the fndngs of fact. The queston presented
s the proper bass for the ta on pantffs saes of cosmetcs mposed by sec-
ton 603 of the Revenue ct of 1932 ( 7 Stat., 261). Ths secton reads n part:
There s hereby mposed upon the foowng artces, sod by the manu-
facturer, producer, or mporter, a ta equvaent to 10 per centum of the prce
for whch so sod: Perfumes, essences, e tracts, toet waters, cosmetcs,
Secton 619 set out the formua for determnng the saes prce. It reads:
Sec. 619. Sae Prce,
(a) In determnng, for the purposes of ths tte, the prce for whch an
artce s sod, there sha be ncuded any charge for coverngs and contaners
of whatever nature, and any charge ncdent to pacng the artce n condton
packed ready for shpment, but there sha be e cuded the amount of ta mposed
by ths tte, whether or not stated as a separate charge. transportaton,
devery, nsurance, nstaaton, or other charge (not requred by the foregong
sentence to be ncuded) sha be e cuded from the prce ony f the amount
thereof s estabshed to the satsfacton of the Commssoner, n accordance
wth the reguatons.
(b) If an artce s
(1) sod at reta;
(2) sod on consgnment; or
(3) sod (otherwse than through an arm s-ength transacton) at ess
than far market prce;
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53
Regs. 6 (1932), rt. 22.
the ta under ths tte sha (If based on the prce for whch the artce s sod)
be computed on the prce for whch such artces are sod, n the ordnary course
of trade, by manufacturers or producers thereof, as determned by the Com-
mssoner.
The pantff takes the poston, frst, that the prce at whch t sod ts prod
nets to ta-tay Corporaton s the proper bass for the ta snce t s the man-
ufacturer s or producer s saes prce, upon whch the ta w s eved; or f
Incorrect n ths, t says that n determnng the saes prce, advertsng and
seng costs are to be emnated, n any event.
The Commssoner orgnay took the poston that the ta-Ray Corporaton
was the mere seng agent of the pantff and, therefore, that pantff s saes
prce was the prce at whch t sod ts products to the reta trade; to wt,
reta prce ess 0 per cent, and he assessed the ta on ths bass. Later,
after ths sut was fed, the Commssoner reduced ths saes prce by 7 M
per cent thereof, and assessed the ta accordngy, credtng pantffs abty
for subsequent months wth the dfference.
It s obvous that the ta-Ray Cor oraton was a mere she. Its actvtes
were carred on by e acty the same peope who had carred on these actvtes
for pantff before ts organzaton; ts offcers were the same as pantff s
offcers; ts board of drectors were the same; t had no operatng capta:
t had no offce space, e cept that furnshed by pantff wthout charge; a of
ts capta stock of the tota sum of 300 was owned by pantff. Its e stence
must be dsregarded. Saes made by t must be treated as havng been made
by the pantff. ( ggns v. mth, 308 U. S., 73; Grffths v. Commssoner,
808 U. S., 355 Ct. D. 1 31, C. . 19 0-1, 136 ; Gregory v. evcrng, 203 U. S.,
65 Ct. D. 911, C. . I -1, 193 (1935) ; Southern Pacfc Co. v. Lowe, 2 7
T . S., 330; Guf O Corporaton v. Lcwcyn, 2 8 U. S., 71; . brccht f Son
v. handy, 11 Fed. (2d), 202.)
Treatng the saes as havng been made by pantff, the transacton s
governed by secton 619(b). Ths provdes that f an artce s sod at reta,
the ta sha be compute on the prce for whch such artces are sod n
the ordnary course of trade by manufacturers or producers thereof. What
ths prce s, s to be determned by the Commssoner.
The Commssoner was wrong n the begnnng n f ng the reta prce as
the prce upon whch the ta shoud e computed. The prce contempated was
that charged n the ordnary course of trade. In the ordnary course of trade
ths s the prce charged by the manufacturer when he sod to a whoesaer.
The defendant seems to admt ths now (R., 82). ut the Commssoner ater
reduced the reta prce by 7 M per cent thereof, and computed the ta on the
remander. Why he dd ths s not shown, but t s to be presumed that t
was because ths was hs determnaton of the prce at whch manufacturers
or producers sod such artces n the ordnary course of trade. Ths s the
prce the Commssoner was commanded to determne, and t s to be presumed
he acted n accordance wth aw.
The pantff has not shown that ths was not the prce to whoesaers and,
of course, the burden was on t to do so. The prce at whch pantff sod
ts products to the ta-Ray Corporaton proves nothng; that was nothng
more than a sae to tsef. Rather, t was no sae at a. The fact that ths
prce was 15 per cent above pantff s manufacturng costs proves nothng, n the
absence of proof that t was customary for manufacturers of cosmetcs to se to
whoesaers on such bass. (We fee sure they dd not se on such bass,
because such reckonng emnates the most vauabe eement of the product,
the consumer s demand for t, but up through advertsng). For the same
reason, the fact that the ta-Ray Corporaton bought some of ts products
from other peope cheaper than pantff charged, proves nothng.
We have carefuy studed pantff s bref and the record, and concude
that the pantff has not borne the burden of showng the prce determned by
the Commssoner was not that denomnated by the statute.
ut pantff says that f the saes to ta-Ray Corporaton are to be ds-
regarded, neverthees, advertsng costs, at any rate, shoud be e cuded from
the saes prce. We can not agree that ths Is so. The prce the pantff
secured for the artce was much greater on account of the advertsng done.
Most of the courts have fronted such transactons as governed by secton 619(b)3,
whch provdes that f the artce s sod ut ess than market prce, otherwse than through
n arm s ength transacton, then the ta sha be computed In the same way as f the
artce had been sod at reta. y whchever subsecton governed, the resut s the safne.
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Regs. 6 (1932), rt. 22.
5
y advertsng, the pantff put vaue In the artce no ess than when It added
the vtamns to the cream; and that vaue s sod. s was sad by the Second
Crcut Court of ppeas n our|os, Inc., v. McOowan (85 Fed. (2d), 510) :
ut to take the appeant s products as mere unnamed bends, m tures,
or compostons saabe to the trade as such at the tme the appeant sod
tem s to gnore the very thng whch gave them ther pecuar saes vaue;
that s, the trade names under whch they were sod not ony eventuay to
the whoesaers, retaers, and consumers but by the appeant tsef to the
saes corporatons.
The ta Is measured by the prce for whch the manufacturer sod Its product.
ow ths prce was but up Is mmatera.
ut, t s argued that secton 619(a) requres the emnaton of these
e penses. Ths secton emnates from the saes prce transportaton, de-
very, nsurance, nstaaton, or other charge. It s argued that advertsng
e penses come wthn the phrase other charge. We are unabe to agree.
The tems e cuded are those e penses whch are ncurred n addton to the
cost of manufacture. Ther e cuson ndcates no more than that Congress
had n mnd the saes prce f. o. b. factory, and meant to e cude those tems
of cost whch go to make up the devered or nstaed saes prce.
Certany advertsng e penses are not of the same knd of thngs whch are
specfcay mentoned transportaton, devery, nstaaton, and nsurance
charges.
Furthermore, Congress, n passng the ct of 1939, evdenty beeved that
the ct of 1932 dd not provde for the e cuson of advertsng costs. Secton
3 of the ct of 1939 ( 53 Stat., 862, 863) reads n part:
Whether sod at arm s ength or not, a transportaton, devery, nsurance,
or other charge, and the whoesaer s saesmen s commssons, and costs and
e penses of advertsng and seng (not requred by the foregong sentence
to be Incuded), sha be e cuded from the prce ony f the amount thereof
s estabshed to the satsfacton of the Commssoner, n accordance wth the
reguatons. Itacs ours.
It w be noted that ths sentence s dentca wth the second sentence of
secton 619(a) of the Revenue ct of 1932, e cept that there has been added the
porton underned n tacs , havng to do wth e penses of advertsng and se-
ng. The pantff says that ths was added to the ct merey for carfcaton, but
we thnk not, for ths reason, among others: Subsecton (b) of secton 3 of the
Revenue ct of 1939 says:
The amendments made by subsecton (a) sha be effectve ony wth
respect to saes made after the date of the enactment of ths ct. Itacs
ours.
It appears, therefore, n passng the ct of 1939, the Congress thought that
the e cuson of advertsng and seng costs was an amendment of the pror
ct, and not merey a carfcaton thereof.
Note, moreover, that t was not a advertsng and seng e penses that were
to be e cuded under the Revenue ct of 1939; t was ony the whoesaer s
e penses of advertsng and seng. Manufacturer s advertsng and seng
e penses are not mentoned. y mpcaton they are to be ncuded. Ths, we
thnk, s a contnuaton of the pocy behnd the 1932 ct.
The Crcut Court of ppeas for the Seventh Crcut, n Campana Corpora-
ton v. arrson (11 Fed. (2d), 00), has reached a contrary concuson. It
was of opnon that seng and advertsng costs shoud be e cuded; n fact,
that a nonmanufacturng charges were to be e cuded. s we have sad,
advertsng has added vaue to the artce, and has enabed the manufacturer
to secure therefor a better prce, |ust as have the vtamns and ts other tangbe
component parts. For ths reason we see no bass for concudng that Congress
meant to e cude these costs.
It resuts that pantff s petton must be dsmssed. It Is so ordered.
Madden, udge; ones, udge; Ltteton, udge; and Whaet, Chef ustce,
concur.
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55
INT RN L R NU COD .
C PT R 35. SS SSM NT.
19 1-12-1065
S. T. 915
Procedure appcabe to addtona assessments of e cse and
msceaueous ta es.
Wth a vew to affordng ta payers every reasonabe opportunty,
pror to assessment, for hearng and presentaton of the facts and aw
appcabe to ther cases, the procedure outned heren w be fo-
owed n the admnstraton of the e cse and msceaneous ta es.
1. When an addtona assessment, or assesment of denquent ta ,
s proposed to be entered on the st (e cept where deay may |eopard-
ze coecton of the ta , or where the amount nvoved s nomna,
or the resut of an evdent mathematca error), a premnary etter
w be drected to the ta payer advsng hm brefy of the bass and
amount of the proposed assesment and concudng wth the foowng
paragraph:
ssessment of the fa . wth statutory nterest thereon, w he wthhed for
a perod of f| days from the date of ths etter n order to afford you an
opportunty to submt to ths offce a protest wth supportng facts, or to request
a conference wth ths offce.
2. In cases of the character descrbed, care shoud be taken to see
that no assessment s made unt after the e praton of the notce
perod. If the ta payer submts a protest or requests a conference,
assessment w be deferred unt carefu consderaton has been gven
to the facts and arguments submtted n the bref or at the conference,
uness t appears that the ta payer s merey endeavorng to deay
assessment wthout good cause, or further deay may |eopardze co-
ecton of the ta ..
3. The 15-day notce perod prescrbed n paragraph 1 s sub|ect
to some fe bty and may be e tended n approprate cases where
coecton w not be |eopardzed by such e tenson.
. In cases where the ta payer has actua notce, as a resut of
conferences n or correspondence from ths offce, of the proposed
assessment, ts bass, and appro mate amount, the foregong procedure
need not be foowed.
5. Interna revenue agents and genera deputy coectors w fur-
nsh the ta payer wth a copy of the report n cases where addtona
or denquent ta s recommended, e cept where the report contans
nformaton of a confdenta nature, such as a case nvovng fraud.
t the concuson of the nvestgaton the ta payer shoud be advsed
that he s prveged to submt a protest or request a conference n
regard to the proposed assessment. ach nvestgatng offcer sha
state n hs report whether he has furnshed the ta payer wth a copy
thereof and has advsed hm of hs prvege of protest and hearng.
G. The procedure outned above s effectve as of March 1, 19 1.
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Regs. 3 (19 0) 101.32.
56
DMISSIONS T .
INT RN L R NU COD .
S CTION 1702. PRINTING OF PRIC ON TIC T.
Reguatons 3 (19 0), Secton 101.32: Re-
qurements appcabe to tckets.
19 1-5-10583
Mm. 51 5
Requrements regardng the prntng of tckets of admsson.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 10, 19 .1.
Coectors of Interna Revenue and Others Concerned:
It appears that there has been consderabe confuson, especay
among the tcket prnters, concernng the requrements of the aw
and reguatons regardng the prntng of admsson tckets. For ths
reason, especa attenton s caed to the foowng:
(1) In accordance wth secton 1702 of the Interna Revenue Code,
the prce at whch every admsson tcket or card s sod must be
conspcuousy and ndeby prnted, stamped, or wrtten on that part
of the tcket whch s to be taken up by the management. Ths re-
qurement s appcabe to tckets whch are to be sod for ess than
21 cents as we as those seng for 21 cents or more.
Despte ths requrement of the aw, tcket prnters are sometmes
requested to prnt tckets whch do not show the prce, but whch have
a space n whch the prce s to be ater stamped or wrtten by the
theater or other pace before the tckets are sod. Tcket prnters,
as such, do not ncur abty to any penaty by prntng such tckets.
owever, n vew of the fact that the theater or_other pace w
ncur abty to the penates provded by secton 1703 of the In-
terna Revenue Code f the prce s not prnted, stamped, or wrtten on
the tckets at the tme they are sod, the practce of prntng tckets
wthout the prce s regarded by the ureau as key to resut n
voatons of the aw by propretors of paces of admsson and
wherever possbe orders for such tckets shoud be dscouraged by the
prnter.
(2) So-caed stock tckets, whch do not show the prce, may
not be used by any theater or other pace (e cept by overstampng or
wrtng the admsson prce thereon) wthout ncurrng abty to
the penates provded by secton 1703 of the Interna Revenue Code.
ta abe admsson tckets must show (n addton to the prce,
the ta , and the tota) the name of the pace to whch they are vad
for admsson and must ether be dated or seray numbered.
(3) Tckets sod at reduced rates must show the reguar estab-
shed prce of admsson and aso the reduced prce, the ta due, and
the tota.
Note. The ta on the reduced prce s hased on the reguar estabshed
prce of admsson (e cept n the case of bona fde empoyees, muncpa
offcers on offca busness, and chdren under 12 years of age). For e ampe,
tckets sod to students, 12 years of age or over, to ades, to members of
Cvan Conservaton Corps, or other groups or casses of ndvduas at a
prce eas than the estabshed prce of admsson to others must show the fu
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57 Regs. 3 (19 0) 101.32.
ta at the rate of 1 cent for each 10 cents or fracton thereof of the reguar
estabshed prce to others for the same or smar accommodatons.
No ta attaches to free admssons to a spoken pay (not a mechanca
reproducton) whether or not set to musc or wth musca parts or accom-
panments, whch s a consecutve narratve nterpreted by a snge set of
characters, a necessary to the deveopment of the pot, In two or more acts,
the performance consumng more than 1 hour and 5 mnutes of tme and
the ta on tckets to such a spoken pay when sod at the tcket offce of
theaters at reduced rates s on the prce for whch sod,
( ) Tckets seng for 1, ncudng ta , shoud show estabshed
prce 91 cents, Federa ta 10 cents, tota 1.01, reduced prce 1.
The tota ta of 10 cents must be pad over to the Government.
(5) Season tckets must show the estabshed prce of the season
tcket, the ta , and the tota.
(6) In accordance wth the provsons of secton 101.32 of Regu-
atons 3 (19 0 edton), f the tcket coverng ta abe admssons
shows the seat or bo for whch t s vad, the ocaton and seat
or bo number must appear on that part of the tcket whch s
taken up by the management as we as on the stub whch s gven
to the patron.
(7) ny crcut ownng and operatng a number of theaters and
desrng to use tckets showng the name of the crcut ownng the
theaters rather than the name of each ndvdua theater must secure
wrtten permsson from the ureau, after furnshng to the ureau
nformaton showng the number of theaters operated by t, whether
tckets are sod at a of the theaters through tcket vendng
machnes whch record the number of tckets sod, and the nature
of the records kept at the home offce and at each theater.
(8) tcket prnters shoud furnsh to the coectors the nfor-
maton requred by secton 101.33, Reguatons 3 (19 0 edton),
that s, the name of the customer orderng admsson tckets the
number of the tckets ordered, the openng and cosng sera num-
bers, and proofs or sampe copes of the tckets themseves. The
coector s offce shoud, upon recept of such proofs or sampe copes
of the tckets, e amne them to verfy whether they are n a n-
stances prnted n accordance wth the aw and reguatons and wth
respect to any mpropery prnted tckets (ncudng those marked
ta free but as to whch there s no record of an e empton
havng been granted), an mmedate nvestgaton shoud be made
to ascertan whether admssons ta s due and, f so, whether ade-
quate steps have been taken to nsure ts coecton.
prnter may make appcaton to the coector of nterna revenue
for the dstrct n whch he s ocated for franked enveopes n whch
to furnsh to coectors the nformaton requred by secton 101.33,
Reguatons 3 (19 0 edton).
(9) ny organzaton orderng tckets prnted wth the words ta
free on the grounds that the proceeds w nure to the beneft of an
organzaton or person comng wthn the provsons of secton 1701
of the Interna Revenue Code shoud e hbt to the prnter an e emp-
ton certfcate on Form 755 secured from the coector of nterna
revenue.
nqures n regard to ths mmeograph shoud be addressed
to the Commssoner and marked for the attenton of MT:ST.
Tmothy C. Mooney,
ctng Commssoner.
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Regs. 2 (1932), rt. 19. 58
T L GR P , T L P ON , R DIO, ND
C L F CILITI S.
INT RN L R NU COD .
S CTION 3 65, S M ND D Y S CTION 1 OF T R NU CT OF
1939 ND S CTION 209 OF T R NU CT OF 19 0. IMPOSITION
ND R T OF T .
Reguatons 2 (1932), rtce 19: Servces 19 1-12-10653
rendered to the Unted States, etc. S. T. 91
( so Secton 3 66.)
Payments made drecty by the Federa Government for teegraph,
teephone, cabe, or rado dspatches or messages n connecton wth
constructon work beng performed by contractors for the War De-
partment and/or Navy Department under a eost-pus-a-f ed-fee con-
tract are e empt from the ta mposed by secton 3 03 of the Interna
Revenue Code, as amended.
dvce s requested whether payments made by the Federa Govern-
ment for teegraph, teephone, cabe, or rado dspatches or messages
n connecton wth constructon work beng performed for the War
Department and/or Navy Department under a cost-pus-a-f ed-fee
contract, as dstngushed from a ump-sum contract, are e empt from
the ta mposed by secton 3 65 of the Interna Revenue Code, as
amended by secton 1 of the Revenue ct of 1939 and secton 209 of
the Revenue ct of 19 0.
Secton 3 65 of the Interna Revenue Code, as amended, mposes
a ta upon payments for teegraph, teephone, cabe, or rado ds-
patches, messages, and conversatons orgnatng wthn the Unted
States and upon payments for eased wre or takng crcut speca
servce. Secton 3 66 provdes n part that no ta sha be mposed
under secton 3165 upon any payment receved for servces or factes
furnshed to the Unted States.
Under the cost-pus-a-f ed-fee contracts n queston, a teegraph,
cabe, and rado dspatches or messages are prepared on standard
Government forms and are certfed by the Government contractng
offcer or hs representatve as beng for an e cusve governmenta
purpose. charges for such dspatches and messages and for tee-
phone messages arc bed at reguar Government rates, and are pad
drecty by the Government. Whenever possbe, such charges are
bed drecty to the Government.
It s hed that payments made drecty by the Federa Government
for teegraph, teephone, cabe, and rado dspatches or messages n
connecton wth constructon work beng performed by contractors for
the War Department and/or Navy Department under a cost-pus-a-
f ed-fee contract are e empt from the ta mposed by secton 3 65
of the Interna Revenue Code, as amended.
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59 Regs. 2 (1932 , rt. 26.
TR NSPORT TION OF OIL Y PIP LIN .
INT RN L R NU COD .
S CTION 3 60, S M ND D Y S CTION 1 OF T R NU CT
OF 1939 ND S CTIONS 209 ND 210 OF T R NU CT OF
19 0. T .
Reguatons 2 (1932), rtce 26: ass of ta . 19 1-11-106
G. C. M. 22580
The M Company, a producer of gasone and crude petroeum, sod
for e port crude petroeum wth a specfed gasone content of 20 per
cent. Gasone and crude petroeum were noved separatey through
ppe nes from nand ponts to shore tanks of the M Company, where
the requred amount of gasone was bended wth the crude petro-
eum n order to meet the 20 per cent specfcaton contaned n the
contract of sae. The bended product was ater devered on the
buyer s vesses.
ed, that the bendng of the crude petroeum and gasone con-
sttuted a break n the contnuty of the movement thereof, and that
a movements of the crude petroeum and gasone by ppe ne pror
to the bendng were domestc n character and sub|ect to ta under
secton 3 60 of the Interna Revenue Code, as amended.
n opnon s requested whether under the crcumstances heren-
after stated the separate movements by the M Company of crude pe-
troeum and gasone by ppe nes from nand ponts to the shore
tanks of the M Company, where such products were bended and were
thereafter devered on buyer s vesse for e portaton, are sub|ect to the
ta mposed by secton 3 60 of the Interna Revenue Code, as amended
by secton 1 of the Revenue ct of 1939 and sectons 209 and 210 of
the Revenue ct of 19 0.
Secton 3 60 of the Interna Revenue Code, as amended, mposes a
ta upon the transportaton of crude petroeum and qud products
thereof by ppe ne orgnatng before uy 1, 19 5.
The M Company, a producer of crude petroeum and gasone, en-
tered nto a contract wth a foregn corporaton for the sae and
e portaton of crude petroeum wth a gasone content of not ess than
20 per cent at a certan prce per barre devered on the buyer s ves-
ses at desgnated wharves owned by the M Company. Inasmuch as
the gasone content of the crude petroeum produced by the M Com-
pany was ess than 20 per cent, t was necessary to bend the requred
amount of natura or casnghead gasone wth the crude petroeum n
order to meet the 20 per cent specfed n the contract of sae. The crude
petroeum and gasone were moved separatey through ppe nes
from nand ponts nto the shore tanks of the M Company where the
bendng occurred. The bended product remaned n the shore tanks
unt devered on the buyer s vesses.
In vew of the consttutona prohbton aganst evyng a ta on
artces e ported from any State ( rtce I, secton 9, cause 5, of the
Consttuton of the Unted States), t becomes necessary to determne
the pont at whch e portaton of the petroeum products n queston
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Regs. 2 (1932), rt. 26.
60
began. The genera rues reatng to such determnaton are stated n
S. T. 679 (C. . II-1, 2 (1933)) as foows:
The test of ta e empton on transportaton by ppe ne of o ntended for
e portaton s the contnuty of the movement from the pont of orgn n the
Unted States to ts foregn destnaton. The mere fact that o transported by
ppe ne s fnay e ported does not necessary mean that t was contnuousy n
course of e portaton after t was started on ts movement from ts pont of
orgn.
In order for a tender of o to be consdered as beng n the course of e por-
taton and e empt from ta , t must be shown (1) that pror to commencement
of the movement the shpper had n hs possesson a contract or order cang
for devery of the o beyond the boundares of the Unted States, and (2) that
subsequenty there was devered at a pont of orgn n the Unted States the
amount and quaty of o covered by the contract or order, to be transported
by a contnuous movement to the destnaton beyond the boundares of the Unted
States.
In order to be e empt as an e port shpment, there must be no break n the
movement, the o must not come to rest en route. In case there s a break n
contnuty, the frst movement s domestc In ts character and amounts pad
for the transportaton are ta abe.

break occurs or the o comes to rest when, as t moves from ts pont of
orgn to a foregn destnaton, t reaches a pace where, at the Instance of the
shpper or consgnee, or ther agent, t s stopped for a busness purpose, such
as a sae, storage, refnng or other manufacture, reconsgnment, or reshpment,
and not n accommodaton to the means of transportaton nsttuted by the
carrers themseves. Instances of a break n the contnuty of an e port move-
ment are (1) o sent to a consgnee at a certan pace wthn the Unted States
en route to a foregn destnaton where the consgnee, upon recept of the o,
refnes, m es, or accumuates t for the purpose of seng t, or (2) o consgned
to a defnte foregn destnaton and, pror to ts reachng such destnaton, t s
reconsgned at a pont In the Unted States to another destnaton.
fter each break a new movement begns. ccordngy, the e port movement
free from ta s the one from the ast pont n the Unted States where the
shpment s broken or the o comes to rest. Itacs supped.
What consttutes a break n contnuty of the movement s a queston
whch must, n the ast anayss, depend upon a the partcuar facts
of each case. Storage, for e ampe, may or may not consttute a
break n contnuty of the movement, dependng argey upon the ength
of tme of the storage and the purpose for whch the product was stored.
If the storage s for a busness purpose, some purpose other than a
mere facty for norma transportaton, a break n the contnuty of the
movement occurs. (Susquehanna Coa Co. v. South mboy, 288
U. S., 665; Damond Match Co. v. Ontonagon, 188 U. S., 82; and
Prare O t Gas Co. v. efferson County. Te .. 76 Fed. (2d), 5 5.)
It s the opnon of ths offce that a break n the contnuty of the
movement occurred n the nstant case when the crude petroeum and
the natura or casnghead gasone were bended n the shore tanks,
snce the act of m ng (bendng) the products consttuted a break n
the transportaton. (S. T. 679, supra.) Ths concuson s supported
by the fact that the e port product specfed n the contract, that s,
crude petroeum wth a gasone content of not ess than 20 per cent,
dd not e st unt the crude petroeum was m ed n the shore tanks
wth natura or casnghead gasone to brng t up to the contract
specfcaton. The e port movement began when the bended product
(crude petroeum wth a gasone content of 20 per cent) eft the
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61
Regs. 2 (1932), rt. 26.
shore tanks n ppe nes whch carred such product drecty to the
tanks aboard the buyer s vesses. movements of the crude pe-
troeum and gasone by ppe ne pror to the tme of bendng n the
shore tanks were domestc n character. It foows that the transpor-
taton of the crude petroeum and natura or casnghead gasone by
ppe ne whch occurred pror to the bendng n the shore tanks s
sub|ect to ta under secton 3 60 of the Interna Revenue Code, as
amended.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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Regs. 71 (1932), rt. 3 .
62
ST MP T S.
INT RN L R NU COD .
S CTION 1802(b), S M ND D Y S CTIONS 1 ND 02 OF T R -
NU CT OF 1939, ND S CTIONS 209 ND 210 OP T R NU CT
OF 19 0. C PIT L STOC ( ND SIMIL R INT R STS) S L S ND
TR NSF RS.
The transfer of stock of the M Corporaton, a Deaware corpora-
ton whose charter was repeaed due to faure to pay the Deaware
franchse ta , s sub|ect to stamp ta under secton 1802(b) of
the Interna Revenue Code, as amended.
S. T. 671 (C. . II-1, 37 (1933)) modfed.
dvce s requested whether the transfer of stock of the M Cor-
poraton, a Deaware corporaton whose charter was repeaed due
to faure to pay the requred franchse ta to the State of ts ncor-
poraton, s sub|ect to stamp ta under secton 1802(b) of the In-
terna Revenue Code, as amended by sectons 1 and 02 of the
Revenue ct of 1939 and sectons 209 and 210 of the Revenue ct
of 19 0.
Secton 1802(b), as amended, mposes a stamp ta on a saes, or
agreements to se, or memoranda of saes or deveres of, or trans-
fers of ega tte to any shares or certfcates of stock, or of profts,
or of nterest n property or accumuatons, of any corporaton, or
of any nvestment trust or smar organzaton, wth certan e -
ceptons not here matera.
The M Corporaton, a Deaware corporaton, defauted n the pay-
ment of ts franchse ta to the State of Deaware. Pursuant to
the provsons of secton 72 of chapter 6 of the Revsed Code of
Deaware (1935), the corporaton s charter was repeaed as of pr
1, 193 . In December, 1935, a credtor s petton for the reorganza-
ton of the corporaton was fed n the Unted States Dstrct Court
for the Dstrct of Deaware. In March, 19 0, the proceedngs were
transferred to the Unted States Dstrct Court for the astern
Dstrct of entucky and are now pendng n that court. The ques-
ton presented s whether a transfer of stock of the M Corporaton
by the owner of such stock s sub|ect to stamp ta .
Secton 71 of chapter 6 of the Revsed Code of Deaware (1935)
provdes that f a corporaton for two consecutve years fas to pay
ts franchse ta ts charter sha be vod. In secton 7 of chapter
65 of the Revsed Code of Deaware t s provded n part as foows:
any corporaton e stng under the aws of ths State whose charter
has become noperatve by aw for nonpayment of ta es may at any
tme procure an e tenson, restoraton, renewa or revva of ts charter .
and thereupon the sad corporaton sha be renewed and revved
wth the same force and effect as f ts charter had not become noperatve and
vod . Such renstatement sha vadate a contracts, acts, matters and
thngs made, done and performed wthn the scope of ts charter by such cor-
poraton durng the tme when such charter was noperatve or
vod wth the same force and effect and to a ntents and purposes
as f sad charter had at a tmes remaned n fu force and effect .
Reguatons 71 (1932), rtce 3 : Saes or
transfers sub|ect to ta .
19 1-8-1061
S. T. 913
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63
Regs. 71 (1932), rt. 35.
In S. T. 671 (C. . II-1, 37 (1933)) t s stated:
If the ssung corporaton has actuay gone out of busness, ether through
surrenderng ts charter or havng ts charter revoked by the State of ts ncor-
poraton for nonpayment of ta es, etc., t s hed that no stock e sts. The
corporaton havng been dssoved, the certfcates are reay not certfcates of
corporate stock because the corporaton s no onger n e stence.
On the transfer of certfcates formery ssued by such dssoved corporaton,
no transfer stamp ta abty w be ncurred. owever, f the corporaton
s st n e stence the transfer of the certfcates s ta abe under the aw even
though the certfcates are otherwse worthess.
It s mpossbe to ay down a broad genera rue to cover the type
of case here nvoved. In other words, each case must be consdered
upon ts own facts. It may be sad, however, that the e stence or
none stence of a corporate charter s not necessary a controng
factor. ven though a corporaton s charter has been forfeted and
the corporaton has been dssoved, the dssouton merey has the
effect of termnatng those rghts of the stockhoders whch are
persona n character, but does not termnate the stockhoder s prop-
erty rghts n the assets of the corporaton. Such property rghts
are not termnated pror to the dstrbuton of the corporaton s assets.
( |r v. Standard Dstng Dstrbutng Co., 7 N. . ., 5 6,
70 t., 93 .)
The repea of the charter of the M Corporaton dd not render
the charter competey nu and vod, but merey suspended and
made t noperatve sub|ect to beng renewed or revved as provded
n secton 71 of chapter 6 of the Revsed Code of Deaware (1935).
There has been no dstrbuton of the corporate assets. The stock n
queston, therefore, represents an nterest n the property of the M
Corporaton.
In vew of the foregong, t s hed that the transfer of stock of
the M Corporaton s sub|ect to the stamp ta mposed by secton
1802(b) of the Interna Revenue Code, as amended.
S. T. 671 (C. . II-1, 37 (1933)) s modfed to the e tent that
t s nconsstent wth ths rung.
S CTIONS 1800, 1802(b), 3 80, ND 3 81(a), S M ND D.
Reguatons 71 (1932), rtce 35: Saes or 19 1-2-10562
transfers not sub|ect to ta . S. T. 912
( so rtce 120.)
Saes or transfers of securtes by a foregn government, stamp
ta havng been pad upon the transfers of such securtes to the
foregn government, are not sub|ect to the stamp ta es mposed by
sectons 1800, 1802(b), 3 S0, and 3 81(a) of the Interna Revenue
Code, as amended.
dvce has been requested whether certan saes or transfers of
shares or certfcates of stock or bonds by the rtsh Government
are sub|ect to the stamp ta es mposed by sectons 1800, 1802(b),
3 80, and 3 81(a) of the Interna Revenue Code, as amended.
In order to be abe better to prosecute the present war n urope,
the rtsh Government, actng pursuant to ts Defence (Fnance)
Reguatons, has transferred to the rtsh Treasury certan shares
or certfcates of stock or bonds at a specfed prce for each securty.
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Regs. 71 (1932), rt. 35. 6
The shares or certfcates of stock or bonds thus transferred to the
rtsh Treasury w be sod or transferred n the Unted States by the
rtsh Government, stamp ta es havng been pad upon the transfers
to such Government.
ased upon the foregong facts, t s hed that the saes or transfers
by the rtsh Government of such shares or certfcates of stock or of
such bonds are not sub|ect to stamp ta es.
S CTION 1802(b), S M ND D Y S CTIONS 1 ND 02 OF T R -
NU CT OF 1939, ND S CTIONS 209 ND 210 OF T R NU CT
OF 19 0. C PIT L STOC ( ND SIMIL R INT R STS) S L S ND
TR NSF RS.
Reguatons 71 (1932), rtce 35: Saes or 19 1-19-10711
transfers not sub|ect to ta . S. T. 918
( so Secton 3 81(a), as amended, and rtce 120.)
The transfer of corporate stock and bonds from the name of a
guardan to the name of hs ward In the State of rkansas s not
sub|ect to stamp ta .
dvce s requested whether the transfer of corporate stock and
bonds from the name of a guardan to the name of hs ward n the
State of rkansas s sub|ect to stamp ta under secton 1802(b) of
the Interna Revenue Code, as amended by sectons 1 and 02 of the
Revenue ct of 1939, and sectons 209 and 210 of the Revenue ct of
19 0, and under secton 3 81(a) of the Interna Revenue Code, as
amended by secton 210 of the Revenue ct of 19 0, respectvey.
The aw mposes a stamp ta on a saes and transfers of ega tte
to any shares or certfcates of corporate stock or corporate bonds, wth,
certan e ceptons not here appcabe. Where corporate stock or
bonds are transferred from a guardan to a ward, the transfer s sub|ect
to stamp ta f under the oca aw the guardan, and not the ward, hed
the ega tte to the stock or bonds. (S. T. 832, C. . -1, 18;
S. T. 855, C. . 1937-1, 336; S. T. 873, C. . 1938-2, 10; S. T. 911,
C. . 19 0-2, 331.)
There s no provson of the rkansas statutes deang specfcay
wth the queston whether a guardan n that State acqures ega tte
to the persona property of hs ward. owever, such statutes ceary
ndcate that the ward has ega tte to such property, the guardan
havng merey the care and management thereof. (Pope s Dgest of
the Statutes of rkansas, 1937, chapter 78, Guardan and Ward. )
In Gentry v. Owen (1 rk., 396,60 mercan Decsons, 5 9), hod-
ng that n rkansas a guardan never succeeds to the ega rghts of
hs ward and that a change of guardans eaves a ward s ega tte
undsturbed, the court stated n part as foows:
ut the guardan docs not succeed to the ega rghts of the ward; by
vrtue of hs guardanshp he becomes the authorzed agent of the mnor to pro-
tect hs person, and to take care of and manage hs property, the ega tte to
whch s not n hm but n hs ward, and n whose name contracts are made and
suts touchng hs rghts are prosecuted. Upon a change of guardans, the
property, the ega tte n whch st remans n the ward, passes to the new
guardan, whose rghts and dutes are coe tensve wth hs predecessors.
In Norve v. McFadfen (173 rk., 588, 292 S. W., 1001) t was hed
that a ward, upon comng of age, coud mantan an acton at aw for
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65 Regs. 71 (1932), rt. 120.
converson aganst a thrd person who had mpropery receved assets
of the ward s estate from the guardan. The decson n that case was
predcated on the theory that ega tte to the property was n the ward.
In Russe v. ohnson (193 rk., 5 1,101 S. W. (2d), 72),the Supreme
Court of rkansas stated n part as foows:
Wthout an order of the probate court, a guardan can not nvade the prncpa
of hs wards estate for any purpose, aud the order must be n advance of the
e pendture.
Snce n rkansas ega tte to the persona property of a ward
remans n the ward, t s hed that the transfer of stocks and bonds
from the name of a guardan to the name of hs ward n the State of
rkansas s not sub|ect to stamp ta under sectons 1802 (b) and 3 81 (a)
of the Interna Revenue Code, as amended.
S CTION 3 81, S M ND D Y S CTION 210 OF T R NU CT OF
19 0 TR NSF R OF ONDS.
Reguatons 71 (1932), rtce 120: ass of ta . 19 1-1(5-10G90
( so Secton 1808(a). S. T. 916
The e empton from documentary stamp ta provded n secton
1808(a) of the Interna Revenue Code, reatng to Government and
State obgatons, s not affected by secton (a) of the Pubc Debt
ct of 19 1.
dvce s requested whether the e empton from documentary stamp
ta provded n secton 1808 (a) of the Interna Revenue Code s affected
by secton (a) of the Pubc Debt ct of 19 1, approved February 19,
19 1 (Pubc, No. 7, Seventy-seventh Congress, frst sesson).
Secton 3 81 of the Interna Revenue Code, as amended by secton
210 of the Revenue ct of 19 0, provdes n part as foows:
(a) Imposton op Ta . On a saes, or agreements to se, or memoranda of
saes or deveres of, or transfers of ega tte to any of the nstruments men-
toned or descrbed n secton 1801 and of a knd the ssue of whch s ta abe
thereunder .
Secton 1808 of the Interna Revenue Code, made appcabe to sec-
ton 3 81(a) by secton 3 83, provdes n part:
There sha not be ta ed under ths chapter
(a) Governmf.nt and State Oh.oatons. ny bond, note, or other nstru-
ment, ssued by the Unted States, or by any foregn Government, or by any State,
Terrtory, or the Dstrct of Coumba, or oca subdvson thereof, or muncpa
or other corporaton e ercsng the ta ng power .
Secton (a) of the Pubc Debt ct of 19 1, supra, provdes as
foows:
Interest upon, and gan from the sae or other dsposton of, obgatons ssued
on or after the effectve date of ths ct by the Unted States or any agency or
nstrumentaty thereof sha not have any e empton, as such, and oss from the
sae or other dsposton of such obgatons sha not have any speca treatment,
as such, under Federa ta cts now or hereafter enacted; e cept that any such
obgatons whch the Unted States Martme Commsson or the Federa ousng
dmnstraton has, pror to the effectve date of ths ct, contracted to ssue
at a future date, sha when ssued bear such ta -e empton prveges as were,
at the tme of such contract, provded n the aw authorzng ther Issuance. For
the purposes of ths subsecton a Terrtory, a possesson of the Unted States, and
the Dstrct of Coumba, and any potca subdvson thereof, and any agency or
nstrumentaty of any one or more of the foregong, sha not be consdered as
an agency or nstrumentaty of the Unted States.
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egs. 71 (1932), rt. 8 . 66
It s cear from the specfc anguage used n secton (a) of the
Pubc Debt ct of 19 1, supra, that Congress had n mnd ncome and
other smar ta es and not documentary stamp ta es. It s accord-
ngy hed that the e empton provded n secton 1808(a) of the Inter-
na Revenue Code, supra, reatng to Government and State obga-
tons, s not affected by secton (a) of the Pubc Debt ct of 19 1,
supra.
S CTION 3 82, S M ND D Y S CTION 1 OF T R NU CT OF
1939, ND S CTIONS 209 ND 210 OF T R NU CT OF 19 0.
CON Y NC S.
Reguatons 71 (1932), rtce 8 : What con- 19 1-16-10691
sttutes rea property determnabe by aw of S. T. 917
State where ocated.
O and gas eases of Indefnte duraton coverng ands n
Mchgan, or assgnments thereof, consttute conveyances of reaty
sub|ect to stamp ta .
dvce s requested whether o and gas eases of ndefnte dura-
ton coverng ands n Mchgan, or assgnments of such nstruments,
consttute conveyances of .reaty sub|ect to stamp ta under secton
3 82 of the Interna Revenue Code, as amended by secton 1 of the
Revenue ct of 1939 and sectons 209 and 210 of the Revenue ct
of 19 0.
The aw mposes a stamp ta on any Deed, nstrument, or wrt-
ng whereby any ands, tenements, or other reaty sod
sha be granted, assgned, transferred, or otherwse conveyed to, or
vested n, the purchaser or purchasers, when the con-
sderaton or vaue, of the nterest or property conveyed, e cusve
of the vaue of any en or encumbrance remanng thereon at the tme
of sae, e ceeds 100 . What consttutes ands, tene-
ments, or other reaty s determnabe by the aw of the State
n whch the property s stuated. ( rtce 8 , Reguatons 71.)
The Supreme Court of Mchgan, n aencke v. Davdson et a.
(290 Mch., 298, 287 N. W., 72), hed (syabus) :
ease of o and gas rghts n tract of and consttutes an nterest n rea
property and not a mere opton.
In the body of ts opnon the court stated :
It goes wthout sayng that the assgnment of such rghts from one hoder
to another (as n the nstant case) s n effect a reeasng or at east a
transferrng of the rghts of a essee to hs assgnee. Therefore such assgn-
ments are as much deangs n nterests n rea estate as are orgna ease-
hod transactons.
In ths connecton t s nterestng to note that at east by cear nference
the egsature of ths State has consdered o and gas eases as conveyances
of rea estate.
No covenant sha be mped n any conveyance of rea estate, e cept
o and gas eases, whether such conveyance contan speca covenants or not.
(C. L. 192 ), secton 13281; Stat. nn., 26.52 .)
In vew of the foregong, t s hed that o and gas eases of
ndefnte duraton coverng ands n Mchgan, or assgnments of
such nstruments, consttute conveyances of reaty sub|ect to stamp
ta under secton 3 82 of the Interna Revenue Code, as amended.
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67
Regs. 96, rt. 202.
PROC SSING T S.
TITL IL R FUNDS OF MOUNTS COLL CT D UND R T
GRICULTUR L D USTM NT CT. (1936)
Reguatons 96, rtce 202: Facts and evdence 19 1-17-10696
n support of cam. Ct. D. 1507
processng ta agrcutura ad|ustment act revenue act of 1936
decson op court.
1. Cam for Refund Pork Packer Customs Saughterer Frst
Domestc Processor.
pork-packng company whch purchased hogs n the open market
and engaged a customs saughterer to k them at an agreed prce
per head was not entted to the refund of processng ta es pad.
Tte II of the Revenue ct of 1930 restrcts the refund of processng
ta es to those persons who were the frst domestc processors and who
aone were obgated to pay the ta . In the case of hogs the saught-
erer Is the frst domestc processor and the ta payer under the gr-
cutura d|ustment ct
2. Unted States Processng Ta oard of Revew ursdcton.
The Unted States Processng Ta oard of Revew has no |urs-
dcton to revew the Commssoner s dsaowance of refund cams
of ta payers who pad ta es wth respect to the processng of agr-
cutura commodtes for customers for a charge or fee.
3. Consttutonaty of Refund Statute
Tte II of the Revenue ct of 1936 does not voate due process In
fang to provde a refund to a pettoner who wts not the frst
domestc processor and ta payer under the grcutura d|ustment
ct
. Rehearng Dened.
Petton for rehearng dened October 1, 19 0.
5. Certorar Dened.
Petton for wrt of certorar dened February 3, 19 1.
Unted States Crcut Court of ppeas fob the Seventh Crcut.
Fuhrman f Forser Co., pettoner, v. Commssoner of Interna Revenue,
respondent.
11 Fed. (2d), 863.
Petton for revew of decson of the Unted States Processng Ta oard of Revew.
efore Sparks, Treanor, and erneb, Crcut udges.
uy 22,19 0.
OPINION.
erner, Crcut udge: Fuhrman Forster Co. (pettoner) fed a refund
cam for sums aeged to have been pad as processng ta es under the grcu-
tura d|ustment ct. ( 8 Stat, 31, 7 U. S. C. ., secton 601 ct srq.) The
Commssoner of Interna Revenue re|ected the cam on the ground that the
amount sought to be recovered had not been pad by or coected from the pet-
toner under the grcutura d|ustment ct. Pettoner then sought revew of
the dsaowance n the Unted States Processng Ta oard of Revew. There,
upon moton of the Commssoner, the oard dsmssed the petton for ack of
|ursdcton. The case s now before us on petton to revew pursuant to secton
906(g) of the Revenue ct of 1936. ( 9 Stat, 1750, 7 U. S. C. ., secton 6 8.)
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Regs. 96, rt. 202.
68
There are aso three companon pettons Nos. 7173, 717 , and 7175 fed wth
ths court, whch present the dentca probem before us n the nstant case.
Upon moton made and order duy entered, the decson n ths case sha appy
to and be hed as controng In the other three cases.
The pettoner s engaged n the meat packng busness and to the trade t s
known as a pork packer. cept for kng foor factes, ts busness wth
respect to cuttng, curng, smokng, cookng, manufacturng sausage and other
processng s vrtuay the same as other packers who operate ther own abattor.
The pettoner purchased the hogs n the open market (from the producer or
commsson houses) and engaged the C. . urnette Co. (a customs saught-
erer) to k the hogs at an agreed prce per head. fter the kng and chng
operatons whch are conducted under the supervson of the pettoner, the car-
casses and vscera are transported to pettoner s pant for the treatment above
descrbed. Counse for pettoner states that the customs saughterer s a baee
for hre to do a specfc |ob under a contract and that wth respect to the
arger meat packng companes who own and operate ther own abattor, the
saughter of hogs s the frst of a seres of processes n preparng the hogs for
market
Pettoner pad the processng ta es for November and December of 1933,
amountng to 13,711.23, drecty to the coector of nterna revenue. Later
the coector returned the payments wth nstructons to pay the C. . urnette
Co. Thereafter the coector demanded payment of and receved the ta from
C. . urnette Ct). From that tme on C. . urnette Co. sent the pettoner
nvoces for the kng charge and separate notces of the processng ta es on
hogs saughtered. In turn the pettoner pad C. . urnette Co. the kng
fee and processng ta by separate checks, and recorded the dsbursements
on ts records as processng ta es pad. The money coected from the pet-
toner was actuay used by C. . urnette Co. for the payment of the process-
ng ta es. The ony e cepton to ths method of payment appears to be the
payment by the pettoner of 2,589.13 drecty to the coector on uy 1, 1935.
though the pettoner has fed a refund cam for 260,075.15 (the amount of
processng ta es pad as above descrbed), the pettoner ndcates that t bore
the burden ony to the e tent of 18,120. 3.
In the nstant case counse contends that pettoner was the processor wthn
the ntendment of the grcutura d|ustment ct ( 8 Stat., 31), and that t
ought not to be dened the rght to a refund because t was compeed to pay
the ta to the saughterer. On the other hand counse for the Commssoner
contends that the saughterer was the ta payer under Tte II of the Revenue
ct of 1936 ( 9 Stat., 17 7). The man queston here nvoved, s whether
the pettoner was the processor who was obgated to pay the processng ta
under the statute.
The ta ng tatute, The grcutura d|ustment ct was enacted n 1933
and the pertnent provsons for purpose of dscusson heren are: (1) The
ct mposed the processng ta upon the frst domestc processng of the
commodty and provded that the ta sha be pad by the processor. ( 8
Stat., 35.) (2) It aso provded that the term processng means In case
of hogs, the saughter of hogs for market. ( 8 Stat., 30.) It
further provded (3) that no ta sha be requred to be pad on processng
by or for producers for home consumpton, and ( ) that The Secretary of
grcuture s authorzed, by reguatons, to e empt from the payment of
the processng ta the processng of commodtes by or for the producer
thereof for sae by hm . ( 8 Stat., 39.)
s the b passed the ouse of Representatves t contaned (1) and (3)
above, a provson empowerng the Secretary of Treasury to defne processng
wth respect to any commodty, and a provson statng that the Secretary
of grcuture s authorzed to e empt producers from the payment of the
processng ta wth respect to hogs n cases where the producer s
saes of the products resutng from the processng do not e ceed
100 per annum. (Congressona Record, voume 77, pages 671-700.) In the
Senate amendments were ntroduced to the ouse b and these were referred
to the Commttee on grcuture and Forestry for consderaton. (Congres-
sona Record, voume 77, pages 786 et scq.) Later ths commttee reported
the b as amended to the Senate for genera dscusson thereon. (Congres-
sona Record, voume 77, pages 1350 ct eq.) For our partcuar purpose,
the commttee deeted the defnton and e empton provsons descrbed above
and added (2). Thus the b as amended contaned (1), (2), and (3)
aready descrbed.
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69
Regs. 96, rt. 202.
The pertnent dscusson nduged n by the Senate Members centered around
a hypothetca set of facts whch may be stated brefy as foows: a producer
ks hs own hog, grnds t up, packs t nto sausage; he uses part of t for
home consumpton and ses part of t to the oca grocer; what are the con-
sequences of these actons under the b as amended (See Congressona
Record, voume 77, pages 1562-1065, 1629.) In the dscusson that foowed,
the Members of the Senate e pressed what they thought woud be the conse-
quences under the facts of the hypothetca probem. It was concuded that
there were at east three processng operatons n the probem but that prov-
son (1) of the b as amended ndcated ceary that the ta s mposed on
the nta processng operaton, the actua kng; that kng the hog for
home consumpton was e empted under provson (3) of the b as t passed the
ouse or as amended by the Senate and that the kng of the hog for sae
to the grocer was ta abe under provson (2) of the b as amended by the
Senate. Therefore, an amendment was ntroduced mmedatey, n the form
of provson ( ) aready descrbed, to provde for occasona saes by the
producer of hs processed hog.
The provsons of the ouse b as amended by the Senate namey, parts
(1), (2), (3), and ( ) became part of the grcutura d|ustment ct.
Part (2) was dscussed n the Senate, the body that added t to the b, and
n that dscusson ts reaton to (1), (3), and ( ) was emphaszed. If pages
1562 to 65 of the Congressona Record (devoted to the Senate dscusson
summarzed above) mean anythng at a, they mean that the egsators who
were responsbe for part (2) thought the foowng: that were the e empton
provsons of the b deeted, not even a farmer who ked hs own hog and
sbd part of the carcass to the oca grocer was mmune from ta aton; that
even he woud be a saughterer of hogs for market and therefore abe for
the processng ta . We are convnced that the words for market n the
statute are used to dstngush between the saughterng of hogs by or for an
owner for home consumpton and the saughterng of hogs where the resutant
product s sod.
grcutura commodtes on ther way to genera consumpton as food or
for ndustra purposes usuay undergo a seres of one or more processng
operatons to prepare them for use and dstrbuton. Thus hogs are not con-
sumed as raw materas hut n the form of pork products derved from certan
processng operatons. nd nasmuch as the ta s eved on the processng of
the commodty, t s necessary to take the commodty ether as t enters the
processng operatons or after t emerges therefrom. The statute recognzed
these facts when t mposed the ta on the fr.t processng of the hogs and pro-
vded that In the case of hogs the term processng meant the saughter of hogs
for market. The ta attached at the saughterng operatons, the nta opera-
ton n the seres of operatons necessary to prepare the hogs for market. It
foows too that a ta attachng to the product as t emerges from the subsequent
processng operatons, woud fa to reach part of the commodty on account of
the oss of weght durng the operatons.
s soon as the grcutura d|ustment ct was passed, the Department of
grcuture prepared reguatons nterpretng the term processng wth respect
to certan agrcutura commodtes. (Secton 9(d), 8 Stat., 36.) In the case
of hogs the frst reguatons defned the term n the words of the statute tsef
The frst domestc processng s the saughterng of hogs for market. ( og
Reguatons, Seres 1. effectve November 5, 1933.) Later the Department of
grcuture avaed tsef of secton 15(b) of the ct ( 8 Stat., 39) and made
two e ceptons to the standard that the frst domestc processng s the saughter-
ng of hogs. ( og Reguatons, Seres 1, No. 1, ssued October 29, 193 .) These
e ceptons e empted the producer or feeder who saughtered hs own
hogs 1 and sod the carcass to such transferees as butchers, packers, retaers,
hotes and restaurants. In these nstances the nta act of the transferee In
preparng the carcass for use was hed to consttute the frst domestc process-
ng. No other hog reguatons were ssued after October 29, 193 .
These departmenta reguatons were further refned by Treasury decsons and
rungs ssued by the ureau of Interna Revenue. (See secton 10(d), 8 Stat.,
37.) Reguatons are genera rues ony and often speca probems have to be
met. The effect of the reguatons. Treasury decsons and ureau rungs Is to
feeder was defned as a person en aced In the fattenng of hops for market or n
farmng operatons, e cept retaers, whoesaers or dstrbutors of meat, butchers, abat-
person who owned the hog at the tme of farrowng.
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Regs. 96, rt. 202
70
gve an e act statement of what s to be ta ed, who s to be ta ed and at what
pont n the processng operaton the ta s to be Imposed. Our e act factua
stuaton, the case of the customs processor, soon came to the attenton of the ta
coectors. Who was abe for the ta the customs saughterer or hs customer
(pork packer) On ay 1 ,193 , the rung was made that the customs saughterer
was the frst domestc processor of the hogs n such a case and that he was abe
for the processng ta . (See Interna Revenue uetn, No. 20, page 19, dated
May 1 , 193 ; C. . III-1, page 51, anuary- une, 193 .) In the nstant case
the Government mposed the ta on C. . urnette Co. (the customs saughterer).
Refund statute. In 19.36 the grcutura d|ustment ct was hed unconsttu-
tona n Unted States v. uter (297 U. S., 1 Ct. D. 1070, C. . -1, 21 (1936) ),
and thereafter Congress enacted Tte II of the Revenue ct of 1936 whch
provded for a refund of the processng ta es. ( 9 Stat., 17 7.) eretofore we
have dscussed the severa provsons of ths refund statute. (F. F. Laboratores
v. Commssoner, 10 Fed. (2d), 563 Ct. D. 1 18. C. . 1939-2, 396 ; Oswad aeger
akng Co. v. Commssoner, 108 Fed. (2d), 375 Ct. D. 1 55, C. . 19 0-1, 266 ,
certorar dened, 60 S. C, 723.) Upon further consderaton we fnd no reason
for recedng from what we there sad. We hed n those cases that the statute re-
strcted refunds to the partcuar processor who aone was obgated to pay the
processng ta under the ta ng statute.
Ceary ths statute authorzes refunds to any processor who was obgated
under the grcutura d|ustment ct to pay the processng ta and can show
that he dd not pass the ta burden on to others. (Secton 902. 9 Stat., 17 7.)
ut, as far as t s pertnent here, the statute arranges the cams of ta payers
under the ta ng statute nto two casses and then appes separate enforcement
procedures to each cass of cams. The cams are cassfed as foows: (1)
processng ta refund cams, or cams of ta payers who pad ta es upon the
processng of commodtes used n ther own busness; and (2) custom processng
ta refund cams, or cams of ta payers who pad ta es wth respect to the proc-
essng of commodtes for customers for a charge or fee. (Secton 902. 9 Stat.,
17 7; secton 913(b). 9 Stat., 175 : artce 101 (h), (), (k). Treasury Reguatons
96, promugated under the Revenue ct of 1936.) In ths regard the Commssoner
has provded that cams be fed on separate forms: cam (1) on P. T. Form 79;
and cam (2) on P. T. Form 78. (Secton 903, 9 Stat, 17 7; artces 501 and 601,
Treasury Reguatons 96.) The enforcement procedures seected are as foows:
for the enforcement of cam (1). from Commssoner to oard of Revew to the
appeate courts (secton 006, 9 Stat., 17 81 ; for the enforcement of cam (2),
from Commssoner to dstrct court or Court of Cams to the appeate courts
(sectons 90 and 905, 9 Stat., 17 8).
Concusons. We have studed the statutes and now we can answer the probem.
The ta ng statute ta os the frst domestc processor and n the case of hogs ths
person s the saughterer, the one who performs the nta processng operaton.
It does not requre that the saughterer be aso a packer n hs own rght before
he quafes as the frst domestc processor and ta payer. It s not concerned wth
the number of processng operatons but wth the frst processng operaton. The
person who performs the saughterng he may aso perform the subsequent
processng operatons (packer) or he may specaze n kng ony (the nde-
pendent abattor) s the frst domestc processor and ta payer under the ta ng
statute. In the nstant case C. . urnette Co. was engaged n the speca busness
of saughterng hogs for others a professona ker of hogs. Ths company
saughtered pettoner s hogs as an ndependent contractor and pad the processng
ta to the Government, and was the frst domestc processor and ta payer under
the grcutura d|ustment ct.
Moreover the refund statute recognzed the cam of the C. . urnette Co. type
of camant rcass (2) and authorzes a refund of the ta es pad, f the camant
can show t bore the ta burden. Of course C. . urnette Co. coud not recover
under the statute, for t passed on the burden. ssumng, however, that pettoner
were the pro| er ta camant, t woud be a camant n cass (2) under the refund
statute. substantay dentca case arose n the Ffth Crcut, and the court
there sad: The oard of Revew was gven |ursdcton to revew ony cams
of ta payers who pad processng ta es upon the processng of commodtes used n
ther own busness. The amount sought to be recovered n ths acton represents
ta es pad wth respect to the processng of an agrcutura commodty for cus-
tomers for a charge or fee, and the oard of Revew had no |ursdcton to revew
the Commssoner s dsaowance of the cam. ( rab Parkng Co. v. Comms-
soner, 9 Fed. (2d), 278, 279, certorar dened. une 6. 19 0.) We agree wth
the quoted statement: the oard of Revew has no |ursdcton over cams of
cass (2).
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71
Regs. 96, rt. 202.
Nor does the refund statute voate due process n ts appcaton to pettoner. If
pettoner was not the frst domestc processor and ta payer under the grcu-
tura d|ustment ct, t had no rght to a refund. In fang to provde a refund
to pettoner n such a case, the refund statute dd not voate due process.
The decson of the oard of Revew shoud be affrmed.
ffrmed.
S CTION 903. FILING OF CL IMS.
Reguatons 96, rtce 202: Facts and 19 1-26-10758
evdence n support of cam. Ct. D. 1520
PROC SSING T R NU CT OF 1936 D CISION OF COURT.
Petton fob Revew Cam fob Refund Suffcency ursdc-
ton of oard of Revew Consttutonaty of Statute.
The Unted States Processng Ta oard of Revew dd not err
n dsmssng a petton for determnaton upon ts merts of a cam
for refund of processng ta es pad where the ta payer, athough
fng ts cam od the prescrbed form, eded the paragraph reatng
to the amount of the ta borne by t and stated that t was mpossbe
to determne and prove how much of the ta , f any, was not ab-
sorbed by the ta payer. Such a cam dd not meet the requre-
ments of artce 202 of Reguatons 90. The oard of Revew has no
orgna |ursdcton, and was wthout authorty under the prov-
sons of Tte II of the Revenue ct of 1936 to entertan a petton
on Its merts where the refund cam was not compete. The ta -
payer s concuson that t was mpossbe to determne and prove
how much of the ta was borne by t does not present a consttutona
queston.
Unted States Crcut Coubt of ppeas for the S th Crcut.
Tennessee Consodated Coa Co., pettoner, v. Commssoner of Interna
Revenue, respondent.
117 Fed. (2d), 52.
On petton to revew an order of the Unted States Processng Ta oard of Revew.
efore cks, en, and rant, Crcut udges.
February 6, 19 1.
OPINION.
cks, Crcut udge: Petton to revew an order of the Unted States
Processng Ta oard of Revew, dsmssng a petton for the determnaton
upon ts merts of a cam for refund of 177. 5 ta es pad upon the processng
of hogs, under the provsons of the grcutura ct decared nvad anu-
ary 19, 1936, n Unted States v. Suter (297 U. S., 1 Ct. D. 1070, C. . -1,
21 (1936) , the cam havng been dsaowed by the Commssoner of Interna
Revenue. ccordng to the petton, ta es were pad durng the perod from
September, 1933, to December, 1935.
The refund cam was fed under the provsons of Tte II of the Revenue
ct of 1936 (sectons 901-917, ch. 690, 9 Stat., 16 8) whch authorzed refunds
of amounts so coected under certan condtons and mtatons and prescrbed
the procedure to be foowed. The Commssoner dsaowed the cam upon
the ground, that t contaned no aegaton or evdence that pettoner had
borne the burden of the ta and had not shfted It to others; and that t
afforded no bass for a determnaton of the ncdence of the ta and faed to
conform to the provsons of sectons 902 and 903 of the statute.
In ts petton to the oard the pettoner not ony took ssue wth the
rungs of the Commssoner but nssted that the Commssoner erred n not
hodng that sectons 902 and 903 of Tte II of the Revenue ct of 1936
were unconsttutona n so far as they purported to condton refund upon
proof that the ta payer had borne the burden of the ta . The oard dsmssed
the petton upon the ground that the refund cam faed to compy wth the
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Regs. 96, rt. 202.
72
provsons of the ct here nvoved and of the Treasury reguatons promugated
thereunder.
Our queston s, whether the order of dsmssa was |ustfed.
It s provded by secton 902 that before the camant s entted to any refund
he s requred to estabsh to the satsfacton of the Commssoner n accordance
wth the prescrbed reguatons, or to the satsfacton of the oard, that he has
borne the burden of the ta and has not been reeved thereof nor rembursed
therefor, nor shfted such burden drecty or ndrecty n the manner set out n
secton 902(a) (b). s a further prerequste to the aowance of the cam, secton
903 requres that the cam shoud be ted n accordance wth the reguatons
prescrbed by the Commssoner wth the approva of the Secretary. evdence
reed upon n support of such cam sha be ceary set forth under oath. rtce
201 of appcabe Treasury Reguatons 96 provdes that the cam for the refund
of such ta sha be made on prescrbed forms and be prepared n accordance
wth the nstructons contaned thereon and wth the provsons of the reguatons.
It must be kept n mnd that the Government has a rght to determne for
tsef Unted States v. Mche, 282 U. S., 650, 659 ICt. D. 310, C. . -, 297
(1931) ; Dsmuke v. Unted States. 297 U. S., 167, 171 by aw and by proper
reguatons whch have the force of aw Maryand Cas. Co. v. Unted States,
251 U. S., 3 2, 3 9 the condtons upon whch t consents to refund the ta and
t s |ust as cear that pettoner has not comped wth the prerequste condtons.
The refund cam was fed by the oard as hbt to the petton. It
was on P. T. Form 79 prescrbed by the reguatons but the form was not foowed.
In the prnted affdavt statng the essenta eements of the cam the pettoner
eded the foowng paragraph:
. (a) That the amount of the burden of the processng ta on the processng
of the commodty named above whch was borne by the camant as set forth n
coumn 2 above s true and correct; that the camant has not been reeved
thereof nor rembursed therefor nor shfted such burden, drecty or ndrecty,
(1) through ncuson of such amount by the camant, or by any person drecty
or ndrecty under hs contro, or havng contro over hm, or sub|ect to the
same common contro, n the prce of any artce processed from such com-
modty; (2) through reducton of the prce pad for such commodty; or (3)
n any manner whatsoever; and that no understandng or agreement, wrtten
or ora, e sts whereby he may be reeved of the burden of such amount, be
rembursed therefor, or may shft the burden thereof; and (6) that the data
and statements submtted n and made a part of Schedue D are true and correct;
In the space cang for computaton and comparson of the average margn
before, durng and after the ta perod to ndcate the burden of the ta actuay
borne by t, the pettoner answered, No such nformaton avaabe. In the
space provded for a Statement of Facts tendng to estabsh that t had borne
the burden of the ta , the pettoner wrote,
It s mpossbe to determne and prove how much of the ta , f any, was not
absorbed by the ta payer.
Ta payer demands refund of the entre amount pad because the Supreme
Court has hed that t was egay assessed and coected and because any
attempt to condton or restrct the refund thereof, by requrng proof that the
tu was absorbed by ta payer, s unconsttutona and vod.
It s too cear for e tended dscusson that pettoner dd not fe a compete
cam as requred by artce 202 of the appcabe reguatons. It struck from
the form matters of substance whch the reguatons requre and whch the
Commssoner had a rght to nsst upon. It has faed to set forth ceary under
oath any evdence upon whch t recs n support of the cam. We thnk there-
fore that the order of the oard dsmssng the petton upon the grounds n-
dcated was ceary rght. (Unted States v. Fet Tarrant Co.. 283 U. S., 269
Ct D. 336, C. . -, 31 (1031) ; Tucker v. e ander, 275 U. S., 228 T. D. 3973,
O. . I-1, 287 (1927) ; Maryand Cas. Co. v. Unted States, supra ; ngs County
Savngs Insttuton v. ar, 116 U. S., 200; Nchos v. Unted States, 7 Wa.,
122, 130; Lee Wson Co. v. Commssoner, 111 Fed. (2d), 313. 317 (C. C. . 8).)
ut pettoner nssts, the vadty of the cam for refund to one sde, that ts
petton to the oard stated a good cause of acton whch shoud have been
heard upon ts merts.
The petton averred n substance that pettoner had borne the burden of the
ta and had not been reeved therefrom or rembursed therefor and had not
shfted the burden drecty or ndrecty to others and that ts cam for refund
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Regs. 96, rt. 202.
had been dsaowed by the Commssoner. We need not further recte the
averments of the petton for the oard was wthout authorty to entertan t.
It had no orgna |ursdcton. y secton 906(b) of the ct |ursdcton s
conferred upon t to revew the aowance or dsaowance of the Commssoner
of a cam for refund and to determne the amount of refund due any camant
wth respect to such cam ; and by secton 906(c) the pettoner upon ts
request s entted to a hearng on the merts of hs cam n whoe or n part.
The terms cam or cam for refund mean of course a vad cam under
the statute and ths ony. (See Lee Wteon Co. v. Commssoner, supra.)
Fnay, t s urged that Tte II of the Revenue ct of 15)36 s unconsttutona,
n so far as t condtons a refund upon a showng that a ta payer bore the burden
of the ta when such proof s not avaabe. ust what partcuar provson
of the Consttuton s thus voated s not ponted out.
ut the petton whch we are urged to consder wthout reference to the
cam for refund does not aver that such proof s not avaabe. The statement
n the cam to the effect that t Is mpossbe to determne and prove how much
of the ta , f any; was not absorbed by the ta payer and the further statement
no such nformaton avaabe were mere concusons or nferences whch the
pettoner coud not determne for tsef. The queston of mpossbty or
avaabty of proof was one for the revewng authortes under a proper
cam. Consttutona questons are not to be decded hvpotheMeav. (See
nn ton Mfg. Co. v. Davs, 301 U. S., 337, 353 Ct. D. 123 , C. . 1937-1, 85 .)
The order sought to be revewed s affrmed.1
1 udge rant concurred n the conference concuson In ths case but ded before the
opnon was prepared.
0 8 1 1 16
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7
N D COTTON CONTROL CT OF 193 , S
M ND D.
19 1-1 -10667 Ct. D. 1 99
processng ta bankhead cotton contro act, as amended second
defcency appropraton act decson of court.
1. Ta on cess Cotton Producton Purchase: of Ta -
empton Certfcates Cam fob Refund.
cotton grower who purchased cotton ta e empton certf-
cates through the Department of grcuture n eu of payment of
the ta mposed by the ankhead Cotton Contro ct, as amended,
on cotton produced n e cess of hs aotment, may not recover the
amount pad for the certfcates n an acton aganst the Unted
States based upon the re|ecton of a cam for refund. Congress
has prescrbed the condton that refunds are aowabe ony to the
e tent that the ta was pad n money, and satsfacton of ta
abty by the purchase of e empton certfcates s not con-
sdered a payment of the ta n money.
2. ursdcton of Court.
The dstrct court s wthout |ursdcton, In the absence of
fraud, to revew the fndngs of fact and concusons of aw of the
Commssoner of Interna Revenue upon the merts of a cam,
fed by a cotton grower after the ankhead Cotton Contro ct
was decared unconsttutona, for the refund of amounts pad
for ta e empton certfcates. The Second Defcency ppropra-
ton ct, approved une 25, 1938, specfcay prohbts the mante-
nance of such an acton.
Unted States Crcut Court of ppeas for the Ffth Crcut.
T. . Cook, appeant, v. Unted States of merca, appeee.
115 Fed. (2d), 63.
ppea from the Dstrct Court of the Unted States for the Mdde Dstrct of abama.
efore Foster, omes, and McCord, Crcut udges.
November 15, 19 0.
opnon.
omes, Crcut udge: Durng the years 193 and 1935, appeant (pantff
beow) was a grower of cotton n abama. e produced more cotton than
was aotted to hm under certan acreage-reducton contracts whch he had
entered nto wth the Unted States, and became sub|ect to a ta on hs e cess
prmucton n the sum of 5 cents per pound. In eu of the payment of ths ta
he purchased, through the Unted States Department of grcuture, cotton
e empton certfcates, payng therefor appro matey cents per pound.
fter the grcutura d|ustment ct and the ankhead Cotton Contro ct
were decared unconsttutona,1 appeant duy fed cam for the amount of
payments made by hm for such e empton certfcates. s cam was re|ected,
and ths sut was brought by hm aganst the Unted States to recover the
amount of sad cam. moton to dsmss the compant was made by the de-
fendant, whch was sustaned by the court beow on the grounds that (1) the
compant showed on ts face that the court acked |ursdcton of the sub|ect
matter, (2) the Unted States had not consented to be sued upon the cam set
forth n the compant, and (3) the provsons of the Second Defcency p-
propraton ct, approved une 25, 1938, specfcay prohbted the mantenance
of ths acton.
Unted Sates v. uter (207 U. S., 1 Ct. D. 1070, C. . -1, 21 (1036) ) ; Unted
6 tafe v. Lee Moor (9a Fed. (2d), 22).
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Mso.
It a we setted that the Unted States Government s not suabe as of
common rght, and the party who sues It must brng hs case wthn the au-
thorty of some ct of Congress or the court can not e ercse ursdcton over t.
Recognzng ths rue, the appeant ponts to the Tucker ct, approved
March 3, 1887 (ch. 359, 2 Stat., 505), and the Second Defcency ppropraton
ct, approved une 25, 1938. The Tucker ct Is genera n ts nature, and
must gve way to speca statutes coverng the partcuar cases. The Federa
courts, other than the Supreme Court, do not derve ther |ursdcton from
the Consttuton of the Unted States, but e ercse ony such powers as Con-
gress, wthn consttutona mts, confers upon them. So ong as t does not
e pand that |ursdcton beyond such mtatons, the Congress may gve,
wthhod, or restrct that |ursdcton as t sees ft. Courts created by statute
must ook to the statute as the warrant of ther authorty, and even an mned
repea of It eaves the courts poweress to decde pendng cases.
If t be conceded that the Tucker ct gves |ursdcton n ths cass of cases
(whch we do not decde), t was taken away n ths partcuar case by the
provsons of the Second Defcency ppropraton ct, supra, whch provded
that, n the absence of fraud, a fndngs of fact and concusons of aw of
the Commssoner of Interna Revenue upon the merts of any such cam for
refund, and the mathematca cacuatons made n connecton therewth, shoud
not be sub|ect to revew by any court or by any offcer, empoyee, or agent of
the Unted States.
Treasury Decson No. 850 C. . 1938-2, 76 , duy promugated, provdes
that refunds w be aowed ony to the e tent that the ta , penaty, or nterest
was pad n money, and that the satsfacton of ta abty by the surrender
or use of ta e empton certfcates, ta payment warrants, or ta e empton
stamps Is not consdered a payment of the ta n money.
The Unted Sates Government Is under no obgaton to provde a remedy
through the courts aganst tsef.5 The Congress havng prescrbed the con-
dtons appcabe to refunds of amounts coected under the unkhead Cotton
Contro ct, these condtons must be strcty foowed.
In the case before us, appeant pad no ta , n money or otherwse, to the
coector of nterna revenue. e had the opton of payng the ta n cash to
such coector In hs dstrct on hs e cess nt cotton grown n 193 and 1935
(as was done n Unted States v. Lee Moor, 93 Fed. (2d), 22) ; but, for reasons
presumaby deemed wse by hm, he chose to purchase ta e empton cer-
tfcates to cover the gnnng of hs e cess cotton, and, accordngy, he receved
the gmer s certfcate that the cotton was free of any ta en or cam. e
was thereby enabed to gn and se hs e cess nt cotton wthout payng the
ta mposed by the aforesad ct.
Not ony dd Congress e pressy prohbt the refund of amounts not pad as a
ta n money to a coector of nterna revenue, hut t further provded that, n
the absence of fraud, a fndngs of fact and concusons of aw of the Com-
mssoner of Interna Revenue upon the merts of any such cam for refund
shoud not be sub|ect to revew by any court. ppeant aeges the fng of a
proper cam for refund and ts re|ecton by appetee. Ths amounts to an
aegaton that appeant s cam for refund, requred to be fed by the pro-
vsons of the ct, was re|ected by the Commssoner of Interna Revenue upon
ts merts. Therefore, the court beow, snce the compant contaned no
aegaton of fraud, was wthout ursdcton to revew the Commssoner s fnd-
ngs of fact and concusons of aw upon the merts of appeant s cam. The
|udgment of the dstrct court s affrmed.
Unted States v. Cark (8 Tot, 36. ); Red v. Unted State (211 U. 8, 520) 1
Unted Stoen v. Mche (282 . S., 656 Ct. fa. 310, C. . -, 297 (1931)1) : Munroe v.
Unted States (303 . S.. 36).
Shedon v. S (8 ow., 11: De root v. Unted States (8 Wa.. 10): Case of
erng Machne Companes (18 Wa., 553) ; F. Parte Robnson (10 Wa.. 506) ; Stevenson
v. Fan (195 C. S.. 165) ; entucky v. Powers (201 . S., 1) ; Parte Wsner (203 S,
0) ; ne . urke Constructon Co. (260 . S.. 226) ; Ws v. Caforna (293 U S,
62) : etna Lfe Ins. Co. v. Uaworth (300 U. S.. 227).
Insurance Co. v. Rtche (6 Wa.. 5 1): The ssessor v. Osborne (0 Wa., 567)
aowe v. Commons (239 U 8., 500) ; Smawood v. Uaardo (275 U. S., 56).
Unted States v. abeock (250 U. S.. 328).
Cheatham v. Unted States (92 U. ., 85) ; Stephens v. Monangahea ank (111 T . 8.,
197) : Medburg v. Unted States (173 U. S.. 02) ; Parsh v. Mc cagh (21 17. S., 12 ) :
Roc Isand, etc., R. R. v. Unted States (25 U. 8., 1 1 Ct. D. 2 C. . . 3 2 (1921)11 :
Luckenbach S. 8. Co. v. Unted States (272 II. S., 533) ; Unted States v. Mche (282
T . S.. 656 Ct. D. 310, C. . -, 297 (1031) ).
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76
ITUMINOUS CO L T .
Reguatons 98 (1937), rtce 11: ffectve 19 1-2 -107 8
date. T. D. 5053
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 311.
ITUMINOUS CO L T .
rtce 11, Reguatons 98 (1937 edton), as amended and as made
appcabe to the Interna Revenue Code, further amended to con-
form to Pubc Law 3 , Seventy-seventh Congress.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 98 Part 311, Tte 26, Code of
Federa Reguatons , reatng to the ta es on the sae or other ds-
posa of btumnous coa mposed under the tumnous Coa ct of
1937 as made appcabe to the Interna Revenue Code (53 Stat.,
Part 1; 26 U. S. G, Sup. ) by Treasury Decson 885, approved
February 11. 1939 C. . 1939-1 (Part ), 396 Chapter 1, note,
Tte 26, Code of Federa Reguatons, 1939 Sup. , to the provsons
of the ct approved pr 11, 19 1 (Pubc Law 3 , Seventy-seventh
Congress), such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey precedng artce 11
secton 311.11, Tte 26, Code of Federa Reguatons , as amended
by Treasury Decson 7 2, approved une 22, 1937 C. . 1937-1,
3 8 , the foowng:
Pubc Law 3 , Seventy-seventh Congress. pproved pr 11, 19 1.
e t enacted by the Senate and ou e of Representatve of the
Unted States of merca n Congress assembed, That (a) secton 19
of the tumnous Coa ct of 1937 (reatng to termnaton of the
ct) s amended to read as foows:
Sec. 19. Ths ct sha cease to be In effect (e cept as provded In
secton 13 of the Revsed Statutes) and any agences and offces estab-
shed under, or to engage n the admnstraton of, ths ct sha cease
to e st at 12: 01 a. m., pr 26, 19 3.
(b) Secton 3527 of the Interna Revenue Code (reatng to termua-
ton of the btumnous coa ta es) s amended to read as foows:
Sec. 3527. Termnaton of Ta .
The ta es mposed by ths chapter sha not appy to the sae or
other dsposa, after pr 25, 19 3, of btumnous coa.
Par. 2. rtce 11, as amended by Treasury Decson 7 2, s
amended to read as foows:
The ta es attach to saes or other dsposas of btumnous coa made by the
producer thereof on and after une 21, 1937, but do not attach to such saes
or other dsposas after pr 25, 19 3.
(Ths Treasury decson s prescrbed under the authorty con-
taned n secton 3521 of the Interna Revenue Code, 53 Stat, 31
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77 Mm
(26 U. S. G, Sup. , 3521), secton 3791 of the Interna Revenue
Code, 53 Stat., 67 (26 U. S. C, Sup. , 3791), and the ct approved
pr 11, 19 1 (Pubc Law 3 , Seventy-seventh Congress).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved une 10, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 12,19 1, 11.26 a. m.)
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Regs. 7 (1937), rt. I .
78
LCO OL T .
SU C PT R C MISC LL N OUS CIS T S. PRODUCTION,
FORTIFIC TION, T -P YM NT, TC, OF WIN .
Reguatons 7 (1937), mcus I : Ta payment 19 1-5-1058
of wnes. T. D. 5033
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 178.
PRODUCTION, FORTIFIC TION, T -P YM NT, TC., OF WIN
mendng Reguatons No. 7.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Dstrct Supervsors, Coectors of Interna Revenue, and Others
Concerned.
y vrtue of and pursuant to the provsons of sectons 3030(b) 1,30 0,
3176, and 3301 of the Interna Revenue Code, paragraph 108 of Reg-
uatons No. 7 (secton 178.108, Tte 26, Code of Federa Reguatons)
s hereby amended to read as foows:
Par. 108. Ta -payment by stamp. Whenever the propretor proposes to ta -
pay and remove wne, he sha, pror to such remova, securey aff to each cask,
barre, or other mmedate contaner (e cept bottes of a capacty of 1 gaon or
ess) or to each case or other shppng contaner (e cept raroad tank cars),
stamps denotng payment of the nterna revenue ta thereon. The stamps sha
be aff ed to the Government head of each package or sde of each case. When
remova s made n a tank truck, the stamps sha be aff ed to a sutabe board
fastened to the truck n a permanent manner. The stamps must be aff ed wth a
good adhesve. In the case of wooden contaners, tacks or stapes sha be used n
addton to the adhesve. The propretor sha cance the stamps by ndeby
wrtng or stampng thereon or perforatng hs name or ntas and the date of
canceaton. Upon beng aff ed and canceed a coatng of transparent varnsh
or sheac, or gue that does not dscoor the stamps and that affords protecton
aganst mosture, erasure, and remova equa to that afforded by vnrnsh or
sheac, must be apped over the stamps. The number of bottes and the sze of
each botte n a case of champagne, sparkng wne, or artfcay carbonated wne,
must be stenced or marked on the case.
Tmothy C. Mooney,
ctng Commssoner of Interna Revenue.
pproved anuary 2 ,19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster anuary 28, 19 1, 10.18 a. m.)
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MISC LL N OUS RULINGS.
C SS PROFITS T .
19 1-12-10655
T. D. 50 3
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 30.
C SS PROFITS T .
Reguatons reatng to aowance of e cess profts credt and
Informaton to be ncuded n returns fed under the cess Profts
Ta ct of 19 0, as amended by the cess Profts Ta mendments
of 19 1.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
y reason of the enactment of the cess Profts Ta mendments
of 19 1 (Pubc Law 10. Seventy-seventh Congress), approved March
7,19 1 page 535, ths uetn , the foowng reguatons are hereby
prescrbed:
Secton 30.1. cess profts credt; aowance. The cess Profts Ta ct
of 19 0 provdes two methods for computng the e cess profts credt: (1) the
ncome method under whch the credt s computed as provded n secton 713,
and (2) the nvested capta method under whch the credt s computed as
provded n secton 71 . The cess Profts Ta mendments of 19 1 provde
that, n the case of the foowng corpora ons, the e cess profts credt for any
ta abe year sha be the credt based u m ncome, computed as provded n
secton 713, or the credt based upon nvested capta, computed as provded
n secton 71 , whchever credt resuts n the esser ta for the ta abe year
for whch the ta s beng computed:
(o) domestc corporaton whch was actuay n e stence before anuary
1, 19 0.
(6) domestc corporaton whch s an acqurng corporaton wthn the
meanng of secton 7 0 of Suppement and whch was constructvey n
e stence at the begnnng of ts base perod.
(c) foregn corporaton (1) whch s engaged n trade or busness wthn
the Unted States, or has an offce or pace of busness theren, at any tme
durng the ta abe year; (2) the frst ta abe year of whch for the purposes
of the e cess profts ta begns on any date n 19 0; (3) whch was n e stence
on the day 8 months pror to such date; and ( ) whch at any tme durng
each of the ta abe years n such S months was engaged n trade or busness
wthn the Unted States, or had an offce or pace of busness theren. s
to what consttutes beng engaged n trade or busness wthn the Unted States,
see secton 19.231-1 of Reguatons 103.
If a ta payer dscams n ts return for a partcuar ta abe year the use of
ether credt, the credt so dscamed sha not, for the purposes of the nterna
revenue aws, be appcabe to the computaton of the ta for the ta abe year
wth respect to whch the dscamer s made.
domestc corporaton whch was not actuay n e stence before anuary
1, 19 0, and whch was not constructvey n e stence on the date of the
begnnng of ts base perod, and a foregn corporaton whch does not meet
the requrements of (c) above, are requred to compute ther credt under the
nvested capta method provded n secton 71 . (Secton 62, 53 Stat, 82, 26
( 79)
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Msc.
80
U. S. C Sup. 62; sectons 13, 1 , 15, cess Profts Ta mendments of 19 ;
Pubc Law 10, Seventy-seventh Congress.)
Sec. 30.2. verage base perod net ncome of acqurng corporaton. Secto
7 2 of the cess Profts Ta ct of 19 0 provdes rues for the computaton o
the average base perod net ncome n the case of certan corporatons whch ar
acqurng corporatons wthn the meanng of secton 7 0. The cess Proft
Ta mendments of 19 1 provde that every acqurng corporaton whch wa.
tsef actuay n e stence before anuary 1, 19 0, sha have an eecton t
compute ts average base perod net ncome under ether of the two foown|
methods:
(a) The average base perod net ncome computed under secton 71c
soey wth reference to the ta payer s own base perod e perence, wthout
reference to the base perod e perence of any of the ta payer s component
corporatons; or
(6) The average base perod net ncome computed under secton 7 2 wth
reference to the base perod e perence of the ta payer and each quafed,
component corporaton.
The eecton sha be made n the e cess profts ta return for the partcuar
ta abe year. n eecton once made s rrevocabe for a partcuar ta abe
year, but a new eecton s granted for each succeedng ta abe year. n
acqurng corporaton whch was merey constructvey n e stence before
anuary 1, 19 0, by reason of the provsons of secton 7 0, s requred, In every
case, to compute ts average base perod net ncome under secton 7 2. (Secton
02, 53 Stat., 32, 26 U. S. C, Sup., 62; secton 15, cess Profts Ta mendments
of 19 1, Pubc Law 10, Seventy-seventh Congress.)
Sec 30.3. Informaton requred n returns. ny ta payer whch s entted
to have ts e cess profts credt computed under secton 713 or secton 71 ,
whchever credt resuts n the esser e cess profts ta , s requred, even though
t has fed od Form 1121, to fe a return on Form 1121 (revsed March, 19 1),
and such return sha (uness the ta payer states theren that t dscams the
use of one of the credts) contan computatons of the credts computed under
secton 713 and secton 71 and the e cess profts net ncome computed wth
the credt under secton 713 and the e cess profts net ncome computed wth
the credt under secton 71 , and sha contan a the nformaton requred
by such revsed form and by these reguatons wth respect to such computa-
tons. ta payer statng n ts return that t dscams the use of one of the
credts n the computaton of the e cess profts ta for the ta abe year may
omt from the return the computaton and nformaton based upon such ds-
camed credt. (Secton 62, 53 Stat., 32, 26 U. S. C, Sup., 62; secton 16, cess
Profts Ta mendments of 19 1, Pubc Law 10, Seventy-seventh Congress.)
Sec. 30. . Modfcaton of pror reguatons. Reguatons 109 page 69, ths
uetn Part 30, Tte 26, Code of Federa Reguatons 19 1, Sup. are hereby
modfed to the e tent that they may be Inconsstent wth these reguatons.
(Secton 62, 53 Stat, 32, 26 T . S. C, Sup., 62; sectons 13, 1 , 15, 16, cess
Profts Ta mendments of 19 1, Pubc Law 10, Seventy-seventh Congress.)
Gut T. everno,
Commssoner of Interna Revenue.
pproved March 15, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster March 18,19 1,11. 6 a. m.)
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81
Mso.
LCO OL T .
19 1-7-10C05
T. D.5039
mendments to basc permt procedure under Federa coho
dmnstraton ct.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Dstrct Supervsors and Others Concerned:
Secton 1. y vrtue of and pursuant to the provsons of the
Federa coho dmnstraton ct, as amended (U. S. C. Sup.,
Tte 27), secton 3170 of the Interna Revenue Code (53 Stat.,
Part 1) and secton 161 of the Revsed Statutes (U. S. C, Tte 5,
secton 22), Part 171 of Tte 26 of the Code of Federa Reguatons
s hereby amended by strkng out subsectons (c) and (d) of
secton I71. d thereof.
Sec. 2. y vrtue of and pursuant to the provsons of the Federa
coho dmnstraton ct, as amended (U. S. C. Sup., Tte 27),
secton 3170 of the Interna Revenue Code (53 Stat., Part 1) and
secton 161 of the Revsed Statutes (U. S. C, Tte 5, secton 22),
Part 171 of Tte 26 of the Code of Federa Reguatons s hereby
amended by addng to secton 17. d thereof the foowng new
subsectons:
(c) The hearng In any proceedngs nsttuted under ths secton by the
Deputy Commssoner sha be hed by hm, or by a hearng offcer authorzed
by hm, and at such tme and pace as he may desgnate. The hearng n any
proceedngs nsttuted under ths secton by any dstrct supervsor sha be
hed by hm, or by a hearng offcer authorzed by hm, and at such tme and
pace as he may desgnate, e cept that the tme and pace of any hearng wthn
a dstrct other than that of such supervsor sha be such tme and pace as
may be desgnated by the dstrct supervsor of the other dstrct, who sha
conduct the hearng or authorze a hearng offcer to conduct t, and who sha
certfy for decson the record thereof to the dstrct supervsor who Insttuted
the proceedngs. The tme and pace of any desgnated hearng may be changed
upon agreement of the partes.
(d) Upon wrtten appcaton, the attendance and testmony of any person,
or the producton of documentary evdence, n proceedngs nsttuted under
ths secton may be requred by persona subpena (Form 16 ) or by subpena
duces tecum (Form 16 5). Subpenas may be ssued by the Deputy Comms-
soner, or by any dstrct supervsor, or by any offcer or empoyee thereunto
authorzed by ether the Deputy Commssoner or the dstrct supervsor. oth
the appcaton and the subpena sha set forth the tte of the proceedngs,
the name and address of the person whose attendance s requred, the date
and pace of hs attendance, and, f documents are requred to be produced,
a descrpton thereof; and the appcaton sha set forth suffcent facts to
show the reevancy of the testmony and documents.
(e) ny offcer nsttutng proceedngs under ths secton, or authorzed to
conduct hearngs n such proceedngs, may order the takng of depostons In
the proceedngs at such tme and pace as he may desgnate before a person
havng the power to admnster oaths. The testmony sha be reduced to wrtng
by the person takng the deposton, or under hs drecton, and the deposton
sha be subscrbed by the deponent uness the subscrbng thereof s waved
n wrtng by the partes. ny person may be subpenaed to appear and
depose and to produce documentary evdence n the same manner as wtnesses
at hearngs.
(/) Ctatons, notces of dsapprova of appcaton, notces of hearng, orders,
and a documents, other than subpenas, served n proceedngs under ths sec-
ton, sha be served n person by any ofeer, empoyee, or agent of the Treasury
Department, or by regstered ma (wth request for regstry return recept
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Msc.
82
card post-offce Form 3811) to the ast known address In the records of the
coho Ta Unt certfcate of mang and the regstry return card (post-
offce Form 3811), or a certfcate of persona servce, sha be fed as part of
.the record n each case. Subpenas sha be served n person, and, when ssued
cm behaf of the Unted States, servce sha be made by an offcer, empoyee,
or agent of the Treasury Department
(g) ny provsons of Reguatons No. 1, Reatng to the Issuance, Revoca-
ton, Suspenson and nnument of asc Permts, whch are nconsstent wth
the provsons of ths secton, are repeaed to the e tent of such nconsstency.
Sec. 3. These reguatons sha take effect 15 days after the date
of fng wth the Dvson of the Federa Regster, but sha not n-
vadate any act done pror to such effectve date n conformty wth
reguatons theretofore e stng.
Stewart erkshre,
Deputy Commssoner of Interna Revenue.
pproved anuary 21, 19 1.
Gut T. everng,
Commssoner of Interna Revenue.
pproved February 12, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster February 13, 19 1, 11.51 a. m.)
19 1-2 -107 5
T. D.5050
Revsed standards of Identty for brandy.
Treasury Department,
Offce of Commssoner of Interna Revenue.
To Dstrct Supervsors and Others Concerned:
Secton 1. y vrtue of and pursuant to the provsons of the
Federa coho dmnstraton ct, as amended (U. S. C, Sup., Tte
27), secton 3170 of the Interna Revenue Code (53 Stat., part 1), and
secton 161 of the Revsed Statutes (U. S. C, Tte 5, secton 22),
Reguatons No. 5, Reatng to Labeng and dvertsng of Dsted
Sprts (27 C. F. R., part 5), are amended as foows:
rtce II, secton 21, cass of sad reguatons (27 C. F. R. 5.21)
s amended to read:
Cass h- randes. randy s a dstate, or a m ture of dstates,
obtaned soey from the fermented |uce, mash or wne of frut, or from the
resdue thereof, dsted at ess than 190 proof n such manner as to possess
the taste, aroma and characterstcs generay attrbuted to the product, and
botted at not ess than 80 proof; and sha aso Incude such dstates, aged
for a perod of not ess than 50 years, and botted at not ess than 72 proof, n
cases where the reducton n proof beow 80 Is due soey to osses resutng
from natura causes durng the perod of agng. randy, or m tures thereof,
not conformng to any of the foowng standards sha be desgnated as
brandy, and such desgnaton sha be quafed by a truthfu and adequate
statement of composton In drect con|uncton therewth.
(a) Frut brandy s brandy dsted soey from the |uce or mash of whoe,
sound, rpe frut, or from standard grape, ctrus, or other frut wne, wth or wth-
out the addton of not more than 20 per cent by voume (cacuated pror to the
addton of water to factate dstaton) of the ees of such wne, and sha
Incude m tures of such brandy wth not more than 20 per cent (cacuated on a
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proof bass) of ees brandy. Frut brandy, derved e cusvey from grapes, sha
be desgnated as grape brandy or brandy. Frut brandy, other than grape
brandy, derved e cusvey from one varety of frut, sha be desgnated by the
word brandy quafed by the name of such frut (e. g., peach brandy, appe
brandy, orange brandy ), e cept that appe brandy may be desgnated
appe|ack. Frut brandy derved from more than one varety of frut sha be
desgnated as frut brandy, quafed by a truthfu and adequate statement of
composton (e. g., frut brandy a bend of 90 per cent grape brandy and 10
per cent backberry brandy ).
(6) Cognac or Cognac (grape) brandy, Is grape brandy dsted n the
Cognac regon of France, whch s entted to be so desgnated by the aws and
reguatons of the French Government.
(c) Dred frut brandy s brandy that conforms to the standard for frut
brandy e cept that t has been derved from sound, dred frut, or from the
standard wne of such frut. randy derved from rasns, or from rasn wne,
sha be desgnated as rasn brandy. Other brandes defned n ths para-
graph sha be desgnated n the same manner as frut brandy from the correspond-
ng varety or varetes of frut e cept that the name of the frut sha be quafed
by the word dred.
( f) Lees brandy Is brandy dsted from the ees of standard grape, ctrus,
or other frut wne, and sha be desgnated as ees brandy, quafed by the
name of the frut from whch such ees are derved.
(e) Fomace brandy, or marc brandy, s brandy dsted from the skn
and pup of sound, rpe grapes, ctrus or other frut, after the wthdrawa of the
|uce or wne therefrom, and sha be desgnated as pomace brandy, or marc
brandy, quafed by the name of the frut from whch derved. Grape pomace
brandy may be desgnated as grappa or grappa brandy.
(f) Neutra brandy s any brandy dsted on or after uy 1, 19 1, at more
than 170 proof. randy so dsted sha be desgnated n the same manner as
f ds ed at a ower proof, e cept that the desgnaton sha be quafed by the
word neutra n the same sze and knd of type, e. g., neutra brandy, neu-
tra grape ees brandy, or neutra grape pomace brandy.
(g) Substandard brandy sha bear as a part of ts desgnaton the word
substandard, and sha Incude
(1) ny brandy dsted at not more than 170 proof from |uce, mash or
wne havng a voate acdty n e cess of that proscrbed for standard wne,
and any brandy dsted at more than 170 proof from |uce, mash or wne
h vng a voate acdty, cacuated as acetc acd and e cusve of suphur
do de, n e cess of 0.L 0 gram per 100 cubc centmeters (20 C.); measure-
ments of voate acdty under ths subparagraph sha be cacuated e cusve
of water added to factate dstaton.
(2) ny brandy whch has been dsted from unsound, moudy, dseased
or decomposed |uce, mash or wne, or whch shows n the fnshed product
any taste, aroma or characterstc assocated wth products dsted from
such |uce, mash or wne.
rtce II, secton 21, cass 7 of sad reguatons (27 C. F. R. 5.21)
s amended by changng subparagraph (g) thereof to read:
(g) ny brandy to the dstng matera for whch has been added any amount
of sugar other than the knd and amount of sugar e pressy authorzed for the
ameoraton of standard wne.
rtce III, secton 3 ( /) of sad reguatons (27 C. F. R. 5.3 ) s
amended to read:
(d) In the case of whsky (as defned n rtce II, secton 21, cass 2) and
mercan type whsky produced on or after March 1, 1938, and n the case of
brandy produced on or after uy 1, 19 1, whch, n whoe or n part, s treated
wth wood chps through percoaton or otherwse, durng dstaton, rectfca-
ton, or storage, there sha be stated n drect con|uncton wth the cass and
type desgnaton the phrase coored and favored wth wood chps.
rtce III, secton 38( ) of sad reguatons (27 C. F. R. 5.39)
s amended to read:
(5) Statements of age for rum, brandy, Scotch, Irsh, and Canadan whskes,
and bended Scotch, bended Irsh, and bended Canadan whskes. (1) ge
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8
may, but need not, be stated on abes of rums, brandes, and bended or unbended
Scotch, Irsh, and Canadan whskes, as defned In rtce II of these reguatons
Provded, That an approprate statement wth respect to age sha appear on
the brand abe n the case of any brandy not aged for a perod of at east two
years.
(2) If age s stated, It sha be substantay as foows: Ths rum s
years od ; Ths brandy s years od; Ths whsky Is years od;
the banks to be fed n wth the age of the youngest dsted sprts n the
product.
Sec. 2. These reguatons sha take effect uy 1,19 1.
Stewart erkshre,
Deputy Commssoner of Interna Revenue.
pproved May 29,19 1.
Guy T. everng,
Commssoner of Interna Revenue.
pproved une 6, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 9,19 1,LU a. m.)
19 1-2 -107 6
T. D. 5051
mendng the abeng and advertsng reguatons tnder the
Federa coho dmnstraton ct, to prevent the mseadng use
of brand names, and for other purposes.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Dstrct Supervsors and Others Concerned:
y vrtue of and pursuant to the provsons of the Federa coho
dmnstraton ct, as amended (U. S. C. Sup., Tte 27), secton
3170 of the Interna Revenue Code (53 Stat., part 1), and secton
161 of the Revsed Statutes (U. S. C, Tte 5, secton 22), Regua-
tons No. , No. 5, and No. 7, reatng to abeng and advertsng of
wne, dsted sprts, and mat beverages, respectvey (27 C. F. R.,
parts , 5, and 7), are amended as foows:
rtce II, secton 20, of Reguatons No. 5 (27 C. F. R. 5.20) s
amended to read:
Sbc. 20. ppcaton of standards. The standards of Identty for the severa
casses and types of dsted sprts set forth heren sha be appcabe ony to
dsted sprts for beverage or other nonndustra purposes. Nothng contaned
n these standards of dentty sha be construed as authorzng the nonndustra
use of any dsted sprts produced n an ndustra acoho pant, e cept that
acoho or neutra sprts, as heren defned, may be so used f produced
pursuant to the basc permt requrements of the Federa coho dmnstraton
ct.
rtce III, secton 30( ), of Reguatons No. (27 C. F. R. .30) s
amended to read:
(6) teraton of abes. (1) It sha be unawfu for any person to ater,
mutate, destroy, obterate or remove any mark, brand, or abe upon wne
hed for sae n nterstate or foregn commerce or after shpment theren, e cept
as authorzed by Federa aw, or e cept as provded n paragraph (2) of ths
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subsecton: Provded, That the dstrct supervsors of the coho Ta Unt
may, upon wrtten appcaton, permt addtona abeng or reabeng of wne
for purposes of compance wth the requrements of ths artce or of State aw.
(2) No appcaton for permsson to reabe wne need be made n any case
where there s added to the contaner, after remova from customs custody or
from the premses where botted or packed, a abe dentfyng the whoesae
or reta dstrbutor thereof, and contanng no references whatever to the
characterstcs of the product.
rtce III, secton 33, of Reguatons No. (27 C. F. R. .33),
rtce III, secton 33, of Reguatons No. 5 (27 C. F. R. 5.33), and
rtce II, secton 23, of Reguatons No. 7 (27 C. F. R. 7.23), are
amended to read:
rand names. (a) Genera. The product sha bear a brand name, e cept
that f not sod under a brand name, then the name of the person requred to
appear on the brand abe sha be deemed a brand name for the purpose of
ths artce.
(6) Mseadng brand names. No abe sha contan any brand name, whch,
standng aone, or n assocaton wth other prnted or graphc matter, creates
any mpresson or nference as to the age, orgn, dentty, or other characterstcs
of the product uness the Deputy Commssoner fnds that such brand name,
ether when quafed by the word brand or when not so quafed, conveys
no erroneous mpressons as to the age, orgn, dentty, or other characterstcs
of the product.
(c) Ths secton sha not operate to prohbt the use by any person of any
trade name or brand of foregn orgn not effectvey regstered n the Unted
States Patent Ofcc on ugust 29, 1935, whch has been used by such person or
hs predecessors n the Unted States for a perod of at east fve years mme-
datey precedng ugust 29, 1935: Provded, That If such trade name or brand
s used, the desgnaton of the product sha be quafed by the name of the
ocaty n the Unted States n whch produced, and such quafcaton sha be
In scrpt, type, or prntng as conspcuous as the trade name or brand.
rtce III, secton 39( ), of Reguatons No. (27 C. F. R. .39),
rtce III, secton 1(e), of Reguatons No. 5 (27 C. F. R. 5. 1), and
rtce II, secton 20(d), of Reguatons No. 7 (27 C. F. R. 7.29), are
amended to read:
Fags, seas, coats of arms, crests, and other nsgna. Labes sha not con-
tan, n the brand name or otherwse, any statement, desgn, devce, or pctora
representaton whch the Deputy Commssoner fnds reates to, or s capabe of
beng construed as reatng to, the armed forces of the Unted States, or the
mercan fag, or any embem, sea, nsgna, or decoraton assocated wth such
fag or armed forces; nor sha any abe contan any statement, desgn, devce,
or pctora representaton of or concernng any fag, sea, coat of arms, crest
or other nsgna, key to msead the consumer to beeve that the product
has been endorsed, made, or used by, or produced for, or under the super-
vson of, or In accordance wth the specfcatons of the government, organza-
ton, famy, or ndvdua wth whom such fag, sea, coat of arms, crest, or n-
sgna s assocated.
rtce I, secton 6 (g), of Reguatons No. (27 C. F. R. .C ),
rtce I, secton 6 (g), of Reguatons o. 5 (27 C. F. R. 5.6 ),
and rtce , secton 5 (g), of Reguatons No. 7 (27 C. F. 11. 7.5 ),
are amended to read:
Fags, seas, coats of arms, crests, and other nsgna. No advertsement sha
contan any statement, desgn, devce, or pctora representaton of or reatng
to, or capabe of beng construed as reatng to, the armed forces of the Unted
States, or of the mercan fag, or of any embem, sea, nsgna, or decoraton
assocated wth such fag or armed forces; nor sha any advertsement contan
any statement, devce, desgn, or pctora representaton of or concernng any
fag, sea, coat of arms, crest, or other nsgna, key to msead the consumer
to beeve that the product has been endorsed, made, or used by, or produced for,
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or under the supervson of, or n accordance wth the specfcatons of the
government, organzaton, famy, or Indvdua wth whom such fag, sea,
coat of arms, crest, or nsgna s assocated.
Stewabt erkshre,
Deputy Commssoner of Interna Revenue.
pproved une 5,19 1.
Guy T. everng,
Commssoner of Interna Revenue.
pproved une 11, 19 1.
. Morgenthau, r.,
Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster une 12, 19 1, 11.28 a. m.)
Reguatons 10(19 0), Sectons 185.18, 185.91, 19 1-19-10712
185. 7 , etc. T. D. 50
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 185.
mendng Reguatons 10.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Dstrct Supervsors, Coectors of Interna Revenue, and Others
Concerned:
Pursuant to sectons 2872, 2875, 2878, 2879, 2883, 2885, 2903, 290 ,
2905, 2910, 2915, 3170, and 3176 of the Interna Revenue Code, Regu-
atons 10 are hereby amended n these respects:
(1) requrements concernng e port storage warehouses and
e port storage rooms are revoked. Ths amendment w affect the
foowng sectons, among others, sectons 185.18, 185.91, 185. 7 ,
185. 82, and 185. 8 ;
(2) cept as they may affect bonds fed pror to the effectve
date of these reguatons, a requrements reatve to e port storage
bond, Form 65 , are revoked. Ths amendment affects the foowng
sectons, among others, sectons 185.52, 185.73, 185.91, 185.95, 185.103,
185.110, 185.111, 185.112, 185.120, 185.121, 185.131, 185.132, 185.133,
185.13 , and 185.135;
(3) (a) ach propretor of an nterna revenue bonded ware-
house who has outstandng on the effectve date of these reguatons
on e port storage bond, Form 65 , may, as to sprts stored there-
under, substtute for the obgaton thereof bond. Form 1571, cover-
ng hs bonded warehouse, by fng wth the dstrct supervsor a
consent of surety, Form 1533, on the atter bond, f such bond s n
the ma mum pena sum or n such pena sum as w cover the ta
on a dsted sprts n the warehouse or n transt thereto, n-
cudng sprts botted for e port; provded that, f bond, Form
1571, s not n the ma mum pena sum and s nsuffcent to cover the
ta on sprts botted for e port, the propretor may fe a new or
addtona bond, Form 1571, to cover the ta on such sprts;
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(b) ach propretor of an nterna revenue bonded warehouse,
who desres to receve, or depost, for storage n hs bonded ware-
house on and after the effectve date of these reguatons dsted
sprts botted for e port, must fe wth the dstrct supervsor a
consent of surety, Form 1533, e tendng the terms of the e stng
bond, Form 1571, to cover the ta on dsted sprts botted for
e port to be stored n such bonded warehouse, f such bond s n the
ma mum pena sum or n such pena sum as w cover the ta on
a dstea sprts n the warehouse or n transt thereto, ncudng
sprts botted for e port; provded that, f bond, Form 1571, s
not n the ma mum pena sum and s nsuffcent to cover ta on
sprts botted for e port to be receved, or deposted, for storage
n the warehouse, the propretor must fe a new or addtona bond,
Form 1571, to cover the ta on such sprts;
(c) One consent of surety, Form 1533, may be furnshed to cover
both stuatons mentoned n paragraph (3) (a) and (b); and
( ) Sectons 185.51, 185.359, 185.365, 185.366, 185.367, and 185.369
are amended to read as foows:
Sec. 185.51. Transportaton and warehousng bond, Form 1571. very person
desrng the estabshment of nn nterna revenue bonded warehouse sha, upon
fng hs appcaton. Form 27-D, e ecute bond on Form 1571, Transportaton
and Warehousng ond, n trpcate, n conformty wth the provsons of
rtce I, nnd re the same wth the dstrct supervsor. The pena sum of
such bond sha be not ess than the amount of nterna revenue ta at the
rate prescrbed by aw on the quantty of dsted sprts that w be stored
n such warehouse and n transt thereto at any one tme, ncudng dsted
sprts botted for e port, provded that the ma mum pena sum of such bond
sha not e ceed 200,000 for each such warehouse. ( ; Sees. 2872, 2S79(c),
I. R. C.)
Sec. 185.350. ppcaton. Whenever an owner desres to remove dster s
orgna packages of dsted sprts from an nterna revenue bonded ware-
house for bottng n bond for storage pendng wthdrawa of the botted sprts
for e portaton, he sha e ecute Form G55, n trpcate. ( ; Sees. 2903,
290 , 291 I- R- C.)
Skc. 185.3G5. Records. (a) Report of packages removed for bottng.
The storekeeper-ganger w report the remova of the sprts from the bonded
warehouse for bottng n bond fur e port on hs monthy return, Form 1513, and
the bottng of the sprts on Form 1515 and Form 1516, n accordance wth the
reguatons governng the bottng of dsted sprts n bond. When the sprts
have been botted and cased, they w be returned to the storage porton of the
bonded warehouse. These sprts need not be mantaned n a separate room
or budng, but sha be kept separate and apart from a other dsted sprts
stored n the warehouse. The storekeeper-ganger sha report the quantty so
deposted on Form 1516, n the statement, port Storage Transactons.
(6) Report of cases fed and redeposted. fter the dsted sprts have
been botted and the cases returned to the stornge porton of the bonded ware-
house, the storekeeper-ganger w e ecute hs report of cases fed and deposted
n the bonded warehouse n Part 5 of Form 655. One copy of the report, together
wth Form 1520 coverng the regauge of the packages, w be forwarded to the
dstrct supervsor. Remnants remanng after bottng dsted sprts In bond
for e port sha be dsposed of as provded n the reguatons governng the
bottng of dsted sprts n bond, and approprate notaton made on Forms
655 and 1515. ( : Sees. 290 . 2910. 2915, I. R. C.)
Sec. 185.3C6. Transfer between warehouses. Whenever t s desred to trans-
fer dsted sprts, whch have been botted In bond for e port and whch are
stored n a bonded warehouse, to another nterna revenue bonded warehouse for
storage, pror to drect e portaton or transportaton for e port, the propretor
of the recevng warehouse sha e ecute an appcaton for transfer of the sprts
on Form 236. If te transfer s to be made between bonded warehouses n the
sane dstrct. Form 236 w be prepared n quntupcate, and f the transfer s
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to be made between bonded warehouses In dfferent dstrcts, Form 236 w be
prepared n se tupet. The appcant w enter a appcabe data ndcated by
the form, and w aso enter thereon the statement To be receved and de-
posted for storage for e port. The Forms 236 w be fed and dsposed of n
accordance wth secton 185.298 or 185.312, as the case may be. The cases w
be Inspected, transferred, receved, e amned, and reported n the manner pro-
vded by rtce II, n so far as t reates to the transfer of sprts botted
n bond before ta payment. ( ; Sec. 2875, I. R. C.)
PORT TION OF OTTL D DISTILL D STOUTS.
Sec. 185.367. ppcaton and bond. Whenever t Is desred to wthdraw bot-
ted dsted sprts from the bonded warehouse, ether for drect e portaton
or for transportaton for e port, the owner sha e ecute appcaton on Form
206, n trpcate, n accordance wth secton 185.317. The request for regauge
w not be e ecuted. The appcant sha forward a copes of Form 206 to the
dstrct supervsor, together wth a propery e ecuted e port bond n a suffcent
ena sum, computed as prescrbed n secton 185.329, e cept that the appca-
ton need not be accompaned by a bond f the appcant has on fe wth the
dstrct supervsor an approved contnung bond (Form 657 or 658) In a suff-
cent pena sum. ( ; Sees. 2905, 3170, I. R. C.)
Sec. 185.369. Records. When the sprts have been removed from the ware-
house, the storekeeper-ganger sha make approprate entres In Form 1516 In
the statement port Storage Transactons, and the propretor sha report
the remova on Form 52-C. ( ; Sec. 290 , I. R C.)
These reguatons sha be effectve on and after the thrteth day
foowng approva.
Tmothy C. Moonet,
ctng Commssoner of Interna Revenue.
pproved May 1, 19 1.
ohn L. St| van,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster May 5, 19 1, 10.53 a. m.)
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S CTION 511 OF T M RC NT M RIN CT, 1936, S
M ND D.
19 1-6-10593
T. D.5035
TITL 26 INT RN L R ND . C PT R L SU C PT R , P RT 32.
Genera Order No. 38 of the Unted States Martme Commsson.
Reguatons under secton 511 of the Merchant Marne ct, 11)36, as
amended .
Treasury Department,
Offce of the Secretary of the Treasury,
Washngton, D. C.
Unted States Martme Commsson,
Washngton, D. C.
To Offcers and mpoyees of the Treasury Department, the Unted
States Martme Commsson, and Others Concerned:
Tabe of Contents.
32.0. Introductory.
32.1. Defntons.
32.2. Scope of statute.
32.3. Requrements as to opernton.
32. . ppcaton to estabsh fund.
32.5. Tentatve authorzaton to estabsh fund.
32.6. stabUshment of fund.
32.7. Transactons pror to promugaton of these reguatons.
32.8. Investment of funds n securtes.
32.9. auaton of securtes In fund.
32.10. Wthdrawas from fund.
32.11. Tme deposts.
32.12 ecton.
32.13. Depost of proceeds of saes or Indemntes.
32.1 . Depost of earnngs and recepts.
32.15. Tme for makng deposts.
32.16. Ta abty as to earnngs deposted.
32.17. ocaton of gan for ta purposes.
32.18. Requrements as to new vesses.
32.19. Contracts obgatng deposts.
32.20. Perod for constructon.
32.21. Noncompance wth requrements.
32.22. tent of ta abty.
32.23. ssessment and co ecton of defcences.
32.2 . Reports by ta payers.
32.25. Constructon or acquston by controed corporaton.
32.26. ass of new vesse.
32.27. dmnstratve |ursdcton.
Secton 32.0. Introductory. The ct approved October 10, 19 0
(Pubc, No. 8 0, Seventy-s th Congress, thrd sesson), provdes:
That tte of the Merchant Marne ct, 1936, as amended, Is hereby
amended by addng at the end thereof a new secton to read as foows:
Sec. 511. (a) When used n ths secton the term new vesse means
any vesse (1) documented or agreed wth the Commsson to be docu-
mented under the aws of the Unted States; (2) constructed n the
Unted States after December 31, 1939, or the constructon of whch has
been fnanced under ttes or II of ths ct, as amended, or the con-
Sectons 32.0 to 32.2T are Issued under the authorty contaned In secton 511 of the
Merchant Marne ct, 1930, as added by the ct approved October 10. 19 0 (Pubc, No.
8 0, Seventy-s th Congress, thrd sesson), and secton 3791 of the Interna Revenue Code
153 Stat., 67: 26 U. S. C, Sup., 3791).
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structon of whch has been aded by a mortgage Insured under tte I
of ths ct as amended; and (3) ether ( ) of sueh type, sze, and speed
as the Commsson sha determne to be sutabe for use on the hgh
seas or Great Lakes In carryng out the purposes of ths ct, but not of
ess than two thousand gross tons or of ess speed than tweve knots,
uness the Commsson sha determne and certfy n each case that a
vesse of a specfed esser tonnage or speed s desrabe for use by the
Unted States n case of war or natona emergency, or ( ) constructed
to repace a vesse or vesses requstoned or purchased by the Unted
States.
(b) For the purposes of promotng the constructon of vesses neces-
sary to carryng out the pocy set forth n tte I of ths ct, any ctzen
of the Unted States who Is operatng a vesse or vesses In the foregn or
domestc commerce of the Unted States or In the fsheres or owns a
vesse or vesses beng so operated, or who, at the tme of purchase or
requston of the vesse by the Government, was operatng a vesse or
vesses so engaged or owned a vesse or vesses beng so operated, may
estabsh a constructon reserve fund, for the constructon or acquston
of new vesses, to be composed of deposts of proceeds from saes of ves-
ses, ndemntes on account of osses of vesses, earnngs from the opera-
ton of vesses, and recepts, n the form of Interest or otherwse, wth
respect to amounts prevousy deposted. Such constructon reserve
fund sha be estabshed, mantaned, e pended, and used n accordance
wth the provsons of ths secton and rues or reguatons to be pre-
scrbed |onty by the Commsson and the Secretary of the Treasury.
(c) In the case of the sae or actua or constructve tota oss of a
vesse, f the ta payer deposts an amount equa to the net proceeds
of the sae or to the net ndemnty wth respect to the oss n a con-
structon reserve fund estabshed under subsecton (b), then, f the
ta payer so eects n hs ncome-ta return for the ta be year n
whch the gan was reazed, no gan sha be recognzed to the ta payer
n respect of such sae or ndemnfcaton n the computaton of net
ncome for the purposes of Federa ncome or e cess-profts ta es.
For the purposes of ths subsecton no amount sha be consdered ns
deposted n a constructon reserve fund uness It s deposted wthn
s ty days after t s receved by the ta payer e cept that n the case
of amounts receved on or before the date of enactment of ths secton
or wthn s ty days after such date, the depost may be made wthn
one hundred and twenty days after the date of enactment of ths
secton. s used n ths subsecton the term net proceeds and the
term net ndemnty mean the sum of (1) the ad|usted bass of the
vesse and (2) the amount of gan whch woud be recognzed to the
ta payer wthout regard to ths subsecton.
(d) The bass for determnng gan or oss and for deprecaton,
for the purpose of Federa ncome or e cess-profts ta es, of any new
vesse constructed or acqured by the ta payer In whoe or n part out
of the constructon reserve fund sha be reduced by that porton of the
deposts n the fund e pended n the constructon or acquston of the
new vesse whch represents gan not recognzed under subsecton (c).
(e) For the purposes of ths secton, (1) f the net proceeds of a
sae or the net ndemnty n respect of a oss are deposted n more than
one depost, the amount consstng of the gan sha be consdered as
frst deposted; (2) amounts e pended, obgated, or otherwse wth-
drawn sha be apped aganst the amounts deposted n the fund n the
order of depost; and (3) f any depost conssts n part of gan not
recognzed under subsecton (c), any e pendture, obgaton, or wth-
drawa apped aganst such depost sha be consdered to consst of
gan n the proporton that the part of the depost consstng of gan
bears to the tota amount of the depost.
(f) Wth respect to any ta abe year, amounts on depost on the
ast day of such year In a constructon reserve fund n accordance wth
ths secton and wth respect to whch a the requrements of sub-
secton (g) have been satsfed, to the e tent that such requrements
are appcabe as of the ast day of sad ta abe year, sha not consttute
an accumuaton of earnngs or profts wthn the meanng of secton
102 of the Interna Revenue Code.
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M(g) The provsons of subsectons (c) and (f) sha appy to any
depost n the constructon reserve fund ony to the e tent that such
depost s e pended or obgated for e pendture, n accordance wth
rues and reguatons to be prescrbed |onty by the Commsson and the
Secretary of the Treasury, under a contract for the constructon or
acquston of a new vesse or vesses entered nto wthn two years
from the date of such depost, and ony f under such rues and regu-
atons
(1) wthn . ch perod of two years not ess than 12 per
centum of the constructon or contract prce of the vesse or vesses
s pad or rrevocaby commtted on account thereof and the pans
and specfcatons therefor are approved by the Commsson to the
e tent by t deemed necessary; and
(2) n case of a vesse or vesses not constructed under the
provsons of ths tte or not purchased from the Commsson,
( ) sad constructon s competed, wthn s months from the date
of the constructon contract, to the e tent of not ess than 5 per
centum thereof (or n case the contract covers more than one
vesse, the constructon of the frst vesse so contracted for s so
competed to the e tent of not ess than 5 per centum) as estmated
by the Commsson and certfed by t to the Secretary of the
Treasury, and ( ) a constructon under such contract s com-
peted wth reasonabe dspatch thereafter.
(h) The Commssoner of Interna Revenue s authorzed under
rues and reguatons to be prescrbed |onty by the Secrettry of the
Treasury and the Commsson to grant e tensons of the perod wthn
whch the deposts sha be e pended or obgated or whn whch
constructon sha have progressed to the e tent of 5 per centum of
competon as provded heren, but such e tenson sha not be for an
aggregate addtona perod n e cess of two years wth respect to
the e pendture or obgaton of such deposts or more than one year
wth respect to the progress of such constructon.
() ny such deposted gan or porton thereof whch s not so
e pended or obgated wthn the perod provded, or whch s other-
wse wthdrawn before the e praton of such perod, or wth respect
to whch the constructon has not progressed to the e tent of 5 per
centum of competon wthn the perod provded, or wth respect to
whch the Commsson fnds nnd certfes to the Secretary of the Treas-
ury that, for causes wthn the contro of the ta payer, the entre
constructon s not competed wth reasonabe dspatch, f otherwse
ta abe ncome under the aw appcabe to the ta abe year n whch
such gan was reazed, sha be ncuded n the gross Income for such
ta abe year, e cept for the purpose of the decared vaue e cess-
profts ta and the capta stock ta . If any such deposted gan or
porton thereof s so ncuded n gross ncome for such ta abe year,
there sha (n addton to any other defcency) be assessed, coected,
and pad n the same manner as f t were a defcency, an amount
equa to 1.1 per centum of the amount of gan so ncuded, such amount
beng n eu of any ad|ustment wth respect to the decared vaue
e cess-profts ta for such ta abe year.
( ) Notwthstandng any other provson of aw, any defcency In
ta for any ta abe year resutng from the ncuson of any amount
In gross Income as provded by subsecton (), and the amount to be
treated as a defcency under such subsecton n eu of any ad|ustment
wth respect to the decared vaue e cess-profts ta , may be assessed
or a proceedng n court for the coecton thereof may be begun wth-
out assessment, at any tme: Provded, however. That Interest on any
such defcency or amount to be treated as a defcency sha not begn
unt the date the deposted gan or porton thereof n queston s
requred under subsecton (1) to be Incuded n gross Income.
(k) Ths secton sha be appcabe to a ta payer ony In respect
of saes or ndemnfcatons for osses occurrng wthn a ta abe year
begnnng after December 31, 1939, and ony n respect of earnngs
derved durng a ta abe year begnnng after December 31, 1939.
(1) For the purposes of ths secton a vesse sha be consdered
as constructed or acqured by the ta payer f constructed or acqured
by a corporaton at a tme when the ta payer owns at east 95 per
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centum of the tota number of shares of each cass of stock of the
corporaton.
(m) The terms used n ths secton sha have the same meanng
as n chapter 1 of the Interna Revenue Code.,
Secton 905(a) of the Merchant Marne ct, 1936, as amended by
secton 39(a) of the ct of une 23, 1938 (52 Stat,, 96 ; 6 U. S. C,
Sup., 12 (a)), provdes:
(a) The words foregn commerce or foregn trade mean com-
merce or trade between the Unted States, Its Terrtores or possessons,
or the Dstrct of Coumba, and a foregn country.
Secton 905 (c) of the Merchant Marne ct, 1936, as amended by
secton 39(b) of the ct of une 23, 1938 ( 9 Stat., 2016; 52 Stat.,
96 ; 0 U. S. C, Sup., 12 (c)), provdes:
(c) The words ctzen of the Unted States ncude a corporaton,
partnershp, or assocaton ony f t s a ctzen of the Unted States
wthn the meanng of secton 2 of the Shppng ct, 1916, as amended
(U. S. C, tte 6, secton 802), and, n the case of a corporaton,
partnershp, or assocaton operatng a vesse on the Great Lukes, or
on bays, sounds, rvers, harbors, or nand akes of the Unted
States the amount of nterest requred to be owned by a ctzen of the
Unted States sha be not ess than 75 per centum.
Secton 2 of the Shppng ct, 1916, as amended ( 1 Stat., 1008;
6 U. S. C, 802, 803), provdes:
Sec. 2. (a) That wthn the meanng of ths ct no corporaton,
partnershp, or assocaton sha be deemed a ctzen of the Unted
States uness the controng nterest theren s owned by ctzens of
the Unted States, and, n the case of a corporaton, uness ts pres-
dent and managng drectors are ctzens of the Unted States and
the corporaton tsef s organzed under the aws of the Unted States
or of a State, Terrtory, Dstrct, or possesson thereof, but n the
case of a corporaton, assocaton, or partnershp operatng any vesse
n the coastwse trade the amount of nterest requred to be owned
by ctzens of the Unted States sha be 75 per centum.
(b) The controng nterest n a corporaton sha not be deemed
to be owned by ctzens of the Unted States (a) f the tte to a
ma|orty of the stock thereof s not vested n such ctzens free from
any trust or fducary obgaton n favor of any person not a ctzen
of the Unted States; or (b) f the ma|orty of the votng power n
such corporaton s not vested n ctzens of the Unted States; or
(e) f through any contract or understandng t s so arranged that
the ma|orty of the votng power may be e ercsed, drecty or nd-
recty, n behaf of any person who s not a ctzen of the Unted
Staes; or (d) f by any other means whatsoever contro of the
corporaton s conferred upon or permtted to be e ercsed by any
person who s not a ctzen of the Unted States.
(c) Seventy-fve per centum of the nterest n a corporaton sha
not be deemed to be owned by ctzens of the Unted States (a) f
the tte to 75 per centum of ts stock s not vested n such ctzens
free from any trust or fducary obgaton n favor of any person
not a ctzen of the Unted States; or (b) f 75 per centum of the
votng power n such corporaton s not vested n ctzens of the
Unted States; or (c) f, through any contract or understandng t s
so arranged that more than 2r per centum of the votng power n
such corporaton may be e ercsed, drecty or Indrecty, n behaf
of any person who s not a ctzen of the Unted States; or (d) f
by any other means whatsoever contro of any nterest n the cor-
poraton n e cess of 25 per centum s conferred upon or permtted to
be e ercsed by any person who s not a ctzen of the Unted States.
(d) The provsons of ths ct sha appy to recevers and trustees
of a persons to whom the ct appes, and to the successors or
assgnees of such persons.
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Secton 8 of the Interna Revenue Code (53 Stat., 26) n part
provdes:
Sec. 8. Defntons.
When used In ths chapter
(a) Ta abe Year. Ta abe year means the caendar year,
or the fsca year endng durng such caendar year, upon the bass
of whch the net Income s computed under ths Part. Ta abe year
Incudes, n the case of a return made for a fractona part of a year
under the provsons of ths chapter or under reguatons prescrbed
by the Commssoner wth the approva of the Secretary, the perod
for whch such return s made.
(b) Fsca Year. Fsca year means an accountng perod of
tweve months endng on the ast day of any month other than
December.
Secton 3791 of the Interna Revenue Code (53 Stat., 67) n part
provdes:
Sec. 3791. Rues and Reguatons.
(a) uthorzaton.
(1) In genera. the Commssoner, wth the approva
of the Secretary, sha prescrbe and pubsh a needfu rues and
reguatons for the enforcement of ths tte.
(2) In case of change n aw. The Commssoner may make
a such reguatons, not otherwse provded for, as may have be-
come necessary by reason of any ateraton of aw In reaton to
nterna revenue.
(b) Retroactvty of Reguatons or Rungs. The Secretary, or
the Commssoner wth the approva of the Secretary, may prescrbe
the e tent. If any, to whch any rung, reguaton, or Treasury dec-
son, reatng to the nterna revenue aws, sha be apped wthout
retroactve effect
Pursuant to the foregong provsons of aw, the foowng reg-
uatons are herehy prascrbed and Treasury Decson 5023, Genera
Order No. 35 of the Unted States Martme Commsson, promu-
gated November 29, 19 0 C. . 19 0-2, 29 Part 32, Tte 26,
Code of Federa Reguatons, 19 0 Sup. , s hereby superseded.
Sec. 321. Defntons. s used n these reguatons, e cept as otherwse nd-
cated bv the conte t:
(a) The term ct means the Merchant Marne ct, 1936, as amended;
(6) The term statute means secton 511 of the Merchant Marne ct, 1936,
as amended;
(c) The term secton means one of the sectons of these reguatons:
(d) The terms Commsson and Martme Commsson mean the Unted
States Martme Commsson;
(e) The term ctzen means a person who, f an ndvdua, was born or
naturazed as a ctzen of the Unted States or, f other than an ndvdua, meets
the requrements of secton 905(c) of the ct and secton 2 of the Shppng ct,
1916, as amended;
(f) The term ta payer means a ctzen who has estabshed or seeks to
estabsh a constructon reserve fund under the provsons of the statute and
these reguatons, and may ncude a partnershp;
(g) The term corporaton ncudes assocatons and ont stock companes;
h) The term stock ncudes the share n an assocaton or |ont-stock
company.
In so far as the computaton and coecton of ta es are concerned, other terms
used n these reguatons, e cept as otherwse Indcated by the conte t, have the
same meanng as n the Interna Revenue Code and the reguatons thereunder.
Sec. 32.2. Scope of statute. The statute provdes, under condtons specfed,
for the nonrecognton for ncome and e cess-profts ta purposes of the gan
reazed from the sae or ndemnfcaton for oss of certan vesses. It aso per-
mts the accumuaton of the proceeds of such sae or ndemnfcaton and of
certan earnngs wthout abty under secton 102 of the Interna Revenue Code.
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(For the norma appcaton of secton 102, see sectons 19.102-1 to 19.102- ,
ncusve, Reguatons 103.)
The benefts of the statute are avaabe to any ctzen as defned n secton
32.1(c), who durng any ta abe year begnnng after December 31, 1939, owns
and operates a vesse or vesses wthn the scope of secton 32.3. Such benefts
are aso avaabe to a ctzen who owns a vesse or vesses, wthn the scope of
secton 32.3, operated by others. ctzen so operatng such a vesse or vesses
owned by any other person, athough he can derve no beneft from the provsons
reatng to the nonrecognton of gan from the sae or oss of such vesse or
vesses so owned, may estabsh a constructon reserve fund n whch he may
depost earnngs from the operaton of such vesse or vesses.
The statute appes ony wth respect to saes or osses of vesses wthn the
scope of secton 32.3 occurrng wthn a ta abe year begnnng after December
31,1939, or n respect of earnngs derved from the operaton of such vesses durng
a ta abe year begnnng after December 31, 1939. oss to be wthn the statute
must be an actua or constructve tota oss. Whether there s a tota oss, actua
or constructve, w be determned by the Martme Commsson. s to what
proceeds, earnngs, or recepts may be deposted n the constructon reserve fund,
see sectons 32.13 and 32.1 . The oss of a vesse whch occurs durng a ta abe
year begnnng pror to December 31, 1939, s not wthn the scope of the statute,
even though the ta payer s ndemnfed durng a ater year.
Seo. 32.3. Requrements as to operaton. The statute appes wth respect to
vesses operated n the foregn or domestc commerce of the Unted States or n
the fsheres. The foregn commerce of the Unted States ncudes commerce
or trade between the Unted States (ncudng the Dstrct of Coumba), the
Terrtores and possessons whch are embraced wthn the coastwse aws, and
a foregn country or other Terrtores and possessons of the Unted States.
The domestc commerce of the Unted States ncudes commerce or trade between
ports of the Unted States and ts Terrtores and possessons, embraced wthn
the coastwse aws. The fsheres ncude the fsheres of contnenta Unted
States and ts Terrtores and possessons, e cept the Phppne Isands (see
secton 5, 39 Stat., 5 7; 8 U. S. C, 1003). The statute does not appy to
vesses owrated n the foregn commerce or fsheres of some country other than
the Unted States.
Sec. 32. . ppcaton to estabsh fund. ny person camng to be entted
to the benefts of the statute may make appcaton, n wrtng, to the Com-
msson for permsson to estabsh a constructon reserve fund. The appca-
ton sha be n such form and substance as the Commsson may prescrbe and
sha desgnate, among other thngs, the depostory or depostores wth whch
the appcant proposes to estabsh the sad fund. The orgna appcaton
sha be e ecuted and verfed by the ta payer or, f the ta payer s a corpora-
ton, by one of ts prncpa offcers, and sha be accompaned by 11 copes
when fed wth the Commsson.
Sec. 32.5. Tentatve authorzaton to estabsh fund. Where the tme be-
tween the recept by the Commsson of the appcaton for permsson to
estabsh a constructon reserve fund and the date pror to whch an amount
receved from the sae or oss of a vesse must be deposted to come wthn
the scope of the statute s nsuffcent to permt a determnaton of the
egbty of the appcant, the Commsson may tentatvey authorze the
estabshment of a constructon reserve fund and the depost of such amount
theren. Such tentatve authorzaton sha be sub|ect to rescson by the
Commsson, f subsequenty t s determned that the appcant s not entted
to the beneft of the statute, and, upon such determnaton, the fund sha be
cosed and a amounts on depost theren sha be wthdrawn.
Sec. 32.6. stabshment of fund. If the appcaton s approved by the
Commsson, the Commsson w adopt a resouton authorzng the estabsh-
ment of a constructon reserve fund wth the depostory or depostores
desgnated by the ta payer and approved by the Commsson. The resouton
w provde for |ont contro by the Commsson and the ta payer over such
fund, w set forth the condtons governng the estabshment and mante-
nance of the fund and the makng of deposts theren and wthdrawas there-
from, and w desgnate the representatves authorzed to e ecute nstruments
of wthdrawa on behaf of the Commsson.
certfed copy of the resouton of the Commsson w be furnshed the
ta payer. If the ta payer s a corporaton, t sha prompty adopt, through
ts board of drectors, a resouton satsfactory In form and substance to the
Commsson, authorzng the estabshment and mantenance of the fund In
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conformty wth the acton of the Commsson. If the ta payer s not a
corporaton t sha prompty e ecute an agreement wth the depostory sats-
factory n form and substance to the Commsson to conform to the acton
of the Commsson as set forth n the resouton. Certfed copes of the
resoutons of the Commsson and of the ta payer (f t s a corporaton)
w be furnshed to the depostory by the Commsson and the ta payer
respectvey for ts gudance n mantanng the fund and honorng Instru-
ments of wthdrawa. The ta payer, f a corporaton, sha aso furnsh the
Commsson wth a certfed copy of ts resouton, or f not a corporaton, a
dupcate orgna of ts agreement wth the depostory.
Sec. 32.7. Transactons pror to promugaton of these reguatons. Where
the ta payer has comped wth the requrements of the Premnary regua-
tons for estabshment of constructon reserve funds under secton 511 of the
Merchant Marne ct, 1936, as amended (T. D. 5023 Genera Order No.
35 of the Commsson), and, wth the approva of the Commsson, has made
deposts authorzed by the statute n such fund, the ta payer sha submt to
the Commsson, prompty upon the promugaton of these reguatons, the
appcaton requred by secton 32. hereof. If and when such appcaton s
approved by the Commsson, deposts and wthdrawas sha be made, and
the constructon reserve fund sha be mantaned n accordance wth these
reguatons. If the appcaton s not approved the fund sha be cosed and
a amounts on depost theren sha be wthdrawn.
If, pror to the estabshment of a constructon reserve fund under these
reguatons, a ta payer has made necessary payments under a contract, whch
satsfes the provsons of these reguatons and the statute, for the construc-
ton or acquston of a new vesse, such ta payer may, If subsequenty
authorzed to estabsh a constructon reserve fund under these reguatons,
draw aganst such fund as rembursement for the amount, f any, of other
funds whch, wth the approva or ratfcaton of the Commsson, the ta payer
used pror to the estabshment of the fund for the purpose of makng such
necessary payments.
Sec. 32.8. Investment of funds n securtes. Interest-bearng drect obga-
tons of the Unted States, or obgatons fuy guaranteed as to prncpa and
Interest by the Unted States, may be deposted n the constructon reserve fund
n eu of cash, and such obgatons may aso be purchased w|h cash on depost
n the fund. In nstances where the ta payer desres to depost any other
securtes n the fund In eu of cash, or to purchase such other securtes wth
cash on depost In the fund, the ta payer sha make wrtten appcaton to the
Commsson and sha not consummate the transacton unt the wrtten consent
of the Commsson sha have been receved. The appcaton sha descrbe
the securtes fuy. very approva of such appcaton by the Commsson
sha be condtoned upon agreement by the ta payer forthwth to dspose of
such securtes upon subsequent request by the Commsson. Immedatey upon
the purchase of any securtes for depost n the fund, the ta payer sha advse
the Commsson, gvng the date of purchase, a descrpton of the securtes, and
the prce pad therefor (net, brokerage and other charges, and gross). Ord-
nary the Commsson w not approve the depost n the fund n eu of cash,
or the purchase wth cash on depost n the fund, of securtes not actvey
traded n on e changes regstered under the Securtes change ct of 193 ,
or securtes whch are not ega for Investment of trust funds.
Sec. 32.9. auaton of securtes n fund. In cases where securtes are depos-
ted n the fund n eu of cash, or are purchased wth cash on depost n the
fund, the market vaue of such securtes must not be ess than the amount
of cash n eu of whch they are so deposted or wth whch they are so pur-
chased. For the purpose of determnng the amount n the fund, the market
vaue of securtes sha be determned n the foowng manner:
(a) In nstances where no actua purchase s Invoved, such as the nta
depost of securtes n the fund n eu of cash, the ast saes prce thereof on
the prncpa e change on the day the depost was made sha be deemed to be
the market vaue thereof, or, f no such saes were made, the market vaue
thereof w be determned by the Commsson on such bass as t may deem
to be far and reasonabe n each case.
(b) Wth respect to transactons nvovng the purchase of securtes wth
cash on depost n the fund, market vaue sha be the gross prce pad
(ad|usted for accrued nterest), provded that f such securtes are purchased
otherwse than upon a regstered e change the prce sha be wthn the range
of transactons on the e change on the date of such purchase, or, f there were
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no such transactons, then the market vaue thereof w he determned by
the Commsson on such bass as t may deem to be far and reasonabe n each
case.
If securtes on depost n the fund are repaced by cash from the genera
funds of the ta payer, the amount of cash to be deposted n the fund n eu
thereof sha be not ess than the amount at whch such securtes were vaued
at the tme of ther depost n the fund.
Purchase money obgatons secured by vesses sod or rrevocabe commt-
ments to fnance the constructon or acquston of new vesses whch are depos-
ted n the constructon reserve fund as provded n secton 32.13 ordnary w
be consdered as equvaent to ther face vaue.
Sec. 32.10. Wthdrawas from fund. Checks, drafts, or other nstruments of
wthdrawa, after havng been e ecuted by the ta payer, sha be forwarded to
the Commsson at Washngton wth approprate e panaton of the purpose of
the proposed wthdrawa, ncudng propery certfed Invoces or other support-
ng papers. Such nstruments of wthdrawa, after counter-sgnature on behaf
of the Commsson, w ordnary be forwarded to the payees.
mounts obgated under a contract for the constructon or acquston ot
new vesses wthn the scope of the statute may not, so ong as the contract
contnues n fu force and effect, be wthdrawn for a purpose other than the
constructon or acquston of such new vesses.
Sec. 32.11. Tme deposts. Deposts n the constructon reserve fund not n-
vested n securtes may be paced n tme deposts when, n the udgment of
the ta payer, t s desrabe and feasbe so to do.
Sec. 32.12. ecton. s a prerequste to nonrecognton of gan on the sae or
oss of a vesse as provded by the statute, the ta payer after estabshng a con-
structon reserve fund must make an eecton n hs ncome ta return, or f a
partnershp n the partnershp return of ncome, for the ta abe year n whch the
gan s reazed. The eecton sha be wth respect to each vesse and sha be
shown by a statement to that effect, submtted as a part of, and attached to, the
return. The statement, whch need not be on any prescrbed form, sha set forth
a computaton of the amount of the reazed gan, the dentty of the vesse,
whether t was sod or ost and the date of sae or oss, the sae prce or fu amount
of ndemnty, the amount and date of each payment of the sae prce or ndemnty,
the bass for ta purposes, and any other data affectng the determnaton of the
reazed gan.
Depost of an amount equa to the net proceeds of the sae or oss must be made
wthn the perod specfed n secton 32.15 of these reguatons and may not be
deayed beyond the specfed perod to awat the e ecuton or fng of a statement
of eecton.
Sec. 32.13. Depost of proceeds of saes or ndemntes. The depost requred by
the statute must be made n a constructon reserve fund, estabshed wth a depos-
tory or depostores approved by the Commsson and sub|ect to the |ont contro
of the Commsson and the ta payer. It s not necessary to estabsh a separate
fund wth respect to each vesse sod or ost. Wth respect to any vesse sod or
ost, however, the depost must be n an amount equa to the net proceeds of
the sae or the net ndemnty for the oss. y net proceeds and net n-
demnty s meant (1) the ad|usted bass of the vesse pus (2) the amount of gan
whch woud be recognzed for ta purposes n the absence of the statute. Where
the proceeds from the sae of a vesse ncude purchase money obgatons, such
obgatons together wth the entre coatera therefor, sha be deposted, wth the
remander of the proceeds, n the constructon reserve fund as a part of the net
proceeds. The depostory sha receve payment of a amounts due on such pur-
chase money obgatons and such amounts sha he paced n the fund n substtu-
ton for the porton of the obgatons pad. If the ta payer so desres, he may
depost n the constructon reserve fund cash or approved securtes n an amount
equa to the face vaue of any purchase money obgatons n eu of depostng such
obgatons.
In the case of the sae or oss of a vesse, the ta payer must depost the fu
amount of each payment (ncudng cash, notes, or other evdences of ndebted-
ness) as a snge depost n the constructon reserve fund. payment dvded
between two or more depostores w be regarded as a snge depost. mounts
receved by the ta payer pror to the date of consummaton of the sae of the
vesse sha be consdered as havng been receved by the ta payer at the tme the
sae s consummated.
Where a vesse s sub|ect to a mortgage or other encumbrance at the tme of ts
sae or oss and the ta payer actuay receves ony an amount representng hs
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97
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equty n such vesse, he sha depost n the constructon reserve fund the amount
receved and concurrenty therewth other funds n an amount equa to the dffer-
ence between the amount receved and the net proceeds or net ndemnty.
Such other funds may be In the form of cash, or, sub|ect to the approva of the
Commsson, (1) nterest-bearng securtes, or (2) an rrevocabe commtment to
fnance the constructon or acquston of the new vesse by an obgor approved by
the Commsson n an amount equa to he amount by whch the net proceeds
e ceeds the cash or securtes deposted n the fund.
In case of the sae or oss of severa vesses, a depost of the net proceeds or
net ndemnty wth respect to one or more of the vesses s permssbe. Where
severa vesses are sod for a ump sum the net proceeds aocated to each vesse
sha be determned n accordance wth any reasonabe rue satsfactory to the
Commssoner of Interna Revenue.
depost whch s not provded for by the statute sha, wthout unreason-
abe deay, be emnated from the fund and ta abty w be determned as
though such depost had not been made. (See secton 32.22.)
Sec. 32.1 . Depost of earnngs and recepts. ctzen may depost a or any
part of earnngs derved from operaton, wthn the scope of secton 32.3, of
a vesse or vesses owned ether by hmsef or any other person. Such earnngs
may ncude payments receved by an owner, as compensaton for use of hs
vesse, from other persons by whom t s so operated. arnngs from other
sources may not be deposted. Ony earnngs ntended for constructon or acqu-
ston of new vesses may be deposted. The earnngs deposted must be of
ta abe years begnnng after December 31, 1939.
The earnngs from operaton of vesses whch are egbe for depost are the
net earnngs determned wthout regard to any deducton for deprecaton,
obsoescence, or amortzaton wth respect to such vesses. Recepts from
deposted funds, n the form of nterest or otherwse, may be deposted.
Sec. 32.15. Tme for makng deposts. Deposts of amounts representng pro-
ceeds of the sae or ndemnfcaton for oss of a vesse must be made wthn
60 days after recept by the ta payer, e cept that amounts receved on or
before December 9, 19 0, may be deposted not ater than February 7, 19 1.
arnngs and recepts, wthn the scope of the statute, of ta abe years begn-
nng after December 31, 1939, may be deposted at any tme. (See secton
32.1 .)
Sec. 32.16. Ta abty as to earnngs deposted. Depost n the constructon
reserve fund of earnngs from operaton of a vesse or vesses, or recepts, n
the form of nterest or otherwse, wth respect to amounts prevousy deposted
does not e empt the ta payer from ta abty wth respect thereto. arnngs
and recepts deposted n a constructon reserve fund estabshed n accordance
wth the provsons of the statute and these reguatons do not consttute an
accumuaton of earnngs or profts wthn the meanng of secton 102 of the
Interna Revenue Code as ong as the requrements of the statute and these
reguatons reatve to the use of the fund n the constructon or acquston of
new vesses are satsfed. For appcaton of the statute n case earnngs or
recepts so deposted are ater wthdrawn for purposes otter than the con-
structon or acquston of new vesses, or there s faure otherwse to compy
wth the statute or these reguatons, see secton 32.21.
Sec. 32.17. ocaton of gan for ta purposes. If the net proceeds of a
sae or the net ndemnty n respect of a oss are deposted n more than one
depost, the gan w be consdered as frst deposted. mounts e pended,
obgated, or wthdrawn w be apped aganst the amounts deposted n the
order of depost. If any depost conssts n part of gan not recognzed under
the statute, any e pendture, obgaton, or wthdrawa apped aganst such
depost w be consdered to consst of gan n the proporton that the part of
the depost consstng of gan bears to the tota amount of the depost If
amounts on depost n a constructon reserve fund are e pended, obgated, or
wthdrawn for constructon or acquston of new vesses, the porton thereof
whch represents gan w be apped n reducton of the bass of such new
vesses for determnng gan or oss, and for deprecaton, for the purpose of
Federa ncome or e cess-profts ta es. If any amounts are wthdrawn for
purposes other than the constructon or acquston of new vesses, the porton
thereof whch represents gan, f otherwse consttutng ta abe ncome under
the aw appcabe to the ta abe year n whch such gan was reazed, w be
ncnded n the gross ncome for such ta abe year, e cept for the purpose
of the decared vaue e cess-profts ta and the capta stock ta . (See secton
32.22.)
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98
The date funds are obgated under a contract for the constructon or acquston
of a new vesse, rather than the date of payment from the fund, w determne
the order of appcaton aganst the deposts n the fund. When a contract for
the constructon or acquston of a new vesse Is entered nto, amounts on depost
n the constructon reserve fund w be deemed to be obgated to the e tent of
the amount of the ta payer s abty under the contract Deposts w be
deemed to be so obgated n the order of depost, each new contract obgatng
the earest depost not prevousy e pended, obgated, or wthdrawn. 5 the
abty under the contract e ceeds the amount n the constructon reserve fnnd,
the contract w be deemed to obgate, to the e tent of that part of such e cess
not otherwse satsfed, the earest depost or deposts thereafter made.
ampe: ta payer who makes hs return on the caendar year bass ses a
vesse n 19 1 for 1,000,000, reazng a gan of 00,000. One hundred thousand
doars of the sae prce s receved n March, 19 1, when the contract s sgned,
and the baance of 900,000 s receved n une, 19 1, on devery of the vesse.
The 1,000,000 s deposted n a constructon reserve fund n uy, 19 1. In
December, 19 1, the ta payer aso deposts 150,000 representng earnngs of that
year. In 19 2 he ses another vesse for 1,000,000. reazng a gan of 250,000.
The sae prce of 1,000,000 s receved on devery of the vesse n February, 19 2,
and deposted n the constructon reserve fund n March, 19 2. In September,
19 2, the ta payer purchases for cash out of the constructon reserve fund a new
vesse for 1,750,000. To the cost of ths vesse must be aocated the 19 1
deposts of 1,150,000 and 600,000 of the March, 19 2, depost. Ths eaves n the
fund 00,000 of the March, 19 2. depost. The amount of the unrecognzed gan
to be apped aganst the bass of the new vesse s as foows: 00,000 gan rep-
resented n the 19 1 deposts, pus the same proporton of the 250,000 gan rep-
resented n the March, 19 2, depost ( 1,000,000) whch the amount ( 600,000)
600 00
aocated to the vesse s of the amount of the depost, . e., 00,000 Pusyooo oo)
of 250,000 or 150,f00, a tota of 550,000. Ths reduces the bass of the new
vesse to 1,200,000 ( 1,750,000 ess 550,000).
In 19 3 the ta payer ses a thrd vesse for 3,000,000, reazng a gan of
900,000. The 3,000,000 s receved and deposted n the constructon reserve
fund n une, 19 3, makng the tota n the fund 3, 00,000. In December. 19 3,
the ta payer contracts for the constructon of a second new vesse to cost a
ma mum of 3,2 ;0000, thereby obgatng that amount of the fund, and n
une, 19 , receves permsson to wthdraw the unobgated baance amountng
to 200.000. To the cost of the second new vesse must be aocated the 00,000
baance of the March, 19 2, depost and 2,800,000 of the une. 19 3, depost. The
nnrecognz d gan to be apped aganst the bass of such new vesse s that pro-
porton of the gan represented n each depost whch the porton of the depost
00 000
aocated to the vesse bears to the amount of such depost, . e.,
of 250,000, or 100,000 pus ff of 900,000, or 8 0,000, makng a tota of
0 0,000. The 200,000 wthdrawn s apped aganst the une, 19 3, depost and
the porton thereof whch represents gan w be recognzed as ncome for 19 3,
the year n whch reazed. The computaton of the recognzed gan s as foows:
OO/ ) 1900,000 or 60,000.
3,000,000
Sec. 32.18. Requrements as to new vesses. For the purposes of the statute
and these reguatons, the new vesse must be
(1) documented under the aws of the Unted States when t s acqured by
the ta payer, or the ta payer must agree that when acqured t w be
documented under the aws of the Unted States;
(2) (a) constructed n the Unted States after December 31, 1939, or (6)
ts constructon must have been fnanced under Tte or Tte II of the
ct, or (c) ts constructon must have been aded by a mortgage nsured
under Tte I of the ct; and
(3) ether (a) of such type, sze, and speed as the Martme Commsson
determnes to be sutabe for use on the hgh seas or Great Lakes n
carryng out the purposes of the ct, but of not ess than 2.000 gross tons
or of ess speed than 12 knots, e cept that a partcuar vess may be of
esser tonnage or speed f the Martme Commsson determnes and certfes
that the partcuar vesse s desrabe for use by the Unted States n case of
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99
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war or natona emergency, or (6) constructed to repace a vesse or vesses
requstoned or purchased by the Unted States, n whch event t must he of
such ty|e, sze, and speed as to consttute a sutabe repacement for the vesse
requstoned or purchased, but f a vesse aready but s acqured to repace
a vesse or vesses requstoned or purchased by the Unted States, such
vesse must meet the requrements set forth n subdvson (3) (a) of ths
paragraph.
vesse w be deemed to be constructed after December 31, 1939, ony f con-
structon was commenced after that date. Sub|ect to the provsons of ths secton,
a new vesse may be newy but for the ta payer, or may be acqured after t s
but.
It s not necessary that vesses sha be repaced vesse for vesse. The new
vesses may be more or ess n number than the repaced vesses, provded the
other requrements of ths secton are met.
Sec. 32.19. Contracts obgatng deposts. contract for the constructon or
acquston of a new vesse entered Into pror to October 10, 19 0, or a contract
whch supersedes, amends, or suppements such a contract, s not wthn the scope
of the statute. Uness otherwse authorzed by the Commsson, contracts for the
constructon of new vesses must be for a f ed prce, or provde for a base prce
that may be ad|usted for changes n abor and matera costs up to but not e -
ceedng .r per cent of the base prce. Pans and specfcatons for the new vesse
or vesses must be approved by the Commsson to the e tent t deems necessary.
Wthn two years from the date of any depost n a constructon reserve fund,
uness e tenson s granted as herenafter provded, such depost must be obgated
under a constructon or purchase contract and at east 12 per cent of the
constructon or contract prce must be actuay pad or rrevocaby commtted on
account thereof. mounts on depost n a constructon reserve fund w be
deemed to be obgated for e pendture when a bndng constructon or purchase
contract has been entered nto and w be deemed to be rrevocaby commtted
when due and payabe n accordance wth the terms of the contract of con-
structon or acquston. The Commssoner of Interna Revenue may. upon
appcaton and a showng of proper crcumstances, and wth the approva of
the Martme Commsson, aow an e tenson or e tensons of tme, not to
e ceed two years n the aggregate, wthn whch the contract sha be entered
nto and the deposts e pended or obgated, or the 12 | per f,ent of the con-
structon or contract prce sha be pad or rrevocaby commtted.
ta payer requrng such e tenson sha make appcaton therefor to
the Commssoner of Interna Revenue, and transmt t wth an approprate
statement of the crcumstances, and approprate documents n substantaton
of the statement, to the Martme Commsson. The Commsson w forward
the appcaton and accompanyng documents to the Commssoner of Interna
Revenue wth a statement of ts approva or dsapprova. In case an appcaton
for e tenson Is dened, the ta payer w be abe for deay as though no
appcaton had been made.
Sec. 32.20. Perod for constructon. now vesse constructed otherwse than
under the provsons of Tte of the ct, and not purchased from the Mar-
tme Commsson must, wthn s months from the date of the constructon
contract, or wthn the perod of any e tenson, be competed to the e tent of
not ess than 5 per cent as estmated by the Martme Commsson and certfed
by t to the Secretary of the Treasury. In case of a contract coverng more
than one vesse t w be suffcent f one of the vesses s 5 per cent competed
wthn the s months perod from the date of the contract or wthn the
perod of any e tenson, and so certfed. constructon must be competed
wth reasonabe dspatch as determned by the Martme Commsson. If,
for causes wthn the contro of the ta payer, the entre constructon s not
competed wth reasonabe dspatch, the Commsson w so certfy to the
Secretary of the Treasury. For the effect of such certfcaton, see secton
82.2L
The Commssoner of Interna Revenue may, upon appcaton and a showng
of satsfactory reasons therefor, grant an e tenson or e tensons of tme
wthn whch the 5 per cent of constructon sha he competed, but such
e tensons sha not aggregate more than one year. . In other words, no e ten-
son may be granted whch sha aow a tota perod, for the requred 5 per
cent competon, of more than 18 months from the date of the constructon
contract. tenson w be granted ony upon approva of the Martme
Commsson. ppcaton therefor sha be made n accordance wth the
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500
procedure ndcated by secton 32.19. In case an appcaton for e tenson Is
dened, the ta payer w be abe for deay as though no appcaton had
been made.
Sec. 32.21. Noncompance wth requrements. Wthdrawa from the con-
structon reserve fund for purposes other than the constructon or acquston
of new vesses, or faure to compy wth the requrements of the statute or
the reguatons reatve to the utzaton of such funds n the constructon or
acquston of new vesses, w resut n the recognton, for the ta abe year
n whch reazed, of the amount of the gan represented n that porton
of the fund nvoved. If securtes on depost n a constructon reserve fund
are sod and the amount paced n the fund n eu thereof s ess than the
market vaue of the securtes at the tme of ther depost, the dfference between
such market vaue and the amount paced n the fund n eu of the securtes
w be deemed to have been wthdrawn.
In the event of noncompance wth the prescrbed condtons reatve to any
contract for constructon or acquston of new vesses, recognton w e tend
to the entre amount of the gan represented n that porton of the construc-
ton reserve fund obgated under such contract. Thus, f the Martme Com-
msson determnes and certfes to the Secretary of the Treasury that for
causes wthn the contro of the ta payer constructon under a contract Is not
competed wth reasonabe dspatch, the entre amount of the gan represented
n the porton of the constructon reserve fund obgated under the contract
w be recognzed even though a other condtons have been satsfed. In
case of noncompance wth the requrements of the statute or these regua-
tons, see secton 32.17 as to the aocaton of gan.
Noncompance wth the provsons of the statute or these reguatons rea-
tve to the utzaton of the deposted amounts may aso, Inasmuch as the
statutory presumpton of subsecton (f) s then nappcabe, warrant an e am-
naton to ascertan whether such amounts consttute an unreasonabe accumu-
aton of earnngs and profts wthn the meanng of secton 102 of the Interna
Revenue Code. Under that secton and the reguatons thereunder, f such
amounts are deposted and the fund mantaned n good fath for the purpose
of the constructon or acquston of new vesses, such amounts w not con-
sttute an unreasonabe accumuaton.
Sec. 32.22. tent of ta abty. Incuson of gan n gross Income sha
be for a ncome and e cess-prc.fts ta purposes, but not for the purposes of
the decared vaue e cess-profts ta and the capta stock ta . In eu of
any ad|ustment wth respect to the decared vaue e cess-profts ta , there s
mposed for the ta abe year n whch the gan was reazed (see secton 32.17)
an addtona ta of 1.1 per cent of the amount of the gan. No addtona
capta stock ta abty s ncurred.
In the case of deposts n the constructon reserve fund of amounts derved
from sources other than those specfed n the statute, or n the case of faure
to depost an amount equa to the net proceeds or net ndemnty wthn
the prescrbed statutory perod, the ta payer obtans no suspenson or post-
ponement of any ta abty and the ta s coectbe wthout regard to the
provsons of the statute. (See secton 32.13.)
Sec. 32.23. ssessment and coecton of defcences. ny addtona ta , n-
cudng the 1.1 per cent of the amount of the gan mposed n eu of decared
vaue e cess-profts ta , due on account of wthdrawa from a constructon re-
serve fund, or faure to compy wth the provsons of the statute or the regua-
tons, s coectbe as a defcency. Interest upon such defcency w run from
the date the wthdrawa or noncompance occurs. The amount of any defcency,
ncudng nterest and addtons to the ta . determned as a resut of such wth-
drawa or noncompance, may be assessed, or a proceedng n court for the
coecton thereof may be begun wthout assessment, at any tme and wthout
regard to any perod of mtatons or any other provsons of aw or rue of
aw. ncudng the doctrne of res |udcata.
Sec. 32.2 . Reports by ta payers. Wth each ncome ta return fed for a
ta abe year durng any part of whch a constructon reserve fund Is n e st-
ence the ta payer sha submt a statement settng forth a detaed anayss of
such fund. The statement, whch need not be on any prescrbed form, sha
ncude the foowng nformaton wth respect to the constructon reserve fund:
(1) The actua baance n the fund at the begnnng and end of the ta abe
year;
(2) The date, amount, and source of each depost durng the ta abe year;
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501
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(3) If Item (2) conssts of proceeds from the sae, or ndemnfcaton of oss, of
a vesse, the amounts of the unrecognzed gan;
( ) The date, amount, and purpose of each e pendture or wthdrawa from
the fund; and
(5) The date and amount of each contract, under whch deposted funds are
deemed to be obgated durng the ta abe year, for constructon or acquston
of a new vesse and the dentfcaton of such vesse.
Ta payers sha keep such records and make such addtona reports as the
Commssoner of Interna Revenue or the Martme Commsson may requre.
Sec. 32.25. Constructon or acquston by controed corporaton. For the pur-
poses of the statute and these reguatons a new vesse s consdered as con-
structed or acqured by the ta payer If constructed or acqured by a corporaton
at a tme when the ta payer owns not ess than 95 per cent of the tota number
of shares of each cass of stock of the corporaton.
Sec. 32.26. ass of new vesse. The bass for determnng gan or oss and for
deprecaton for the purpose of Federa ncome or e cess-profts ta es wth respect
to a new vesse constructed or acqured by the ta payer wth funds deposted n
the constructon reserve fund, s reduced by the amount of the unrecognzed gan
represented n the funds aocated under the provsons of these reguatons to
the cost of such vesse. (See secton 32.17.)
Sf . 32.27. dmnstratve |ursdcton. Sectons 32.3 to 32.11, Incusve, and
secton 32.18 dea prmary wth matters under the |ursdcton of the Martme
Commsson. Sectons 32.12, 32.16, and 32.17 and sectons 32.21 to 32.26, ncu-
sve, dea prmary wth matters under the ursdcton of the Commssoner
of Interna Revenue. Generay, matters reatng to the estabshment, mante-
nance, e pendture, and use of constructon reserve funds and the constructon
or acquston of new vesses are under the |ursdcton of the Martme Com-
msson ; and matters reatng to the determnaton, assessment, and coecton
of ta es are under the |ursdcton of the Commssoner of Interna Revenue.
Correspondence shoud be addressed to the partcuar authorty havng |urs-
dcton n the matter.
Guy T. evkrno,
Cornmssoner of Interna. Revenue.
ohn L. Suvan,
ctng Secretary of the Treasury.
y order of the Unted States Martme Commsson.
W. C. Peets, r.,
Secretary.
anuary 31,19 1.
(Ped wth the Dvson of the Federa Regster anuary 31, 19 1, 11. 9 a. m.)
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502
S CTION 3 OF T INSON CT ( 8 ST T., 503, 505), S
M ND D Y CT OF UN 25,1936 ( 9 ST T., 1926), ND
Y CT OF PRIL 3, 1939 (53 ST T., 555, 560). CT OF
UN 28, 19 0 (PU LIC, NO. 671) . S CTION 01, S COND
R NU CT OF 19 0 (PU LIC, NO. 801, S NTY-
SI T CONGR SS, T IRD S SSION).
19 1-5-10586
T. D.503
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 31.
C SS PROFITS ON CONTR CTS FOR N L SS LS ND RMY ND N Y
IRCR FT.
Treasury Decsons 906 C. . 1939-2, 0 , 909 C. . 1939-2,
22 , and 5000 C. . 19 0-2, 397 suspended wth respect to certan
contracts and subcontracts by reason of secton 01 of the Second
Revenue ct of 19 0. .
Treasury Department,
Offce of the Secretary of the Treasury,
Washngton, D. C.
War Department,
Offce of the Secretary of War,
Washngton, D. C.
Navy Department,
Offce of the Secretary of the Navy,
Washngton, D. O.
To Offcers and mpoyees of the Treasury Department, the War
Department, the Navy Department, and Others Concerned:
Paragraph 1. Secton 01 of the Second Revenue ct of 19 0
(Pubc, No. 801, Seventy-s th Congress, thrd sesson), approved
October 8, 19 0, provdes:
Sec. 01. Suspenson of Proft-Lmtng Pbovsons of the nson ct.
The provsons of secton 3 of the ct of March 27, 193 ( S Stat. 505;
3 U. S. 0., secton 96), ns amended, begnnng wth the frst provso
thereof, and secton 2(b) of the ct of une 28, 1910 (Pubc, Numbered 671,
Seventy-s th Congress, thrd sesson), sha not appy to contracts or sub-
contracts for the constructon or manufacture of any compete nava vesse
or any rmy or Navy arcraft, or any porton thereof, whch are entered
Into n any ta abe year n whch the e cess profts ta provded In Sub-
chapter of Chapter 2 of the Interna Revenue Code Is appcabe or woud
be appcabe If the contractor or subcontractor, as the case may be, were a
corporaton, and any agreement to pay nto the Treasury proft n e cess of
10 per centum, 12 per centum, or 8 per centum, as the case may be, of the
contract prces of any such contracts or subcontracts sha be wthout effect.
Ths secton sha aso appy to such contracts or subcontracts whch were
entered nto before the date of the begnnng of the contractor s or subcon-
tractor s frst ta abe year whch begns n 19 0 and whch are not competed
before such date.
Par. 2. The e cess profts ta provded n Subchapter of Chap-
ter 2 of the Interna Revenue Code, as added by secton 201 of the
Second Revenue ct of 19 0, s appcabe ony wth respect to ta -
abe years begnnng after December 31, 1939. Pursuant to the
above-quoted secton 01, the provsons of Treasury Decson 906
C. . 1939-2, 0 Part 17, Tte 26, Code of Federa Reguatons,
1939 Sup. , reatng to e cess profts on contracts for nava vesses
and arcraft, Treasury Decson 909 C. . 1939-2, 22 Part 16,
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Msc.
Tte 26, Code of Federa Reguatons, 1939 Sup. , reatng to e cess
profts on contracts for rmy arcraft, and Treasury Decson 5000
C. . 19 0-2, 397 Part 26, Tte 26, Code of Federa Regua-
tons, 19 0 Sup. , reatng to e cess profts on contracts for nava
vesses and rmy and Navy arcraft, sha not appy wth respect
to the foowng contracts and subcontracts otherwse comng wthn
the scope of any of such Treasury decsons:
(1) Those whch are entered nto n any ta abe year of the
contractor or subcontractor (as the case may be) to whch the
e cess profts ta s appcabe, or to whch such ta woud
be appcabe f the contractor or subcontractor (as the case
may De) were a corporaton; and
(2) Those whch are entered nto before, but not competed
before, the begnnng of the contractor s or subcontractor s
(as the case may be) frst ta abe year whch begns n 19 0.
Paragraph 2 may be ustrated by the foowng e ampes:
ampe (1): On May 1, 1939, the Corporaton, whch makes
ts ncome ta returns on the caendar year bass, entered nto a con-
tract whch was (as of the date entered nto) wthn the scope of Treas-
ury Decson 909, such contract beng competed on November 1,19 0.
Pursuant to such prme contract, the Corporaton, on une 1, 1939,
entered nto a subcontract wth the Y Corporaton, whch makes
ts ncome ta returns on the bass of a fsca year enfng une 30.
The subcontract, whch was aso (as of the date entered nto) wthn
the scope of Treasury Decson 909, was competed on une 15, 19 0.
Snce the prme contract was not competed before the begnnng of
the contractor s frst ta abe year whch begns n 19 0 ( anuary 1,
19 0), Treasury Decson 909 does not appy wth respect thereto.
Snce the subcontract was not entered nto n a ta abe year to whch
the e cess profts ta appes and snce t was competed before
the begnnng of the subcontractor s frst ta abe year whch begns
n 19 0 ( uy 1, 19 0), Treasury Decson 909 contnues to appy
wth respect thereto.
ampe (2): On October 1,1939, the Corporaton, whch makes
ts ncome ta returns on the bass of a fsca year endng ugust 31,
entered nto a contract whch was (as of the date entered nto) wthn
the scope of Treasury Decson 909, such contract beng competed on
uy 29, 19 0. Pursuant to such prme contract, the Corporaton,
on December 23,1939, entered nto a subcontract wth the Y Corpora-
ton, whch makes ts ncome ta returns on the caendar year bass.
The subcontract, whch was aso (as of the date entered nto) wthn
the scope of Treasury Decson 909, was competed on February 15,
19 0. Snce the prme contract was not entered nto n a ta abe year
to whch the e cess profts ta appes and snce t was competed before
the begnnng of the contractor s frst ta abe year whch begns n
19 0 (September 1, 19 0), Treasury Decson 909 contnues to appy
wth respect thereto. Snce the subcontract was not competed before
the begnnng of the subcontractor s frst ta abe year whch begns
n 19 0 ( anuary 1,19 0), Treasury Decson 909 does not appy wth
respect thereto.
Par. 3. The date of competon of a partcuar contract or subcon-
tract sha, for the purposes of ths Treasury decson, be determned
n accordance wth the provsons of Treasury Decson 906, 909, or
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50
5000, whchever s appcabe, or woud have been appcabe e cept
for the provsons of secton 01 of the Second Revenue ct of 19 0 and
ths Treasury decson ssued thereunder, to such contract or sub-
contract.
Par. . n agreement contaned n any of the contracts or subcon-
tracts referred to n paragraph 2 of ths Treasury decson, to pay nto
the Treasury proft n e cess of 10, 12, or 8 per cent (as the case may
be) of the contract prce thereof, sha be wthout effect.
(Ths Treasury decson s ssued under the authorty contaned
n secton 01 of the Second Revenue ct of 19 0 (Pubc, No. 801,
Seventy-s th Congress, thrd sesson), sectons 2(b), 3, and of
the ct of une 28, 19 0 (Pubc. No. 671, Seventy-s th Congress,
thrd sesson), secton 1 of the ct of pr 3, 1939, 53 Stat., 560
(10 U. S. C, Sup., 311; 3 U. S. C, Sup., 96), and secton 3 of the
ct of March 27,193 , 8 Stat., 505 (3 U. S. C, 96), as amended by
the ct of une 25, 1936, 9 Stat,, 1926 (3 U. S. C, Sup., 96), and as
further amended and made appcabe to contracts and subcontracts for
rmy arcraft, by secton 1 of such ct of pr 3,1939.)
Gut T. everng,
Commssoner of Interna Revenue.
pproved December 3, 19 0.
ohn I Suvan,
ctng Secretary of the Treasury.
pproved anuary 10,19 1.
enry L. Stmson,
Secretary of War.
pproved anuary 2 ,19 1.
Frank no ,
Secretary of the Na y.
(Fed wth the Dvson of the Federa Regster anuary 29, 19 1, 11.50 a. m.)
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505
Msc.
OL OM RG RIN /
19 1-1-10557
MS. 233
Schedue of oeomargarne produced and materas used durng the month
of November, 19 0, as compared tcth November, 1939.
November,
19 0.
Tota producton of uncoored oeomargarne
Tota wthdrawn ta -pad
Ingredent schedue o uncoored oeomargarne:
abassu o
Coconut o
Corn o
Cottonseed o
Dervatve of gycerne
Lecthn
Mk
Monostearne.- -
Neutrn ard
Oeoo
Oeo stearne
Oeo stock
Peanut o
Sat
Soda (bcnoate of)
Soya bean o
Soya bean stearne
tamn concentrate
Tota
Tota producton of coored oeomargarne
Tota wthdrawn ta -pad
Ingredent schedue of coored oeomargarne:
utter favor
Coconut o.. -
Coor
Corn o
Cottonseed o
Cottonseed stearne
Dervatve of gycerne
Lecthn
Mk
Monostearne
Neutra ard..
Oeoo
Oeo stearne
Oeo stock
Peanut o
Sat
Soda (benzoatc of)
Soya bean o
Soya bea
tamn
Tota
Pound .
29, 72 ,028
30,820,6 6
85, 550
56 , 11
16,321
889,01
66,323
10, 13
9 ,772
18,529
00,690
321,896
262, 757
102,8 9
157,051
101, 177
10,692
186,566
200
1,086
30. 660,3.17
27S. 001
33. 780
2
99, 8 6
268
18
19, 282
60
321
81
9,828
397
5, 126
23, 22
575
3,800
67
18, 2 8
98
70,638
80
2
292,562
Fgures are sub|ect to revson unt pubshed n the Commssoner s annua report.
Of the amount produced, 16,5 6 pounds were reworked.
Of the amount produced, 27.029 pounds were reworked.
Of the amount produced, 2,528 pounds were reworked.
Of the amount produced, 128 pounds were reworked.
0 3 1 1 17
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506
19 1-5-10. 82
MS. 23
Schedue of oeomargarne produced and materas used durng the month of
December, 19 0, as compared wth December, 1939.
December,
1910.
December,
1939.
Pounds.
32, 216. 785
Pounds.
25, 38. 98
Ingredent schedue of uncoored oeomargarne:
31.080.270
25,711.098
Mk
13. 660
1, 52. 23
33. 763
13,087. 959
73.61
12. 791
6,966.821
IS, 33
768.978
2 0
659.111
1,912.8 2
53. 93
8. 765. S0O
60.257
7,1 2
,958, 870
201, 718
Oeo o
1. 50.385
300. 7 3
153. 505
181.318
1,232, 5
11.89
8, 90. 715
1, 75
860.38
236.008
78, 27
193. f. )
1,0-f). 755
9. 116
7,5 6. 2 6
1.3 2
Oeo stock
Peanut o
Sat
Soda (benznnte of)
Soya bean o.
tamn concentrate
Tota
33. 250.973
26,59 . 951
239. 990
1 8, 126
Tota wthdrawn ta-pad
3S. 080
5 IfO
Ingredent scheduo of coored oeomargarne:
1
Coconut o
75, 325
182
23
18. 989
1,320
29
26
68, 597
387
7, 13
26,25,8
296
2,3W
392
8, 152
73
88,769
US
5
13. 181
210
2S3
77
29. 13
Coor
Corn o
Cottonseed o
Cottonseed stearne
Dervatve of gycerne
Mk
Monostearne
,200
15, 526
Oeo o _
Oeo stearne
Oeo stock
958
200
7,702
35
29.10S
1
Peanut o
Sat
58,900
3
Tota
266,981
159,862
Of the amount produced, 2 ,273 pounds were reworked.
1 Of the amount produced, 10, 25 pounds were reworked,
Of the amount produced, G 0 pounds were reworked.
Of the amount produced, 1, 75 pounds were reworked.
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607
Msc.
19 1-9-10623
MS. 235
Schedue of oeomargarne produced and materas used durng the month of
anuary, O|, as compared wth anuary, 19 0.
anuary,
IML
anuary.
19 0.
Pounds.
33.617,656
Pounds.
29,20 . 63
Tota wthdrawn ta -pad
33. 79. 237
29.378,265
Ingredent schedue of uncoored oeomargarne:
abassu o . .
692,201
6
utter
Coconut o .
1.212.290
37.115
13, 15.083
86.230
76.858
6,155, 518
15,796
770. 157
1,759.069
227.0 3
153.677
199,65
1,158.6 0
13.359
9.272, 395
2,001.6 9
83.5 5
10,055, 129
72, 08
7,165
8,666, 278
Corn o . . . .
Cottonseed o
Lecthn . .
Mk
Monostearn
Neutra ard... -
238,029
1,131,517
261. u:t
Oeo o
Oeo stearne - .
Oeo stock -
119,617
165.727
Peanut o
Sat
1,206,030
11,639
Soda fbenzoate of)
a
8,939.392
1,513
1, 81
Tota
3 , 55 . 399
30,653.803
Tota producton of coored oeomargarne
12, 20
1 9. 578
Tota wthdrawn ta -pad
. ,. 110
30,011
Ingredent schedue of coored oeomargarne:
utter favor -
2
68.092
258
23
9.779
Coor
106
261
21,968
60
318
83
29,591
Corn o
35,335
300
391
352
71, 266
:t ,
6, 1
29,387
185
, 163
81
Cottonseed stearne
Dervatve of gycerne
Mk
Monostearne
2,871
12,690
2,687
661
138
7,56
38
38,837
Oeo o
Oeo stearne
Oeo stock .
Peanut o
Sat
15, .558
1 5
187,921
2 0
2
Soda fben oate of)
Soya bean o .
Sova bean stearne
tamn concentrate
3
Tota
20. 79
162,651
These fgures ncude manufacturers returns whch were not avaabe for pubcaton n pror reports.
1 Of the amount produced, 18,792 |wunds were reworked.
Of the amount produced, 20,735 pounds were reworked.
Of the amount produced, 22 pounds were reworked.
Of the amount produced, 6 0 pounds were reworked.
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Msc.
508
19 1-15-10671
MS. 237
mended schedue of oeomargarne produced and materas used durng the month
of anuary, 19 1, as compared wth anuary, 19 0.
anuary,
19 1.
anuary,
19 0.
Tota producton of unooored oeomargarne ...
Pounds.
33,617,656
Pounds.
29. 209, 38
Ingredent schedue of uncoored oeomargarne:
33, 779. 237
29.378.6 3
abassu o
692.201
8
Corn o
1,212,290
37.115
13, 76,923
86.230
15,018
6,155, 518
15.798
770, 157
1,759,080
227,0 3
153,677
1911. 65
L 158, 6 0
13.359
9,272,395
2
2,001,6 9
83. 5 5
Lecthn .
7.185
6,866,278
Mk
238,029
1.131, 517
261.93
119.617
185,727
1,206.030
11.639
8,939,392
Oeo o
at
1,613
1, 81
Tota
3 , 55 , 399
30,6SS. 803
12, 20
1 t, s s
Ingredent schedue of coored oeomargarne:
5(1, 1111
28,665
utter aror
2
Coor
68,092
258
23
9,779
106
281
21,968
60
318
83
29,591
ecthn
35, 335
300
391
352
71,266
35
6, 1
29,387
195
,163
81
Mk
Monostearno
Z 871
12,690
2,687
661
138
7,66
36
33,837
Sat
15,558
1 5
187,921
2 0
2
3
Tota .
20, 79
162,851
Of the amount produced, 18,792 pounds were reworked.
Of the amount produced, 20,73.1 pounds were reworked.
Of the amount produced, 22 pounds were reworked.
Of the amount produced, 6 0 pounds were reworked.
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509
Msc.
19 1-1 -10068
MS. 236
Schedue of oeomargarne produced and materas used durng the month of
Febwary, 19 / , as cor.pared wth February, 19 0.
February,
19 1.
f uncoored oeomargarne..
Tota wthdrawn ta-pad
Ingredent schedue of uncoored oeomargarne:
abassu o ,
utter
Coconut on
Corn on
Cottonseed o
Dervatve of gycerne
Mk
Monostearne
Neutra ard
Oeo on
Oeo stearne
Oeo stock
Peanut oU
Sat
Soda (bemoate of)
Soya bean o
Soya fakes
eeetabe (turn
tamn concentrate.
Tota
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad
Ingredent schedue of coored oeomargarne:
utter favor
Cocouut o
Coor
Corn o -
Cottonseed oU
Cottonseed stenrne
Dervatve of gycerne
ecthn
Mk
Monostearne
Neutra ard
Oeo o
Oeo stearne
Oeo stock
Peanut o
Sat -
Soda (benzoate of)
Soya bean o
bean stearne -.
concentrate
Tota.
Pound .
27, 765, 301
27,829,055
62,000
1,178.909
39.1 8
11,683.677
63, 16
1 .028
5,2S5, 9 9
10,961
97.115
1,137. 272
252,601
117. 5
162. M
986,022
10, 21
7,318,59
15
1,295
2a 721. 7
337, 16
39, 8
3 5. 5 8
2
116,988
65,328
386
1 7
39
5
1,823
12, 603
2,3 0
360
392
610
6
78
62,226
399
38,1 5
6.322
2,176
23.7 2
25.60
355
1, 75
2,650
2, 302
177
13
12, 2
10.008
150
39
7 ,926
0,098
2 0
3
2
Of the amount produced. 23,016 pounds were reworked.
Of the amount produced, 21,7 1 pounds were reworked.
Of the amount produced, 379 pounds were reworked.
Of the amount produced, 30 pounds were reworked.
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Msc.
510
19 1-17-10697
MS. 238
Schedue of oeomargarne produced and matera u ed durng the month of
March, / . ;/. at compared wth March, 19 0.
March, ML
March, 19 0.
Pmndt.
Pmndt.
Tota producton of uuootorod oeomargarne
33.5S8.531
26.523.191
Tota wthdrawn ta -pad . . .
3 . 288.031
26,800.262
Ingredent schedue of uncoored oeomargarne:
66,280
525.197
60
utter
. 308,270
39.352
13, 120.097
65,068
15,655
6,359.036
15.081
893.661
1.633.3 1
281.31
130.010
2. 21. 7
86,219
9,013. 03
Lecthn
62,607
7.55
8,0 5.721
Oeoof
16 ,876
1,176, 750
1 .710
9, 396. 3
297. 738
1,302.816
2 2, C77
9 .095
1.050
1 6.1
1.076.929
10.100
7,125, 375
1.170
1.2S7
at
1.586
3 . 601. 530
27. 61. 30
291, 67
137,958
Ingredent schedue of coored oeomargarne:
0.397
29.209
1
93
Coor
115, 98
2 7
3
2,930
110
62
7, 95
270
282
5
Corn o
21. 20
1.230
215
57
Mk .
6 ,692
273
5. 16
27,26
655
3,200
750
2 3
10,887
81
28.619
Pam o
2.965
1 .396
00
1.810
Sat...
59,667
11
6.692
0
3.801
3
Tota
301.580
150. 0
1 Of the amount produced, 32,317 pounds were reworked.
Of the amount produced, 10,706 pounds were reworked.
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#
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511
Msc.
19 1-23-10739
MS. 239
Schedue of oeomargarne produced and materas used durng the month of
pr. 19 1, as compared wth pr, 19 0.
pr. 19 1.
pr, 19 0.
Poundt.
I31.75f. 81
Pnundg.
27.233.829
Ingredent schedue of uncoored oeomargarne:
30,63 ,999
27,551.58
Corn o
211,130
1,210,23
37,612
12,862.027
78.023
15,008
6,9 1.639
13.895
879,583
1, 375, 185
361. 155
81,518
13.600
158. 572
1,103. 855
12,6 8
8,350,760
935,95
3,016,302
32.36
8,173.118
77.9 7
6,9 8
5,208,285
Lecthn
Mk
633,96
1, 216,693
312,881
117, 0
Pam o
112. 51
1,129. 257
9,615
7, 103. 7115
.500
1.29
Sat
Soya bean o
tamn concentrate
1,53
Tota
32,708,358
(Ss. 7S1
Tota producton of coored oeomargarne
m-|, ::
177. 3 8
Tota wthdrawn ta -pad
,313
20. (155
Ingredent schedue of coored oeomargarne:
831
utter favor
6
Coor
171, 179
30
6
68,050
120
3
Corn o _-
Cottonseed o _ -
33,836
900
671
38
7 ,623
306
6,76
26,780
1 , 881
Cottonseed stearne
Dervatve of gycerne
03
Lecth n
M
Mk
36,212
Monostcarne - - -
Neutra ard
3.958
18, 275
820
2,120
Oeoo
2,275
17, 770
62
1 , 2 3
211
71,663
71
1
Pam o
38
8,032
73
36,785
at
Soya bean o
Soya bean stearne _
tamn concentrate
3
Tota
21,109
190,690
1 Of the amount produced, 2,567 pounds were reworked.
Of the amount produced, 2 , 32 pounds were reworked.
Incudes manufacturers returns whch were not avaabe for pubcaton n pror schedue.
Of the amount produced, 3 8 pounds were reworked.
Of the amount produced, 12 pounds were reworked.
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Msc.
512
19 1-26-10761
MS. 2 0
Schedue of oeomargarne produced and materas used durng the month of
May, 19 , as compared wth May, 19-O.
May, 19 1.
Tota producton or uncoored oeomargarne..
Tota wthdrawn ta -pad
Pounds.
26, 30 ,376
Ingredent schedue of uncoored oeomargarne:
abassu o
Coconut o -
Corn o
Cottonseed o --
Dervatve of gycerno
Dacety
muso
Lecthn
Mk
Monostearne.-
Neutra ard -
Oeoo
Oeo stearne - --.
Oeo stearn o
Oeo stock
Pam o
Peanut o
Sat
6oda (beraoate of)
oy a bean o - -
Soya bean stearne
tamn concentrate
Tota-
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad
Ingredent schedue of coored oeomargarne:
abassu o -
utter favor
Coconut o
Coor
Corn o
Cottonseed o
Cottonseed stearne
Dervatve of gycerne
Lecthn -
Mk
Monostearne
Neutra ard
Oeo o
Oeo stearne
Oeo stock --
Pam o
Peanut o
Sat
Soda fhen oate of)
Soya bean o
Soya bean stearne -
tamn concentrate
Tota.
26.8O .S 0
1,117,395
39.287
11,169,921
61,865
1
10
13,927
, 860,157
11.96
593, 191
1,2 0,696
256.250
76, 88
77
166. 03
909,382
11,091
6,6 5, 189
295
1,129
27.175,118
1.388, 1
7, 830
351.08
1,371
52
273.8 0
5. 520
3.02
528
2 1.321
887
1,866
198.682
10
1,8
7,270
129
7,263
556
253,133
238
5
1, 29,027
Of the amount produced. 19.811 pounds were reworked,
Of the amount produced, 29,7 pounds were reworked.
Of the amount produced, 16 pounds were reworked.
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#
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513
Msc.
TO CCO.8
19 1-5-10585
T. 79
Statement of manufactured tobacco produced, by cause , durng the month of
November, 1S 0, as compared th November, 1039.
November,
19 0.
November,
1939.
Pug
Pound).
3,9 1,8 1
2, 3 0
21. 29
Pounds.
3,851,32
515,2 3
365.5 9
3, 15,282
17, 86.579
fne-cut chewng. . ... .... .... ...........
3,256,200
17,6 1,733
Tota
25, 703,603
25,613.977
19 1-9-10622
T.80
Statement of manufactured tobacco produced, by casses, durng the month of
December, 10O, as compared wth December, 1939.
December,
19 0.
December,
1939.
p
Pounds.
3,881,357
56. 310
380,070
3. 196,397
15, 227, 235
Pounds.
3,703,223
8. 759
32), 309
3,195,078
1 . 20,982
Tota
22,9 1,375
22,161,951
Statement of manufactured tobacco produced, by casses, durng the month of
anuary, . t, as compared wth anuary, O/fO.
19 1-1 -10069
T. 81
anuary,
19 1.
anuary,
19 0.
Pounds.
Pounds.
3, 8 ,16S
3SI9, 95
330, 80
3, 590,96
16, 165,0 0
Twst
3,881,717
57, 002
20, 59
3,035, 098
16,751,061
Tota
25, 152, 537
22,970, 1
Fgures are sub|ect to revson unt pubshed n the Commssoner s annua report.
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#
p
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Msc.
51
19 1-18-10701
T. 82
Statement of manufactured tobacco produced, by casses, durng the month of
February, 19 1, as compared wth February, 19 0.
February,
19 1.
February,
19 0.
Pne
Pound.
3.7 8.168
61, 27
355.257
3, 3 7. 215
1 , 718, 571
Pounds.
035. 09
81.22
299.909
3,396 970
15,835.73
Twst
tmokng
Tota
22,630, 85
2 .0 9.2 6
19 1-22-10728
T.83
Statement of manufactured tobacco produced, by casses, durng the month of
March, 19 1, as compared wth March, 19 0.
March, 19 1.
March, 19 0.
Pug
Pounds.
,065,325
67, 691
Poundt.
3, 805,80
53,73
335.070
3,363,062
16,086,939
Twst.
389,360
3,385.380
16, 58,306
Smokng
Tota
2 ,766,062
2 ,0 ,609
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O RD OF T PP LS.
19 1-16-10683
RUL S OF PR CTIC FOR T UNIT D ST T S O RD OF T
PP LS.
Inthoducton.
These revsed rues are promugated pursuant to authorty of secton 1111,
Interna Revenue Code, whch provdes that The proceedngs of the oard
and ts dvsons sha he conducted n accordance wth such rues of practce
and procedure (other than rues of evdence) as the oard may prescrbe and
n accordance wth the rues of evdence appcabe n the courts of the Dstrct
of Coumba n the type of proceedngs whch pror to September 16, 1938,
were wthn the |ursdcton of the courts of equty of sad Dstrct
Congress n the Revenue cts has enacted provsons reatng to the organza-
ton, |ursdcton, and procedure of the oard of Ta ppeas, and to the acton
of the ureau of Interna Revenue wth respect to the assessment and coecton
of defcences when a petton has been fed wth the oard. Reference a
made to those statutory provsons n the Revenue cts for procedura requre-
ments other than those reatng to the conduct of proceedngs before the oard
and ts dvsons to whch these rues of practce are mted. ttenton a
caed to the Interna Revenue Code for convenent reference, and partcuary
to sectons 271, 272, 273, 1100, and 11 2.
Rue 1. usness ours.
The offce of the oard at Washngton, D. C, w be open each busness
cay from 9 o cock a. m. to .30 o cock p. m.
Rue 2. dmsson to Practce.
Persons of the foowng casses who are found by the oard, upon con-
sderaton of ther appcatons, to be ctzens of the Unted States, of good
mora character, and to possess the requste quafcatons to represent others,
may be admtted to practce before the oard:
(a) ttorneys at aw who are admtted to practce before the Supreme
Court of the Unted States or the hghest court of any State or Terrtory or
of the Dstrct of Coumba.
(6) Certfed pubc accountants duy quafed under the aws of any State
or Terrtory or of the Dstrct of Coumba.
Corporatons and frms w not be admtted or recognzed.
n appcant for admsson must fe hs appcaton wth the oard on the
form provded. Forms w be furnshed upon request to the secretary of the
oard. Such appcaton sha be accompaned by a current certfcate of the
cerk of the court n whch the appcant s admtted to practce to the effect
that he has been so admtted and s n good standng; or a current certfcate by
the proper State, Terrtora, or Dstrct authorty to the effect that the app-
cant s a certfed pubc accountant n good standng, duy quafed and entted
to practce n such State or Terrtory or the Dstrct of Coumba.
The oard may deny admsson to, suspend, or dsbar any person who n ts
|udgment does not possess the requste quafcatons to represent others, or
who s ackng n character, ntegrty, or proper professona conduct. No per-
son sha be suspended for more than 60 days or dsbarred unt he has been
afforded an opportunty to be heard. dvson may mmedatey suspend any
person for not more than 60 days for contempt or msconduct durng the course
of any proceedng.
The oard may requre any practtoner before t to furnsh a statement under
oath of the terms and crcumstances of hs empoyment n any proceedng.
Rue 3. Persona Representaton n Leu of Counse,
ny ndvdua ta payer or member of a ta payer partnershp may appear for
hmsef or such partnershp upon adequate dentfcaton to the oard. ta -
payer corporaton may be represented by a bona fde offcer of the corporaton
upon permsson granted, n ts dscreton, by the oard or the dvson sttng.
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516
Rue . Fobm and Stye or Papebs.
papers fed wth the oard sha be ether prnted or typewrtten, and If
typewrtten, sha be on ony one sde of pan whte paper. Ths paper sha be
not more than SY2 nches wde and 11 nches ong, and sha wegh not ess than
16 pounds to the ream. The papers sha be fastened on the eft sde and at no
other pace.
Typewrtten papers sha have no covers or backs. Copes sha be cear and
egbe but may be on any weght paper. If prnted, they sha be n 10 or 12
pont type, on good ungazed paper, 5 Inches wde by 9 nches ong, wth nsde
margn not ess than 1 nch wde, and wth doube-eaded te t and snge-eaded
quotatons. Ctatons sha be n Itacs when prnted, and underscored when
typewrtten.
The proper capton sha be paced upon a papers fed. If the pettoner Is
an ndvdua, the fu gven name and surname sha be set forth n the capton.
If the pettoner s a marred woman, her gven name sha be used, not the
name of her husband preceded by Mrs. If the pettoner Is a fducary, the
name of the estate, trust, or other person for whom he acts, sha be gven frst,
foowed by the name of the fducary. (See rues 5 and 6(a), and ppend I,
Form No. 2.)
cept as otherwse provded n these rues, a sgned orgna and four con-
formed copes of a papers sha be fed. Whenever any paper s fed n more
than one proceedng (as a moton to consodate proceedngs or n proceedngs
aready consodated), one addtona copy sha be fed for each addtona pro-
ceedng.
The wrtten sgnature, whether of counse or of the pettoner, sha be n Ind-
vdua and not n frm name, e cept that where the pettoner s a corporaton
the wrtten sgnature sha be by an actve offcer of the corporaton. The name
and mang address of the pettoner or of counse sha be typed or prnted m-
medatey foowng the wrtten sgnature.
Rue 5. Proper Partes.
The proceedng sha be brought by and n the name of the person aganst whom
the Commssoner determned the defcency or abty, as the case may be ,
or by and n the fu descrptve name of the fducary egay entted to nsttute
a proceedng on behaf of such person.
In the event of a varance between the name set forth n the notce of
defcency or abty and the correct name, a statement of the reasons for such
varance sha be set forth n the petton. (See rues , 6, and 23.)
Rue 6. Intaton or a Proceedng Petton.
proceedng sha be ntated by fng wth the oard a petton, as provded
n rues , 5, and 8, and substantay n accordance wth Form 2, shown n
ppend I. The petton sha be compete n tsef so as fuy to state the
ssues. It sha contan:
(a) capton n the foowng form:
Unted States oard of Ta ppeas.
, pettoner,
v. Docket No.
Commssoner of Interna Revenue, respondent.
petton.
(6) Proper aegatons showng |ursdcton n the oard.
(c) statement of the amount of the defcency or abty, as the case may
be , determned by the Commssoner, the nature of the ta , the perod for whch
determned, the amount thereof (as neary as may he computed) In controversy,
and the coecton dstrct n whch the return was fed.
( Z) Cear and concse assgnments of each and every error whch the pettoner
aeges to have been commtted by the Commssoner n the determnaton of the
defcency. Issues n respect of whch the burden of proof s by statute paced
upon the Commssoner w not be deemed to be rased by the pettoner In the
absence of assgnments of error n respect thereof. ach assgnment of error
sha be numbered.
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(e) Cear and concse numbered statements of the facts upon whch the pet-
toner rees as sustanng the assgnments of error, e cept those assgnments of
error n respect of whch the burden of proot s by statute paced upon the
Commssoner.
(f) prayer, settng forth reef sought by the pettoner.
Iff) The sgnature of the pettoner or that of hs counse. (See rue .)
(ft) verfcaton by the pettoner; provded that where the pettoner s so-
|ournng outsde the Unted States or s a nonresdent aen, the petton may
bo verfed by a duy apponted attorney In fact, who sha attach to the petton
a copy of the power of attorney under whch he act and who sha state n hs
verfcaton that he acts pursuant to such power, that such power has not been
revoked; that pettoner s absent from the Unted States, and the grounds of hs
knowedge of the facts aeged n the petton. s used heren the term Unted
States ncudes ony the States and the Dstrct of Coumba. notary pubc
Is not authorzed to admnster oaths, etc., n matters n whch he s empoyed as
counse. (See Tte , ch. 2, D. C. Code, and 26 Op. . G., 236.)
The verfcaton sha contan a statement that the fducares sgnng and ver-
fyng have authorty to act for the ta payer.
Where the pettoner s a corporaton, the person verfyng sha state In hs
verfcaton that he has authorty to act for the corporaton.
The sgnature and the verfcaton to the petton sha be consdered the cer-
tfcate of those performng these acts that there s good ground for the petton,
he proceedng has not been nsttuted merey for deay, and t s not frvoous.
(f) copy of the notce of defcency or abty, as the case may be , sha
be appended to the petton. If a statement has accompaned the notce of
defcency, so much thereof as s matera to the ssues set out n the assgn-
ments of error kewse sha be appended. If the notce of defcency refers to
pror notces from the ureau, whch nre necessary to eucdate the determna-
ton, such parts thereof as are matera to the ssues set out n the assgnments
of error sha kewse be appended. (See ppend I, Form No. 2.)
Rue 7. Fng of Petton.
n orgna and four cear copes of the petton, ether prnted or type-
wrtten as provded by rue , sha be fed wth the oard. (See rue 9.) The
copes of the petton sha be conformed to the orgna by the pettoner.
Faure to fe a suffcent number of copes, as provded In ths rue, or to
conform to the requrements of rues , 5, and 8, sha be ground for the
dsmssa of the proceedng.
Rue 8. Fke for Fng Petton.
The fee for fng a petton wth the oard sha be 10, payabe at the tme
of fng.
Rue 9. Fng.
ny document to be fed wth the oard, must be fed at the offce of the
oard n Washngton, D. C, durng busness hours; provded, that a dvson
hearng a proceedng may permt documents pertanng thereto to be fed at the
hearng.
Rue 11. Docket.
Upon recept of the petton, the proceedng w be docketed and assgned a
number and the partes notfed thereof. Ths number sha be paced by the
partes on a papers thereafter fed n the proceedng.
Rue 12. Servce of the Petton.
Upon fng of a petton and the copes, as prescrbed n rue 7, the cerk w
serve a copy upon the Commssoner.
Rue 1 . nswer.
fter servce upon hm of a copy of the petton, the Commssoner sha have
60 days wthn whch to fe an answer or 5 days wthn whch to move n
respect of the petton. The answer sha be so drawn as fuy and competey
to advse the pettoner and the oard of the nature of the defense. It sha
contan a specfc admsson or dena of each matera aegaton of fact contaned
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518
In the petton and a statement of any facts upon whch the Commssoner rees
for defense or for affrmatve reef or to sustan any ssue rased n the petton
n respect of whch ssue the burden of proof s, by statute, paced upon the
Commssoner. ach paragraph contaned n the answer sha be numbered to
correspond wth the paragraphs of the petton. n orgna and four copes
of the answer sha be fed, of whch the orgna sha be sgned by the Com-
mssoner or hs counse and the copes conformed by hm.
The cerk w serve one copy of the answer upon the pettoner or hs counse
of record by regstered ma.
Rue 15. Repy.
If the answer of the Commssoner sets forth facts upon whch he rees for
affrmatve reef, or contans a statement of the facts upon whch he rees to
sustan an ssue n respect of whch the burden of proof s paced upon hm by
statute, the pettoner sha, wthn 5 days after a copy of such answer s maed
to hm or hs counse of record by regstered ma, fe a repy whch sha con-
tan a specfc admsson or dena of each matera aegaton of fact contaned
n the answer and sha set forth any facts upon whch he rees for defense.
ach paragraph contaned n the repy sha be numbered to correspond wth
the paragraphs of the answer. n orgna and four copes of the repy sha be
fed, of whch the orgna sha be sgned by the pettoner or hs counse and
the copes conformed by hm.
The oard upon moton of the respondent In whch good cause s shown, or
upon ts own moton, may requre the verfcaton of any repy.
The cerk w serve one copy of the repy upon the Commssoner.
Rue 16. onder of Issue.
proceedng sha be deemed at ssue upon the fng of the answer uness a
repy s requred under rue 15, In whch event the proceedng sha be deemed
at ssue upon the fng of the repy.
Rue 17. mended and Suppementa Peadngs.
The pettoner may, as of course, amend hs petton at any tme before answer
s fed. fter answer s fed, a petton may be amended ony by consent of the
Commssoner or on eave of the oard.
motons to amend, made pror to the hearng, must be accompaned by the
proposed amendments or amended peadng.
Upon moton made, the oard may, n ts dscreton, at any tme before the
concuson of the hearng, permt a party to a proceedng to amend the peadngs
to conform to the proof.
When motons to amend are granted at the hearng, the amendment or amended
peadng sha be fed at the hearng or wth the oard wthn such tme as the
dvson may f .
See rues and 19.
Rue 18. Peadngs Genera.
The oard, upon moton of ether party n whch good cause s shown, or upon
ts own moton, may order a further and better statement of the nature of the
cam or defense, or of any matter stated In any peadng. Such a moton fed
by a party sha pont out the defects companed of and the detas desred.
If such order of the oard s not obeyed wthn 15 days or wthn such other tme
as the oard may f , the oard may strke the peadng to whch the moton
was drected or may make such other order as t deems ust
If no repy s requred by these rues, each and every matera aegaton of
fact set out n the answer sha be deemed to be dened. ny new or affrmatve
matter contaned n the repy sha be deemed to be dened.
Where an answer has been fed, each and every matera aegaton of fact
set out n the petton and not e pressy admtted or dened n the answer, sha
be deemed to be admtted. Where a repy s requred by these rues and a repy
has been fed, each and every matera aegaton of fact set out n the answer
and not e pressy admtted or dened n the repy sha be deemed to be admtted.
Where no answer s fed or where a repy s requred by these rues, but no
repy s fed, the adverse party, wthn 5 days after the e praton of the tme
f ed by these rues for fng the answer or the repy, as the case may be (or
wthn 5 days after the promugaton of these rues, whchever sha aow the
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greater tme), may fe a moton wth the oard cang attenton to the fact
that the peadng has not been fed wthn the specfed tme and certan matera
aegatons of fact have not been dened, and requestng the oard to enter ts
order that those partcuar undencd aegatons sha be deemed to be admtted.
The oard w serve a copy of ths moton upon the other party and ssue an order
to show cause, returnabe on or before a day certan. If the above descrbed
moton s not fed wthn the prescrbed tme, the aegatons of the peadng to
whch there was no response sha be deemed to be dened.
uk 19. Motons.
Motons must be tmey. If a moton, other than one reatng to the recept
of evdence durng tra, s made oray durng tra, the maker thereof sha
prompty reduce t to wrtng and fe t wth the oard uness the dvson
drects otherwse. Motons sha be prepared n the form and stye prescrbed
by rue . The cerk w serve a copy of each moton upon the opposte party.
Motons w be acted upon as ustce may requre and may, n the dscreton
of the oard, be paced upon the caendar for argument. (See aso rue 30(b).)
The fng of a moton sha not consttute cause for postponement of a hearng
from the date set.
No moton for rehearng, further hearng, reconsderaton or the ke may,
e cept by speca eave of the oard, be fed more than 30 days after the opnon
has been served; and no moton for vacaton or revson of a decson may, e cept
by speca eave of the oard, be fed more than 30 days after the decson has
been entered.
ue 20. tensons or Tme.
Contnuances, e tensons of tme (e cept for the fng of the petton and
e cept as otherwse provded n these rues), and ad|ournments may be ordered
by the oard on ts own moton or may be granted by t n ts dscreton on
moton of ether party fed n wrtng and showng good and suffcent cause
therefor.
Rue 21. Dsmssa.
proceedng may be dsmssed for cause upon moton of ether party or of
the oard.
Rue 22. Servce.
When at any tme there are two or more counse of record for a pettoner,
servce w be made upon the one whose appearance was frst entered of record,
uness he has otherwse requested by wrtng fed wth the oard, n whch
event servce w be upon such other counse of record as may be desgnated by
hm. owever, servce upon any counse of record sha be deemed servce upon
the party. If there s no counse of record, servce w be made upon the
pettoner.
Servce may be made upon the Commssoner n person, upon deputes desg-
nated by hm for the purpose of acceptng servce, or upon counse appearng
for the respondent n the proceedng. (See rues 12, 1 , and 15.)
Rue 23. Substtuton of Partes.
In the event of the death of a pettoner or for other cause, the oard may
order the substtuton of the proper partes. In the event of mstake n the name
or tte of a proper party, the oard may order substtuton of the proper name
or tte. (See rue 5.)
Motons for substtuton shoud be accompaned by a proper certfcate of
the court or offca havng custody of the record showng the nterest of the
party substtuted. In the event of a change In the name of a corporaton or
other party pettoner, a moton to amend the peadngs to show such change
shoud he fed, accompaned by a copy of the certfcate, decree, or other docu-
ment, effectng such change, certfed by the offca havng custody of such
document, uness the partes have agreed to the change and have so ndcated
n the record.
Rue 2 . Substtuton on Wthdrawa or Counse Notce of ppearance.
Counse of record n any proceedng desrng to wthdraw must gve prompt
notce of hs wthdrawa to the oard and to hs cent. The oard may, n
ts dscreton, wthhod permsson to counse of record to wthdraw.
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520
Where the petton s not subscrbed by counse, or counse of record has
wthdrawn, counse subsequenty appearng for the pettoner sha mmedatey
fe a notce of appearance, whch sha ncude statements of hs admsson to
practce before the oard and of hs mang address.
Notce of a change n the mang address of counse or pettoner sha be
fed prompty wth the oard, and a separate notce sha be fed for each
docket number nvoved.
Rue 25. Caendars.
(a) Washngton and crcut caendars. ach proceedng when at ssue w
be paced ether upon the Washngton caendar or upon a crcut caendar, n
accordance wth rue 26. (See ppend II.)
(6) earng caendars. The cerk, as drected from tme to tme by the
charman, w prepare hearng caendars.
(c) Reserve caendar. proceedng whch s at ssue may be paced upon
the reserve caendar for good cause shown, as, for e ampe, to awat the dec-
son of the Supreme Court n a pendng case.
Rue 26. Pace of earng Requests and Desgnaton.
The pettoner at the tme of fng the petton sha aso fe a request show-
ng the name of the pace where he woud prefer the hearng on the merts
to be hed. copy of ths request w be served upon the Commssoner by
the cerk of the oard.
If the pettoner has fed no request, or f the respondent desres that the
hearng on the merts be hed at some pace other than the pace requested by
the pettoner, the respondent sha fe at the tme he fes hs answer, a request
showng the name of the pace preferred by hm. copy w be served upon
the pettoner by the cerk of the oard.
These requests sha not be bound as a part of the petton or answer but sha
be separate therefrom and sha consst of an orgna and four copes.
The oard w determne the pace of hearng, wth due regard to any request
propery fed n the proceedng and In accordance wth the statutory provson
that the tme and pace of tra sha be f ed wth as tte nconvenence and
e pense to ta payers as s practcabe, and, n a cases, w notfy the partes
of the pace at whch or n the vcnty of whch the hearng on the merts w
be hed.
Motons for change In desgnaton of the pace of hearng, made after the
notce of the tme of the hearng has been maed, w not be deemed to have
been tmey fed.
In case t s necessary for the oard to hear the partes on matters other than
the merts, such hearng w be hed n Washngton uness good cause s shown
for hodng t esewhere.
(See ppend II for further Informaton to assst n makng requests as to
pace of hearng.)
Rue 27. Notce of earng.
When a proceedng has been paced upon the hearng caendar the cerk w,
not ess than 15 days n advance, notfy the partes of the pace where and the
date when t w be caed.
Rue 28. Ca of Caendar and ssgnment for earng.
The hearng caendar of proceedngs to be heard at Washngton w be caed
at 9.30 a. m. The hearng caendar of proceedngs to be heard esewhere w be
caed at the tme ndcated n the notce of hearng. Proceedngs w be assgned
therefrom for hearng n due course.
Rue 29. Faure To ppear.
The une cused absence of a party or hs counse on the day set for the hearng
of any proceedng w not be the occason for deay. The hearng w proceed
and the case w be regarded as submtted on the part of the absent party or
partes.
The oard may requre appearance for argument or t may accept brefs In
eu of persona appearance.
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521
Msc.
Rut 30. Submsson Wthout earng oe ppearance.
(a) Submsson of cases unthout hearng where tacts are uncontested. ny
proceedng not requrng a hearng for the submsson of evdence (as, for
e ampe, where suffcent facts have been admtted, stpuated, or ncuded n
the record n some other way), may be submtted at any tme by notce of the
partes fed wth the oard. The partes need not wat for the proceedng to be
caendared and need not appear n person. The charman w then assgn the
proceedng to a dvson for report, whch dvson, upon request of the partes,
w f a tme for fng brefs or for ora argument.
(6) contested moton, not predcated upon an ssue of fact, may be submtted
n the same way.
See, however, rue 31.
Rue 31. vdence and the Submsson of vdence.
(a) Rues appcabe. The proceedngs of the oard and Its dvsons w be
conducted n accordance wth the rues of evdence appcabe In the courts of the
Dstrct of Coumba n the type of proceedngs whch pror to September 16, 1938,
were wthn the |ursdcton of the courts of equty of sad Dstrct.
(6) Stpuatons. The partes, by stpuaton n wrtng fed wth the oard
or presented at the hearng, may agree upon any facts nvoved n a proceedng.
Stpuatons fed need not be formay offered to be consdered n evdence.
Wrtten stpuatons sha be fed n dupcate. Dupcates of e hbts appended
to the stpuaton need not be provded uness requested.
(c) Depostons must be offered. Testmony taken by deposton w not be
consdered unt offered and receved n evdence.
(d) Documentary evdence. (1) When books, records, papers, or documents
have been receved n evdence, a copy thereof or of so much thereof as may be
matera or reevant may, In the dscreton of the dvson hodng the hearng, be
substtuted therefor.
(2) fter the decson of the oard n any proceedng has become fna, the
oard may, upon moton, permt the wthdrawa by the party entted thereto of
orgna e hbts, or the oard may, on ts own moton, make such other dspos-
ton thereof as It deems advsabe.
(e) Not evdence. Statements n the petton, e parte affdavts, and brefs
do not consttute evdence.
(/) Faure of proof. Faure to adduce evdence n support of the matera
facts aeged n the petton and dened by the Commssoner In hs answer w be
ground for dsmssa. Where there s a |onder of Issue on questons of fact, the
provsons of rue 30 do not reeve the party upon whom rests the burden of proof
from propery producng evdence to support the ssues.
Rue 32. urden of Proof.
The burden of proof sha be upon the pettoner, e cept as otherwse pro-
vded by statute, and e cept that n respect of any new matter peaded n
hs answer, t sha be upon the respondent.
Rue 35. refs.
The partes shoud be prepared to make ora arguments at the concuson
of the hearng or to fe wrtten ctatons of authortes at that tme f the
dvson so drects. The fng of brefs and the makng of ora arguments
sha be n accordance wth the drectons of the member presdng at the
hearng. If the dvson does not drect otherwse, each party sha have 5
days after the day on whch the hearng was concuded wthn whch to fe
a bref and ether party may fe a repy bref wthn 15 days after the
fng of the orgna bref by hs opponent. fter a bref has been fed, the
cerk w serve a copy upon the opposte party, uness the bref bears a
notaton that a copy has aready been served.
If brefs are typewrtten, an orgna and four copes sha be fed; f
prnted, 20 copes. ach bref sha contan on ts front fyeaf a tabe of
contents wth page references, suppemented by a st of a ctatons, aphabet-
cay arranged as to cases cted, together wth references to pages. Ctatons
sha be n tacs, when prnted, and underscored, when typewrtten.
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522
The form of a brefs sha be as foows:
(a) statement of the nature of the ta .
(b) The party havng the burden of proof sha set forth compete state-
ments of the facts based upon the evdence. ach statement sha be num-
bered, sha be compete n tsef, and sha consst of a concse statement of
the essenta fact and not a dscusson or argument reatng to the evdence
or the aw. Reference to the pages of the transcrpt or the e hbts reed
upon n support thereof sha be nserted after each separate statement.
If the other party dsagrees wth any or a of the statements of fact, he
sha set forth each correcton whch he beeves the evdence requres and
sha gve the same numbers to hs statements of fact as appear n hs op-
ponent s bref. s statement of fact sha be set forth n accordance wth
the requrements above desgnated.
(c) concse statement of the ponts upon whch the party rees.
((/) The argument. The argument sha set forth the ponts of aw reed
upon and any dscusson of the evdence deemed necessary to support the
statement of fact.
Rue 0. Tbanscmpts of Proceedngs.
earngs before the oard or ts dvsons sha be stenographcay reported
and a transcrpt thereof sha be made f, n the opnon of the oard or of
the dvson hodng the hearng, a permanent record of the hearng s deemed
necessary. Transcrpts sha . be supped to the partes and to the pubc by the
offca reporter at such rates as may be f ed by contract between the oard and
the reporter.
Rue . Subpenas.
(a) ow U ued. The party desrng a subpoena must make a tmey appca-
ton therefor, n wrtng.
(6) ppcaton for. The appcaton sha state the name and address of each
wtness requred, the tme and pace at whch and the offcer before whom he s
to appear, and whether he may desgnate someone to appear n hs pace. n
orgna and two conformed copes sha be fed. (See ppend I. Form No. 3.)
(c) For producton of document . If evdence other than ora testmony s
requred, such as documents or wrtten data, the appcaton sha set forth the
specfc matter to be produced and suffcent facts to ndcate that such matter Is
reasonaby necessary to estabsh the cause of acton or defense of the appcant.
(d) Servce and proof. The oard w not serve subpoenas, but w eave
servce to be procured t y the party makng the appcaton. Servce may be made
by any ctzen of the Unted States over the age of 21 years and competent to be
a wtness, and not a party to or n any way nterested n the proceedng. Proof
of servce may be made by affdavt.
Rue 5. Depostons.
(a) ppcaton to take. When ether party desres to take a deposton, he
sha fe wth the oard a verfed appcaton and two conformed copes, together
wth an addtona copy for each addtona docket number nvoved. The oard
upon request w furnsh forms for ths purpose. If the space n the form fur-
nshed by the oard s nadequate for settng forth the reasons n support of the
appcaton n any partcuar case, a substtute form may be used, but the substtute
must contan a of the nformaton caed for on the oard s form. (See ppen-
d I, Form No. 5.)
(6) Lmtaton on tme for appcaton to take. ppcatons to take depos-
tons must be fed at east 30 days pror to the date set for the hearng of the
proceedng, and such depostons must be competed and fed wth the oard at
east 10 days pror to the hearng: Provded, Such appcatons w not be re-
garded as suffcent ground for the grantng of a contnuance from the date or
pace of the hearng theretofore set, uness the proceedng sha have been at
ssue ess than 60 days and the moton for contnuance sha have been fed not
ess than 20 days pror to sad date of hearng: Provded further, That under
speca crcumstances, and for good cause shown, the oard may otherwse order.
(c) uafcaton of offeer. Ths offcer before whom depostons are taken
must be authorzed to admnster oaths. Secton 3032. I. R. O. In no case sha
a deposton be taken before any person who has any offce connecton or busness
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Msc.
empoyment wth ether party or hs counse e cept by consent of the partes and
when no other offcer s avaabe, and n hs certfcate of return to such deposton
such offcer sha so certfy.
(tf) Order for takng. Upon recept of such appcaton, the cerk w serve
a copy thereof on the opposte party, and aow a reasonabe tme for ob|ecton
thereto. Thereafter, the oard w, n ts dscreton, make an order, a copy
of whch w be maed or devered to the partes or ther counse, wheren the
oard w name the wtness whose deposton s to be taken and specfy the tme
when, the pace where, and the offcer before whom the wtness s to testfy, but
such tme, pace, and offcer specfed In the oard s order may or may not be
the same as set forth n the appcaton. The appcant sha tbereuwn make
a necessary arrangements for the takng of each deposton and sha furnsh
the offcer before whom t s to be taken wth a copy of the order above mentoned.
(e) y stpuaton. t any tme after ssue s |oned, the partes or ther
counse may, by stpuaton duy sgned and fed, take depostons. In such cases,
the stpuaton shn state the name and address of each wtness, the tme when
and the pace where such depostons w be taken and. the name, address, and
offca tte of the offcer before whom t s proposed to take the depostons. In
such cases, no order to take depostons w be ssued, but they shn be taken
and returned by the offcer n accordance wth the rues of the oard.
f) Manner of takng. ach wtness must frst take the oath or affrm. The
questons propounded to hm and hs answers must be recorded verbatm.
Ob|ectons to questons or answers sha be e pcty but brefy and concsey
stated, but no comment, e panaton, or argument of any knd sha be recorded;
nether sha there be recorded any comment, e panaton, or argument by e amn-
ng counse. ny matter reported n voaton of ths rue may be suffcent cause
for the suppresson of the deposton.
(g) Other wtnesses to be e cuded. t the request of ether party, a person
whom ether e pects or ntends to ca as a wtness In the same or any reated
proceedng sha be e cuded from the room where the testmony of a wtness s
beng taken. If such person remans n the room or wthn hearng of the e am-
naton after such request has been made, he sha not thereafter be permtted
to testfy e cept by the consent of the party who requested hs e cuson.
(ft) Depostons to be sgned. The testmony of the wtness when transcrbed
sha be read to or by hm and sha be sgned by hm. (See ppend I. Form
No. a)
() Form n whch depostons must be returned to the oard. When a depos-
ton s returned to the oard t must ow the docket number and the capton
(the names of the partes) of the proceedng as appears n the oard s records,
the pace and date of takng, the name of the wtness, the party by whom cued,
the names of counse present, ndcatng whch party each counse represents,
and (n the body of the deposton) the name of counse e amnng or cross-e am-
nng the wtness.
The offcer must so fasten the sheets of the deposton that they can not be
tampered wth. e must spare no pans to return to the oard the e act test-
mony he has taken. e hbts must be carefuy marked so as to be capabe
of dentfcaton, and when practcabe must be attached to the deposton.
The offcer must propery e ecute and attach to the deposton a certfcate of
return n the form prescrbed. (See ppend I, Form No. 6.)
(/) Return of. The offcer must encose the orgna depostons and e hbts,
together wth two copes of the depostons, n a seaed packet, wth postage
or other transportaton charges prepad, and drect and forward the same to the
Unted States oard of Ta ppeas, Washngton, D. O. In each case, the org-
na of the depostons must be drected and forwarded to the oard. The offcer
may, however, upon wrtten request, dever a copy of the depostons to ether or
to both of the partes, or to ther representatves, n eu of sendng such copes
to the oard as above provded. If one or both of the requred copes are dev-
ered by the offcer takng the depostons, he sha attach to hs return the wrtten
request of the party or partes, or of ther counse to whom such copy or copes
were devered, and sha state n hs certfcate of return the fact of devery by
hm of such copy or copes. If copes of the depostons are devered by the
offcer takng the same, no servce of copes of such depostons upon the party
or hs counse of record w be made by the oard.
(k) The deposton of any wtness sha not consttute a part of the record unt
receved In evdence. (See rue 31.)
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52
Rue 6. Depostons Upon Wrtten Interrogatores:
Depostons may be taken n the dscreton of the oard upon wrtten nterrog-
atores n substantay the same manner as provded n rue 5 for depostons
upon ora e amnaton. n orgna and fve copes of the nterrogatores must
be fed wth the appcaton. The cerk w serve one copy of the appcaton
and of the nterrogatores upon the opposte party. If the opposte party desres
to fe ob|ectons or cross-nterrogatores, he must do so wthn 10 days after the
appcaton and nterrogatores have been served upon hm. Cross-nterrogatores
must consst of an orgna and fve copes. The cerk w serve one copy thereof
upon the opposte party who, f he has any ob|ecton thereto, must fe hs ob|ec-
tons wthn 10 days thereafter. No ob|ectons to the nterrogatores or cross-
nterrogatores w be consdered at the hearng uness tmey fed n accordance
wth ths rue.
No person other than the wtness, a stenographc reporter, and the offcer takng
the deposton upon wrtten nterrogatores and cross-nterrogatores sha be
present at the e amnaton of the wtness. Ths fact sha be certfed by the
offcer takng the deposton. That offcer sha propound the nterrogatores and
cross-nterrogatores to the wtness n ther order and cause the testmony to be
reduced to wrtng n the wtness s own words.
Depostons obtaned n foregn countres must be taken upon wrtten nterroga-
tores, e cept as otherwse drected by the oard for cause shown.
Rue CO. Computatons by Partes for ntry of Decson.
Where the oard has promugated or entered ts opnon determnng the
Issues n a proceedng, t may wthhod entry of ts decson for the purpose of
permttng the partes to submt computatons pursuant to the oard s deter-
mnaton of the ssues, showng the correct amount of the defcency or overpay-
ment to be entered as the decson. If the partes are n agreement as to the
amount of the defcency or overpayment to be entered as the decson pursuant
to the report of the oard, they or ether of them sha fe prompty wth the
oard an orgna and two copes of a computaton showng the amount of the
defcency or overpayment and that there s no dsagreement that the fgures
shown are n accordance wth the decson of the oard. The oard w then
enter ts decson. If, however, the partes are not n agreement as to the amount
of the defcency or overpayment to be entered as the decson, n accordance
wth the report of the oard, ether of them may fe wth the oard a computa-
ton of the defcency or overpayment beeved by hm to be n accordance wth
the report of the oard. The cerk w serve a copy thereof upon the opposte
party, w pace the matter upon the hearng caendar for argument In due
course, and w serve notce of the argument upon both partes If the opposte
party fas to fe ob|ecton, accompaned by an aternatve computaton, at east
fve days pror to the date of such argument, or any contnuance thereof, the
oard may enter decson n accordance wth the computaton aready submtted.
If n accordance wth ths rue computatons are submtted by the partes whch
dffer as to the amount to be entered as the decson of the oard, the partes w
be afforded an opportunty to be heard n argument thereon on the date f ed,
and the oard w determne the correct defcency or overpayment and enter
ts decson.
ny argument under ths rue w be confned strcty to the consderaton of
the correct computaton of the defcency or overpayment resutng from the
report aready made, and no argument w be heard upon or consderaton gven
to the ssues or matters aready dsposed of by such report or of any new ssues.
Ths rue s not to be regarded as affordng an opportunty for rehearng or
reconsderaton.
Rue 51. Costs Preparaton of Record on Revew.
Immedatey after the contents of a record on revew have been setted or
agreed to, the cerk w notfy the pettoner of the costs and charges for the
preparaton, comparson, and certfcaton of sad records; such charges to be
determned n accordance wth the provsons of an ct of Congress entted
n ct to provde fees to be charged by cerks of the dstrct courts of the
Unted States, approved February 11, 1923 ( 3 Stat., 857-858; U. S. C, Tte
28, sectons 5 8-55 ).
No transcrpt w be certfed and transmtted to the appeate court unt the
costs and chargas therefor have been pad.
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525
Msc.
pettoner for revew who requests the cerk to certfy but not to prepare
documents for transmsson to a Unted States Crcut Court of ppeas or to
the Unted States Court of ppeas for the Dstrct of Coumba sha furnsh
the cerk wth the copes of the documents to be certfed.
Rue 52. Costs Prntng of Record on Revew.
In each proceedng for revew of a decson of the oard by the Unted States
Crcut Court of ppeas for the Second Crcut when revew s sought by the
Commssoner of Interna Revenue, the cerk of the oard sha, mmedatey
after the contents of the record on revew, as requred by rue 35 of the court,
have been setted or agreed upon, make avaabe to the Commssoner, or hs
counse, the record of the oard n the proceedng. The Commssoner sha
cause the record to be prnted. Twenty-fve copes of the prnted record sha
be devered to the cerk of ths oard for certfcaton and for fng wth the
cerk of the crcut court of appeas. The cerk of the oard sha serve three
copes of the prnted record upon counse for the ta payer.
Rue 53. Copes of oard Records Fees fob Furnshng.
pan or a certfed copy of any document, record, entry, or other paper
may be had upon appcaton to the oard, the fee to be charged and coected
therefor to be determned n accordance wth the provsons of the ct of Con-
gress entted n ct to provde fees to be charged by cerks of the dstrct
courts of the Unted States, approved February 11, 1925 ( 3 Stat., 857-858;
U. S. C, Tte 28, sectons 5 8-55 ).
Rue 60. Fees and Meage.
Tte of the Revenue ct of 19 6 provdes n part:
Sec. 909. (a) ny wtness summoned or whose deposton s taken under
secton 908 sha receve the same fees and meage as wtnesses In courts of
the Unted States. Such fees and meage and the e penses of takng any such
deposton sha be pad as foows:
(1) In the case of wtnesses for the Commssoner, such payments sha be
made by the Secretary out of any moneys approprated for the coecton of
nterna-revenue ta es, and may be made n advance.
(2) In the case of any other wtnesses, such payments sha be made, sub-
|ect to rues prescrbed by the oard, by the party at whose nstance the wt-
ness appears or the deposton s taken.
No wtness, other than one for the Commssoner, sha be requred to testfy
n any proceedng before the oard unt he sha have been tendered the fees
and meage to whch he s entted n accordance wth the above provson
of aw.
Rue 61. Computaton or Tme Sundays and odays.
Whenever these rues prescrbe a tme for the performance of any act, Sun-
days and ega hodays n the Dstrct of Coumba sha count |ust as any
other days, e cept that when the tme prescrbed for the performance of an act
e pres on a Sunday or a ega hoday n the Dstrct of Coumba, such tme
sha e tend to and ncude the ne t succeedng day that s not a Sunday or
such a ega hoday: Provded, Thnt when the tme for performng any act
s prescrbed by statute nothng n these rues sha be deemed to be a mta-
ton or e tenson of the statutory tme perod.
The foowng-named days are ega hodays wthn the Dstrct of Coumba:
New Tear s Day. anuary 1 (U. S. C, Tte 5, secton 87).
Inauguraton Day, every fourth year ( 8 Stat., 879; D. C. Code, Tte 22,
secton 126).
Washngton s rthday, February 22 (U. S. C., Tte 5, secton 87).
Decoraton Day, May 30 (U. S. C, Tte 5, secton 87).
Fourth of ny (U. S. C, Tte 5, secton 87).
Labor Day, frst Monday n September (U. S. C, Tte 5, secton 87).
rmstce Day, November 11 (52 Stat., 351).
Thanksgvng Day, day procamed bv the Presdent (secton 993, R. S.,
reatng to D. C: D. C. Code, Tte 22, secton 126).
Chrstmas Day, December 25 (U. S. C Tte 5, secton 87).
When ega hodays fa on Sunday the ne t day sha be a hoday (22
Stat, 1; D. C. Code, Tte 22, secton 126).
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526
Rue 62. Speca ssessment.
(a) If some of the ssues rased by the petton nvove secton 327 or secton
328 of the Revenue ct of 1918 or of 1921 or secton 210 of the Revenue ct of
1917, as the case may be , and some do not nvove such sectons, the hearng may,
n the dscreton of the oard, on moton, be mted n the frst nstance to tra
of the ssues whch do not nvove such sectons.
(6) hearng may be had n the dscreton of the oard, on moton, mted
to the tra of the ssue whether the pettoner s entted to have ts ta deter-
mned as provded n secton 328 or secton 210, as the case may be .
(c) If the oard decdes that the pettoner s entted to have ts ta deter-
mned as provded n secton 328 or secton 210, as the case may be , the respond-
ent sha wthn 60 days after such decson fe wth the oard an orgna and two
copes of a proposed redetermnaton showng the method of the computaton. If,
wthn 20 days after servce by the cerk upon the pettoner of a copy of such
proposed redetermnaton, the partes are unabe to agree upon the amount of ta ,
ether party may move, or the oard may upon ts own moton order, that the
proceedng be paced upon the caendar for further hearng, at whch ether party
may submt proof of the correct amount of ta and defcency or overpayment.
(d) If from the peadngs or otherwse t appears of record before the oard
that the partes agree that pettoner s entted to have ts ta determned as
provded n secton 328 or secton 210, as the case may be , and the ony ssue
s as to the correct amount of the ta so determned, the proceedng w be
paced upon the caendar n due course for hearng, at whch ether party may
submt proof of the correct amount of the ta and defcency or overpayment.
Rue 70. ffectve Date.
These rues sha become effectve pr 1, 19 1, supersedng a pror edtons
and amendments.
PP NDI .
I. Forms.
These forms are sub|ect to amendment as crcumstances may render nec-
essary.
No. 2. Petton.
No. 3. ppcaton for subpena.
No. 5. ppcaton for order to take depostons.
No. 6. Certfcate on return of depostons.
(Note. Read rue of the rues of practce of the oard and carefuy
observe the requrements thereof as to form, sze, and stye of papers.)
No. 2. P TITION.
( See rues , 5, 6, 7, and 8.)
Unted States oard of Ta ppeas. , pettoner,
Commssoner of Interna Revenue, respondent.
Docket No.
petton.
The above-named pettoner hereby pettons for a redetermnaton of the
defcency set forth by the Commssoner of Interna Revenue n hs notce of
defcency ( ureau symbos) dated , 19 , and as a bass
of hs proceedng aeges as foows:
1. The pettoner s (set forth whether ndvdua, corporaton, fducary, etc.,
as provded n rue C) wth prncpa offce (or resdence) at
(Strwt.)
The return for the perod here
(Cty.) (State.)
nvoved was red wth the coector for the dstrct of
2. The notce of defcency (a copy of whch s attached and marked hbt
) was maed to the pettoner on , 19 .
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527
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3. The ta es In controversy are (ncome, profts, estate, or gft) ta es for the
(caendar or fsca year) year 19 and n the amount of doars
(state as e acty as possbe the amount n dspute).
. The determnaton of ta set forth n the sad notce of defcency s based
upon the foowng errors: ( numerate specfcay the assgnments of error
In a concse manner and avod peadng facts whch propery beong n the
succeedng paragraph.)
5. The facts upon whch the pettoner rees as the bass of ths proceedng
ore as foows: ( ere set forth aegatons of the facts reed upon but not the
evdence n ordery and ogca sequence, wth subparagraphs ettered, so as
fuy to nform the oard of the ssues to be presented and to enabe the Comms-
tvoner to admt or deny each specfc aegaton.)
Wherefore, the pettoner prays that ths oard may hear the proceedng and
( ere state the reef desred).
(Sgned) ,
(Pettoner or counse.)
(Tost-offce address.)
State op g.
County of
, beng duy sworn, says that he s the pettoner
(f a corporaton, or fducary, state tte of offce or trust of person verfyng and
that he s duy authorzed to verfy the foregong petton) above named ; that he
has- read the foregong petton, or had the same read to hm, and s famar wth
the statements contaned theren, and that the statements contaned theren are
true, e cept those stated to be upon nformaton and beef, and that those he
beeves to be true.
(Sgned)
Subscrbed and sworn to before me ths day of , 19 .
(Sgned)
(Offca tte.)
sea
No. . PPLIC TION FOR SU P N .
pettoner,
v.
Commssoner of Interna Revenue, respondent.
Docket No.
To the Unted States oard of Ta ppeas:
ppcaton s hereby made for the ssuance of a subpena for the attendance
before
(The Unted States oard of Ta ppeas or the name and offca tte of the person
authorzed to take depostons.)
at on
at o cock m. of the foowng persons whose ora testmony Is
desred on behaf of the n the above-entted
(Pettoner or respondent.)
proceedng:
N M . DDR SS.
Dated , 19
(Sgned)
(Post-offce address).
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No. 5. PPLIC TION FOR ORD R TO T D POSITIONS.
(See rues 5 and G.)
Unted States oard of Ta ppeas.
, pettoner,
v. Docket No.
Commssoner of Interna Revenue, respondent.
appcaton for order to take depostons.
To the Unted States oard of Ta ppeas:
1. ppcaton Is hereby made by the above-named _
(Pettoner or respondent.)
for an order to take the deposton of the foowng-named person :
name of wtness. post-offce address.
(a)
(b)
(c)
(d)
2. It s desred to take the depostons of the persons above named and each of
them for the foowng reasons:
(a) w testfy to the foowng matera matters:
(Set forth brefy the matter upon whch sad wtness w be caed to testfy.)
(b) w testfy to the foowng matera matters:
(c) w testfy to the foowng matera matters:
(d) w testfy to the foowng matera matters:
3. The reasons why desres to take the
(1 ottoncr or respondent.)
testmony of the above-named persons rather than have them appear pprsonuy
and testfy before the oard are as foows: (State specfcay reasons for each
wtness.)
. It s desred to take the testmony of
(Names of wtnesses.)
on the day of 10 , at the hour of o cock m.
( date suffcenty n advance of the day set for hearng of the proceedngs to enabe
the deposton to be competed and ed wth the oard at east 10 days pror to the
hearng.)
before n the cty of ,
(State name and tte of offca.)
State of at room
(Gve number of room, street
number, and name of budng.)
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529 Msc.
5. That a a
(Name of offca before whom depostons are to be taken.)
, who has no offce connecton or busness enpoy-
(Gve offca tte,)
ment wth the pettoner or hs counse.
Dated , 19
(Sgned)
State or
(Pettoner or counse.)
(Post-offce address.)
County of
, beng duy sworn, says that the fore-
(Pettoner or counse.)
gong appcaton for order to take depostons s made n good fath and for
the reasons theren stated and that the same s not made for purposes of deay.
(Sgned)
Subscrbed and sworn to before me ths day of , 19 .
(Sgned)
(Offca tte.)
S L
No. 6. C RTIFIC T ON R TURN.
To the Unted States oard of Ta ppeas:
I, , the person named n the foregong order
to take depostons, hereby certfy:
1. That I proceeded, on the day of , . D. 19 ,
at the offce of , n the cty of ,
State of , at o cock m., under the sad
order and n the presence of and
the counse of the respectve partes, to take the foowng
depostons, vz:
of the
(Pettoner or respondent.)
of the
a wtness produced on behaf
a wtness produced on behaf
(Pettoner or respondent.)
of the
(Pettoner or respondent.)
-, a wtness produced on behaf
2. That each wtness was e amned under oath at such tmes and paces
as condtons of ad|ournment requred, and that the testmony of each wtness
(or hs answers to the nterrogatores fed) was taken steuographcay and
reduced to typewrtng by me or under my drecton.
3. That after the testmony of each wtness had been reduced to wrtng the
transcrpt of that testmony was read and sgned by the wtness n my presence,
and that each wtness acknowedged before me that hs testmony was n a
respects truy and correcty transcrbed.
. That, after the sgnng of the deposton n my presence, no ateratons or
changes were made theren.
5. That I have no offce connecton or busness empoyment wth the pettoner
or hs attorney e cept that , ob|ecton to whch was
(State connecton.)
waved by both partes to the proceedng.
S L
(Sgnature of person takng deposton.)
Offca tte.)
(Post-offce address.)
Note. Ths form when propery e ecuted houd be attached to and bound wth the.
transcrpt precedng the frst pane thereof. It shoud then be encosed n a seaed enveop
and addressed to Unted States oard of Ta ppeas, Washngton, D. C.
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530
II. equests foe Pace of earng.
The oard w f the tmes and paces for ts hearngs n order to secure
reasonabe opportunty to ta payers to be heard wth as tte nconvenence and
e pense to ta payers as s practcabe. (Secton 1105, I. . C.) earngs may
be hed at any pace requested rf sutabe accommodatons are avaabe and a
suffcent number of cases are ready for hearng there. parta st of ctes
where a combnaton of these crcumstances has |ustfed a caendar of hearngs
recenty appears beow. It s pubshed here merey to assst partes n makng
requests under rue 26. The groupng of certan ctes n the st ndcates that
f one of those ctes s requested, t may be necessary to hod the hearng at the
other cty n order to make up a suffcent caendar of hearngs. Lkewse, If
suffcent cases are not ready for hearng n any partcuar cty requested by ta -
payers, or f sutabe quarters are not avaabe there, the oard may fnd t
necessary to combne the hearngs requested for that cty and hod them aong
wth the hearngs requested for some other cty n the vcnty.
abama:
rmngham.
Mobe.
rkansas: Ltte Rock (aternatve,
Memphs, Tenn.).
Caforna:
1.08 ngees.
San Francsco.
Coorado: Denver.
Dstrct of Coumba: Washngton.
Forda:
acksonve.
Mam.
Tampa (aternatve, Mam).
Georga: tanta.
awa: onouu (aternatve, Log
ngees or San Francsco, Caf.)
Inos: Chcago.
Indana : Indanapos.
Iowa : Des Mones.
entucky: Lousve.
Lousana :
New Oreans.
Shreveport.
Mane: Portand (aternatve, oston,
Mass.)
Massachusetts: oston.
Mchgan:
Detrot.
Grand Rapds.
Mnnesota : St. Pau.
Mssour:
ansas Cty.
St. Lous.
Montana : eena.
Nebraska: Omaha.
New ersey: Newark.
New York :
uffao.
New York Cty.
LIST.
North Carona:
Greensboro.
Raegh.
Oho:
Cncnnat (aternatve, Coum-
bus ).
Ceveand.
Coumbus (aternatve, Cncn-
nat).
Okahoma:
Okahoma Cty (aternatve,
Tusa).
Tusa (aternatve, Okahoma
Cty).
Oregon: Portand.
Pennsyvana:
Phadepha (aternatve, Wash-
ngton, D. C, or New York,
N. Y.).
Pttsburgh.
South Carona :
Chareston.
Coumba.
Tennessee:
no ve (aternatve, tanta,
Ga.).
Memphs.
Nashve.
Te as:
Daas.
ouston.
Ftah: Sat Lake Cty.
Washngton:
Seatte.
Spokane.
West rgna: Chareston.
Wsconsn:
Madson (aternatve, Mwaukee).
Mwaukee.
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Mso.
MISC LL N OUS.
19 1-11-106 5
Mm. 298 (Rev.)
Symbos for use n correspondence.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, February 28, 19 1.
Coectors of Interna Revenue; Interna Revenue gents n Charge;
Dstrct Supervsors; eads of Fed Dvsons, Technca Staff;
Speca gents n Charge; Deputy Commssoners; and Other
Offcers and mpoyees of the ureau of Interna Revenue Con-
cerned:
The foowng drectons supersede those contaned n Mmeograph
298 (revsed), dated March 25, 19 0 C. . 19 0-1, 296 , and a
other nstructons n confct therewth. Secton 63(6), Part I, of the
Interna Revenue Manua s, aso, amended to conform to the fo-
owng :
very etter prepared n the ureau n Washngton w bear n
the upper eft-hand corner of the frst page, and mmedatey beow
the wordng ddress repy to, etc., a symbo that w ndcate the
offce of orgn; provded, that ths practce w not appy to Congres-
sona correspondence, or to etters prepared for the sgnatures of
others than offcas of the ureau.
very etter addressed to the ureau by a fed offce, f t s n
repy to a communcaton from the ureau, w bear, mmedatey
above the body of the etter and near the center of the frst page, the
symbo that appears n the communcaton that s beng answered;
thus ttenton: d: P . If the etter s not n repy to a ureau
communcaton, the symbo of the unt, dvson, or secton of the
ureau concerned w be ndcated n the same manner, provded
there s no queston as to the proper symbo; f any doubt e sts, no
symbo whatever w be used.
Where a fed offce uses a system of symbos n conductng ts
correspondence, the approprate symbo w be paced n the upper
eft-hand corner of the frst sheet, |ust beow the wordng In repy-
ng refer to, of each etter addressed to the ureau. The ureau
etter, f any, repyng to such communcaton w show the fed
offce symbo above the body of the etter n the same manner as s
prescrbed n the ne t precedng paragraph.
Cosed, and not wndow, enveopes wth prnted or typewrtten
address w be used by fed offces n transmttng ma to the ureau.
very such enveope, or other wrapper, w bear n the ower eft
hand corner of the face thereof the same symbo that s quoted n the
communcaton whch t ncoses. There s no ob|ecton to forward-
ng n one enveope a number of communcatons ntended for the
same unt or dvson of the ureau; n fact ths s desrabe, e cept
that nstructons contaned n C Crcuar 12 8, dated May 28,
1938, regardng the separaton of matter reatng to empoyment
ta es from other ma for the ccounts and Coectons Unt shoud
be comped wth. Under no crcumstances, however, shoud corre-
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532
spondence pertanng to the work of one unt be ncosed n an
enveope addressed to another unt.
Informaton whch w assst fed offcers n determnng the
destnaton of correspondence that s not n repy to ureau etters
may be obtaned by drectng an nqury to the dmnstratve
Dvson, attenton Communcaton Secton.
Ony one sub|ect w be treated n any one etter.
The foowng represents the organzaton and symbos used:
Offce of the Commssoner.
d dmnstratve Dvson.
d : C Communcaton Secton.
d : P Prntng and ndng Secton.
d : SL Space and Lease Secton.
d : S Suppes and qupment Secton.
P Personne Dvson.
Pub. Re. Pubc Reatons Dvson.
SD Speca Deputy Commssoner.
SD: Tn Tranng Dvson.
TS Technca Staff.
ccounts and Coectons Unt.
C: DC Deputy Commssoner.
C: D ssstant Deputy Commssoner.
C: ecutve ssstant.
C : mT Chef, mpoyment Ta ctvtes.
C: T Technca ssstants.
C: D Dsbursement ccountng Dvson.
C: Co Coecton ccountng Dvson.
C: P S Coectors Personne, qupment, and Space Dvson.
UDIT DI ISION.
C: ead of Dvson.
C: : udt and d|ustment Secton.
C: : amnng Secton.
C: : F Fes Secton.
C: : F: R R ankruptcy Unt.
UL S ND R GUL TIONS DI ISION.
C: RR ead of Dvson.
C: RR: 1 Secton 1.
C : RR: 2 Secton 2.
C: RR: 3 Secton 3.
S R IC DI ISION.
C: S ead of Dvson.
C: S : F Fes Secton.
C: S : S Stenographc Secton.
CONTROL DI ISION.
C: C ead of Dvson.
C: C: ssessment Secton.
C: C: CC Cams Contro Secton.
coho Ta Unt.
T: DC Deputv Commssoner.
T: L Lega Dvson.
NFORC M NT.
T: ssstant Deputy Commssoner.
T: amnng Secton.
T: PP Pardon and Paroe Secton.
T : F nforcement Fes Secton.
T:RM Raw Materas Secton.
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(Msc.
P RMISSI ND DMINISTR TI .
T: P ssstant Deputy Commssoner.
T: PI Fed Inspecton Dvson.
T: PS Personne and Suppy Dvson.
T: PR Procedure Dvson.
T: S Statstca Secton.
T: udt Dvson.
T: onded ccounts Secton.
T: T Ta Secton.
T: L Laboratory Dvson.
SIC P RMIT ND TR D PR CTIC .
T: P ssstant; Deputy Commssoner.
T: P: L Labes Secton.
Offce of the Cef Counse.
GC: Chef Counse.
GC: ppeas Dvson.
GC: C Cv Dvson.
GC: C: C Compromse Secton.
GC: I Interpretatve Dvson.
Dgest Secton.
GC: L It Legsaton and Reguatons Dvson.
GC: P Pena Dvson.
GC: R Revew Dvson.
ecutve.
GC: ngneers and udtors Secton.
GC: R R Reorganzaton Secton.
GC: M R Ma and Records Secton.
Income Ta Unt.
IT Deputy Commssoner.
ssstant Deputy Commssoner.
IT: R: udt Revew Dvson (New York).
IT:R: udt Revew Dvson (Connectcut, Mane, Massachusetts, New
ampshre, New ersey, Pennsyvana, Rhode Isand, ermont).
IT:R:C udt Revew Dvson C ( abama, Deaware, Dstrct of Coum-
ba, Forda, Georga, entucky, Maryand, Mchgan, North
Carona, Oho, South Carona, Tennessee, rgna, West
rgna).
IT:R:D udt Revew Dvson D (Coorado, Inos, Indana, Iowa,
ansas, Mnnesota, Mssour, Nebraska, New Me co, North
Dakota, South Dakota, Wsconsn, Wyomng).
IT:R: udt Revew Dvson ( aska, rzona, rkansas, Caforna,
awa, Idaho, Lousana, Msssspp, Montana, Nevada, Oka-
homa, Oregon, Te as, Utah, Washngton).
IT: R: : | Speca d|ustment
cearng dvson.
IT: CI ead of Dvson.
IT: CI: CC Cams Contro Secton.
IT: CI: D Returns Dstrbuton Secton.
IT : CI: P Provng Secton.
IT: CI: St Statstca Secton.
NGIN RING ND LU TION DI ISION.
IT: ead of Dvson.
IT: : p pprasa Secton.
IT : : NR Natura Resources Secton.
IT : : PU Pubc Uttes Secton.
IT: : Se Securtes Secton.
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53
FI LD PROC DUR DI ISION.
IT: F Fed Procedure Dvson.
PR CTIC ND PROC DUR DI ISION.
IT: P ead of Dvson.
IT:P:IR ureau Informaton and Rungs Secton.
IT:P:C Coordnatng and dvsory Secton.
IT: P: T Ta payers Rungs Secton.
IT: P: T: 1 Group-1.
IT: P: T: 2 Group 2.
R CORDS DI ISION.
IT: Rec ead of Dvson.
IT: Rec: F Fes Secton.
IT: Rec: IW Returns Inspecton and Wthhodng Returns Secton.
S R IC DI ISION.
1T:S Servce Dvson.
CN U T NRIC M NT DI ISION.
IT: U ead of Dvson.
IT: U : R udt and Revew Secton.
IT: U : Conf Conference Secton.
IT: U : I Invadty Cams Secton.
Integence Unt.
81 Chef. Integence Unt.
Msceaneous Ta Unt.
MT: DC Deputy Commssoner.
MT: CST Capta Stock Ta Dvson.
MT: T state Ta Dvson.
MT : PT Processng Ta Dvson.
MT: ST Saes Ta Dvson.
MT: T Tobacco Dvson.
Guy T. evekno,
C ommssoner.
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Mso.
L GISL TION.
C SS-PROFITS T M NDM NTS OF 19 1.
19 1-11-106 7
. R. 3531. PU LIC L W 10, S NTY-S NT CONGR SS C PT R
10, FIRST S SSION .
n ct To amend certan provsons of the Interna Revenue Code
reatng to the e cess profts ta , and for other purposes.
e t enacted by the Senate and ouse of Representatves of the Unted States
of merca n Connrcss assembed, That ths ct may be cted as the cess
Profts Ta mendments of 19 1 .
Sec. 2. Unused cess Profts Credt.
(a) Secton 710(b)(3) of the Interna Revenue Code Is amended to read aa
foows:
(3) Unused e cess profts credt. The amount of the e cess profts
credt carry-over for the ta abe year, computed n accordance wth sub-
secton (c).
(b) Computaton or cess Profts Credt Carry-over. Secton 710 of the
Interna Revenue Code s amended by addng at the end thereof the foowng
new subsecton:
(c) cess Profts Credt Carry-over.
(1) Defnton of unused e cess profts credt. The term unused
e cess profts credt means the e cess, f any, of the e cess profts credt
for any ta abe year begnnng after December 31, 1939, over the e cess
profts net ncome for such ta abe year, computed on the bass of the e cess
profts credt appcabe to such ta abe year.
(2) Computaton of e cess profts credt carry-over. The e cess profts
credt carry-over for any ta abe year sha be the sum of the foowng:
( ) The unused e cess profts credt for the frst precedng ta abe
year; and
( ) The unused e cess profts credt for the second precedng ta abe,
year reduced by the amount, f any, by whch the e cess profts net
ncome for the frst precedng ta abe year e ceeds the sum of
() the e cess profts credt for such frst precedng ta abe
year, pus
() the unused e cess profts credt for the thrd precedng
ta abe year.
Sec. 3. bnorma Deducton n ase Perod.
Sectons 711(b)(1) (G), ( ), and (I), of the Interna Revenue Code are
amended to read as foows:
(G) Dvdends Receved. The credt for dvdends receved sha appy,
wthout mtaton, to dvdends on stock of domestc corporatons;
( ) Payment of udgments, and So Forth. Deductons attrbutabe to
any cam, award, udgment, or decree aganst the ta payer, or nterest on
any of the foregong, f abnorma for the ta payer, sha not be aowed,
and f norma for the ta payer, but In e cess of 125 per centum of the
average amount of such deductons n the four prevous ta abe years, sha
be dsaowed n an amount equa to such e cess;
(I) Intangbe Drng and Deveopment Costs. Deductons attrbutabe
to Intangbe drng and deveopment costs pad or ncurred n or for the
drng of wes or the preparaton of wes for the producton of o or gas,
and for deveopment costs n the case of mnes, f abnorma for the ta payer,
sha not be aowed, and f norma for the ta payer, but In e cess
of 125 per centum of the average amount of such deductons n the four
prevous ta abe years, sha be dsaowed n an amount equa to such
e cess; and
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536
( ) bnorma Deductons. Under reguatons prescrbed by the Com-
mssoner, wth the approva of the Secretary, for the determnaton, for
the purposes of ths subparagraph, of the cassfcaton of deductons
() Deductons of any cass sha not be aowed f deductons of
such cass were abnorma for the ta payer, and
() If the cass of deductons was norma for the ta payer, but the
deductons of such cass were In e cess of 125 per centum of the average
amount of deductons of such cass for the four prevous ta abe years,
they sha be dsaowed n an amount equa to such e cess.
( ) Rues for ppcaton of Subparagraphs ( ), (I), and ( ). For the
purposes of subparagraphs ( ), (I), and ( )
() If the ta payer was not n e stence for four prevous ta abe
years, then such average amount specfed n such subparagraphs sha
be determned for the prevous ta abe years t was n e stence and the
succeedng ta abe years whch begn before the begnnng of the ta -
payer s second ta abe year under ths subchapter. If the number of such
succeedng years s greater than the number necessary to obtan an aggre-
gate of four ta abe years there sha be omtted so many of such
succeedng years, begnnng wth the ast, as are necessary to reduce
the aggregate to four.
( ) Deductons sha not be dsaowed under such subparagraphs
uness the ta payer estabshes that the abnormaty or e cess s not
a consequence of an Increase n the gross Income of the ta payer In
ts base perod or a decrease n the amount of some other deducton n ts
base perod, and s not a consequence of a change at any tme n the
type, manner of operaton, 6ze, or condton of the busness engaged
n by the ta payer.
() The amount of deductons of any cass to be dsaowed under
such subparagraphs wth respect to any ta abe year sha not e ceed
the amount by whch the deductons of such cass for such ta abe year
e ceed the deductons of such cass for the ta abe year for whch the
ta under ths subchapter s beng computed.
Sbo. . Computaton of verage ase Perod Net Income.
(a) Secton 713(a)(1) of the Interna Revenue Code s amended by strkng
out subsecton (b) and nsertng In eu thereof subsecton (d) , and by
strkng out subsecton (c) wherever occurrng theren and nsertng n eu
thereof subsecton (g) .
(b) Secton 713(b) of the Interna Revenue Code s amended to read as
foows:
1(b) ase Perod.
(1) Defnton. s used In ths secton the term base perod
( ) If the corporaton was n e stence durng the whoe of the
forty-eght months precedng the begnnng of ts frst ta abe year under
ths subchapter, means the perod commencng wth the begnnng of ts
frst ta abe year begnnng after December 31, 1935, and endng wth the
cose of ts ast ta abe year begnnng before anuary 1, 19 0; and
( ) In the case of a corporaton whch was n e stence durng ony
part of the forty-eght months precedng the begnnng of ts frst ta abe
year under ths subchapter, means the forty-eght months precedng the
begnnng of ts frst ta abe year under ths subchapter.
(2) Dvson nto haves. For the purposes of subsectons (d) and (f)
the base perod of the ta payer sha be dvded nto haves, the frst haf
to be com )sed of one-haf the entre number of months n the base perod
and to begn wth the begnnng of the base perod.
(c) Defct n cess Profts Net Incomf;. For the purposes of ths secton
the term defct n e cess profts net ncome wth respect to any ta abe year
means the amount by whch the deductons pus the credt for dvdends receved
e ceeded the gross ncome. For the purposes of ths subsecton n determnng
whether there was such an e cess and n determnng the amount thereof, the
ad|ustments provded n secton 711 (b)(1) sha be mnde.
(d) verage Rase Pekod Net Income Determnaton.
(1) Defnton. For the purposes of ths secton the average base perod
net ncome of the ta payer sha he the amount determned under subsecton
(e), sub|ect to the e cepton that f the aggregate e cess profts net ncome
for the ast haf of ts base perod, reduced by the aggregate of the defcts
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Msc.
In e cess profts net ncome for such haf, s greater than such aggregate
so reduced for the frst haf, then the average base perod net ncome sha
be the amount determned under subsecton (f), f greater than the amount
determned under subsecton (e).
(2) For the purposes of subsectons (e) and (f), If the ta payer was n
e stence durng ony part of the 8 months precedng the begnnng of ts
frst ta abe year under ths subchapter, ts e cess profts net ncome
( ) for each ta abe year of tweve months (begnnng wth the
begnnng of ts base perod) durng whch t was not n e stence, sha
be an amount equa to 8 per centum of the e cess of
() the day nvested capta for the frst day of the ta payer s
frst ta abe year begnnng after December 31, 1939, over
() an amount eqna to the same percentage of such day
Invested capta as s appcabe under secton 720 n reducton of
the average Invested capta of the precedng ta abe year;
( ) for the ta abe year of ess than tweve months consstng of that
part of the remander of Its base perod durng whch t was not n
e stence, sha be the amount ascertaned for a fu year under subpara-
graph ( ), mutped by the number of days n such ta abe year of
ess than tweve months and dvded by the number of days n the
tweve months endng wth the cose of such ta abe year.
(3) In no case sha the average base perod net Income be ess than zero.
( ) For the computaton of average base perod net Income n the case of
certan reorganzatons, see secton 7 2.
(e) verage ase Perod Net Income Genera verage. The average base
perod net ncome determned under ths subsecton sha be determned a
foows:
(1) y computng the aggregate of the e cess profts net Income for each
of the ta abe years of the ta payer In the base perod, reduced, f for more
than one of such ta abe years there was a defct n e cess profts net ncome,
by the sum of such defcts, e cudng the greatest;
(2) y dvdng the amount ascertaned under paragraph (1) by the tota
number of months In a such ta abe years; and
(3) y mutpyng the amount ascertaned under paragraph (2) by
tweve.
(f) verage ase- Perod Net Income Increased arnnos n Last at
or ase Perod. The average base perod net ncome determned under ths
subsecton sha be determned as foows:
(1) y computng, for each of the ta abe years of the ta payer n ts
base perod, the e cess profts net Income for such year, or the defct n e cess
profts net ncome for such year;
(2) y computng for each haf of the base perod the aggregate of the
e cess profts net ncome for each of the ta abe years n such haf, reduced,
f for one or more of such years there was a defct n e cess profts net
Income, by the sum of such defcts. For the purposes of such computaton,
f any ta abe year s party wthn each haf of the base perod there sha
be aocated to the frst haf an amount of the e cess profts net Income
or dect n e cess profts net Income, as the case may be, for such ta abe
year, whch bears the same rato thereto as the number of months fang
wthn such haf bears to the entre number of months n such ta abe year;
and the remander sha be aocated to the second haf;
(3) If the amount ascertaned under paragraph (2) for the second haf
s greater than the amount ascertaned for the frst haf, by dvdng the
dfference by two;
( ) y addng the amount ascertaned under paragraph (3) to the amount
ascertaned under paragraph (2) for the second haf of the base perod;
(5) y dvdng the amount found under paragraph ( ) by the number of
months n the second haf of the base perod and by mutpyng the resut by
tweve;
(6) The amount ascertaned under paragraph (5) sha be the average
base perod net ncome determned under ths subsecton, e cept that the
average base perod net ncome determned under ths subsecton sha n
no case be greater than the hghest e cess profts net ncome for any ta abe
year n the base perod. For the purpose of such mtaton f any ta abe
year s of ess than tweve months, the e cess profts net Income for such
0 3 1 1 18
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538
ta abe year sha be paced on an annua bass by mutpyng by tweve
and dvdng by the number of months ncuded n such ta abe year.
(7) For the purposes of ths subsecton, the e cess profts net ncome for
any ta abe year endng after May 31, 19 0, sha not be greater than an
amount computed as foows:
( ) y reducng the e cess profts net ncome by an amount whch
bears the same rato thereto as the number of months after May 31,
19 0, bears to the tota number of months n such ta abe year; and
( ) y addng to the amount ascertaned under subparagraph ( )
an amount whch bears the same rato to the e cess profts net ncome
for the ast precedng ta abe year as such number of months after
May 31, 19 0, bears to the number of months n such precedng year.
The amount added under ths subparagraph sha not e ceed the amount
of the e cess profts net ncome for such ast precedng ta abe year.
(C) If the number of months n such precedng ta abe year s ess
than such number of months after May 31, 19 0, by addng to the
amount ascertaned under subparagraph ( ) an amount whch bears
the same rato to the e cess profts net ncome for the second precedng
ta abe year as the e cess of such number of months after May 31,
19 0, over the number of months n such precedng ta abe year bears
to the number of months n such second precedng ta abe year.
(c) Secton 713(c) of the Interna Revenue Code s amended by strkng out
(c) and nsertng n eu thereof (g) .
(d) Secton 7 3(a) of the Interna Revenue Code s amended by strkng out
secton 713(c) and nsertng n eu thereof secton 713(g) .
Sec. 5. bnormates n Income n Ta abe Perod.
Secton 721 of the Interna Revenue Code s amended to read as foows:
Sec. 721. bnormates n Income n Ta abe Perod.
(a) Defntons. For the purposes of ths secton
(1) bnorma ncome. The term abnorma Income means ncome of
any cass ncudbe n the gross Income of the ta payer for any ta abe year
under ths subchapter f t s abnorma for the ta payer to derve ncome
of such cass, or, f the ta payer normay derves ncome of such cass but
the amount of such ncome of such cass Incudbe n the gross ncome of
the ta abe year s n e cess of 125 per centum of the average amount of
the gross ncome of the same cass for the four prevous ta abe years, or,
f the ta payer was not n e stence for four prevous ta abe years, the
ta abe years durng whch the ta payer was n e stence.
(2) Separate casses or ncome. ach of the foowng subparagraphs
sha be hed to descrbe a separate cass of Income:
( ) Income arsng out of of a cam, award, udgment, or decree,
or nterest on any of the foregong; or
( ) Income consttutng an amount payabe under a contract the
performance of whch requred more than 12 months; or
(C) Income resutng from e poraton, dscovery, prospectng, re-
search, or deveopment of tangbe property, patents, formuae, or proc-
esses, or any combnaton of the foregong, e tendng over a perod of
more than 12 months; or
(D) Income ncudbe n gross ncome for the ta abe year rather
than for a dfferent ta abe year by reason of a change n the ta -
payer s accountng perod or method of accountng; or
( ) In the case of a essor of rea property, ncome ncuded n gross
ncome for tc ta abe year by reason of the termnaton of the ease; or
(F) Income consstng of dvdends on stock of foregn corporatons,
e cept foregn persona hodng companes.
the ncome whch s cassfabe n more than one of such subparagraphs
sha be cassfed under the one whch the ta payer rrevocaby eects.
The cassfcaton of ncome of any cass not descrbed n subparagraphs
( ) to (F), ncusve, sha be sub|ect to reguatons prescrbed by the Com-
mssoner wth the approva of the Secretary.
(3) Net bnorma Income. The term net abnorma ncome means the
amount of the abnorma ncome ess, under reguatons prescrbed by the
Commssoner wth the approva of the Secretary, ( ) 125 per centum of
the average amount of the gross ncome of the same cass determned under
paragraph (1), and ( ) an amount whch bears the same rato to the amount
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539
Mso.
of any drect costs or e penses, deductbe In determnng the norma-ta net
Income of the ta abe year, through the e pendture of whch such abnorma
ncome was n whoe or n part derved as the e cess of the amount of such
abnorma Income over 125 per centum of such average amount bears to the
amount of such abnorma ncome.
(b) mount ttrbutabe to Other Years. The amount of the net abnorma
ncome that s attrbutabe to any prevous or future ta abe year or years sha
be determned under reguatons prescrbed by the Commssoner wth the ap-
prova of the Secretary. In the case of amounts otherwse attrbutabe to future
ta abe years, f the ta payer ether transfers substantay a ts propertes or
dstrbutes any property n compete qudaton, then there sha be attrbutabe
to the frst ta abe year n whch such transfer or dstrbuton occurs (or f
such year s prevous to the ta abe year n whch the abnorma ncome Is n-
cudbe In gross Income, to such atter ta abe year) a amounts so attrbutabe
to future ta abe years not ncuded In the gross Income of a prevous ta abe year.
(c) Computaton or Ta fob Current Ta abe Year. The ta under ths
subchapter for the ta abe year, n whch the whoe of such abnorma ncome
woud wthout regard to ths secton be ncudbe, sha not e ceed the sum of:
(1) The ta under ths subchapter for such ta abe year computed
wthout the ncuson In gross Income of the porton of the net abnorma
ncome whch Is attrbutabe to any other ta abe year, and
(2) The aggregate of the Increase In the ta under ths subchapter whch
woud have resuted for each prevous ta abe year to whch any porton
of such net abnorma Income Is attrbutabe, computed as f an amount
equa to such porton had been Incuded In the gross ncome for such prevous
ta abe year.
(d) Computaton of Ta fob Future Ta abe Year. The amount of the
net abnorma ncome attrbutabe to any future ta abe year sha, for the pur-
poses of ths subchapter, be Incuded In the gross ncome for such ta abe year.
The ta under ths subchapter for such future ta abe year sha not e ceed the
sum of
(1) The ta under ths subchapter for such future ta abe year computed
wthout the Incuson In e cess profts net Income of the porton of such net
abnorma ncome whch Is attrbutabe to such year, and
(2) The decrease n the ta under ths subchapter for the prevous ta abe
year n whch the whoe of such abnorma ncome woud wthout regard
to ths secton be Incudbe, whch resuted by reason of the e cuson of
the whoe or a part of the abnorma Income from the gross Income for such
prevous ta abe year; but the amount of such decrease sha be dmnshed
by the aggregate of the Increases In the ta under ths subchapter whch
have resuted for the ta abe years Intervenng between such prevous ta -
abe year and such future ta abe year because of the ncuson n the gross
ncome of the portons of such net abnorma Income attrbutabe to such Inter-
venng years.
Sec. 6. bnorma ase Perod arnngs.
Secton 722 of the Interna Revenue Code Is amended to read as foows:
Sec. 722. d|ustment of bnorma ase Perod Net Income.
(a) Genera Rue. In the case of a ta payer whose frst ta abe year under
ths subchapter begns n 19 0, f the ta payer estabshes
(1) that the character of the busness engaged In by the ta payer as of
anuary 1, 19 0, s dfferent from the character of the busness engaged In
durng one or more of the ta abe years In Its base perod (as defned n
secton 713(b)(1)) ; or
(2) that n one or more of the ta abe years n such base perod norma
producton, output, or operaton was nterrupted or dmnshed because of
the occurrence of events abnorma In the case of such ta payer; and
(3) the amount that woud have been ts average base perod net ncome
( ) f the character of the busness as of anuary 1, 19 0, had been
the same durng each of the ta abe years of such base perod; and
( ) f none of the abnorma events referred to n paragraph (2) had
occurred; and
(C) If In each of such ta abe years none of the tems of gross In-
come had been abnormay arge, and none of the tems of deductons
had been abnormay sma; and
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5 0
( ) that the amount estabshed under paragraph (3) s greater than
the average base perod net ncome computed under secton 713(d) or sec-
ton 7 2, as the case may be,
then the amount estabshed under paragraph (3) sha be consdered as the
average base perod net ncome of the ta payer for the purposes of ths subchapter.
(b) Rues fob ppcaton of Subsecton (a). For the purposes of sub-
secton (a)
(1) gh prces of materas, abor, capta, or any other agent of pro-
ducton, ow seng prce of the product of the ta payer, or ow physca
voume of saes owng to ow demand for such product or for the output of
the ta payer, sha not be consdered as abnorma.
(2) The character of the busness engaged n by the ta payer as of anu-
ary 1, 19 0, sha be consdered dfferent from the character of the busness
engaged n durng one or more of the ta abe years n ts base perod ony
f
( ) there s a dfference n the products or servces furnshed; or
( ) there s a dfference n the capacty for producton or opera-
ton ; or
(O) there s a dfference n the rato of nonborrowed capta to tota
capta; or
(D) the ta payer was n e stence durng ony part of ts base
perod; or
( ) the ta payer acqured, before anuary 1, 19 0, a or part of the
assets of a compettor, wth the resut that the competton of such com-
pettor was emnated or dmnshed.
(3) The average base perod net ncome determned under subsecton
(a) (3) sha be computed In the same manner as provded n secton 713(d),
e cept paragraphs (2) and ( ), but for such purposes computng e cess
profts net ncome and defct n e cess profts net ncome on the bass of the
assumptons made n subsecton (a)(3).
( ) If subsecton (a)(1), or both subsectons (a)(1) and (a)(2) are
appcabe to any ta payer, ts average base perod net ncome under sub-
secton (a)(3) sha not e ceed the e cess profts net Income (as computed
for the purposes of subsecton (a)(3)) for the ast ta abe year n such
base perod. For the purposes of ths paragraph, f such ast ta abe year
s of ess than tweve months, the e cess profts net ncome for such ta abe
year sha be paced on an annua bass by mutpyng by tweve and dvd-
ng by the number of months ncuded n such ta abe year.
(c) Lmtaton on ppcaton of Genera uk. Ths secton sha not be
appcabe uness
(1) the ta under ths subchapter for the ta abe year computed wthout
reference to ths secton, e ceeds 6 per centum of the ta payer s norma-ta
net ncome for such year; and
(2) the appcaton of ths secton woud resut n a dmnuton of the
ta otherwse payabe under ths subchapter for the ta abe year by more
than 10 per centum thereof.
(d) tent of Reducton n Ta Undeb Ths Secton. The appcaton
of ths secton sha not reduce the ta payabe under ths subchapter for the
ta abe year beow 6 per centum of the ta payer s norma-ta net ncome for
such year. The ta under ths subchapter computed wth the appcaton of
subsecton (a) sha be Increased by an amount equa to 10 per centum of the
ta computed wthout reference to ths secton.
(e) ppcaton fob Reef Undeb Ths Secton. The ta payer sha com-
pute ts ta and fe ts return under ths subchapter wthout the appcaton of
ths secton. The benefts of ths secton sha not be aowed uness the ta -
payer, wthn s months from the date prescrbed by aw for the fng of ts
return, makes appcaton therefor n accordance wth reguatons to be pre.-
scrbed by the Commssoner wth the approva of the Secretary, e cept that
f the Commssoner n the case of any ta payer wth respect to the ta abty
of any ta abe year
(1) ssues a premnary notce statng a defcency n the ta mposed
by ths subchapter such ta payer may, wthn nnety days after the date
of such notce, make such appcaton, or
(2) mas a notce of defcency ( ) wthout havng prevousy ssued
a premnary notce thereof or ( ) wthn nnety days after the date of
such premnary notce, such ta payer may cam the benefts of ths sec-
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on In ts petton to the oard or n an amended petton n accordance
wth the rues of the oard.
If the appcaton s not fed wthn s months after the date prescrbed
by aw for the fng of the return, the appcaton of ths secton sha not reduce
the ta otherwse determned under ths subchapter by an amount In e cess of
the amount of the defcency fnay determned under ths subchapter wthout the
appcaton of ths secton. If the average base perod net ncome has been
determned under subsecton (a) for any ta abe year, the Commssoner may,
by reguatons approved by the Secretary, prescrbe the e tent to whch the
mtatons prescrbed by ths subsecton may be waved for the purpose of
determnng the ta under ths subchapter for a subsequent ta abe year.
Skc. 7. Consodates Returns of Insurance Companes Otheb Than Lte or
Mutua.
Secton 730(e) (6) of the Interna Revenue Code s amended to read as foows:
(6) Insurance companes sub|ect to ta aton under secton 201 or 207.
Sec. 8. Incorporaton of Partnershp or Soe Propretorshp.
(a) Secton 7 0(a)(1)(C) of the Interna Revenue Code s amended by
strkng out owned by such other corporaton. and nsertng In eu thereof:
owned by such other corporaton, or
(D) Substantay a the propertes of a partnershp n an e change to
whch secton 112(b)(5), or so much of secton 112 (c) or (e) as refers to
secton 112(b) (5), or to whch a correspondng provson of a pror revenue
aw, s or was appcabe.
(b) Secton 7 0(b)( ) of the Interna Revenue Code Is amended by strkng
out the perod at the end thereof and nsertng n eu thereof a semcoon and
the foowng:
or
(5) In the case of a transacton specfed n subsecton (a)(1)(D), the
partnershp whose propertes were acqured.
(c) Secton 7 0 of the Interna Revenue Code s amended by nsertng at the
end thereof the foowng new subsecton :
(h) So Propretorshp. For the purposes of sectons 7 0(a)(1)(D),
7 0(b)(5), and 7 2(g), a busness owned by a soe propretorshp sha be con-
sdered a partnershp.
(d) Secton 7 2 of the Interna Revenue Code s amended by Insertng at
the end thereof the foowng new subsecton:
(g) In the case of a partnershp whch Is a component corporaton by vrtue
of secton 7 0(b) (5), the computatons requred by ths Suppement sha be made,
under rues and reguatons prescrbed by the Commssoner wth the approva of
the Secretary, as f such partnershp had been a corporaton. For the purpose of
such computatons, n makng the ad|ustment for Income ta es requred by secton
711(b)(1)( ), the partnershp so regarded as a corporaton sha be consdered
as havng dstrbuted a ts net ncome as a dvdend.
Sec. 9. Procedura Provsons.
Part 1 of subchapter of chapter 2 of the Interna Revenue Code s amended
by nsertng at the end thereof the foowng new secton:
Sec. 732. Revew of bnormates by oard or Ta ppeas.
(a) Petton to the oard. If a cam for refund of ta under ths subchapter
for any ta abe year s dsaowed n whoe or n part by the Commssoner, and
the dsaowance reates to the appcaton of secton 711(b) (1) ( ), (I), ( ), or
( ), secton 721, or secton 722, reatng to abnormates, the Commssoner sha
send notce of such dsaowance to the ta payer by regstered ma. Wthn
nnety days after such notce s maed (not countng Sunday or a ega hoday
n the Dstrct of Coumba as the nneteth day) the ta payer may fe a petton
wth the oard of Ta ppeas for a redetermnaton of the ta under ths sub-
chapter. If such petton s so fed, such notce of dsaowance sha be deemed
to be a notce of defcency for a purposes reatng to the assessment and co-
ecton of ta es or the refund or credt of overpayments.
(b) Defcency Found by oard n Case of Cam. If the oard fnds that
there s no overpayment of ta n respect of any ta abe year n respect of whch
the Commssoner has dsaowed, n whoe or n part, a cam for refund descrbed
In subsecton (a) and the oard further fnds that there s a defcency for such
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5 2
year, the oard sha have |ursdcton to determne the amount of such defcency
and such amount sha, when the decson of the oard becomes fna, be assessed
and sha be pad upon notce and demand from the coector.
(c) Fnaty of Determnaton. If n the determnaton of the ta abty
under ths subchapter the determnaton of any queston s necessary soey by
reason of secton 711(b)(1) ( ), (I), ( ), or ( ), secton T21, or secton 722,
the determnaton of such queston sha not be revewed or redetermned by any
court or agency e cept the oard.
Sec. 10. Captazaton of dvertsng, tc., pendtures.
(a) Part 1 of subchapter of chapter 2 of the Interna evenue Code s amended
by nsertng at the end thereof the foowng new secton:
Sec. 733. Captazaton of dvertsng, tc., pendtures.
(a) ecton to Charge to Capta ccount. For the purpose of computng
the e cess profts credt, a ta payer may eect, wthn s months after the date
prescrbed by aw for fng ts return for ts frst ta abe year under ths sub-
chapter, to charge to capta account so much of the deductons for ta abe years
n ts appcabe base perod on account of e pendtures for advertsng or the
promoton of good w, as, under rues and reguatons prescrbed by the Comms-
soner wth the approva of the Secretary, may be regarded as capta nvestments.
Such eecton must be the same for a such ta abe years, and must be for the
tota amount of such e pendtures whch may be so regarded as capta nvest-
ments. In computng the e cess profts credt, no amount on account of such
e pendtures sha be charged to capta account:
(1) For ta abe years n the base perod uness the eecton authorzed n
subsecton (a) s e ercsed, or
(2) For any ta abe year pror to the begnnng of the base perod.
(b) ffect of ecton. If the ta payer e ercses the eecton authorzed
under subsecton (a)
(1) The net ncome for each ta abe year n the base perod sha be con-
sdered to be the net Income computed wth such deductons dsaowed, and
such deductons sha not be consdered as havng dmnshed earnngs and
profts. Ths paragraph sha be retroactvey apped as f t were a part
of the aw appcabe to each ta abe year n the base perod; and
(2) The treatment of such e pendtures as deductons for a ta abe
year In the base perod sha, for the purposes of secton 73 (b)(2), be
consdered treatment whch was not correct under the aw appcabe to
such year.
(b) mendment to Chapter 1. Secton 23(a) of the Interna Revenue Code
s amended by addng at the end thereof a new paragraph, appcabe to ta abe
years begnnng after December 31, 1939, readng as foows:
(3) pendtures fob advertsng and good w. If a corporaton
has, for the purpose of computng ts e cess profts credt under chapter
2 , camed the benefts of the eecton provded n secton 733, no deducton
sha be aowabe under paragraph (1) to such corporaton for e pend-
tures for advertsng or the promoton of good w whch, under the rues
and reguatons prescrbed under secton 733(a), may be regarded as
capta nvestments.
Sec. 11. d|ustment n Case of Inconsstent Poston.
Part 1 of subchapter of chapter 2 of the Interna Revenue Code Is amended
by nsertng at the end thereof the foowng new secton:
Sec. 73 . d|ustment n Case of Poston Inconsstent Wth Pror Income
Ta Labty.
(a) Defntons. For the purposes of ths secton
(1) Ta payer. The term ta payer means any person sub|ect to a
ta under the appcabe revenue ct.
(2) Income ta . The term ncome ta means an ncome ta mposed
by chapter 1 or chapter 2 of ths tte; Tte I and Tte I of the Revenue
cts of 1938, 1936, and 193 ; Tte I of the Revenue cts of 1932 and
1928; Tte II of the Revenue cts of 1926 and 192 ; Tte II of the Revenue
cts of 1921 and 1918; Tte I of the Revenue ct of 1917; Tte I of the
Revenue ct of 1916; or secton II of the ct of October 3, 1913; a war
profts or e cess profts ta mposed by Tte III of the Revenue cts of
1921 and 1918; or Tte II of the Revenue ct of 1917; or an ncome, war
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profts, or e cess profts ta mposed by any of the foregong provsons,
as amended or suppemented.
(8) Pror ta abe year.- ta abe year begnnng after December 31,
1939, sha not be consdered a pror ta abe year.
(b) Crcumstances of d|ustment.
(1) If
( ) n determnng at any tme the ta of a ta payer under ths
subchapter an Item affectng the determnaton of the e cess profts
credt s treated n a manner nconsstent wth the treatment accorded
such tem In the determnaton of the ncome-ta abty of such
ta payer or a predecessor for a pror ta abe year or years, and
( ) the treatment of such tem n the pror ta abe year or years
consstenty wth the determnaton under ths subchapter woud effect
an ncrease or decrease n the amount of the Income ta es prevousy
determned for such ta abe year or years, and
(C) on the date of such determnaton of the ta under ths sub-
chapter correcton of the effect of the nconsstent treatment n any
one or more of the pror ta abe years s prevented (e cept for the
provsons of secton 3801) by the operaton of any aw or rue of aw
(other than secton 3761, reatng to compromses),
then the correcton sha be made by an ad|ustment under ths secton. If
n a subsequent determnaton of the ta under ths subchapter for such
ta abe year such nconsstent treatment Is not adopted, then the correcton
sha not be made n connecton wth such subsequent determnaton.
(2) Such ad|ustment sha be made ony If there s adopted n the
determnaton a poston mantaned by the Commssoner (n case the net
effect of the ad|ustment woud be a decrease n the ncome ta es prevousy
determned for such year or years) or by the ta payer wth respect to
whom the determnaton s made (n case the net effect of the ad|ustment
woud be an ncrease n the Income ta es prevousy determned for such
year or years) whch poston s nconsstent wth the treatment accorded
such tem n the pror ta abe year or years whch was not correct under
the aw appcabe to such year.
(c) Method and ffect of d|ustment. (1) The ad|ustment authorzed
by subsecton (b), n the amount ascertaned as provded n subsecton (d),
If a net ncrease sha be added to, and f a net decrease sha be subtracted
from, the ta otherwse computed under ths subchapter for the ta abe year
wth respect to whch such Inconsstent poston Is adopted.
(2) If more than one ad|ustment under ths secton s made because more
than one nconsstent poston s adopted wth respect to one ta abe year
under ths subchapter, the separate ad|ustments, each an amount ascertaned
as provded n subsecton (d), sha be aggregated, and the aggregate net
ncrease or decrease sha be added to or subtracted from the ta otherwse
computed under ths subchapter for the ta abe year wth respect to whch
such nconsstent postons are adopted.
(3) If a the ad|ustments under ths secton, made on account of the
adopton of an nconssfent poston or postons wth respect to one ta abe
year under ths subchapter, resut n an aggregate net ncrease, the ta mposed
by ths subchapter sha n no case be ess than the amount of such aggregate
net ncrease.
(d) scertanment of mount of d|ustment. In computng the amount of
an ad|ustment under ths secton there sha frst be ascertaned the amount
of the ncome ta es prevousy determned for each of the pror ta abe years
for whch correcton s prevented. The amount of each such ta prevousy
determned for each such ta abe yenr sha be (1) the ta shown by the ta -
payer, or by the predecessor, upon the return for such pror ta abe year,
ncreased by the amounts prevousy assessed (or coected wthout assessment)
as defcences, and decreased by the amounts prevousy abated, credted, re-
funded, or otherwse repad n respect of such ta ; or (2) f no amount was
shown as the ta by such ta payer or such predecessor upon the return, or If
no return was made by such ta payer or such predecessor, then the amounts
prevousy assessed (or coected wthout assessment) as defcences, but such
amounts prevousy assessed, or coected wthout assessment, sha be decreased
by the amounts prevousy abated, credted, refunded, or otherwse repad n
respect of such ta . There sha then be ascertaned the ncrease or decrease
In each such ta prevousy determned for each such year whch resuts soey
from the treatment of the Item consstenty wth the treatment accorded such
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tem n the determnaton of the ta abty under ths subchapter. To the
ncrease or decrease so ascertaned for each such ta for each such year there
ha be added nterest thereon computed as f the ncrease or decrease con-
sttuted a defcency or an overpayment, as the case may be, for such pror
ta abe year. There sha be ascertaned the dfference between the aggregate
of such ncreases, pus the Interest attrbutabe to each, and the aggregate of
such decreases, pus the nterest attrbutabe to each, and the net Increase or
decrease so ascertaned sha be the amount of the ad|ustment under ths
secton wth respect to the nconsstent treatment of such tem.
Sec. 12. dmssbe ssets or Deaers n Securtes.
(a) Secton 720(a) (1) ( ) of the Interna Revenue Code s amended to read
as foows:
( ) Stock n corporatons e cept stock n a foregn persona-hodng
company, and e cept stock whch s not a capta asset; and
(b) Secton 711(a)(2)( ) s amended by nsertng after companes a
perod and the foowng: Ths subparagraph sha not appy to dvdends
on stock whch s not a capta asset .
Sec. 13. owance of cess Profts Crh|t.
Secton 712 of the Interna Revenue Code s amended to read as foows:
Sec. 712. cess Pbofts Credt owance.
(a) Domestc Corporatons. In the case of a domestc corporaton whch
was n e stence before anuary 1, 19 0, the e cess profts credt for any ta abe
year sha be an amount computed under secton 713 or secton 71 , whchever
amount resuts n the esser ta under ths subchapter for the ta abe year
for whch the ta under ths subchapter Is beng computed. In the case of a
other domestc corporatons the e cess profts credt for any ta abe year sha
be an amount computed under secton 71 . (For aowance of e cess profts
credt n case of certan reorganzatons of corporatons, see secton 7 1.)
(b) Foregn Corporatons. In the case of a foregn corporaton engaged
n trade or busness wthn the Unted States or havng an offce or pace of
busness theren, the frst ta abe year of whch under ths subchapter begns
on any date n 19 0, whch was n e stence on the day forty-eght months
pror to such date and whch at any tme durng each of the ta abe years n
such forty-eght months was engaged n trade or busness wthn the Unted
States or had an offce or pace of busness theren, the e cess profts credt
for any ta abe year sha be an amount computed under secton 713 or sec-
ton 71 , whchever amount resuts n the esser ta under ths subchapter for
the ta abe year for whch the ta under ths subchapter s beng computed.
In the case of a other foregn corporatons the e cess profts credt for any
ta abe year sha be an amount computed under secton 71 .
(c) ffect of Dscamer of Credt. If the ta payer states n ts return
for the ta abe year under ths subchapter that t dscams the use of the
credt computed under secton 713 or the use of the credt computed under sec-
ton 71 , the credt so dscamed sha not, for the purposes of the Interna
revenue aws, be appcabe to the computaton of the ta under ths sub-
chapter for such ta abe year.
Sec. 1 . cess Profts Credt of cqurng Corporatons.
Secton 7 1 of the Interna Revenue Code s amended to read as foows:
Sec. 7 1. owance of cess Profts Credt.
(a) owance. In the case of a ta payer whch s an acqurng corpora-
ton whch was n e stence on the date of the begnnng of ts base perod,
the e cess profts credt for any ta abe year sha be an amount computed
under secton 713 or secton 71 , whchever amount resuts n the esser ta
under ths subchapter for the ta abe year for whch the ta under ths
subchapter s beng computed.
(b) ffect of Dscamer of Credt. If the ta payer states n ts return
for the ta abe year under ths subchapter that t dscams the use of the
credt computed under secton 713 or the use of the credt computed under
secton 71 , the credt so dscamed sha not, for the purposes of the nterna
revenue aws, be appcabe to the computaton of the ta under ths subchapter
for such ta abe year.
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Sec. 15. verage ase Perod Net Income of cqurng Corporatons.
So much of secton 7 2 of the Interna Revenue Code as foows the secton
headng and precedes the begnnng of subsecton (a) s amended to read as
foows:
In the case of a ta payer whch s an acqurng corporaton the e cess
profts credt of whch s aowed under secton 7 1, ts average base perod
net ncome (for the purpose of the credt computed under secton 713) f
the ta payer was actuay n e stence before anuary 1, 19 0, sha, at the
eecton of the ta payer made n ts return for the ta abe year, be computed
as foows, and f the ta payer was not actuay n e stence before such date,
sha be computed as foows, n eu of the method provded n secton 713: .
Sec. 16. Computaton of Credts on Returns.
Secton 729(b) of the Interna Revenue Code s amended by strkng out
(b) Returns. and Insertng n eu thereof the foowng:
(b) Returns.
(1) Computaton of e cess profts credts. In the case of a ta -
payer whch under secton 712 or secton 7 1 s entted to have the e cess
profts credt computed under secton 713 or secton 71 , whchever resuts
n the esser ta under ths subchapter, the return under ths subchapter
for any ta abe year sha contan computatons of two tentatve ta es,
one wth the credt computed under secton 713 and one wth the credt
computed under secton 71 ; and the return sha contan a Informaton
whch the Commssoner, by reguatons prescrbed by hm wth the ap-
prova of the Secretary, may prescrbe as necessary for such computatons.
If the ta payer states n such return that t dscams the use of one
of such credts n the computaton of the ta under ths subchapter for
the ta abe year, the computaton and nformaton based on such credt
may be omtted from the return.
(2) no return requred. .
Sec. 17. ffectve Date.
The amendments made by ths ct sha be effectve as of the date of enact-
ment of the cess Profts Ta ct of 19 0.
pproved, March 7,19 1.
19 1-7-10602
. . R S. 80. PU LIC L W 3, S NTY-S NT CONGR SS
C PT R 3, FIRST S SSION .
ont Resouton to amend secton 12 of the Interna Revenue
Code by e tendng the tme for certfcaton of natona-defense
factes and contracts for amortzaton purposes.
Resoved oy the Senate and ouse of Re/yresentatves of the Unted
States of merca n Congress assembed, That secton 12 (f) (1) of
the Interna evenue Code s amended by strkng out wthn the
tme specfed n paragraph (3) of ths subsecton, and .
Sec. 2. Secton 12 (f) (3) of the Interna Revenue Code s amended
to read as foows:
The certfcate provded for n paragraph (1) sha have no
effect uness an appcaton therefor s fed Tbefore the e praton
of s ty days after the begnnng of such constructon, recon-
structon, erecton, or nstaaton or the date of such acquston,
or before February 6, 19 1, whchever s ater: Provded, That
n no event and notwthstandng any of the other provsons of
ths secton, no amortzaton deducton sha be aowed n respect
of any emergency facty for any ta abe year uness a certfcate
n respect thereof under paragraph (1) of ths subsecton sha
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5 6
have been made pror to the makng of the eecton, pursuant to
subsecton (b) and (d) ( ) of ths secton, to take the amortza-
ton deducton and begn the s ty-month perod n or wth such
ta abe year, or before February 6, 19 1, whchever s ater.
Sec. 3. Secton 12 () of the Interna Revenue Code s amended
(a) y strkng out from the frst sentence thereof , before the
e praton of nnety days after the makng of such contract or one
hundred and twenty days after the date of the enactment of the
Second Revenue ct of 19 0, whchever of such perods e pres the
ater, :
(b) y strkng out from the second sentence thereof , before the
e praton of nnety days after the makng of a contract or one
hundred and twenty days after the date of the enactment of the
Second Revenue ct of 19 0, whcever of such perods e pres the
ater, ; and
(c) y addng after the second sentence thereof a new sentence to
read as foows: The certfcates provded for under ths subsecton
sha have no effect uness an appcaton therefor s fed before the
e praton of s ty days after the makng of such contract, or before
Feb ruary 6, 19 1, whchever s ater.
Sec. . The amendments made by ths |ont resouton to secton 12
of the Interna Revenue Code sha be appcabe as f they were a
part of such secton on the date of the enactment of the Second Revenue
ct of 19 0.
pproved, anuary 31, 19 1.
19 1-10-10627
. R. 2059. PU LIC L W 7, S NTY-S NT CONGR SS C PT R 7,
FIRST S SSION .
n act to ncrease the debt mt of the Unted States, to provde
for the Federa ta aton of future ssues of obgatons of the Unted
States and ts nstrumentates, and for other purposes.
e t enacted by the Senate and ouse of Representatves of the Unted States
of merca n Congress assembed, That ths ct may be cted as the Pubc Debt
ct of 19 1.
Seo. 2. (a) Secton 21 of the Second Lberty ond ct, as amended, s further
amended to read as foows:
Seo. 21. The face amount of obgatons ssued under the authorty of ths
ct sha not e ceed n the aggregate 65,000,000,000 outstandng at any one
tme.
(b) The authorty granted n the foowng provsons of aw to ssue obgatons
s termnated :
(1) Secton 32 of the ct entted n ct to provde ways and means to meet
war e pendtures, and for other purposes , approved une 13, 1808, as amended
(U. S. C, 193 edton, tte 31, secton 750) (authorzng the ssue of 300,000,000
certfcates of ndebtedness) ;
(2) Secton 6 of the Frst Lberty ond ct, as amended (U. S. C. 193 edton,
tte 31, secton 755) (authorzng the ssue of 2,000,000,000 certfcates of ndebt-
edness) ; and
(3) Secton 6 of the Second Lberty ond ct, as amended (U. S. C, 193 ed-
ton, tte 31, secton 757) (authorzng the ssue of ,000,000,000 of war savngs
certfcates).
(c) Secton 301 of tte III of the Revenue ct of 19 0 (5 Stat. 526) (creatng
a speca fund for the retrement of defense obgatons) s repeaed.
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Sew. S. Secton 22 of the Second Lberty ond ct, as amended (U. S. C, tte
31, secton 757c), s amended to read as foows:
Sec. 22. (a) The Secretary of the Treasury, wth the approva of the Pres-
dent, s authorzed to ssue, from tme to tme, through the Posta Servce or
otherwse, Unted States savngs bonds and Unted States Treasury savngs cer-
tfcates, the proceeds of whch sha be avaabe to meet any pubc e pendtures
authorzed by aw, and to retre any outstandng obgatons of the Unted States
bearng nterest or ssued on a dscount bass. The varous Issues and seres of
the savngs bonds and the savngs certfcates sha be n such forms, sha be
offered n such amounts, sub|ect to the mtaton mposed by secton 21 of ths
ct, as amended, and sha be ssued n such manner and sub|ect to such terms
and condtons consstent wth subsectons (b), (c), and (d) hereof, and ncud-
ng any restrctons on ther transfer, as the Secretary of the Treasury may from
tme to tme prescrbe.
(b) Savngs bonds and savngs certfcates may be ssued on an nterest-
bearng bass, on a dscount bass, or on a combnaton nterest-bearng and
dscount bass and sha mature, n the case of bonds, not more than twenty
years, and n the case of certfcates, not more than ten years, from the date as
of whch ssued. Such bonds and certfcates may be sod at such prce or
prces, and redeemed before maturty upon such terms and condtons as the
Secretary of the Treasury may prescrbe: Provded, That the Interest rate on,
and the ssue prce of, savngs bonds and savngs certfcates and the terms upon
whch they may be redeemed sha be such as to afford an nvestment yed not
n e cess of 3 per centum per annum, compounded semannuay. The denom-
natons of savngs bonds and of savngs certfcates sha be such as the Secretary
of the Treasury may from tme to tme determne and sha be e pressed n
terms of ther maturty vaues. The Secretary of the Treasury s authorzed
by reguaton to f the amount of savngs bonds and savngs certfcates ssued
n any one year that may be hed by any one person at any one tme.
(c) The Secretary of the Treasury may, under such reguatons and upon
such terms and condtons as he may prescrbe, ssue, or cause to be Issued,
stamps, or may provde any other means to evdence payments for or on account
of the savngs bonds and savngs certfcates authorzed by ths secton, and
he may make provson for the e change of savngs certfcates for savngs
bonds. The mtaton on the authorty of the Postmaster Genera to pre-
scrbe the denomnatons of posta-savngs stamps contaned n the second
paragraph of secton 6 of the ct of une 25, 1910, as amended (U. S. 0., tte
39, secton 756), s removed; and the Postmaster Genera s authorzed, for
the purposes of such secton and to encourage and factate the accumua-
ton of funds for the purchase of savngs bonds and savngs certfcates, to
prepare and ssue posta-savngs stamps n such denomnatons as he may
prescrbe.
(d) The provsons of secton 7 of ths ct, as amended (reatng to e -
emptons from ta aton), sha appy to savngs bonds ssued before the effec-
tve date of the Pubc Debt ct of 19 1. For purposes of ta aton any ncre-
ment n vaue represented by the dfference between the prce pad and the
redempton vaue receved (whether at or before maturty) for savngs bonds
and savngs certfcates sha be consdered as Interest. The savngs bonds
and the savngs certfcates sha not bear the crcuaton prvege.
(e) The appropraton for e penses provded by secton 10 of ths ct and
e tended by the ct of une 16, 1921 (U. S. O., tte 31, sectons 760 and 761),
sha be avaabe for a necessary e penses under ths secton, and the Sec-
retary of the Treasury s authorzed to advance, from tme to tme, to the
Postmaster Genera from such appropraton such sums as are shown to be
requred for the e penses of the Post Offce Department and of the Posta
Servce, n connecton wth the handng of savngs bonds, savngs certfcates,
and stamps or other means provded to evdence payment therefor, whch sums
may be used for addtona empoyees or any other e pendture, wherever or
n whatever cass of post offce ncurred, In connecton wth such handng.
(f) No further orgna ssue of bonds authorzed by secton 10 of the ct
approved une 25, 1910 (U. S. C, tte 39, secton 760), sha be made after
uy 1, 1935.
(g) t the request of the Secretary of the Treasury the Postmaster Genera,
under such reguatons as he may prescrbe, sha requre the empoyees of the
Post Offce Department and of the Posta Servce to perform, wthout e tra
compensaton, such fsca agency servces as may be desrabe and practcabe
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5 8
In connecton wth the ssue, devery, safekeepng, redempton, or payment of
the savngs bonds and savngs certfcates, or n connecton wth any stamps
or other means provded to evdence payments.
Sec. . (a) Interest upon, and gan from the sae or other dsposton of,
obgatons ssued on or after the effectve date of ths ct by the Unted States
or any agency or nstrumentaty thereof sha not have any e empton, as
uch, and oss from the sae or other dsposton of such obgatons sha not
have any speca treatment, as such, under Federa ta cts now or hereafter
enacted; e cept that any such obgatons whch the Unted States Martme
Commsson or the Federa ousng dmnstraton has, pror to the effectve
date of ths ct, contracted to Issue at a future date, sha when ssued bear
such ta -e empton prveges as were, at the tme of such contract, provded
n the aw authorzng ther ssuance. For the purposes of ths subsecton a
Terrtory, a possesson of the Unted States, and the Dstrct of Coumba, and
any potca subdvson thereof, and any agency or nstrumentaty of any
one or more of the foregong, sha not be consdered as an agency or nstru-
mentaty of the Unted States.
(b) The provsons of ths secton sha, wth respect to such obgatons, be
consdered as amendatory of and suppementary to the respectve cts or parts
of cts authorzng the ssuance of such obgatons, as amended and sup-
pemented.
Sue. 5. Ths ct, e cept sectons 2 (b) and (c), sha become effectve on the
frst day of the month foowng the date of ts enactment.
pproved, February 19, 19 1.
19 1-15-10681
. . R S. 60. PU LIC L W 18, S NTY-S NT CONGR SS
C PT R 21, FIRST S SSION .
ont Resouton To mend the Interna Revenue Code.
Resoved by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That the Interna
Revenue Code, as amended, be amended as foows:
In secton 27(c), nsert 1936 or before 1937 .
In secton 113(a) (11). nsert or the Revenue ct of 1938, 52 Stat.
508, after 9 Stat, 1698, .
In secton 113(a) (11), nsert or the Revenue ct of 1938 at
the end of the thrd sentence and after the Revenue ct of 1936
wherever t appears n the ast sentence.
In secton 50 (a), nsert or of secton 05 of the Revenue ct of
1938 after subsecton (c) of ths secton .
In secton 50 (a), nsert or under Tte I of the Revenue ct
of 1938 after under ths subchapter .
In secton 50 (a), nsert begnnng after December 31, 1937
after any precedng ta abe year .
In secton 50 (b), strke out the perod at the end of the subsecton
and nsert n eu thereof a semcoon.
In secton 50 (c) (3) ( ), nsert before the cosng mark of paren-
thess the foowng: or, n the case of a ta abe year begnnng n
1939, by the amount aowed under secton 05(c) of the Revenue
ct of 1938 n the computaton of the ta under Tte I of such ct
for a ta abe year begnnng pror to anuary 1, 1939 .
In secton 506(c)(2)( ), nsert after , or both, the foowng:
of ths secton or secton 07 of the Revenue ct of 1938, .
In secton 506(c)(2)( ), nsert after , or both the foowng:
of ths secton or secton 07 of the Revenue ct of 1938, .
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In secton 812(c), nsert or under Tte III of the Revenue ct
of 1932, 7 Stat. 2 5, after under chapter , .
- In secton 813(a)(2), nsert or chapter before the perod at
the end of the headng.
In secton 813(a)(2), strke out chapter 3 and nsert n eu
thereof ths subchapter .
In secton 813(a)(2), nsert or under Tte III of the Revenue
ct of 1932, 7 Stat. 2 5, after under chapter where t frst
appears.
In secton 813(a)(2), nsert or under Tte III of the evenue
ct of 1932 after under chapter wherever t appears there-
after.
In secton 813(a)(2), nsert or 860 after 810 wherever t
appears.
In secton 813(b), nsert or 860 after 810 wherever t appears.
In secton 861(a)(2), nsert or under Tte III of the Revenue
ct of 1932, 7 Stat. 2 5, after under chapter , .
In secton 936(b), nsert or under Tte III of the Revenue ct
of 1932, 7 Stat. 2 5, after under chapter where t frst appears.
In secton 936(b), nsert or under Tte III of the Revenue ct
of 1932 after under chapter wherever t appears thereafter.
In secton 936(b), strke out 813(b) from the end of paragraph
(1) and nsert n eu thereof 813(a) (2) .
In secton 1536, strke out 3762 and nsert n eu thereof 3661 .
mend that part of secton 1805 foowng the paragraph defnng
the term sver buon to read as foows:
The term person means an ndvdua, partnershp, assocaton, or cor-
poraton.
The Secretary s authorzed to ssue, wth the approva of the Presdent, such
rues and reguatons as the Secretary may deem necessary or proper to carry
out the purposes of ths secton.
In secton 2887, strke out by precedng the ta pad stamp
n the ne t to the ast sentence of the second paragraph and nsert
n eu thereof of .
In secton 2901(b), strke out any moneys n the Treasury not
otherwse approprated from the end of the second sentence and
nsert n eu thereof annua appropratons from the genera fund
of the Treasury .
In secton 3170, strke out or where t appears mmedatey
before by any aw .
Sec. 2. The sectons of the Interna Revenue Code amended by
ths |ont resouton sha have effect as f such sectons, as so amended,
had been enacted n the Interna Revenue Code on February 10, 1939.
pproved, March 17 19 1.
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550
COMMITT R PORTS.
19 1-11-106 8
C SS-PROFITS T M NDM NTS OF 19 1.
ouse of Representatves Report No. 1 6, Seventy-seventh CongTess, Frst Sesson.
February 2 , 19 1.
Mr. Doughton, from the Commttee on Ways and Means, submtted the
foowng report to accompany . R. 3531 :
The Commttee on Ways and Means, to whom was referred the b ( . R.
3531) to amend certan provsons of the Interna Revenue Code reatng to
the e cess-profts ta , and for other purposes, havng had the same under
consderaton, report t back to the ouse wthout amendment and recommend
that the b do pass.
N D FOR T L GISL TION.
The Second Revenue ct of 19 0, approved October 8, 19 0, ta es at gradu-
ated rates reachng a ma mum of 50 per cent the e cess profts of corpora-
tons. Ths ct had two ma|or purposes, as whs stated n the report of your
commttee. These purposes were, frst, to provde addtona revenue urgenty
needed to hep meet the costs of the natona-defense program, and, second, to
prevent the rearmament program from furnshng an opportunty for the
creaton of new war monares or the further substanta enrchment of
aready weathy persons.
In vew of these compeng motves, the provsons of that ct ay a ta
upon that porton of the earnngs of corporatons determned to be e cess
profts. The ta rates provded, or even hgher rates, are thoroughy |ustfed
f the ncome sub|ect thereto s ceary of the type ntended to be reached.
t the same tme, equtabe consderatons demand that every reasonabe pre-
cauton be taken to prevent unfar appcaton of the ta n abnorma cases.
The weght of the burden mposed carres wth t a commensurate need for
restrctng ts appcaton to the cases for whch t was desgned.
Sensbe to these consderatons, your commttee and the Congress, n formu-
atng and enactng that egsaton, e ercsed cauton both wth respect to
the methods provded for measurng the porton of the corporate earnngs to be
sub|ected to the ta and n aevatng the specfc hardshps whch were ds-
cosed. t the same tme, t was observed that specfc treatment desgned
aone for such unusua cases as coud then be foreseen woud not prove adequate
to meet the equtabe demands.
For ths reason the commttee of conference on the second revenue b of
19 0 adopted a provson hasty desgned to take care of unforeseeabe stua-
tons by provdng ad|ustments for abnormates of both ncome and capta.
Ths provson was known to be nadequate at that tme but nevertheess was
nserted n the aw as a token of assurance to ta payers that further congres-
sona acton woud be taken n ths respect. Thus, n the statement of the
managers on the part of the ouse on the second revenue b of 19 0 C. . 19 0-2,
551 . the foowng statement was made wth respect to further acton toward the
reef of abnormates:
It s understood that the Treasury and members of the stTC of the ont
Commttee on Interna Revenue Ta aton w gve further study to the entre
probem covered by ths secton and w report to the approprate commttees
on the sub|ect as soon as possbe.
Pursuant to those nstructons, the Treasury and the staff of the ont
Commttee made further studes and have reported ther fndngs to your com-
mttee, whch fndngs furnsh the bass for the present egsaton.
SUMM RY OF PRINCIP L F TUR S.
perence wth e cess-profts ta es, both n the Unted States and abroad, has
demonstrated concusvey that reef n abnorma cases can not be predcated
on specfc nstances foreseeabe at any tme. The unusua cases that are
certan to arse are so dverse n character and unpredctabe that reef pro-
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vsons couched In other than genera and fe be terms are certan to prove
nadequate.
For these reasons, the present egsaton attempts to provde, both by specfc
terms and n carefuy guarded genera terms, a set of fe be rues whch
shoud aevate at east the buk of the severe hardshp cases whch may arse.
The success or faure of egsaton of ths type depends, to a consderabe
degree, upon ts ntegent and sympathetc admnstraton. Through ts con-
fdence In the e perence and abty of the offcas of the Treasury Department
and the ureau of Interna Revenue, your commttee recommend the present
fe be and broad egsaton as the most satsfactory method of meetng the
contngences that w arse.
So that the reef afforded by the b may be avaabe for the entre perod
covered by the e cess-profts ta , the provsons of ths egsaton are made
retroactve to appy to ta abe years begnnng after December 31, 1939.
The b affords reef n the foowng stuatons:
1. It reeves the hardshps whch may be caused by the sharpy fuctuatng
earnngs of many types of companes, the actvtes of whch are dependent
upon busness cyces, by aowng unused e cess-profts credts to be carred
over nto the two succeedng ta abe years, thereby tendng to eve off the
unusua effects due to rse and fa of ncome. In addton, the aowance of
such an e cess profts credt carry-over w be of substanta beneft to new
corporatons, and to od corporatons undergong a perod of e panson.
2. It adds to the st of ad|ustments for specfc tems of abnorma deduc-
tons, set out n secton 711(b) of the e stng aw, a further ad|ustment for
abnorma deductons of any cass durng the years In the base perod.
3. Reef s provded for corporatons that e perenced rapd growth durng
the base perod. Under e stng aw, ony the average e perence durng those
years can be counted n determnng the e cess-profts credt based on ncome.
Corporatons whose factes and producton capactes were substantay n-
creased durng ths perod woud thus be penazed as compared to corporatons
whch had aready acheved and mantaned a hgh and constant eve of produc-
ton. The b w gve effect to the rato of ncrease durng these years. Ths
treatment w afford a substanta advantage to these e pandng companes
as compared wth the use of the eve average now requred.
. stng aw provdes for ad|ustments wth respect to s specfc casses
of abnorma ncome receved durng the ta abe years sub|ect to the e cess-
profts ta . These specfc tems were aowed to be spread over the years to
whch they are actuay attrbutabe. Your commttee fee that the reef
afforded by ths provson shoud not be mted to these specfc tems but
shoud be avaabe aso wth respect to any tem of abnorma ncome as such
ncome s defned n the b.
5. Snce the average earnngs credt Is based upon the amount of the ta -
payer s average ncome durng the base perod, the happenng of some unusua
event durng ths perod may create a grave hardshp on the ta payer. For
e ampe, the ta payer s pant may be destroyed by fre or wndstorm or ts
operatons for any year greaty mpeded by food, strkes, or other events ham-
perng producton and greaty curtang ncome for a gven perod. The b
woud attrbute to the ta payer n such an event the earnngs whch It woud
normay have e perenced had such event not occurred. Lkewse, If the ta -
payer can estabsh that the character of ts busness as of anuary 1, 19 0,
Is dfferent from the character of the busness engaged n durng one or more
ta abe years of the base perod, the ta payer s permtted to estabsh what
ts average base perod net ncome woud have been f the character of the
busness had been the same durng each of the ta abe years of such base perod.
The dfferences whch consttute a change n the character of the busness are
set forth n the b.
Ths genera reef provson Is fet by your commttee to be necessary In
order to protect the unantcpated cases not covered by the specfc reef pro-
vsons covered by e stng aw and the other provsons of ths b. To be
effectve, the provson must be eastc and as fe be as admnstratve demands
w aow.
Proper safeguards, however, are taken to prevent abuse. For e ampe, the
burden s upon the ta payer to estabsh the abnormaty of Its e perence
durng the base perod. In addton, reef s not granted n stuatons brought
on by (o) hgh prces of matera, abor, capta, or any other agent of pro-
ducton, (6) ow seng prce of the product of the ta payer, or (o) ow
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552
physca voume of saes due to ow demand for the ta payer s product Further-
more, reef under ths provson s dened uness the e cess-profts ta other-
wse payabe e ceeds 6 per cent of the ta payer s norma-ta net ncome for
the year and uness the reef afforded by ths secton woud dmnsh the
e cess-profts ta otherwse payabe by more than 10 per cent.
The ta payer must frst compute and pay hs ta wthout regard to ths
reef provson fnd then must petton the Commssoner for reef by way
of cam for refund.
Your commttee fee that so safeguarded and restrcted ths reef provson,
though broad and genera n nature, w satsfactory aevate hardshps
due to abnorma condtons n the base perod, and at the same tme prevent
abuses.
6. Under Suppement of e stng aw, corporatons resutng from certan
ta -free e changes or reorganzatons durng or after the base perod are
permtted the use of ther predecessor s earnng e perence n the computaton
of ther e cess profts credt based on ncome. The b e tends ths prvege
to corporatons growng out of partnershps or soe propretorshps n ta -free
e changes durng ths same perod. The resutng corporaton woud thus
be aowed to use the earnngs hstory of the predecessor partnershp or soe
propretorshp, after frst convertng such earnngs to a corporate bass.
7. Under secton 10 of the b, a ta payer n computng ts e cess-profts
credt may eect wthn s months after the date prescrbed by aw for
fng ts frst e cess-profts return, to charge to capta account, so much
of e pendtures deducted n the base perod for advertsng or the promoton
of good w, as under rues and reguatons prescrbed by the Commssoner
may be regarded as capta nvestments. Ths w beneft the ta payer,
whether t eects the ncome credt or the nvested capta credt n computng
ts e cess-profts ta . Ta payers usng the ncome credt w have ther base
perod ncome ncreased by the amount of the deducton dsnowed. Ta -
payers usng the nvested capta credt w have ther nvested capta n-
creased by reason of a restoraton of such e pendtures to ther earnngs and
profts account. ta payer who eects under ths secton must captaze
a such e pendtures not ony for the base perod years but aso for ta abe
years subsequent to the base perod. Snce the deductons In such cases are
retroactvey dsaowed, the ta payer Is requred to pay any addtona ncome
ta , pus nterest thereon, whch s due by reason of the dsaowance of the
deducton.
D T IL D DISCUSSION OF T PRO ISIONS OF I ILL.
Secton 1. Tte of the .
Ths secton merey sets out the tte of the b, provdng that It may be
cted as the cess Profts Ta mendments of 19 1.
Secton 2. cess-Profts Creot Carry-Over.
Ths amendment removes the restrcton of the carry-over prvege to cor-
poratons wth norma-ta net ncomes of not more than 25,000, makng t
appcabe to a corporatons, and provdes for a 2-year carry-over nstead of
a 1-year carry-over.
Secton 3. knorma Deductons n the ase Perod.
To ascertan the e cess-profts credt based on ncome, t s necessary to
determne the e cess-profts net ncome for the ta abe years n the base perod.
For the purposes of computng the e cess-profts net ncome for such years,
secton 711(b) (1) of the present aw provdes for ad|ustments to the norma-ta
or speca-cass net Income, wth respect to a number of Rpectc tems of both
Income and deductons. In addton to the ad|ustments for the deductons spec-
fed by the present aw. the amendments made by ths secton provde that
any deducton w be dsaowed for the base perod f It was of a cass
abnorma for the ta payer. If such deducton was of a cass norma for the
ta payer, then to the e tent that It e ceeds 125 per cent of the average amount
of the deductons of such cass for the four prevous ta abe years, such e cess
w be dsaowed.
The 125 per cent rue, whch, In the Interests of certanty, s a substtute for
the grossy dsproportonate test In e stng aw, s aso made appcabe to
subsecton ( ) (od subsecton (G)), ad|ustng deductons for the payment of
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553
Msc.
cams, awards, udgments, and decrees aganst the ta payer, and to subsecton
(I) (od subsecton ( )), ad|ustng deductons attrbutabe to ntangbe dr-
ng and deveopment costs wth respect to o and gas wes or mnes.
New subsecton ( ) permts the ad|ustments provded n new subsectons
( ) , (I), and ( ) to be made aso where the ta payer wns not n e stence
for four prevous ta abe years. In such case t w use such prevous ta abe
years durng whch t was n e stence, pus the succeedng ta abe years whch
began before the begnnng of ts second ta abe year sub|ect to tbe e cess-
profts ta , but n no case to aggregate more than four ta abe years. For
e ampe, Corporaton came Into e stence on uy 1, 1938. For the purpose
of measurng abnormates or e cesses of deductons for the ta abe year begn-
nng uy 1, 1938, t may use the ta abe years begnnng uy 1, 1939, and
uy 1, 19 0. Snce the ta abe year begnnng uy 1, 19 1, woud be the
ta payer s second ta abe year sub|ect to the e cess-profts ta , that year may
not be used. Ths subsecton aso restrcts the benefts of new subsectons ( ),
(I) , and ( ) by pacng upon the ta payer the burden of estabshng that the
abnormates or e cesses n the deductons treated by those subsectons are not
the consequences of an ncreased gross ncome or a decrease n the sze of other
deductons n the base perod or of changes In the type, manner of operaton,
sze, or condton of the busness conducted by the ta payer.
Nor w deductons of any cass be dsaowed for any ta abe year uness
they e ceed the amount by whch the deductons of the same cass for such
year e ceed the deductons of such cass for the ta abe year for whch the
e cess-profts ta s t eng computed. For e ampe, for the ta abe year In
the base perod, 1938, a corporaton had a deducton of 200,000, athough Its
average deducton of the same cass for a of the years n the test perod
were ony 100,000. If In 19 0 t had deductons of that cass totang 100,000,
for the purpose of determnng Its average earnngs credt to be used n com-
putng Its e cess-profts ta for 19 0. 75,000 of the deducton In 1938 woud
be dsaowed, thereby Increasng the e cess-profts credt. Ths woud be
true snce to the e tent that the deductons of ths cass n 1038 e ceed 125
per cent of the average deductons of the same cass durng the test perod,
they are dsaowed. If n 10 1, however, ths ta payer had deductons of
ths cass totang 150,000, ony 50,000 of the 200,000 for 19.38 woud be
dsaowed In determnng the average-earnngs credt for use aganst the
e cess-profts net ncome for 10 1.
New secton (G) Is od subsecton (I) rearranged for convenence.
Secton . Computaton of vkrage ase Perod Net Income.
The amendments made by ths secton are desgned for the reef of cor-
poratons that e perenced rapd growth durng the base perod. In determn-
ng the e cess profts credt based on ncome the present aw requres the use
of the average earnng e perence of the corporaton durng the years n the
base perod. Trends of growth durng ths perod are gven no weght. Thus,
corporatons whch have materay e panded n the base perod and have for
the ast year n such perod a busness capacty and an ncome much arger
than that for the frst year, are restrcted under e stng aw to Ue use of a
eve average of such years. The nequtes of ths treatment may be us-
trated by a comparson of two corporatons, both of whch have average base
perod earnngs of 250,000 and, under the present aw, the same credt based on
ncome. One of these corporatons has shown substanta growth durng these
base perod years whe the other has mantaned a constant eve.
Tb year.
cess profts net
ncome.
Corpora-
ton .
Corpora-
ton .
1936
250,000
250.000
250,000
250.000
100.000
200.000
300,000
00,000
1937
1939
1,000,000
250,000
1,000.000
MO, 000
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65
To gve these two corporatons the same e cess-profta credt based on Income
as does the e stng aw, operates nequtaby n the case of Corporaton ,
whose earnngs have steady ncreased durng the base perod. credt of
250,000 does not propery refect ts earnng power as of the tme the e cess-
profts ta became appcabe.
Secton of the b provdes an optona method whereby the factor of
growth w be taken nto account n ascertanng the base perod average.
The method provded for by ths secton s operatve ony where the earnngs
for the second haf of the base perod are n e cess of the earnngs for the
frst haf of such perod. For ths purpose, the base perod s dvded nto
haves, each of an equa number of months. The aggregate of the e cess-
profts net ncome for each haf Is frst determned. The e cess of the aggregate
for the second haf over the aggregate for the frst haf s then ascertaned
and dvded by 2. The amount so found Is then added to the e cess-profts net
Income for the second haf and the sum resutng from such addton s dvded
by the number of months In the second haf and mutped by 12. The re-
sutng fgure w be the average base perod net ncome (95 per cent of whch
Is to be used In ascertanng the credt), e cept that the average base perod
net ncome so computed can not e ceed the hghest e cess-profts net ncome
for any ta abe year In the base perod.
n e ampe of the operaton of ths secton s as foows: Suppose a ta payer
reportng on the caendar-year bass has the foowng amounts of e cess-
profts net ncome for the base perod years: 1936, 100,000; 1937, 200,000;
1938, 300,000; and 1939, 00,000. Under the present provsons ts average
base perod net ncome woud be 250,000. Under the proposed amendment
Its average base perod ncome woud be computed as foows:
Sum of e cess-profts net ncome for second haf of base perod 700, 000
Sum of e cess-profts net Income for frst haf 300,000
Dfference . 00, 000
Dfference dvded by 2 200,000
Second haf e cess-profts net Income 700,000
Tota of ast two amounts 900,000
Tota paced upon an annua bass (dvded by number of months n
second haf of base perod, 2 , and mutped by 12) 50,000
ghest e cess-profts net Income for any ta abe year 00,000
verage base perod net ncome 00, 000
Ths method n the case of growng corporatons w thus provde a credt
whch s cosey reated to the earnngs of the second haf of the base perod,
bo that the factor of growth Is thus taken Into account n the computaton
of the credt.
The 1st of une, 19 0, marks generay the begnnng of the Industra e -
panson under the natona defense program. It was because of ths that the
amortzaton aowance n the Second Revenue ct of 19 0 was confned to
constructon and acquston after une 10, 19 0. Corporatons whose ast
ta abe years n the base perod e tend beyond May 31, 19 0, may have greaty
e panded ther factes of producton and, consequenty, ther ncome after
that date. In gvng effect to the factor of growth durng the base perod,
equtabe demands do not ndcate that growth after May 31, 19 0, shoud not
be taken nto account.
For ths reason, secton 713(f)(7), as set out In secton of the b, mts
the benefts to be accorded to the growth factor to ncreases occurrng pror
to une 1, 19 0. In order to acheve ths resut In the determnaton of the
growth factor, the e cess-profts net ncome for any ta abe year n the base
perod endng after May 31, 19 0, Is reduced by the rato whch the number of
months In such year after May 31, 19 0, bears to the entre number of months
In such year. To such Income so reduced s then added an amount whch
bears the same rato to the e cess-profts net ncome of the precedng year as
the number of months after May 31, 19 0, bears to the number of months In
such precedng ta abe year.
For e ampe, a corporaton accounts on the bass of fsca years begnnng
October 1 and endng September 30. It had an e cess-profts net ncome of
500,000 for the year endng September 30, 1939, and 600,000 for the year
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Msc.
endng September 30, 19 0. oth of the e ta ube years are n the base perod
but four mouths of the fsca year 19 0 are after May 31, 19 0. s apped
to ths corporaton, ths provson woud operate as foows:
Ta abe year.
Perod.
Number
of
ccsv
profts
net n-
come.
egnnng

1|. s n
Oct. 1,1938
Sept. 30,1939
12
00.000
600.000
10 0
/Oct. 1,1939
Uune 1.19 0
May 31.19 0
ent. 30.19 0
8

Under subparagraph ( ) of secton 713 (f) (7) the e cess profts net ncome for 19 0 s reduced
by four-twefths or one-thrd of 600.000, equas
200.000
Tota.
Under subparagraph ( ) ths sum s ncreased by four-twefths of the e cess profts net Income
for 1938 or one-thrd of 00,000, equas
Tota.
00,000
133.333
533,333
Thus, for the purposes of ths method of computng the e cess profts credt,
533,333 woud become the e cess profts net ncome for 19 0 u eu of 600,000.
the actua fgure for that year.
If, n the above e ampe, the number of months In the precedng ta abe
year had been ess than the number of months n the fsca year 19 0 after
May 31, 19 0, then recourse must be had to the second precedng ta abe
year to fnd the ncome to be attrbuted to the e cess of such months. For
e ampe, a corporaton has for ts ast three ta abe years n the base perod
the foowng ta abe perods and e cess profts net ncomes:
Ta abe years.
Number
of months.
cess
profts net
ncome.
annng-
ndng-
uy 1, 1938
12
1
12
00,000
75,000
600,000
uy 1,1939
Sept. 30, 1939
Sept. 30,19 0
Instead of the treatment set out In the prevous e ampe, subparagraphs ( )
and (C) prescrbe the foowng:
Ta abe year .
1939, frst....
IU39, second.
19 0
s In the prevous e ampe,
19 0 by four-twefths or one-th
Perod.
egnnng-
uy
uy
1.1938
1,1939
/Oct. 1, 1939 May 31, 19 0 I 8
Uune 1,19 0 I Sept. 30,19 0 I
h ( ) woud reduce the e cess profts net ncome for
,000 equas
ndng-
Number
of
months.
une 30.1939
Sept. 30,1939
Tota
Under subparagraph ( ) there woud be added to the sum so obtaned the entre e cess profts
net ncome for the three months consttutng the second 1939 fsca year
For the one month st not taken nto account, subparagraph C) has recourse to the frst 1939
fsca year and attrbutes to such mouth one-twefth of 00,000 equas ,
Tota.
cess
profts net
ncome
).t0
75,000
600,000
200,000
00.000
75,000
33,333
508,333
Thus, for the purpose of the computaton under subsecton (f), the corporaton
woud have an e cess profts net Income for ts fsca year 19 0, the ast year
In Its base perod, of 508,333 nstead of the actua amount of 600,000.
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556
Provson s made n the amendment for the manner of computaton where
the ta payer, because of changes n ts accountng perod or for other reasons,
has more or ess than four ta abe years, and where part of one ta abe year
s n the frst haf of the base perod and the other part s n the second haf.
To Iustrate ths dvson of a ta abe year yng party In the frst haf and
party n the second, the foowng e ampe s gven:
Years Id the base perod-
Number
of
cess
profts, net
ncome.
egnnng
ndng
months.
Sept. 1,1936
ug. 31, 1937
12
30,000
20,000
60,000
Sept. 1,1937
Dec. 31,1937

an. 1,1938
Dec. 31,1938
12
an. 1,1939
Dec. 31,1939.
12
100,000
Tota
0
210,000
rmsT LF.
The ta abe year begnnng Sept. 1,1936, and endng ug. 31, 1937
12

30,000
20,000
20,000
The ta abe year begnnng Sept. 1,1937, and endng Deo. 31,1937
One-thrd of the ta abe year begnnng an. 1,1938, and endng Deo. 31, 1938
Tota
20
70,000
SICOND 7.
Two-thrds of the ta abe year begnnng an. 1,1938, and endng Dec. 31,1938-.

0.000
100,000
Tota _
20
1 0,000
In makng the computatons under ths aternatve a defct In e cess-profts
net ncome (or n the case of more than one defct, the greatest defct) s not
counted as zero as In the case of the computaton on the straght average bass.
Secton 5. bnobhat|tes n Income n Ta abe Perod.
Secton 721 of the present aw provdes reef wth respect to certan abnor-
mates n ncome n the ta abe perod. These abnormates, s In number,
are specfcay descrbed. If abnorma Income fang wthn any one of these
s descrbed casses s receved by the ta payer t s provded that such ncome
shoud be aocated to the ta abe years to whch t s attrbutabe and the
ta for the current year may not e ceed the ta for that year wthout the n-
cuson of the portons of the tem attrbutabe to pror years pus the ncreases
n ta that woud have resuted n such pror years from the addton to
gross ncome of the portons of the tem attrbutabe to those years. It s be-
eved advsabe to e tend the prncpe of ths secton to any abnorma tem of
ncome. s the types of abnorma ncome that may occur can not be predcted
n advance, adequate reef can ony be granted by thus e tendng the scope of
ths secton.
The test of whether an tem Is abnorma Is carfed to provde e pressy
that f the tem Incudbe n the gross ncome of the ta abe year s n e cess
of 125 per cent of the average amount of the gross Income of the same cass
for the four prevous years t sha be consdered abnorma. If the ta payer
was not n e stence for the four prevous ta abe years, the test perod s
the perod durng whch t was n e stence. n tem w aso be consdered
abnorma f t s of a cass whch the ta payer normay does not receve.
The mere fact that an tem ncudbe n the gross ncome of the ta payer s
abnorma, or s n e cess of 125 per cent of the average amount of the gross
ncome of the same cass for the test perod, does not resut n the e cuson
of such tem from e cess-profts net ncome. It s necessary that the tem he
found attrbutabe to other ta abe years. Consequenty, f an ncrease n
busness renders an tem of ncome n e cess of 125 per cent of the ncome
for the test perod, the ncrease n busness w not resut n such ncreased
ncome beng e cuded from e cess-profts net Income.
It s provded further that f an tem of gross ncome s found to be abnorma
such tem sha be reduced by 125 per cent of the average amount of the gross
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557
Msc.
Income of the same cass for the four or ess prevous ta abe years consttutng
the test perod.
Such abnorma tem s further reduced by a proportonate part of the drect
costs or e penses attrbutabe thereto. The tem so reduced s then aocated to
the prevous or future ta abe years to whch t s attrbutabe. The computaton of
the ta foows the method presenty provded for n secton 721, e cept that a
mtaton Is provded on the amount of ta that may be Incurred where the tem
Is attrbutabe In whoe or In part to future years. Under ths mtaton the
ta on Income attrbutabe to future years n no case can e ceed the ta that
woud be payabe f the entre ncome were sub|ect to ta n the year of
recept.
Secton 6. d|ustment of bnorma ase Peeod Net Income.
Secton 722 of the b s desgned to afford reef In the case of certan stu-
atons not covered by other sectons of the b. The reef s confned to the
ad|ustment of the abnorma base perod net ncome of a ta payer eectng the
average earnngs credt, and appes ony In the ense of a ta payer whose frst
e cess-profts ta ta abe year begns n 19-10.
In order to obtan any beneft under ths secton, the ta payer must meet one
of the foowng tests :
(1) The character of ts busness rs of anuary 1, 19 0, must have been dfferent
from the character of the busness engaged In durng one or more of the
ta abe years n ts base perod, or
(2) Norma producton, output, or operaton n one or more of the tn abe
years n the base perod must have been nterrupted or dmnshed because of
events abnorma n the case of the ta payer.
C NG IN C R CT R OF USIN SS.
The character of the busness engaged n by the ta payer as of anuary 1,
19 0, s consdered dfferent from the character of the busness engaged n durng
one or more of the ta abe years n Its base perod ony f:
(1) There s a dfference n the products or servces furnshed. For e ampe,
f a corporaton n one year of the base perod was engaged n both the rado
broadcastng and department store busness and on anuary 1, 19 0, was engaged
ony n the rado broadcastng busness, the department store busneas havng been
dscontnued, the corporaton s deemed to have changed the character of ts
busness. The same s true where a corporaton was engaged n one of the base
perod years n both the whoesae and reta dry goods busness and on anuary
1, 19 0, was engaged ony n the reta dry goods busness.
(2) There s a dfference n the capacty for producton or operaton. n
Iustraton of such a dfference woud be where the corporaton has enarged
Its pant or Increased ts capta.
(3) There s a dfference n the rato of nonborrowed capta to tota capta.
corporaton whch durng the base perod was operatng argey on borrowed
capta but as of anuary 1, 19 0, was operatng argey on equty capta s
deemed to have such a dfference.
( ) ta payer was n e stence durng ony part of the base perod. n
e ampe s where a corporaton n 1938 reorganzed nto two or more corporatons.
The new corporatons woud have been In e stence for ony a part of the base
perod.
(5) The ta payer acqured before anuary 1, 19 0, a or a part of the assets
of a compettor wth the resut that the competton of such compettor was
emnated or dmnshed. ssume that two newspapers were operatng at a oss
or wth very tte ncome durng a or part of the base perod. Pror to
anuary 1, 19 0, the frst newspaper purchased the franchses or other assets
of the second newspaper and as a resut of ts transacton the condton of the
survvng paper was much more promsng. dfference n the character of the
busness of the ta payer as occurred.
avng estabshed that the character of ts busness as of anuary 1, 19 0,
Is dfferent from the character of the busness engaged n durng one or more
of the ta abe years n ts base perod, the ta payer s permtted to estabsh
what Its average base perod net Income woud have been f the character of ts
busness had been the same durng each of the ta abe years of such base perod.
In constructng ts average base perod net ncome, hgh prces of materas, abor,
capta, or any other agent of producton, ow seng prce of the product, a
ow physca voume of saes owng to ow demand for suct product, or for the
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558
output of the ta payer durng the base perod woud not be consdered as makng
the net ncome abnorma.
Moreover, the ta payer In constructng Its average base perod net Income
woud be requred to emnate that part of the Items of gross ncome whch were
abnormay arge or the deductons whch were abnormay sma. Ths net
Income woud aso have to be constructed as f the base perod norma producton,
output, or operaton had not been Interrupted or dmnshed because of the occur-
rence of events abnorma n the case of such ta payer. Such abnorma events
mght ncude a food, a strke, or other events hamperng producton, output, or
operaton.
The amount of the average base perod net ncome so estabshed, f t Is
greater than ts actua average base perod net Income, w be consdered ts
average base perod net ncome for the purposes of ts e cess-profts credt. In
no case may the ta payer s average base perod net ncome, as estabshed,
e ceed the e cess-profts net Income estabshed for the ast ta abe year In
such perod.
ssume, for e ampe, that a newspaper corporaton, whch had a fsca year
endng March 31, 19 0, had acqured the franchses of a rva newspaper n
December, 1930. Pror to that tme, both papers had operated at a oss or a
sma proft. fter such acquston, the survvng newspaper showed a much
arger proft for the remander of ts fsca year endng March 31, 10 0. Under
ths secton, such a newspaper, by estabshng what t woud have earned n
the base perod If the character of Its busness had been the same throughout
Its base perod, w be abe to secure substanta reef. Ths reef w, how-
ever, be mted to the amount of ts e cess-profts net ncome estabshed for
the ast year of Its base perod. Thus, f the corporaton was abe to estabsh
that f the rva newspaper had been acqured as of pr 1, 1039, t woud
have earned for the fu fsca year 19 0 an amount whch woud make ts
e cess-profts net Income for that year 300,000, ths woud be the hghest
amount It coud substtute for ts average base perod net Income.
INT RRUPTION OR DIMINUTION OF NORM L PRODUCTION OR OP R TION IN T S
P RIOD.
ta payer may secure reef under ths secton f ts norma producton,
output, or operaton was nterrupted or dmnshed because of events abnorma
n the case of the ta payer. s n the case of ta payers under the frst cate-
gory, hgh prces of materas, abor, capta, or any other agent of producton,
ow seng prce of the product of the ta payer, or ow physca voume of
saes owng to ow demand for such product or for the output of the ta payer
are not consdered as abnorma. common e ampe of such an abnormaty
s where the busness of the ta payer has been nterrupted or dmnshed due
to a fre, food, or strke. For e ampe, f fre n 1935 had destroyed a ta payer s
pant so that the ta payer s norma producton n 1936 was dmnshed, the ta -
payer woud be permtted to estabsh what ts norma ncome woud have been
f norma producton had e sted n 1936.
C NG OF C R CT R OF USIN SS ND INT RRUPTION OF NORM L PRODUCTION.
ta payer wth both a change n the character of busness and an occurrence
of an abnorma event Interruptng ts norma producton, output, or operaton
n the base perod s sub|ect to the mtaton that ts average base perod net
Income under ths secton can not e ceed the e cess-profts net ncome estab-
shed for the ast ta abe year of such base perod.
LIMIT TION OF MOUNT OF R LI F.
In order to make ths provson admnstratvey workabe, It s provded
that t sha not be operatve uness the e cess-profts ta computed wthout
reference to ths secton Is at east 6 per cent of the ta payer s norma-ta
net ncome for such year, and uness the appcaton of ths reef provson
woud reduce the e cess-profts ta by at east 10 per cent thereof. s a
necessary compement to these mtatons, t s aso provded that any reef
obtnned under ths secton sha not reduce the e cess-profts ta beow 6
per cent of the ta payer s norma-ta net ncome for the ta abe year, and
that the ta computed after the appcaton of ths reef provson sha be
Increased by an amount equa to 10 per cent of the dfference between such
ta and the ta that woud have been payabe wthout the beneft of ths secton.
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559
Msc.
Your commttee fees that these mtatons are necessary to a proper admns-
traton of ths reef provson. The generaty of the reef provded requres
that the ureau of Interna Revenue shoud not be oaded wth so many
pettons for reef as to make t mpossbe for t to e amne and pass upon
such requests wth the requste e pedton and care. If e perence shoud
demonstrate that these mtatons are too hgh, consderaton w be gven
to ther reducton.
DMINISTR TI PROC DUR .
It s deemed advsabe n the nterests of good admnstraton, In vew of
the nature of the probem presented by secton 722, that the ta payer shoud
not be permtted to appy the secton In the computaton of the e cess-profts
ta abty shown upon ts return and that the ta payer shoud be requred
to conform to reasonabe restrctons wth respect to the tme wthn whch t
may make appcaton for the benefts of the secton. ccordngy, under the
provsons of subsecton (d) a ta payer s not permtted to cam the benefts
of secton 722 n computng Its ta upon the return. ta payer, n order to
obtan the benefts of secton 722, must make an appcaton to the Comms-
soner of Interna Revenue under reguatons to be prescrbed by the Com-
mssoner wth the approva of the Secretary of the Treasury. Generay, ths
appcaton must be made wthn s months from the date prescrbed by aw
for the fng of the return. The tme prescrbed by aw for fng the return
ncudes the perod of any e tenson of tme for fng the return granted by the
Commssoner. If the appcaton s not made wthn such perod, further
opportuntes In the foowng stuatons are afforded the ta payer to secure
the benefts of secton 722. These stuatons are as foows:
(1) Under estabshed practce and wth a vew to dsposton of ta cases wth-
out tgaton, the Commssoner ordnary ssues what Is termed a premnary
notce of ta abty so as to afford the ta payer an opportunty of a hearng
before the forma notce of defcency s maed under secton 272(a)(1) from
whch appea es ony to the oard. Where such premnary notce s Issued
to the ta payer, the atter s gven a perod of 90 days from the date of such notce
n whch to make appcaton to the Commssoner for the benefts of secton 722.
If n such case a forma notce of defcency s not Issued unt after the e praton
of such 90-day perod and the ta payer does not ava Itsef of the opportunty
to make such appcaton wthn such perod, the ta payer can not thereafter
cam the benefts of the secton.
(2) Owng to the runnng of the statute of mtatons aganst the makng of
assessments, the Commssoner may fnd t necessary (a) to ma a forma notce
of defcency wthout havng Issued a premnary notce of the ta or (6) havng
Issued a premnary notce, to ma a forma notce of defcency pror to the
termnaton of 90 days. In ether (a) or (6) the ta payer may cam the benefts
of secton 722 n ts petton to the oard or by means of an amended petton
conformabe to the rues of the oard.
In cases under (1) or (2), the benefts of the secton sha not reduce the ta
under Chapter 2 by an amount In e cess of the defcency determned under that
subchapter wthout the appcaton of secton 722.
If for any ta abe year the average base perod net Income has been determned
under secton 722, the Commssoner Is authorzed by reguatons approved by the
Secretary to prescrbe the e tent to whch the requrement of subsecton (d), wth
respect to fng appcaton for the benefts of secton 722, may be waved for a
subsequent ta abe year.
Secton 7. Consodated Returns of Insurance Companes Other Than Lfe
or Mutua.
Secton 730 of the present aw deang wth consodated returns under the
e cess-profts ta does not permt an nsurance company to |on n a consodated
return wth a nonnsurance company. Ths restrcton was nserted because of
the speca manner n whch the ncome of nsurance compnnes s computed under
the ncome ta aws. It s beeved, however, that the dfferences of computaton
n the case of an nsurance company other than fe or mutua are not so sgnfcant
as to prevent such a company from fng a consodated return wth an ordnary
corporaton wth whch t s affated. Consequenty, ths secton amends secton
730 to permt such nsurance companes, . e., those sub|ect to ta aton under
secton 20 , to |on n consodated returns wth ordnnry corporatons.
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560
Secton 8. Incorporaton of Partnershp or Soe Propretorshp.
Under present provsons a corporaton formed as a resut of the Incorporaton
of a partnershp or soe propretorshp may not use the earnngs e perenced
by the atter n determnng ts e cess-profts credt based upon Income. It
s beeved that ths restrcton operates nequtaby wth respect to such cor-
poratons. ccordngy, ths secton amends the present provsons of the
e cess-profts ta to permt the earnngs of the predecessor partnershp or
propretorshp to be refected In the base perod credt of the resutng corpo-
raton n those nstances n whch the assets of the partnershp or propretor-
shp are transferred to the corporaton n a ta -free e change. The amend-
ments n queston are made to Suppement of the e cess-profts ta prov-
sons, whch deas wth a comparabe stuaton where the component ta payer
was a corporaton. In these stuatons the computatons requred by Sup-
pement wth respect to the ncome of the partnershp or the propretorshp
sha be made as f such partnershp or propretorshp were a corporaton, vz,
the deducton on account of ncome ta es sha be computed n accordance wth
the ncome ta es appcabe to corporatons, a deducton for saares sha be
aowed, etc.
Secton 9. Revew of bnormates by oard of Ta ppeas.
Secton 9 of the b (addng secton 732 to the cess Profts Ta ct of
19 0) e tends to the oard e cusve ursdcton to revew the Commssoner s
decson upon any queston the determnaton of whch s necessary soey by
reason of secton 711(b)(1)( ), (I), ( ), or ( ), secton 721 or 722. For
e ampe, an tem of ncome of 100,000, the amount of whch s not In dspute,
s ncudbe n gross ncome for 19 0 and nvoves a queston concededy arsng
under secton 721(a)(2)( ). The Commssoner determnes that the tem
s attrbutabe to 1939 and 19 0 n the respectve sums of 25,000 and 75,000.
Such determnaton s made upon an ssue arsng soey under secton 721 and,
f the ta payer contests such aocaton, the determnaton of the Commssoner
n such case s revewabe ony by the oard. If, however, the Commssoner
determnes, for e ampe, the amount of ncome derved by a ta payer from a
transacton fang wthn secton 721(a)(2)( ), reatng to amounts Incuded
In gross ncome for the ta abe year by reason of the termnaton of a ease
of rea property, and the amount so determned s contested by the ta payer,
the queston as to amount of such ncome s not one arsng soey by reason
of the abnormaty provsons but ndependenty of them and hence revew of the
determnaton as to the amount n such a case s not confned to the oard
Lkewse, revew s not confned to the oard f, for e ampe, the Commssoner
determnes that the ta payer reazed n 19 0 Income of a character whch, If
reazed n that year, woud fa wthn secton 721(a)(2)( ) but whch the
ta payer contends was reazed n 1939. In such case the queston whether
ncome was so reazed In 19 0 may be revewed by the courts upon appea from
the decson of the oard. ssumng In such case that It Is utmatey hed that
the ncome was reazed n 19 0, a dspute as to the resutng queston of aoca-
ton as between years of such tem may not be carred beyond the oard.
Under e stng aw, uness a defcency has been determned by the Comms-
soner, a ta payer has no rght of appea to the oard (secton 272(a) (1),
I. R. C.). Thus, for e ampe, f a refund cam were fed by a ta payer and the
Commssoner dsaowed the cam n whoe or n part but dd not determne
defcency, no rght of revew of the Commssoner s acton by the oard woud be
present. Inasmuch as the ta payer s rght to reef under certan of the
reef provsons provded n ths b may ony be rased by a cam for refund,
t s necessary that a procedure be provded whereby the oard may obtan
|ursdcton to revew a decson by the Commssoner dsaowng such cams.
ccordngy, secton 732 (added to the cess Profts Ta ct of 19 0 by sec-
ton 9 of the b) provdes that the ta payer may fe a petton wth the oard
of Ta ppeas wthn 90 days after notce of such dsaowance s maed for
redetermnaton of the e cess-profts ta . If such petton s fed such notce
of dsaowance s deemed to consttute a notce of defcency for the purposes
of assessment and coecton of any defcences and the credt or refund of
overpayments (ncudng the suspenson of the statute of mtatons wth respect
thereto). If such appea Is taken, then a pertnent ssues bearng upon the ta
abty under Chapter 2 may be rased by the ta payer and revewed by the
oard. If the oard does not fnd an overassessment but fnds a defcency
In such cases, such defcency may be assessed and coected, regardess of any
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561
Msc.
statute of mtatons otherwse appcabe. If a cam for refund nvovng an
Issue of abnormaty Is dsaowed n whoe or n part, and the ta payer does
not wsh to appea to the oard, t st has the rght to sue n the courts upon
any ssue rased n such cam e cept the ssue wth respect to abnormates.
Secton 10. Captazaton of Ceetan pendtures.
Ths secton permts a ta payer, under certan mtatons, to captaze e pend-
tures for advertsng and good w promoton made n the base perod whch the
ta payer had prevousy deducted as an e pense. Such a provson w prevent
hardshp to ta payers who deducted such Items at a tme when the effect of such
deducton on ther e cess-profts credt coud not be foreseen.
Ony e pendtures whch, under rues and reguatons prescrbed by the Com-
mssoner wth the approva of the Secretary, may be determned to be n the
nature of a capta nvestment are aowed to be captazed. It s e pected that
such reguatons w provde a method by whch to dfferentate norma adver-
tsng and good w e pendtures whch may propery be cassfed ony as current
e penses from those e pendtures whch may be consdered to bud up permanent
busness vaues, such as those emboded n trade-marks or trade names, and
whch are n effect a further nvestment In and a permanent asset of the ta -
payer s busness.
If a ta payer makes an eecton under ths secton, ts norma-ta or speca-
cass net ncome for each base perod ta abe year n whch advertsng and
good w e pendtures were deducted sha be recomputed as f that porton of
such e pendtures whch s permtted to be captazed had been captazed n
such ta abe year. ence, the net ncome for each such year w be ncreased
by the amount of the deducton dsaowed, and n the case of a corporaton
eectng the nvested capta credt, the ncrease n net Income w effect an
ncrease In earnngs and profts.
Snce the revenue aws appcabe to each ta abe year are retroactvey
amended by ths secton n order to make the eecton here provded govern the
deductbty of advertsng and good w e pendtures n such pror ta abe
years, the deductons taken are deemed to have been dsaowed, and the ta -
payer must pay the addtona ncome ta whch woud have been due f the
treatment n the pror Income ta ta abe year had been n accordance wth
the eecton provded for n ths secton, pus nterest thereon. Ths prevents
a ta payer from obtanng the benefts of both a deducton and a captazaton
wth respect to the same tem.
If no provson or rue of aw prevents correcton of the effect of dsaowng
6uch deductons, any addtona ncome ta whch woud have been due f
such deductons had been captazed w be coected as a defcency for the
partcuar base perod ta abe year. If, however, correcton of the effect of
such treatment s barred, correcton w be made by means of the ad|ustment
provded under secton 73 .
ta payer eectng under ths secton must captaze a such e pendtures
deducted for base perod ta abe years whch may be regarded as a capta
nvestment. It s further provded that amounts aowed as a deducton on
account of such e pendtures n ta abe years pror to the base perod may not,
under any crcumstances, be captazed.
In order to secure a treatment of e pendtures for advertsng and good w
promoton n ta abe years begnnng after December 31, 1930, unform wth
the treatment accorded smar e pendtures n base perod years, subsecton (b)
provdes that a ta payer whch has eected to captaze e pendtures whch
t has shown to be propery consdered capta nvestments, must captaze for
Income and e cess-profts ta purposes any smar capta e pendtures n
subsequent ta abe years.
Secton 11. d|ustment n Case of Inconsstent Poston.
Secton 11 of the b amends the Interna Revenue Code by the addton of
a new secton desgnated secton 73 . Secton 73 provdes for an equtabe
ad|ustment when a determnaton of the ta abty under Chapter 2 treats
an Item or transacton affectng such ta abty n a manner nconsstent wth
the treatment accorded such tem or transacton n the determnaton of the
ncome ta abty of the ta payer, or a predecessor for a ta abe year or
years begnnng pror to anuary 1, 10 0. d|ustment s authorzed ony f
(1) upon the date of the determnaton under Chapter 2 correcton of the
effect of the nconsstent treatment of the tem or transacton s prevented
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562
(e cept for the provsons of secton 3801) In some one or more of such pror
ta abe years by the operaton of a provson of aw (other than the provsons
of secton 3761 reatng to compromses) or a rue of aw, e. g., statute of
mtatons, cosng agreement. oard decson, or rue of res |udcata, etc., and
(2) the Inconsstent poston adopted n the determnaton s asserted and
mantaned by the party (ether the Commssoner or the ta payer) who woud
be adversey affected by an ad|ustment under ths secton.
fna determnaton s not a prerequste to the appcaton of the secton.
Whenever the ta abty s determned under Chapter 2 and the condtons
prescrbed n subsecton (b) are satsfed, the ad|ustment s made as an es-
senta part of the determnaton of such ta abty. If there are further
proceedngs n the case and the determnaton s overrued, the ad|ustment
fas wth the determnaton. If the determnaton becomes fna, the ad|ust-
ment kewse becomes fna.
No ad|ustment under the secton Is authorzed for any ta abe year uness
correcton under the ordnary procedure appcabe to the assessment and
coecton of defcences or the refund or credt of overpayments, as the case
may be, for such ta abe year s prevented. If, however, the tem or trans-
acton, n respect of whch the nconsstent poston s adopted n the determna-
ton, affected the determnaton of the ta abty n severa of the pror ta -
abe years, the ascertanment of the amount of the ad|ustment w requre a
recompntaton wth respect to each such year as to whch correcton of the
effect of the nconsstent treatment s prevented.
ampe: In December, 193 , Corporaton transferred deprecabe prop-
erty to Corporaton Y n e change for stock of T havng a far market vaue
of 100,000. t the tme of the transfer the property had an ad|usted bass
n the hands of Corporaton of 80,000 and an estmated remanng fe of
20 years. The e change was treated as nonta abe and the gan of 20,000
reazed by the Corporaton was recognzed. For each of the years 1935
to 1939, ncusve, Corporaton Y was aowed deductons for deprecaton n
the amount of ,000, computed on a bass of 80,000, the same bass the prop-
erty had n the hands of the Corporaton. In ts e cess-profts ta return
for the ta abe year 19 0, Corporaton Y camed that the property shoud have
a bass of 100,000 for nvested capta purposes, and aso camed a deducton
of 5,000 for deprecaton for such year. Ths poston was based upon the
contenton that the 193 e change was ta abe and the gan of 20,000 6houd
have been recognzed and added to the bass of the property n the hands of
the Y Corporaton. Tmey cams for refund based upon the aowance of
addtona deductons for deprecaton for the ta abe years 1938 and 1939 were
fed. The statute of mtatons prevents any ad|ustment ether by way of
refund of overpayments or assessment of defcences for the ta abe years
193 to 1937, ncusve. The Commssoner s determnaton of the e cess profts
ta abty for the ta abe year 19 0 adopted the nconsstent poston as-
serted by Corporaton Y and, accordngy, f the computaton under secton
73 (d) dscoses a net ncrease n the ta es prevousy determned for the ta -
abe years for whch correcton Is prevented, an ad|ustment s authorzed
under the provsons of secton 73 . The ascertanment of the amount of the
ad|ustment under subsecton (d) requres a revson of the ta of Corpora-
ton prevousy determned for the year 193 to refect the recognton of gan
n the amount of 20,000, and a revson of the ta of Y Corporaton prevousy
determned for the years 1935, 1936, and 1937 to refect the aowance of an
addtona 1,000 deprecaton deducton for each of those years. If, n any of
the pror ta abe years, the Y Corporaton had been abe to the ta mposed
on persona hodng companes by Tte I of the Revenue cts of 193 , 1936,
or 1938, It woud be necessary to determne the Increase or decrease n such
ta for each such year pus the nterest attrbutabe to each.
ny such ncreases woud be aggregated wth the ncreases n the Tte I
ta es for the pror ta abe years and the decreases kewse woud be aggregated
wth the decreases n the Tte I ta es. The dfference between the aggregate
of the ncreases and the aggregate of the decreases woud then be ascertaned
and the net ncrease so determned woud be the amount of the ad|ustment under
the terms of the above e ampe. If the dfference between the aggregate of
the Increases and the aggregate of the decreases so ascertaned were a net
decrease, then no ad|ustment under ths secton woud be authorzed, snce by
the terms of the e ampe the ta payer had mantaned the Inconsstent poston,
and the secton does not permt ether the ta payer or the Commssoner to
obtan a ta beneft by hs own nconsstency.
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The method of ad|ustment Is prescrbed n subsectons (c) and (d). If the
ad|ustment represents an ncrease n ta , t s added to the ta mposed by
Chapter 2 ; f the ad|ustment represents a decrease n ta , t s subtracted
from the ta mposed by that chapter.
The recomputaton prescrbed n subsecton (d) s merey the ascertanment
of the amount of the ncrease or decrease n each Income ta prevousy de-
termned n each of the pror ta abe years f the tem or transacton n ques-
ton had been treated consstenty wth the treatment accorded such tem or
transacton n the ta abe year for whch the determnaton under Chapter 2
s made. The recomputaton does not admt of revson of any other tems
e cept to the e tent that the treatment of tems taken nto account n ascertan-
ng the ta prevousy determned s affected by the change n the gross or
net ncome. If any such tems are affected, as, for Instance, deductons for
contrbutons, foregn-ta credt, etc., revson shoud be made n conformty
wth such change. If ony one ta abe year s Invoved, the Increase or decrease
n each of the ncome ta es prevousy determned pus nterest thereon, com-
puted as f each such ncrease or decrease were a defcency or an overpayment,
as the case may be, for such ta abe year, sha be ascertaned. The net
ncrease or net decrease n respect of such ta es and nterest for such ta abe
year s the amount of the ad|ustment. If the nconsstent treatment of the
tem or transacton affected more than one of the pror ta abe years, t s
necessary to determne the ncreases or decreases n each of the ta es prevousy
determned for each such year n whch correcton under the ordnary pro-
cedure s prevented. To the ncreases or decreases so ascertaned n each such
ta for each such year there sha be added Interest thereon computed as f
each ncrease or decrease consttuted a defcency or an overpayment, as the
case may be, for such year. The dfference between the sum of the ncreases,
ncudng the nterest computed on such ncreases, and the sum of the decreases,
ncudng the nterest computed on such decreases, sha be ascertaned and the
net ncrease or net decrease so determned s the amount of the ad|ustment
under ths secton.
In computng the ta prevousy determned for any pror ta abe year there
sha be taken nto account any ad|ustment prevousy made under the
provsons of secton 3801.
Whe the amount of the ad|ustment under ths secton Is to be computed
by determnng the dfference whch woud have resuted n the ta prevousy
determned n the pror ta abe years In whch the nconsstent treatment
took pace, such pror ta abe years are brought nto the pcture ony for
the purpose of measurng the amount of the ad|ustment. The amount of the
ad|ustment so ascertaned s to be added to or subtracted from, as the case
may be, the e cess-profts ta for the ta abe year of the determnaton under
Chapter 2 .
In any case where a determnaton of the ta abty under Chapter 2
resuts n the adopton of nconsstent postons wth respect to severa Items,
whether such Inconsstent postons were mantaned by the ta payer or the
Commssoner, or both, an ndependent determnaton under the provsons
of ths secton sha be made n respect of each such tem both for the purpose
of determnng the amount of the ad|ustment and whether such ad|ustment
Is authorzed. The severa ad|ustments authorzed sha be aggregated for
the purpose of determnng the net addton to, or the net reducton n, the
ta mposed by Chapter 2 . If the ad|ustments resut n an aggregate net
ncrease, the ta mposed by Chapter 2 sha n no case be ess than the
amount of such aggregate net ncrease.
If a determnaton under the provsons of Chapter 2 adopts an nconsstent
poston wth respect to an tem and resuts n an ad|ustment under ths
secton, smar treatment of the same tem for subsequent ta abe years under
Chapter 2 s not an nconsstency authorzng further ad|ustment under
ths secton.
Inconsstent treatment wthn the meanng of the secton may reate to
the prncpe or rue of aw apped n determnng the ta abe status of an
Item or transacton or t may reate ony to the amount of the tem whch
s to be taken nto account for ta purposes. The nconsstency s to be
ascertaned by reference to the actua treatment of the Item n the earer
year rather than to what the ta payer or the Commssoner may have urged
at that tme. Moreover, the fact that the nconsstent poston n the ater
year Is based upon an authortatve |udca Interpretaton of the revenue
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5G
aw whch dffers from the accepted Interpretaton of such aw n the earer
year does not remove a case from the scope of the secton.
d|ustments to ncome specfcay authorzed under the provsons of Chapter
2 n computng the e cess-profts net ncome do not occason an ad|ustment
under ths secton, as the secton permts ad|ustment ony where the treatment
n the pror ta abe year was not correct under the aw appcabe to such
year. Ths e cepton does not, however, e tend to the dsaowance of de-
ductons for ta abe years In the base perod pursuant to an eecton under
secton 733 to captaze e pendtures made for advertsng or the promoton
of good w whch were prevousy aowed as deductons. Secton 733 specf-
cay provdes for an ad|ustment under ths secton f correcton of the ta
abty for the ta abe year n whch the deducton was prevousy aowed
Is otherwse prevented.
The term predecessor as used n ths secton means any ta payer, other
than a ta payer sub|ect to an ad|ustment under ths secton, whose ta abty
In a pror ta abe year n respect of a partcuar tem affects the abty of a
ta payer under Chapter 2 wth respect to such tem, and whose ta abty
n such pror ta abe year n respect of such tem woud have been dfferent
If there had been no Inconsstency between the determnaton of the abty of
the ta payer under Chapter 2 and the determnaton of Its own abty for
such pror ta abe year. The term ncudes, among others, a member of an
affated group as defned In secton 730 or a component corporaton wthn the
meanng of secton 7 0(b) (or, f such component corporaton s a partnershp,
the members of such partnershp).
Secton 12. dmssbe ssets or Deaers n Securtes.
Por corporatons usng the nvested capta credt dvdends, e cept dvdends
(actua or constructve) on the stock of foregn persona hodng companes, are
e cuded from the e cess profts net ncome. Lkewse, stock n corporatons, e -
cept stock In a foregn persona hodng company, s made an Inadmssbe
asset by secton 720(a) (1) of the present aw. Corporate stocks hed by deaers,
not as Investments for themseves but for sae to ther customers, are, In reaty,
no dfferent from any other artce hed for sae by a deaer.
Secton 12 of the b amends secton 720(a)(1) of the present aw so as to
aow corporate stocks hed by a deaer for sae to customers to be treated as
admssbe assets. owever, dvdends on stocks so treated are sub|ected to
the e cess-profts ta to the e tent that they e ceed the credt for dvdends
receved provded n secton 26(b) of the Interna Revenue Code. Such stocks
hed by deaers for Investment woud contnue to be treated as Inadmssbe
assets.
Secton 13. ffectve Date.
Ths secton provdes that the amendments made by ths ct sha be effectve
as of the date of enactment of the cess Profts Ta ct of 19 0, whch appes
to ta abe years begnnng after December 31, 1939.
19 1-11-106 9
C SS PROFITS T M NDM NTS OF 19 1.
Senate Report No. 75, Seventy-seventh Congress, Frst Sesson. Caendar No. 78.
February 27 (egsatve day, February 13), 19 1.
Mr. arrson, from the Commttee on Fnance, submtted the foowng report
to accompany . R 3531 :
The Commttee on Fnance, to whom was referred the b ( . R. 3531) to
amend certan provsons of the Interna Revenue Code reatng to the e cess-
profts ta , and for other purposes, havng had the same under consderaton,
report favoraby thereon wth certan amendments and as amended recommend
that the b do pass.
These amendments are as foows:
In eu of secton 13 of the ouse b, four new sectons are added. Under
e stng aw a corporaton entted to use ether the ncome credt or the nvested
capta credt s requred rrevocaby to choose between such credts for each
ta abe year. The amendments adopted by your commttee reeve the ta payer
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565
Msc.
of the hardshp of havng to make such an eecton and provde nstead that
the credt sha be the one resutng n the esser tar.
It Is provded, however, that If a ta payer desres to avod makng the neces-
sary computatons under both credts, t may dscam the appcaton of the
credt whch t does not desre, and thereby reeve tsef of the nfcessfy of
makng the computaton under such dscamed credt.
The amendments made by your commttee retan the prncpe emboded m
secton 13 of the ouse b. Under that prncpe corporatons requred under
e stng aw to compute ther ta under Suppement may, f they so eect,
compute t under such suppement or under Part I as do corporatons not fang
under Suppement .
For convenence, snce no other changes were made In the ouse b, the
report of the Commttee on Ways and Means, , foows n ts entrety.
New sectons 13,1 , 15, 10, added by your commttee are then e paned n deta.
Secton 13 of the ouse b, sottng out the effectve date, becomes secton 17.
The ouse report referred to above ( . Rept. No. 1 8) s prnted In fu
on pages 5o0 to M5 of ths uetn.
Sectons 13, 1 , 15, and 16. owance of Credt.
Under e stng aw a domestc corporaton whch was n e stence before
anuary 1, 19 0, Is requred to eect n ts return between the credt based npon
nvested capta and the credt based upon base perod ncome. The commttee
b reeves the ta payer of the necessty of makng such an eecton and nstead
provdes that the credt sha be an amount computed under ether secton 713
(the credt based upon base perod ncome) or secton 71 (the credt based
upon nvested capta), whchever amount resuts In the esser ta for the
ta abe year for whch the ta s beng computed. s a consequence of the
emnaton of the eecton requrement, the b aso emnates as unnecessary
the provson that f no return s fed, ony the nvested capta method may be
used. smar change s made wth respect to foregn corporatons. Secton
7 1 of Suppement s kewse amended to emnate the requrement of an
eecton.
These sectons requre, n the case of a ta payer whch under secton 712
or secton 7 1 Is entted to have the e cess profts credt computed under secton
713 or secton 71 , wchever resuts In the esser ta under ths subchapter, that
the return sha contan computatons of two tentatve ta es, one wth the
credt computed under secton 713 nnd one wth the credt computed under
secton 71 . The return sha aso contan a Informaton wh h under regua-
tons s prescrbed as necessary for the computatons under each credt
return whch contans ony computatons under one of the credts sha (e cept
n the event of a dscamer as herenafter descrbed) be regarded as no
return.
It s provded, however, that a ta payer who does not desre to make the
necessary computatons n ts return under both credts may stae n ts return
that t dscams the use of whchever credt t does not desre. In that event
the computaton and nformaton based on the credt so dscamed may be
omtted from the return. If such dscamer s made, the credt so dscamed
sha not, for the purposes of the nterna revenue aws (e. g., the computaton
of earnngs and profts, the computaton of the e cess profts credt carry-over,
etc.), be appcabe to the computaton of the ta for such ta abe year wth
respect to whch the dscamer s made.
Secton 15 of the commttee b retans the prncpe of secton 13 of the
ouse b wth respect to Suppement corporatons. Suppement of the
e stng provsons of the e cess-profts ta provdes for a method of computa-
ton of the base perod net ncome In the case of corporatons whch have
e perenced mergers, consodatons, or qudatons. Such mchod under the
present aw s mandatory for such corporatona The b amends secton 7 2
of e stng aw to make such method eectve n the case of corporatons actuay
In e stence pror to anuary 1, 10 0. Such corporatons may compute ther
average base perod net ncome under ether secton 713 or Suppement . The
eecton must be made n the ta payer s return.
S CTION 17. FF CTI D T .
Ths secton provdes that the amendments made by ths ct sha be effectve
as of the date of enactment of the cess Profts Ta ct of 19 0, whch appes
to ta abe years begnnng after December 31, 1939.
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19 1_7_10603
M NDING S CTION 12 OP INT RN L R NU COD Y T NDING
TIM FOR C RTIFIC TION OF N TION L-D F NS F CILITI S ND
CONTR CTS FOR MORTIZ TION PURPOS S.
ouse of Representatves Report No. 11, Seventy-seventh Congress, Frst Sesson.
anuary 2 ,19 1.
Mr. Doughton, from the Commttee on Ways and Means, submtted the faowng
report to accompany . . Res. 80 :
The Commttee on Ways and Means, to whom was referred the resouton
( . . Res. 80) to amend secton 12 of the Interna Revenue Code by e tendng
the tme for certfcaton of natona-defense factes and contracts for amortza-
ton purposes, havng had the same under consderaton, report t back to the
ouse wthout amendment and recommend that the resouton do pass.
Representatves of the War Department, the Navy Department, and the d-
vsory Commsson to the Counc of Natona Defense appeared before your
commttee and urged the speedy enactment of ths egsaton. They ponted out
that n order propery to dscharge ther dutes In ths respect each appcaton
for certfcates, a prerequste to the amortzaton aowance, must be carefuy
Investgated and that these appcatons were beng fed In such numbers as to
make t mpossbe for certfcates to be ssued for a of them before the dead nes
contaned n e stng aw.
The egsaton s purey procedura In character, havng to do ony wth e -
tendng the tme wthn whch effectve certfcaton can be made, and makes
no change n the substantve provsons of e stng aw.
PROC DUR L PRO ISIONS OF ISTING L W.
Factes. The aw now aows rapd ta amortzaton wth respect to factes,
the constructon of whch has been competed, or whch were acqured, after une
10, 19 0; provded, however, that such constructon or acquston s certfed
as necessary In the Interest of natona defense by the dvsory Commsson and
ether the Secretary of War or the Secretary of the Navy. Certfcaton of the
necessty for the factes must be made before constructon s begun or before
the acquston s effected, e cept that certfcates made before February 5 are
effectve for constructon aready begun or acquston aready made. Conse-
quenty, the statute as t presenty stands paces a burden upon the dvsory
Commsson and the War and the Navy Departments to make certfcaton before
February 5 of constructon begun and acqustons aready effected f the ta -
payer makng appcaton for such certfcaton Is to secure ts ta prvege.
Contracts. The aw presenty provdes that contracts between the ta payer
and the Unted States whch remburse the ta payer drecty or ndrecty for
the cost of factes wth respect to whch It Is seekng ths ta prvege must
be certfed as contanng provsons protectng the pubc nterest n the use
and dsposton of the factes. The aw requres that such certfcates sha
be made wthn 90 days after the date of e ecuton of the contract or before Feb-
ruary 6, whchever date s ater. Consequenty, the aw requres that the
dvsory Commsson and the War and Navy Departments certfy before Feb-
ruary 6 the adequacy of the protectve terms n such contract e ecuted before
November 7, 19 0, or ese the ta payer appyng for such a certfcate w have
ost ts opportunty to tak the ta prvege.
The aw paces a smar dead-ne restrcton upon the Issuance of certfcates,
to the effect that a contract does not drecty or Indrecty remburse the ta payer
for the cost of factes. Such contracts must be certfed as to nonremburse-
ment ether wthn 90 days after the date of e ecuton or before February 8, 19 1,
whchever Is ater.
PROPOS D M NDM NT.
Factes. It Is proposed to amend subsecton (f) of secton 12 so that
the dvsory Commsson and the War and Navy Departments may effectvey
certfy the necessty for factes, provded the appcaton for such a certfcate
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567
Msc.
s fed before February 6, 19 1, or wthn 60 days after acquston or the begn-
nng of constructon, whchever Is ater. It s further proposed to provde, how-
ever, that such certfcaton sha not be effectve to support a ta payer s eecton
to take the amortzaton deducton uness the certfcate s ssued before the
e praton of the due date for fng the return for the ta abe year n whch
the ta payer eects to begn the 60-month amortzaton perod or before February
6, 19 1, whchever s ater.
Contracts. It Is proposed to amend subsecton () of secton 12 so as to
provde that the dvsory Commsson and the War and Navy Departments may
effectvey certfy a contract, provded that appcaton for such certfcate s
fed wthn 60 days after the date of e ecuton of the contract or before February
6, 19 1, whchever s ater.
PL N TION OF T M NDM NTS.
Remova of the February 5 and 6 dead nes on fng appcatons for certf-
cates. The amendments wth respect to the change n the dead ne provded
n the present statute proceed on the theory that the tme mtaton shoud be
mposed, not upon certfcaton by the Government agences, but upon appcaton
by the ta payer.
Ths s mperatve n order to Insure thorough and carefu admnstraton of
the certfcaton functons. Under the present aw, the dvsory Commsson and
the War and Navy Departments are presenty faced wth a rush of appcatons
|ust precedng the February 5 dead ne. arge number of appcatons reatng
to constructon aready commenced and acqustons aready made are st beng
fed. If these appcatons are to be thoroughy e amned and the ssues presented
propery resoved, the pressure for the ssuance of certfcates before February 6
shoud be removed.
Moreover, t s beeved that t s unfar to a ta payer to cause t to ose ts
certfcaton because the certfyng agences are unabe to perform adequatey
ther dutes wthn the tme specfed n the statute, a fact over whch the ta payer
has no contro.
For these reasons the amendments requre the ta payer whch has begun con-
structon of, or acqured, any facty for whch t seeks a certfcate to fe ts
appcaton for certfcaton ether before February 6, 19 1, or wthn 60 days
after the date of the begnnng of constructon, or acquston of, such facty,
whchever date s ater. Foowng the same prncpe, appcants for contract
certfcates are requred by the proposed amendments to fe appcatons for such
certfcates wthn 60 days after makng of the contract or before February 6,19 1,
whchever date Is the ater. In ether case the effectveness of the certfcate, f
Issued, w depend upon the date upon whch the appcaton s fed by the ta -
payer and not upon the date on whch the certfcate s made.
It s not cear under the present aw whether a ta payer whch eects n ts
return to take the amortzaton deducton and begn the 60-month perod s
entted to such deducton f the factes whch It desres to amortze have not
been certfed at the tme the return s fed but are certfed some tme after the
e praton of the tme for fng the return. If n such case the ta payer s entted
to begn the amortzaton perod at the tme sgnfed In ts return, the Comms-
soner of Interna Revenue mght be compeed to assert a defcency aganst the
ta payer pendng ssuance of the certfcate of necessty, and the ta payer, after
payng the defcency, mght then be forced to fe a cam for refund after
the certfcate was ssued. In order to reeve the Commssoner of Interna
Revenue of ths admnstratve burden, the proposed amendments contan a pro-
vson makng t cear that the amortzaton deducton w not be aowed for
any ta abe year uness the requred certfcate of necessty has been ssued pror
to the e praton of the due date for fng ts return for such year or before
February 6, 19 1, whchever s ater.
It shoud be noted that presenty the aw estabshes two dead-ne dates,
February 5 for factes certfcates and February 6 for contract certfcates.
Ths dfference resuted from mnor anguage dfferences n the aw. There s
no substantve reason for retanng ths dfference, and n order to avod confuson
the proposed amendments woud estabsh a snge date of February 6, 19 1,
appcabe n a cases.
Need after February 5 for certfcaton of factes after constructon thereof
U begun or aequstUm made The requrement n the present aw that certf-
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568
cates be ssued pror to the begnnng of constructon or the makng of the
acquston has n some nstances threatened deay n the constructon and acqu-
ston of factes vta to natona defense. Ths stuaton has been most fre-
quenty met n cases nvovng acquston of toong and other smar equpment
to meet the demands of future suppy orders. pedtous handng of these
future suppy orders w often requre that the supper pace hs orders for
equpment we n advance of hs actua producton program. t ths eary stage
t s dffcut for the supper to prepare a defnte and specfc appcaton for
a necessty certfcate and equay dffcut for the dvsory Commsson and the
War or Navy Department to determne the proprety of ssung such a certfcate.
It s proposed, therefore, that n such cases the ordery and e pedtous handng
of the certfcaton functons wthout deayng the procurement program w be
greaty advanced by amendng the aw so that such acqustons, n some cases
aso nvovng constructon, can be made and premnary steps taken before the
date on whch ether a certfcate must be made or the rght to a certfcate
forecosed.
It s beeved that the threat of deay from ths cause may be avoded by
removng the requrement that certfcaton must be made before constructon
s begun or acquston Is effected. Instead the amendments merey requre that
appcaton for such certfcaton must be made wthn 60 days after the begnnng
of the constructon or the makng of an acquston.
The proposed amendment has a further advantage n that t w permt the
ta payer to descrbe more defntey than t Is possbe for hm to do under the
present aw factes whch he s proposng to construct or acqure and whch
he avers are necessary for natona defense.
T O CTI FF CT OF T P OPOS D ILL.
Secton of the resouton woud requre that the amendment of secton 12
contaned n the resouton have the same force and effect as f t were provded
n the present aw. y ths means t w be possbe to preserve to the ta payer
hs same prveges wth respect to seectng the year n whch he s to deduct
hs amortzaton as f he had secured hs certfcate n accordance wth the
procedure provded n the present aw.
19 1-7-1060
M NDING S CTION 12 OF INT RN L R NU COD Y T ND-
ING TIM FOR C RTIFIC TION OF N TION L-D F NS F CILITI S
ND CONTR CTS FOR MORTIZ TION PURPOS S.
Senate Report No. 0, Seventy-seventh Congress, Frst Sesson. Caendar No. 6.
anuary 27, 19 1.
Mr. errng, from the Commttee on Fnance, submtted the foowng report
to accompany . . Res. 80 :
The Commttee on Fnance, to whom was referred the |ont resouton ( . .
Res. 80) to amend secton 12 of the Interna Revenue Code by e tendng the
tme for certfcaton of natona-defense factes and contracts for amortzaton
purposes, havng consdered the same, report t favoraby wthout amendment
and recommend that the ont resouton do pass.
The purpose of ouse ont Resouton 80 Is fuy e paned In the report of
the ouse Commttee on Ways and Means accompanyng the |ont resouton,
whch s attached hereto and made a part of ths report
The ouse report referred to, ouse Report No. 11, Seventy-seventh Con-
gress, frst sesson, Is pubshed on pages 566 to 568 of ths uetn.
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19 1-10-10628
INCR SING T D T LIMIT OP TII UNIT D ST T S ND PRO-
IDING FOR F D R L T TION OF FUTUR ISSU S OF O LIG -
TIONS OF T UNIT D ST T S ND ITS INSTRUM NT LITI S.
ouse of Representatves Report No. 20, Seventy-seventh Congress, Frst Sesson.
February S, 10 1.
Mr. Doughton, from the Commttee on Ways and Means, submtted the
foowng report to accompany . R. 2959 :
The Commttee on Ways and Means, to whom was referred the b ( . R.
2959) to ncrease the debt mt of the Unted States, provde for the Federa
ta aton of future ssues of obgatons of the Unted States and ts nstrumen-
tates, and for other purposes, havng consdered the same, report favoraby
thereon wthout amendment and recommend that the b do pass.
The b s desgned (a) to ncrease the pubc debt mt; (6) to gve the
Treasury greater and more fe be contro over savngs bonds as a medum
of fnancng; (c) to substtute a new obgaton caed Treasury savngs cer-
tfcates for the war-savngs certfcates now authorzed by aw; and (d) to
remove a prveges of e empton from Federa ta aton from Federa
obgatons ssued n the future.
N D FO T L GISL TION.
Our contempated natona-defense program has now ncreased unt t
aggregates 28,500,000,000 n appropratons, contract authorzatons, and
recommendatons, accordng to the 19 2 udget. The estmated e pendture
program ncuded n ths udget w resut n combned defcts for the fsca
years 19 1 and 19 2 amountng to more than 15,000,000,000. The baance of
the borrowng authorty of the Treasury Department on anuary 1, 19 1, was
886,000,000 under the genera mtaton and 2,76 ,000,000 under the natona-
defense mtaton contaned n the Frst Revenue ct of 19 0, whch provded
for the ssuance of not more than ,000,000,000 short-term defense obgatons.
These combned baances provde the Treasury wth borrowng authorty suffcent
ony for the ne t four months and, even n that perod, the Treasury Department
woud be greaty restrcted n ts fnancng operatons.
The Secretary of the Treasury appeared before your commttee and testfed
that t woud not be advsabe to undertake the fnancng of the enarged
Datona-defense program through the ssuance of short-term securtes. e
aso deemed t unwse to requre defense securtes to be retred from ear-
marked revenues wthn a specfed perod, as contempated n the Frst Rev-
enue ct of 19 0.
Mr. Morgenthau ponted out that short-term securtes are for the most
part purchased by commerca banks, thereby causng a further ncrease n
deposts. In order to avod, as far as possbe, encouragng such a resut, he
recommended that the Treasury be permtted to ssue obgatons more attrac-
tve to permanent nvestors outsde of the bankng system.
G N R L PL N TION OF T ILL.
The b amends the Second Lberty ond ct, as amended, so as to mt
the face amount of pubc-debt obgatons Issued under the authorty of that
ct to an amount not to e ceed n the aggregate 65,000,000,000 outstandng
at any one tme. It s beeved that ths ncreased mtaton w ampy cover
the Treasury s present antcpated fnancng requrements for the current and
ensung fsca year. The b termnates the authorty to ssue ,000,000,000
of short-term defense obgatons provded n the Frst Revenue ct of 19 0
and certan obsoete authorty to ssue debt obgatons of a character whch
the Treasury does not need and whch, therefore, shoud be emnated from
the statute books. The future borrowng authorty f ed by ths b w
be a-ncusve.
In vew of the enarged fnancng program facng the Treasury Depart-
ment, t s desrabe that It have greater fe bty n the types of securtes
whch may be offered to meet the requrements of varous casses of nvestors.
0 3 1 1 19
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570
Therefore, ths b further amends the Second Lberty ond ct so as to
broaden the authorty under whch Unted States savngs bonds are ssued
and to provde for a new cass of securty to be caed Treasury savngs cer-
tfcates. The statutory mt on the term for whch savngs bonds may be
ssued woud contnue to be 20 years, as at the present, whe a mtaton
of 10 years woud be paced on the Treasury savngs certfcates. It woud
aso provde that both casses of securtes may be ssued ou an Interest-
bearng bass, on a dscount bass, or on a combnaton Interest-bearng and ds-
count bass and that the Secretary of the Treasury may f by reguaton
the amount of savngs bonds and savngs certfcates whch may be hed by any
one person at any one tme.
In addton, the Treasury woud be authorzed to ssue stamps or provde
other means to evdence payments for savngs bonds and savngs certfcates,
and to provde for the e change of savngs certfcates for savngs bonds.
Ths woud permt the Treasury to carry on a program encouragng more
popuar partcpaton n defense fnancng and to offer securtes of a character
whch shoud factate and promote thrft and savngs.
In so far as Federa ta aton of Federa securtes s concerned, the b
removes the ta -e empton prvege by provdng that a obgatons ssued
n the future by the Unted States and ts agences and nstrumentates (e cept
Terrtores, possessons, and the Dstrct of Coumba) sha be sub|ect to
Federa ta es to the same e tent as prvate obgatons.
The b makes no change n e stng aw wth respect to the ta aton of
Federa securtes by the States and ther potca subdvsons nor does It
affect n any way the ta abe status of obgatons of States, muncpates, and
other oca governmenta agences.
It w remove, however, a prveges of e empton from Federa ta aton
not ony from drect obgatons of the Unted States but aso from a obga-
tons ssued by the varous Federa corporatons, nstrumentates, and agences.
Whe the emnaton of the Federa ta -e empton prvege w appy to a
future ssues of Federa obgatons, securtes Issued soey to repace those
ssued pror to the effectve date of the ct whch have been ost or destroyed,
or securtes ssued In dfferent denomnatons n e change for securtes ssued
pror to such effectve date and bearng the same maturty and nterest rate,
w have the same ta -e empton status as the securtes repaced or e changed.
On the other hand, any refundng obgatons ssued subsequent to the effectve
date of the ct woud be fuy sub|ected to Federa ta es under the provsons
of the b.
Your commttee fee that t s partcuary approprate that ths step shoud
be taken n connecton wth the fnancng of the natona-defense program.
shoud be caed upon to share n the enormous task of suppyng the revenue
necessary to fnance ths program. It becomes urgent therefore, from an equ-
tabe pont of vew, that no subscrbers to any gven cass of securtes shoud
receve preferenta treatment. Ths resut s mpossbe f some securtes are
ssued wth ta -e empton prveges whch are worth tte or nothng to the
poorer casses of subscrbers, but whch are worth a great dea to those In the
hgher ncome brackets. Preferenta treatment to ths atter cass s ncom-
patbe wt democratc methods of fnancng the defense program and shoud
be removed.
Your commttee strongy recommend prompt consderaton and acton on
ths mportant egsaton. Two factors partcuary support ths recommenda-
ton: (1) s the Treasury s rapdy approachng the mt of ts borrowng
authorty, t s becomng day more restrcted In the fe bty of ts fnancng
operatons and fe bty s essenta to the successfu operaton of the vast fnan-
ca program necessary to arm and defend the Unted States and guarantee Its
natona securty n the word of to-day; (2) as arge amounts of ong-term
Federa obgatons mature on March o, 19 1, t s mportant that the present
egsaton be enacted before that date.
D T IL D N LYSIS O T ILL.
Secton 1: Ths secton merey gves the b a short tte.
Secton 2: Ths secton amends secton 21 of the Second Lberty ond ct, as
amended, and aso termnates certan authorty to ssue obgatons.
In ts present form secton 21 Is made up of subsectons (a) and (b). Sub-
secton (a) mts to 5,000,000,000 face vaue the amount of bonds, certfcates
of Indebtedness, Treasury bs, and notes Issued under the Second Lberty
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ond ct, as nmended, or under secton 6 of the Frst Lberty ond ct, as
amended, whch may be outstandng at one tme. Subsecton (b), whch was
added by secton 302 of the Revenue ct of 19 0, authorzes the ssuance, under
the Second Lberty ond ct, as amended, of not to e ceed ,000,000,000 of
Natona-defense seres obgatons.
The combned mtaton of 9,000,000,000 estabshed by secton 21 s not
a-ncusve. t the present tme drect obgatons may be ssued under the
foowng provsons of aw:
(1) Sectons 1 (bonds), 5 (certfcates of ndebtedness and bs), 6 (war-
savngs certfcates), 18 (notes), 21(b) (certfcates of ndebtedness, bs, and
notes), and 22 (savngs bouds) of the Second Lberty ond ct, as amended.
(2) Secton 6 of the Frst Lberty ond ct, as amended (certfcates of
ndebtedness).
(3) Secton 32 of the ct of une 13, 1898 (certfcates of ndebtedness).
The 9,000,000,000 mt appes to a of the above e cept war-savngs cer-
tfcates ssued under secton 6 of the Second Lberty ond ct, as amended
(of whc ,000,000 00 may be ssued), and certfcates of Indebtedness Issued
under the ct of 1893 (of whch 300,000,000 may be Issued).
Under secton 21, as amended by secton 2(a) of ths b, the mt on the
amount of obgatons whch may be outstandng under the Second Lberty ond
ct, as amended, Is f ed at 65,000,000,000, the authorty to Issue natona-
defense seres obgatons s repeaed, and the reference to secton 6 of the Frst
Lberty ond ct, as amended, s deeted.
Secton 2(b)(1) woud termnate e stng authorty to ssue 300,000,000 of
certfcates of Indebtedness whch are now outsde the 9,000,000,000 debt mt.
Secton 2(b)(2) woud termnate e stng authorty to ssue 2,000,000,000 of
certfcate of ndebtedness whch are sub|ect to the present debt mt but whch
woud not be sub|ect to the new 65,000,000,000 mt under secton 2(a) of
ths b. Secton 2(b)(3) woud termnate e stng authorty to ssue ,000,-
000,000 war-savngs certfcates whch are now outsde the 9,000,000,000 mt.
The net resut of sectons 2(a) and 2(b) of ths b w be to consodate
under the Second Lberty ond ct, as amended, a authorty of the Treasury
to ssue drect obgatons, and thus make the 65,000,000,000 mtaton the
actua mt of the amount of such obgatons whch may be outstandng at one
tme.
Secton 2(c) woud emnate the speca fund now requred for the retre-
ment of natona-defense seres obgatons by repeang the provson of aw
under whch t was estabshed.
Secton 3: Ths secton amends secton 22 of the Second Lberty ond ct,
as amended (the aw under whch savngs bonds are ssued) In the foowng
partcuars:
(1) It authorzes ssuance, under the aws whch govern the ssuance of
savngs bonds, of a new type of obgaton caed Unted States Treasury
savngs certfcates as a substtute for the war savngs certfcates now author-
zed by secton 6 of the Second Lberty ond ct, as amended (such authorty
s termnated by secton 2 of the b). Whe the Secretary of the Treasury
woud have authorty under the b to dfferentate between the terms of
bonds and certfcates n other respects, the ony dfference between the two
obgatons mposed by aw woud be In the maturty dates. In the case of
bonds the maturty date coud not e ceed 20 years, whe n the case of
certfcates t coud not e ceed 10 years.
(2) Savngs bonds must now be ssued on a dscount bass. Under ths
amendment savngs bonds as we as savngs certfcates coud be ssued on
ether a dscount or an Interest-bearng bass or on a combnaton nterest-
bearng and dscount bass.
(3) Under e stng aw the denomnatons of savngs bonds may not be
ess than 25. Under ths amendment both bonds and certfcates coud bo
ssued In such denomnatons as the Secretary of the Treasury may f .
( ) Under e stng aw no person may hod more than 10,000 maturty
vaue of savng bonds Issued In any one caendar year. Under ths amend-
ment the Secretary of the Treasury coud from tme to tme by reguaton
Increase or ower that mt wth respect to ether bouds or certfcates.
(5) It authorzes the ssuance of stamps to evdence parta payment on
savngs bonds and certfcates and the e change of certfcates for bonds.
(6) It makes the Indefnte appropraton penses of oans, ct of Sep-
tember 2 , 1917, as amended and e tended avaabe to cover e penses Incdent
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572
to the ssuance of savngs certfcates. Such appropraton Is now avaabe
to cover the e penses of Issung savngs bonds.
Secton : Ths secton woud, n effect, make nterest upon, and gan from,
the sae or other dsposton of a obgatons ssued n the future by the
Unted States and ts agences and nstrumentates (e cept Terrtores, pos-
sessons, and the Dstrct of Coumba and any potca subdvson thereof,
and any agency or nstrumentaty of any one or more of the foregong) sub-
|ect to ta aton by the Federa Government to the same e tent as ke obga-
tons of prvate ssuers. Obgatons ssued n the future by the Martme
Commsson and the Federa ousng dmnstraton under commtments
emboded n guaranty contracts entered nto pror to the takng effect of ths
secton woud be treated as outstandng obgatons. The phrase the Unted
States or any agency or nstrumentaty thereof s used n the broadest pos-
sbe sense, so as effectvey to emnate for the future (wth the specfc e -
ceptons noted above) whatever e emptons from Federa ta aton may have
been accorded to any obgatons by any ct of Congress. Ths secton does
not affect n any way the ta abe status of obgatons of States, muncpates,
and other oca governmenta agences.
Secton 5: Ths secton merey provdes that the b, e cept sectons 2 (b) and
(c), s to become effectve on the 1st day of the month foowng the date of en-
actment of the b. Secton 2(b) and (c) are to .become effectve mmedatey.

For the nformaton of the ouse of Representatves, there are set forth
beow the provsons of aw referred to In secton 2(b) of the b.
CT OF UN 13, 1898.
Sec. 32 as amended . That the Secretary of the Treasury s authorzed to
borrow, from tme to tme, at a rate of nterest not e ceedng three per centum
per annum, such sum or sums as, n hs udgment, may be necessary to meet
pubc e pendtures, and to ssue therefor certfcates of ndebtedness n such
form and n such denomnatons as he may prescrbe; and each certfcate so
Issued sha be payabe, wth the Interest accrued thereon, at such tme, not
e ceedng one year from the date of ts ssue, as the Secretary of the Treasury
may prescrbe: Provded, That the sum of such certfcates outstandng sha
at no tme e ceed 300,000,000, and the provsons of e stng aw respectng
counterfetng and other frauduent practces are hereby e tended to the bonds
and certfcates of ndebtedness authorzed by ths ct.
FIRST LI RTY OND CT.
Sec. 6. That n addton to the bonds authorzed by sectons 1 and of ths
ct, the Secretary of the Treasury s authorzed to borrow from tme to tme,
on the credt of the Unted States, for the purposes of ths ct and to meet
pubc e pendtures authorzed by aw, such sum or sums as, n hs |udgment,
may be necessary, and to ssue therefor certfcates of ndebtedness at not ess
than par n such form and sub|ect to such terms and condtons and at such
rate of nterest, not e ceedng 3 6 per centum per annum, as he may prescrbe;
and each certfcate so ssued sha be payabe, wth the nterest accrued thereon,
at such tme, not e ceedng one year from the date of Its ssue, as the Secretary
of the Treasury may prescrbe. Certfcates of ndebtedness heren authorzed
sha not bear the crcuaton prvege, and the sum of such certfcates outstand-
ng sha at no tme e ceed n the aggregate 2,000,000,000, and such certfcates
sha be e empt, both as to prncpa and nterest, from a ta aton, e cept
estate or nhertance ta es, mposed by authorty of the Unted States, or ts
possessons, or by any State or oca ta ng authorty.
S COND LI RTY OND CT.
Sec. 6. as amended . That n addton to the bonds authorzed by secton 1
of ths ct and the certfcates of ndebtedness authorzed by secton 5 of ths
ct, the Secretary of the Treasury s authorzed to borrow from tme to tme,
on the credt of the Unted States, for the purposes of ths ct and to meet
pubc e pendtures authorzed by aw, such sum or sums as n hs |udgment
may be necessary, and to ssue therefor, at such prce or prces and upon such
terms and condtons as he may determne, war-savngs certfcates of the Unted
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States on whch Interest to maturty mny be dscounted n advance at such
rate or rates and computed In such manner as he may prescrbe. Such war-
savngs certfcates sha be n such form or forms an sub|ect to such terms
and condtons, and may have such provsons for payment thereof before
maturty, as the Secretary of the Treasury may prescrbe. ach war-savng
certfcate so ssued sha be payabe at such tme, not e ceedng ve years from
the date of ts ssue, and may be redeemabe before maturty, upon such terms
and condtons as the Secretary of the Treasury may prescrbe. The sum of
such war-savngs certfcates outstandng sha not at any one tme e ceed n
the aggregate ,000,000,000. It sha not be awfu for any one person at any
one tme to hod war-savngs certfcates of any one seres to an aggregate
amount e ceedng 5,000. The Secretary of the Treasury may, under such
reguatons and upon such terms and condtons as he may prescrbe, ssue, or
cause to be ssued, stamps to evdence payments for or on account of such
certfcates.
19 1-10-10629
INCR SING T D T LIMIT OF T UNIT D ST T S ND PRO-
IDING FOR F D R L T TION OF FUTUR ISSU S OF O LIG -
TIONS OF T UNIT D ST T S ND ITS INSTRUM NT LITI S.
Senate Report No. 1, Seventy-seventh Congress, Frst Sesson. Caendar No. 6.
February 13, 19 1.
Mr. rown, from the Commttee on Fnance, submtted the foowng report
to accompany . R. 2959 :
The Commttee on Fnance, to whom was referred the b ( . R. 2959) to
Increase the debt mt of the Unted States, provde for the Federa ta aton
of future ssues of obgatons of the Unted States and ts nstrumentates,
and for other purposes, havng consdered the same, report favoraby thereon
wth amendments and recommend that the b, as amended, do pass.
The b s desgned (o) to ncrease the pubc debt mt and emnate the
present parttons n that mt; (6) to gve the Treasury greater and more
fe be contro over savngs bonds as a medum of fnancng; (c) to authorze
ssuance of a new obgaton caed Treasury savngs certfcates n pace of
the war-savngs certfcates now authorzed by aw; and (d) to sub|ect a
Federa obgatons Issued n the future to Federa ta aton by removng a
prveges of e empton from such ta aton whch they now en|oy.
The amendments recommended by your commttee are as foows:
On page , ne 13, mmedatey foowng the perod at the end of subsecton
(c), add the foowng:
The mtaton on the authorty of the Postmaster Genera to prescrbe the
denomnatons of posta-savngs stamps contaned n the second paragraph of
secton 6 of the ct of une 25, 1910, as amended (U. S. C, tte 39, secton 756),
s removed; and the Postmaster Genera s authorzed, for the purposes of such
secton and to encourage and factate the accumuaton of funds for the pur-
chase of savngs bonds and savngs certfcates, to prepare and ssue posta-savngs
stamps n such denomnatons as he may prescrbe.
Ths amendment, whch woud authorze the Postmaster Genera to ssue
posta-savngs stamps n any denomnatons prescrbed by hm (at present
he can not Issue such stamps n denomnatons of more than 1), s necessary
n order that fu utzaton may be made of posta-savngs stamps as a de-
vce to factate and encourage the accumuaton by sma nvestors of the
mnmum amount necessary to buy savngs bonds or certfcates. Ths amend-
ment was recommended by the Treasury and Post Offce Departments.
On page 5, n subsecton (e), strke out a after Department n ne 1
through the word therefor In ne 10. and Insert n eu thereof the foowng:
and of the Posta Servce, n connecton wth the handng of savngs bonds,
savngs certfcates, and stamps or other means provded to evdence payment
therefor, whch sums may be used for addtona empoyees or any other e -
pendture, wherever or n whatever cass of post offce ncurred, n connecton
wth such handng.
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57
Ths amendment w merey gve the Post Offce Department authorty to
e pend funds whch the b aready authorzes the Treasury Department to
advance to the Post Offce Department n order that t may be n a poston
to perform the work whch the b mposes upon t n connecton wth the
sae and other handng of savngs bonds and savngs certfcates.
N D FO T L GISL TION.
The 19 2 udget submtted to the Congress ast month Indcates that our
contempated natona-defense program has now been Increased to appro matey
28,500,000,000 n appropratons, contract authorzatons, and recommenda-
tons. It aso ndcates that the estmated e pendture programs w resut
n combned defcts for the fsca years 19 1 and 10 2 of 15, 00,000,000. The
baance of the borrowng authorty on anuary 31, 19 1, was 1,123,000,000
under the genera mtaton, and 1,628,000,000 under the natona-defense
mtaton. Ths combned tota of 2,751,000,000 provdes the Treasury wth
borrowng authorty suffcent ony for the ne t four months, and even n that
perod t woud be restrcted to short-term obgatons for a arger part of
ts fnancng operatons than seems advsabe at ths tme.
The Secretary of the Treasury appeared before a subcommttee of your
commttee and testfed that It woud not be advsabe to undertake the fnancng
of the enarged natona-defense program through the ssuance of short-term
securtes. Mr. Morgenthau ponted out that short-term securtes are for the
most part purchased by commerca banks, thereby causng a further ncrease
n deposts. In order to avod, as far as possbe, encouragng such a resut,
he recommended that the Treasury be permtted to ssue obgatons more
attractve to permanent nvestors outsde of the bankng system.
G N R L PL N TION OF T ILL.
The b amends the Second Lberty ond ct, as amended, so as to mt the
face amount of pubc-debt obgatons ssued under the authorty of that ct
to an amount not to e ceed n the aggregate 65,000,000,000 outstandng at any
one tme. It s beeved that ths Increased mtaton w ampy cover the
Treasury s present antcpated fnancng requrements for the current and ensung
fsca year. The b termnates the authorty to ssue ,000,000,000 of short-
term defense obgatons provded n the Frst Revenue ct of 19 0 and certan
obsoete authorty to ssue debt obgatons of a character whch the Treasury
does not need and whch, therefore, shoud be emnated from the statute books.
The future borrowng authorty f ed by ths b w be a-ncusve.
In vew of the enarged fnancng program facng the Treasury Department, t
Is desrabe that It have greater fe bty n the types of securtes whch may be
offered to meet the requrements of varous casses of nvestors. Therefore,
ths b further amends the Second Lberty ond ct so as to broaden the au-
thorty under whch Unted States savngs bonds are ssued and to provde for
a new cass of securty to be caed Treasury savngs certfcates. The statutory
mt on the term for whch savngs bonds may be ssued woud contnue to be
20 years, as at the present, whe a mtaton of 10 years woud be paced on
the Treasury savngs certfcates. It woud aso provde that both casses of
securtes may be ssued on an nterest-bearng bass, on a dscount bass, or on
a combnaton nterest-bearng and dscount bass, and that the Secretary of
the Treasury may f by reguaton the amount of savngs bonds and savngs
certfcates whch may be hed by any one person at any one tme.
In addton, the Treasury woud be authorzed to ssue stamps or provde
other means to evdence payments for savngs bonds and savngs certfcates,
and to provde for the e change of savngs certfcates for savngs bonds. Ths
woud permt the Treasury to carry on n program encouragng more popuar
partcpaton n defense fnancng an to offer securtes of a character whch
shoud factate and promote thrft and savngs.
In so far as Federa ta aton of Federa securtes s concerned, the b re-
moves the ta -e empton prvege by provdng that a obgatons ssued n the
future by the Unted States am ts agences nnd nstrumentates (e cept Ter-
rtores, possessons, and the Dstrct of Coumba) sha be sub|ect to Federa
ta es to the same e tent as prvate obgatons.
The b makes no change n e stng aw wth respect to the ta aton of
Federa securtes by the States and ther potca subdvsons nor does It
affect n any way the ta abe status of obgatons of States, muncpates, and
other oca governmenta agences.
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575
Msc.
It w remove, however, a prveges of e empton from Federa ta aton not
ony from drect obgatons of the Unted States but aso from a obgatons
ssued by the varous Federa corporatons, nstrumentates, and agences.
Whe the emnaton of the Federa ta -e empton prvege w appy to a
future ssues of Federa obgatons, securtes ssued soey to repace those
ssued pror to the effectve date of the ct whch have been ost or destroyed, or
securtes ssued n dfferent denomnatons n e change for securtes ssued
pror to such effectve date and bearng the same maturty and nterest rate,
w have the same ta -e empton status as the securtes repaced or e changed.
On the other hand, any refundng obgatons ssued subsequent to the effectve
date of the ct woud be fuy sub|ected to Federa ta es under the provsons
of the MIL
Tour commttee fee that t s partcuary approprate that ths step shoud
be taken n connecton wth the fnancng of the natona-detense program.
shoud be caed upon to share n the enormous task of suppyng the revenue
necessary to fnance ths program. It becomes urgent therefore, from an equ-
tabe pont of vew, that no subscrbers to any gven cass of securtes shoud
receve preferenta treatment. Ths resut s mpossbe f some securtes are
ssued wth ta -e empton prveges whch are worth tte or nothng to the
poorer casses of subscrbers, but whch are worth a great dea to those n
the hgher ncome brackets. Preferenta treatment to ths atter cass s
ncompatbe wth democratc methods of fnancng the defense program and
shoud be removed.
Your commttee strongy recommend prompt consderaton and acton on ths
mportant egsaton. Two factors partcuary support ths recommendaton:
(1) s the Treasury s rapdy approachng the mt of ts borrowng authorty,
t s becomng day more restrcted n the fe bty of ts fnancng operatons,
and fe bty Is essenta to the successfu operaton of the vast fnanca
program necessary to arm and defend the Unted States and guarantee ts
natona securty n the word to-day; (2) as arge amounts of ong-term
Federa obgatons mature on March 15, 19 1, t s mportant that the present
egsaton be enacted before that date.
D T IL D N LYSIS OF T MI .
The Senate report uses as ts own the anguage of the ouse report (No. 20)
on the detaed anayss of the b, whch anayss Is prnted on pages 069 to 573
of ths uetn.
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IND .
Rung No.
ccountng methods:
F ed-fee Government contract
Long-term contracts, cash recepts and dsbursements bass.
ccountng perod:
Change n, reguatons amended
Fng of returns, fsca years not estabshed
dmssons ta . (See Msceaneous ta es.)
dvertsng e pendtures, captazaton of amounts deducted
n pror years, e cess profts ta eecton, reguatons
grcutura d|ustment ct, cam for refund of processng
ta es. (See Processng ta es.)
coho ta :
asc permts, procedure, amendments
Labeng and advertsng wnes, etc., reguatons amended..
Revsed standards of dentty for brandy, reguatons
amended
Ta -payment of wnes, reguatons amended
Warehousng of dsted sprts, reguatons amended
ocaton of Income and deductons, oss on sae of stock under
common contro
mendments:
Code of Federa Reguatons
Subpart ( ), Part 171, Tte 26
Secton 171. d (c), (d) -
Secton 171. d (e), (/), (g) (added)..
Interna Revenue Code
Sectons 27(c), 113(a)() ---
Secton 12 ...
Sectons 50 (a), (b), (c)(3)( ), 506(c)(2)( ), (c)(2)
( ), 812(c), 813(a)(2), 813(b), 861(a)(2), 936(b),
1536, 1805, 2887, 2901(b), and 3170...
Reguatons ( coho Ta )
rtce III, sectons 30(6), 33, 39(h)
rtce I, secton 6 (g)
Reguatons 5 ( coho Ta )
rtce II, secton 21, cass , 7
rtce II, secton 20
rtce III, secton 33
rtce III, sectons 3 (d), 39(6)
rtce I, secton 6 (g)
Reguatons 7 ( coho Ta )
rtce II, secton 23, 29(d).
rtce , secton 5 (g)
Reguatons 7 (1937)
rtce I , paragraph 108
Reguatons 10, sectons 185.51, 185.359, 185.365, 185.366,
185.367, and 185.369 -
Reguatons 77, artce 229
Reguatons 79 (1936), artce 2..
Reguatons 80 (1937)
rtces 11 and 13
rtce 13
rtces 25, 26, 27
10652
10720
10760
10672
10702
10605
107 6
107 5
1058
10712
10733
10605
10605
10681
10602
10681
107 6
107 6
107 5
107 6
107 6
107 5
107 6
107 6
107 6
1058
10712
10759
10632
10727
10633
10570
(577)
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578
mendments Coutnued.
Reguatons 86
rtce 22(c)-8
rtce 23(m)-9
Reguatons 90, artces 206(8),211(1)(6), 502
Reguatons 91, artces 13, 506
Reguatons 9
rtce 22 (c)-8
rtce 23(m)-9 -- ---
Reguatons 98(1937), artce 11..
Reguatons 100
rtces 1, 5, 201, 301
Reguatons 101
rtce 22(c)-8
rtce 23(m)-9
Reguatons 103
Sectons 19.13-5, 19.13-6, 19.13-7, 19.1 -2, 19.15-1...
Secton 19.22(b) ( )-
Secton 19.22(b) ( )-6
Secton 19.22(c)-8
Secton 19.23(a)-1 (added)
Secton 19.23(m)-9-
Secton 19.27(c)-.
Secton 19. 6-1
Sectons 19.123-1 (c) and 19.12 -9
Secton 19.275-1(6)
Secton 19.362-1
Sectons 19.391 to 19.396 (added)
Secton 19.50 -1
Secton 19.506-6
Reguatons 106, secton 02.216
Reguatons 107, secton 03.216
Reguatons 109, sectons 30.710-2,30.711 (a)-, 30.711 (a)-3,
30.711(b)-, 30.712-1, 30.713-1, 30.71 -1, 30.720-1,
30.721-1 to 30.721-7, 30.722-1, 30.725-3, 30.729-1,
30.730-3, 30.7 0-1, 30.7 0-2, 30.7 1-1, 30.7 2-1,
30.7 3-1, and 30.752-8
Treasury Decson 883 revoked
mortzaton deducton, emergency factes:
Certfcaton, e tenson of tme, Interna Revenue Code
amended
Reguatons amended
nnutes:
Contracts, endowment, nstament payments, cash sur-
render vaue optona
French ctzens temporary n Unted States, wthhodng,
e empton
rkansas, stock transfers from guardan to ward
rmy:
Contracts, suspenson of proft mtng provsons of n-
son ct
nstment aowance, ta abty
Offcers of Offcers Reserve Corps, aowances for unforms,
etc
ssessments, addtona, e cse and msceaneous ta es,
procedure
.
ankhead Cotton Contro ct of 193 , e cess producton ta ,
purchase of ta e empton certfcates, refund cam
ankruptcy ct, e changes n reorganzaton, canceaton of
ndebtedness
ankruptcy and recevershp proceedngs, ta abty durng
recevershp, prorty
Rung No.
107 0
10759
10556
10555
107 0
10759
107 8
10553
10553
107 0
10759
10607
10631
10631
107 0
10702
10759
107 7
10760
107 1
1059
10607
1059
107 7
107 7
10552
1055
10702
10713
10602
107 1
1057
10731
10711
10586
1070
10625
1065
10667
10609
10610 I
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579
anks, nsovent, termnaton of mmunty from ta aton
asc permts, acoho ta , procedure, amendments
tumnous coa, termnaton of ta on saes, reguatons
amended
onds:
Sae, bearer bonds, contract of December 31, devery n
anuary, oss, when reported
Unted States savngs, nterest, e empton
randy, revsed standards of dentty, reguatons amended
rtsh Government, sae or transfer of securtes
ureau of Interna Revenue, correspondence symbos
usness e penses:
penses ncdent to carryng on trade or busness, nd-
vduas, trusts
Teachers, dues, subscrpton fees, trave e penses
C.
Caforna muncpates, street mprovement bonds, nter-
est, e empton
Canada:
Income ta conventon wth, ta on nonresdent aens,
reguatons amended
Natona defense ta , credt
Canceaton of ndebtedness, e changes n reorganzaton under
ankruptcy ct
Capta gans and osses:
Compensaton receved for oss of budngs, machnery, etc
Forecosure saes, rea estate acqured for proft, deducton
Property acqured by gft after December 31, 1920
Retrement of bonds or debentures, deducton
Stock, offset aganst partnershp gans
Stock and stock rghts
Capta osses, subscrpton payments after stock becomes
worthess, deducton
Capta stock ta , accrua date, ad|ustment of returns to refect
ncrease
Carrers Ta ng ct of 1937. See mpoyment ta es.)
Chna Trade ct corporatons, speca dvdend credt
Coastwse trade between mercan ports, seamen, scope
of term
Coecton of ta , surety bond fed wth abatement cam, power
of coector to reease obgaton _
Commssons, trustees , busness e pense deducton
Commttee reports:
cess-profts ta amendments of 19 1
ouse of Representatves (Report No. 1 6)
Senate (Report No. 75)
Interna Revenue Code amendment
ouse of Representatves (Report No. 11)
Senate (Report No. 6)
Pubc Debt ct of 19 1
ouse of Representatves (Report No. 20)
Senate (Report No. 1)
Communty property, Te as. (See mpoyment ta es.)
Compensaton:
owance for unforms, etc., offcers of Offcers Re-
serve Corps, rmy -.
Ctzen en route to duty n Phppnes, accrued saary
Rung No.
10719
293
10605
81
107 8
76
10565
212
10665
197
107 5
82
10562
63
106 5
531
10598
339
10616
205
10709
3 2
10710
3
10589
206
10721
326
10722
330
10713
260
10666
257
10609
193
10708
32
10567
375
10569
380
10619
25
10568
378
10560
37
10561
375
10688
381
10689
382
10730
212
10575
210
10717
270
10659
251
10738
391
10710
3
106 8
550
106 9
56
10603
566
1060
568
10628
569
10629
573
10625
193
10660
268
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580
Compensaton Contnued.
nstment aowance, rmy, Marne Corps
Insurance proceeds for oss of budngs, machnery, etc.,
capta gan
Contracts:
rmy and Navy, suspenson of proft mtng provsons
of nson ct
Government, f ed-fee, ncome from, computaton
Long-term, determnaton of ncome from
Corporatons:
Chna Trade ct, speca dvdend credt
Credts, dvdends pad, reguatons amended
Lqudaton, e tenson of tme set for competon
Ta es, appcabe after December 31, 1939, reguatons
amended
Correspondence symbos, ureau of Interna Revenue
Cotton Contro ct of 193 , e cess producton ta , purchase of
ta e empton certfcates, refund cam
Court decsons:
. S. reder Co.; Unted Staes v
very v. Commssoner
yer Co. v. Unted States
ryant v. Commssoner
Campbe; everng v
Cary v. Commssoner
Ctzens State ank of arstow, Te ., v. da et a
Cty ank Farmers Trust Co. v. Commssoner
Cty ank Farmers Trust Co. v. everng...
Cotton astc Web Co. v. Unted States
Commssoner; very v
Connnssoncr; ryant v
Commssoner; Cary v
Commssoner; Cty ank Farmers Trust Co. v
Commssoner; ectro-Chemca ngravng Co., Inc.,
Commssoner; Fager v
Commssoner; Fager, deceased, v
Commssoner; Fuhrman Forster Co. v
Commssoner; G. U. R. Co. v
Commssoner; ggns v
Commssoner; or
Commssoner; eer v
Commssoner; Magure
Commssoner; Matthews v
Commssoner; McCan v
Commssoner; Pfa|f et a. v
Commssoner; Powers v
Commssoner v. Rust, deceased, et a
Commssoner; Tennessee Consodated Coa Co. v
Cook v. Unted States
ectro-Chemca ngravng Co.. Inc., v. Commssoner
nrght, deceased, et a; everng v
Fager v. Commssoner
Fager, deceased, v. Commssoner
Fuhrman Forster Co. v. Commssoner
Gambr; everng v
Guggenhem v. Rasqun
G. U. R. Co. v. Commssoner
amme; everng v
arrson v. Schaffner
everng v. Campbe
everng; C/ ank Farmers Trust Co. v
everng v. nrght, deceased, et a
everng v. Gambr
Rung No
Page.
1070
192
10708
32
10586
502
10652
236
10720
307
10717
270
107 7
233
10573
250
10607
187
106 5
531
10667
7
10737
39
10721
326
10752
52
10722
330
10685
360
10735
370
10591
289
10610
3
10710
3
10611
3 6
10721
326
10722
330
10735
370
10610
3
10569
380
10735
370
10735
370
10696
67
10733
358
10598
339
10675
319
10639
33
10687
366
10735
370
10568
378
10679
357
10601
8
10707
302
10758
71
10667
7
10569
380
10678
353
10735
370
10735
370
10696
67
10686
36
10599
5
10733
358
10567
375
10676
321
10685
360
10710
3
10678
353
10686
36
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581
Court decsons Contnued.
everng v. amme
everng; orme v -
everng v. uchngs...
everng v. no
everng v. Le Gerse et a
everng v. Reynods
everng v. Rcher
everng v. Rogers
everng v. Thomson
everng v. Wam Faccus Oak Leather Co
ggns v. Commssoner
ggns; Maass v
orme v. everng --
or v. Commssoner
utchngs; everng v
eer v. Commssoner
no ; everng v
Le Gerse et a; everng v
Maass v. ggns - -
Magure v. Commssoner
Massachusetts Protectve ssocaton, Inc., v. Unted Sates.
Matthews v. Commssoner
McCan v. Commssoner
Mone Manufacturng Co. v. Rohenses
Mone Manufacturng Co. v. Unted States
Peter; Unted States v_-_ -
Pfaff et a. v. Commssoner
Powers v. Commssoner
Pyne et a.; Unted States v
Rasqun; Guggenhem v
Reynods; everng v
Rcher; everng v
Rogers; everng v
Rohenses; Mone Manufacturng Co. v
Roya Indemnty Co. v. Unted States
Rust, deceased, et a.; Commssoner v
Ryerson; Unted States v
Ryerson v. Unted States
Schaffner; arrson v
Tennessee Consodated Coa Co. v. Commssoner
Thomson; everng v
Unted States v. . S. reder Co
Unted States; ver Co. v
Unted States; Coton astc Web Co. v
Unted Staes; Cook v
Unted States; Massachusetts Protectve ssocaton, Inc., v.
Unted States; Mone Manufacturng Co. v
Unted States v. Pezer
Unted States v. Pyne et a
Unted States; Roya Indemnty Co. v..
Unted States v. Ryerson
Unted States; Ryerson v
da e a.; Ctzens State ank of arsow, Te ., v
Wam Faccus Oak Leather Co.; everng v
Credt or refund:
Sut, recovery of overpayment of ta , mtaton perod...
Two-year perod, effect of eap year on
Credts:
Corporatons, dvdends pad, reguatons amended
Foregn ta es
Canadan natona defense ta .
Incuson of unta ed ncome n numerator of credt
mtng fracton
ng No.
Page.
10567
375
10663
315
106 1
38
10685
360
10638
30
10736
371
10662
31
10085
360
10568
378
10708
32
10598
339
106 0
3
10663
315
10675
321
106 1
38
10639
33
ocs;,
360
10638
30
106 0
3
10687
366
10581
383
10735
370
10568
378
10592
50
10592
50
106 2
1
10679
357
10601
8
10709
3 2
10599
5
10736
371
10662
31
10685
360
10592
50
10738
391
10707
302
10600
7
106 3
3
10676
321
10758
71
10568
378
10737
39
10752
52
10611
3 6
10667
7
10581
383
10592
50
106 2
1
10709
3 2
10738
391
10600
7
106 3
3
10591
289
10708
32
10737
39
107
397
107 7
233
10666
257
10637
310
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5S2
Rung No.
Credts aganst net ncome:
Chna Trade ct corporatons 1 10717
arned ncome credt, earned net ncome reduced by Pha-
depha ta I 10651
Defense ta , credts aganst ta n e cess of tota ta abty..
Depeton:
Mnes, o and gas wes, etc.
Computaton of net ncome, producton costs, deduc-
ton
Drng costs, aocaton
Leasng transactons, status.
Property, meanng of, depeton aowance, eecton.
Revsed estmates of mnera contents, reguatons
amended
Deprecaton, teachers brares
Dstrct of Coumba property ta es, deducton
Dvdends, speca, Chna Trade ct corporatons
Dsted sprts:
Labeng and advertsng, reguatons nmended
Warehousng, reguatons amended
.
arned ncome, seamen operatng between Unted States ports,
e empton
mpoyment ta es:
Interna Revenue Code
Caendar week, meanng of the term
Communty property, Te as, famy empoyment
mpoyees-
Coa hkers
Coectors performng servces for a pubshng
company
Federa pro|ect, servces performed under cost-
pus-a-f ed-fee contract
mpoyers
Famy empoyment, communty property,
Te as
Lessee of certan department n department store-
cepted servces
grcutura abor
Tobacco, processng of
Water company, factes used party or
whoy for domestc purposes
Federa pro|ect, servces performed under cost-
pus-a-f ed-fee contract
State servce, denquent ta attorney, Tennessee-
Wages, what consttutes, transportaton aowances
pad empoyees workng on Federa pro|ect
Reguatons 90, amended
Reguatons 91, amended
Reguatons 100, amended
Reguatons 106, amended
Reguatons 107, amended
Soca Securty ct, e cepted servces, agrcutura abor,
tobacco, processng of
nstment aowance, rmy, Marne Corps, ta abty
10751
10577
10755
10618
10759
10589
10706
10707
10717
107 6
10712
10673
10695
10621
10726
10630
106 6
10621
10613
10753
1073
106 6
10723
10680
10556
10555
10553
10552
1055
10753
1070
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583
state ta :
Gross estate
Insurance proceeds, reguatons amended
Nonresdent aen, Unted States obgatons, regua-
tons amended
Optona vauaton
Reguatons amended
Proceeds of nsurance and annuty contracts purchased
by unnsurabe
cess-profts ta :
verage earnngs and nvested capta methods dagrammed.
Consodated e cess profts ta reguatons
cess profts credt, nformaton ncuded n returns,
reguatons
cess Profts Ta mendments of 19 1
empton, mng of tungsten mned by others
Patnum mnng, ncome from, e empton
Reguatons
mendments
Returns, fng of.
Trade acceptances evdence of ndebtedness-
cess Profts Ta mendments of 19 1
Commttee reports t-
change rates, foregn
France.
cse ta es:
ddtona assessment, procedure.
Massachusetts corporaton, accrua date.
empt corporatons:
Cooperatve assocaton acqurng grazng and for members.
Unted States Government empoyees medca and hospta
assocaton
empt ncome:
arnngs of shps documented under foregn aws
F|
Panama
Interest
Unted States obgatons
Natona Defense Seres Treasury bs and
notes
Reguatons amended
Unted States savngs bonds
Penson payments, servces rendered both wthn and wth-
out Unted States
Seamen operatng between Unted States ports
Coastwse trade, scope of term
arned ncome
Rung No.
10570
10633
106 0
10727
10638
10639
10615
10656
10655
106 7
107 3
10661
10595
10702
10606
1063
10757
10732
106 7
106 8
106 9
10572
10636
1065
10611
10612
10551
10699
10550
1067
10715
10631
10665
10700
10659
10673
Fees:
ttorneys , busness e pense deducton
Fng and franchse fees, Mchgan
F|, shps earnngs, e empton
Foregn corporatons; ta es, appcabe after December 31, 1939,
reguatons amended
Foregn e change, rates prevang December 31, 19 0
10709
1068
10550
10607
10572
10636
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5S
France:
Ctzens of, annuty ncome, e empton (effect of ta con-
venton and protoco)
change rate of French franc, December 31, 19 0
Gan or oss:
Reorganzaton, e changes under ankruptcy ct, can-
ceaton of ndebtedness
Saes-
ass, property receved under testamentary trust..
Natona Defense Seres Treasury bs and notes. -
Sae contract of December 31, devery n anuary, cash
recepts and dsbursements bass
Gft ta :
Future nterests n property
Nonresdent aen, Unted States obgatons, reguatons
amended
Snge premum fe nsurance poces, vauaton
Good w, e pendtures for promoton of, captazaton of
amounts deducted n pror years, e cess profts ta eecton,
reguatons
I.
Income from sources wthn Unted States possessons, accrued
compensaton, ctzen en route to duty n Phppne Isands-
Insurance:
eneft payments, Soca Securty ct, ta abty
Proceeds under snge premum endowment contract, cap-
ta gan --.
Insurance companes:
Lfe, reserve funds, percentage deducton
Other than fe or mutua, ncrease n reserves for noncan-
ceabe poces, deducton
Interest:
Loan on margna stock purchase where dvdends pad to
ta payer, deducton
Street mprovement bonds, Caforna muncpates
Unted States obgatons, e empton
Natona Defense Seres Treasury bs and notes.-.
Reguatons amended
Unted States savngs bonds
Interna Revenue Code amendment
Commttee reports
(See aso mendments: Interna Revenue Code.)
Inventores:
ectve method
Last n, frst out method, carfcaton
Reta merchants, reguatons amended
Iowa property ta , accrua date
No. Page.
10731
10716
10626
107 0
10677
10636
236
10609
193
10685
360
10686
36
10687
366
10735
370
10736
371
10715
199
10756
2 0
106 1
38
106 2
1
106 3
3
10632
38
10599
5
10600
7
10601
8
10702
69
10660
268
10588
191
10721
326
10566
26
10578
265
10581
383
10750
207
10721
326
10722
330
10715
1S9
10631
195
10665
197
10602
5 5
10603
560
1060
568
G
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585
Rung No. Page.
L.
Legsaton:
cess profts ta amendments of 19 1
Interna Revenue Code amendments
Pubc Debt ct o 19 1.
Leases, consderaton receved on canceaton, gross ncome.
Lens, Federa ta es:
Fng of notces, ermont
adty aganst after-acqured ntangbe property
Lmtaton perod, credt or re und, effect of eap year
Long-term contracts, determnaton of ncome from
Losses:
earer bonds, sae contract December 31, devery n an-
uary, year deductbe
Canceaton of ease, dfference between vaue and consd-
deraton receved, deducton
Partner s ndvdua wagerng oss, reducton of share of
partnershp gans
Property sod to State of Mchgan for denquent ta es,
when deductbe
Subscrpton payments after stock becomes worthess, de-
ducton
M.
Manufacturers e cse ta es:
ddtona assessments, procedure
Toet preparatons
Mechancs hand paste ...
Saes through whoy-owned subsdary, advertsng
and seng costs
Marne Corps, enstment aowance, ta abty
Massachusetts corporaton e cse ta , accrua date
Merchant Marne ct, 1936, amended, reguatons
Mchgan:
Fng and franchse fees, deducton
O and gas eases
Property ta , accrua date
Mnes:
Property, meanng of term, depeton aowance, eecton
Revsed estmates of mnera contents, depcton, regua-
tons amended
Msceaneous ta es:
ddtona assessments, procedure
dm sons ta , requrements regardng prntng tckets of
admsson
Stamp ta es
Conveyances, o and gas eases, Mchgan
empton Government obgatons not affected by
Pubc Debt ct of 19 1
Sae or transfer of securtes, rtsh Government
Stock transfers
Guardan to ward, rkansas
Repea of corporaton s charter
Teegraph, etc., payment by Government, constructon
work by contractors under cost-pus-a-f ed-fee contract.
Transportaton of o by ppe ne, e portaton, break n
contnuty caused by bendng
0 3 1
106 7
10602
10681
10627
10675
10620
10591
107
10720
10565
10675
10559
10597
10730
1065
10592
10752
1070
10611
10612
10593
1068
10691
10658
10618
10759
1065
10583
10691
10690
10562
10711
1061
10653
106
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586
Rung No.
Nav
N.
Contracts, suspenson of proft mtng provsons of n-
son ct
Offcers, trave e penses, deducton
New York Cty saes ta es
Nonresdent aens:
mpoyee of foregn country purchas:ng commsson n
Unted States, ta abty
Interest, Unted States Natona Defense Seres obga-
tons
Unted States obgatons, nterest, e empton
state ta reguatons amended
Gft ta reguatons amended
Income ta reguatons amended
O.
O and gas wes:
Depeton aowance, deducton of producton costs
Drng costs, aocaton
Leasng transactons, status
Revsed est mates of mnera contents, depeton, reguatons
amended
Oeomargarne:
Schedue of producton and materas used
November, 19 0 and 1939... -
December, 19 0 and 1939
anuary, 19 1 and 1910
anuary, 19 1 and 19 0 (amended)
Februarv, 19 1 and 19 0
March, 19 1 and 19 0
pr, 19 1 and 19 0 -
May, 19 1 and 19 0
P.
Panama, shps earnngs, e empton
Partnershp:
Deceased partner s share of profts earned but not receved,
gross ncome
Member s ndvdua gambng oss, reducton of share of
partnershp gans
Penson payments, servces rendered both wthn and wthout
Unted States
Persona servce corporatons, reguatons
Patnum mnng, ncome from e cess profts ta e empton
Processng ta , cam for refund:
Frst domestc processor
Suffcency, |ursdcton of Processng Ta oard of Revew.
Property ta :
Dstrct of Coumba
Iowa, accrua date 1.
Mchgan, accrua date
Pubc Debt ct of 19 1
Commttee reports
Stamp ta e empton, Government obgatons not affected
by
R.
Rates of e change, foregn.
France
Refund or credt, mtaton perod, effect of eap year.
30586
10705
1056
10725
10715
10633
10632
10631
10751
10577
10755
10759
10557
10582
10G23
10671
10668
10697
10739
10761
1067
10678
10679
10559
10700
1059
10661
10696
10758
10706
10707
10677
10658
10627
10628
10629
10690
10572
10636
107
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1
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2
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587
Rung No. Page.
10656
21
10655
79
10595
117
10593
89
1059
276
10609
193
10575
210
10656
21
10606
28
1063
285
10757
286
10672
238
10685
360
10686
36
10687
366
10597
2 1
10733
358
10560
37
10561
375
1056
208
10715
199
10659
251
10673
252
1069
271
10721
326
10722
330
10756
2 0
10730
212
106 5
531
10575
210
10007
187
10693
191
10706
301
10707
302
10666
257
10637
310
Reguatons:
mendments. (See mendments.)
Consodated e cess profts ta
cess profts credt
cess-profts ta
Merchant Marne ct, 1936, amended
Persona servce corporatons
Reorganzaton, e changes under ankruptcy ct, canceaton
of ndebtedness
Returns:
Capta stock ta , accrua date, ad|ustment to refect
ncrease
Consodated, e cess profts ta reguatons
cess profts ta , fng of
Fng of, fsca year not estabshed
8.
Saes:
Gan or oss, bass of property receved by benefcary under
testamentary trust
Property acqured by State of Mchgan under ta sae,
oss
Stock-
cqured from corporaton under common contro wth
ta payer, oss
Persona osses offset aganst partnershp gans
Ta es, New York Cty -
Unted States Natona Defense Seres obgatons, gans
Seamen operatng between Unted States porta:
Coastwse trade, scope of term
arned ncome, e empton
Shps, foregn, e empton of earnngs. (.See empt ncome.)
Soca Securty ct. (See mpoyment ta es.)
Soders and Saors Cv Reef ct of 19 0, offcers wves,
appcabty
Stamp ta es. ( See Msceaneous ta es.)
States:
Interest on street mprovement bonds, Caforna munc-
pates, e empton
Ta es. (See Ta es: State.)
Stock:
Sae contract of December 31, devery n anuary, gan,
cash recept and dsbursements bass
Saes. (See Saes.)
Subscrpton obgatons, payments after stock becomes worth-
ess, oss deducton
Symbos, correspondence, ureau of Interna Revenue
Ta es:
Capta stock ta , accrua date, ad|ustment of returns to
refect ncrease
Corporatons, reguatons amended
Defense ta , credts aganst ta n e cess of tota ta
abty
Dstrct of Coumba, property ta es, deducton
Foregn, credt for
Canadan natona defense ta
Incuson of unta ed ncome n numerator of credt-
mtng fracton
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588
Ta es Cont nued.
Saes, New York Cty
State-
cse ta , Massachusetts corporaton, accrua date...
Franchse fees, Mchgan
Property ta , accrua date
Iowa
Mchgan
Teachers, e penses connected wth professon
Teegraph, etc. (See Msceaneous ta es.)
Te as, communty property. (See mpoyment ta es.)
Tobacco:
Statement of manufactured, produced, by casses
November, 19 0 and 1939.
December, 19 0 and 1939
anuary, 19 1 and 19 0
February, 19 1 and 19 0
March, 19 1 and 19 0
Toet preparatons. (See Manufacturers e cse ta es.)
Trade acceptances, evdence of ndebtedness, e cess profts
ta
Transportaton of o. (See Msceaneous ta es.)
Traveng e penses:
Nava offcers
Teachers attendng teachers conventons
Treasury bs and notes ( Natona Defense Seres ), nterest-
Trust companes, nsovent, termnaton of mmunty from
ta aton
Trusts:
Income
ssgnment by fe benefcary, assgnor s ta abty..
Short term trusts, ta abe to grantor, power of crcut
court of appeas to consder addtona evdence
Tungsten, mng of, ad|usted e cess profts net ncome, e emp-
ton
U.
Unforms, etc., aowances for, offcers of Offcers Reserve Corps,
rmy, ta abty
Unted States oard of Ta ppeas:
Decsons of, st of acquescences and nonacquescences...
Rues of practce, revsed pr 1, 19 1
Unted States obgatons, nterest, e empton:
Income ta reguatons amended
Natona Defense Seres Treasury bs and notes
Nonresdent aens
state ta reguatons amended
Gft ta reguatons amended
Income ta reguatons amended
Unted States savngs bonds
.
ermont, ens for Federa ta es, notces
nson ct, e cess proft on rmy and Navy contracts, sus-
penson of proft mtng provsons
W.
Wne:
Labeng and advertsng reguatons amended
Ta -payment by stamp, reguatons amended
|No.
1056
10611
10612
1068
10677
10658
10589
10585
10622
10669
10701
10728
10732
10705
10589
10715
10719
10676
10662
10663
107 3
10625
1075
10683
10631
10715
10633
10632
10631
10665
10620
10586
107 6
1058
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589
Rung No.
Page.
Wthhodng ta at source:
nnuty ncome payabe French ctzens resdng n France,
10731
262
Conventon, Unted States and Canada, ta on nonresdent
aens, reguatons amended.
10713
260
Income on sezed enemy pr6perty hed by rtsh Govern-
ment
10590
258
Interest, dvdends, property entrusted n Netherands
Government
10590
258
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