amount of inadmissible assets for the purpose of determining the average percentage, the total cost of Liberty bonds subscribed for, whether fully paid or not, should be included in admissible assets (O. D. 28). An interest in the assets of a dissolved corporation represented by stock should not be considered as an admissible asset after the date of dissolution, but should continue to be classed as an inadmissible asset until such time as the assets were actually distributed (I. T. 1434). Only the cost could be included in computing admissibles and inadmissibles when part of the latter became admissible through sale; any profit realized was current (I. T. 1536). In 1917, the purchases of inadmissibles during the year did not affect invested capital (I. T. 1796).

XXII

INVESTED CAPITAL: REORGANIZATIONS

SPECIAL CASES-SUMMARY

Reorganizations and invested capital. Reorganizations prior and subsequent to March 3, 1917. Special cases. Abnormal conditions affecting the income or invested capital of a corporation. Summary.

IN computing the invested capital for the pre-war period, the law provided that if a corporation had acquired a business after January 1, 1911, the corporation was to be regarded as existing from the date of the inception of the prior organization. While this provision no longer has any bearing on the computation of taxes from 1919 to 1921, unless war contracts were worked on during the year, the principle was extended to corporations formed from January 1, 1918, to July 1, 1919; that is, such businesses (before being incorporated) could elect to be taxed as corporations on their net income earned between January 1, 1918, and the date of organization as a corporation, providing their net income for 1918 was in excess of 20% of their invested capital. A similar provision in the 1921 law extended the privilege to be taxed during 1921 as corporations to businesses incorporated within four months after the passage of the law (November 23, 1921) (Sec. 229).

A reorganization or transfer of property taking place after March 3, 1917, if 50% or more of the interest or control remains in the hands of the same persons, was looked upon as a continuation of the same business or ownership, individual, partnership, or corporation, and any asset taken over could not be given a value greater than its value for invested capital purposes (in case the old business was a corporation) or cost (individual or partnership),

plus improvements, less depreciation and other losses (Sec. 331; Art. 941). Inasmuch as this section was eliminated along with the entire excess profits tax title, the question has been raised as to whether depreciation should be computed on the above basis. The law does not specify the basis to be used for calculating the depreciation deduction except in the case of property acquired before March 1, 1913 (Sec. 214(a) (8); 234(a) (7)).1

Where a reorganization was effected prior to March 3, 1917, in which one corporation changed its name and absorbed a second corporation, the assets of the first must be valued at a figure no higher than that allowed the old corporation, while the assets of the second corporation were valued at their fair market value at the time of the transfer (O. 872). A newly formed corporation took over the assets of a defunct corporation on condition and with the consideration that the new corporation pay the debts of the old; stock of the new company was sold for cash to raise working capital. It was held that only the proceeds from the sale of the stock could be included in invested capital (T. B. M. 49). In a reorganization after March 3, 1917, wherein a partnership was incorporated, assets not acquired for value by the partnership were disallowed as invested capital of the corporation (A. R. R. 393). A partnership was incorporated February 14, 1917, and additional capital in the way of land and buildings was contributed by the partners; the basis of value of these additional assets was their appraised value on the date of transfer computed by adding back depreciation to a December 22, 1919, appraisal (A. R. R. 390). A merger is defined as a combination of corporations whereby one corporation maintains its identity and the others lose theirs, while in a consolidation the identity of the constituent corporations is lost by the formation of a new and distinct entity (Sol. Op. 4). Renewal of a charter is not a reorganization (O. D. 930). Reorganizations do not include the securing of a charter in another state and surrendering the old (A. R. R. 16). The reorganization section does not relate to the computation of depreciation and depletion but only invested capital (O. D. 458). Reorganizations prior to March 3, 1917, are not subject to the same limitations as those following that date (A. R. M. 60; Sol. Op. 41). A partnership was incorporated in 1918, stock being issued covering built-up or gradually acquired good-will under the theory that additions in the way 1 See also pages 82-88 and 113-122.

* *

of actual betterments would be permitted; although disallowed, good-will set up on the books in 1900 after a partnership reorganization but written off prior to 1918 could be again set up for invested capital purposes (A. R. R. 618). An individual business was transferred to a corporation, more than 50% of the stock being issued to relatives of the sole owner. It was held that the ownership had changed (A. R. R. 645). The change of corporate ownership taking place in 1913 by order of a court, the stockholders remaining the same, was held to constitute the formation of a new enterprise and the fair market value at that time was properly included in invested capital in a 1917 return (O. D. 1097). "Control * of 50% or more remains in the same persons, or any of them" (Sec. 331) does not confine the continuing control to the same owners; persons will include stockholders of corporations not affiliated. Further, the transfer of values without change therein required by Article 941 is inconsistent with the law where property has a cash value less than cost to the previous owner; the law merely states that no greater value will be allowed (L. O. 1081 and T. D. 3259). A reorganized corporation could not include in its invested capital any appreciation over the old balance sheet, but it was allowed to start a new taxable year and include the surplus at the reorganization date (T. B. R. 2). When a firm was reorganized from a partnership to a corporation subsequent to March 3, 1917, and less than a majority of its stock was transferred to prior owners but in effect all went to them and their nominees, so that they, for a time at least owned the entire corporation, invested capital could not be raised (A. R. R. 409). A corporation, organized during the year and as of January 1 taking over another business, could not file a return for the full year (A. R. R. 467). A foreign corporation organized a domestic corporation to take over its local business and controlled over 50% of its stock. The assets were valued at their cost to the foreign corporation (O. D. 789). The provisions relating to reorganizations did not apply to any acts prior to the Revenue Act of 1918 (O. D. 783). A reorganization after March 3, 1917, did not require the use of cost values to the prior owner under the 1917 law, as it did in the 1918 law in case there was less than a 50% change in ownership (A. R. R. 285).

The identity of the stockholders in a reorganization prior to March 3, 1917, did not destroy the fact that two separate entities existed. Therefore the assets should be valued at the amount paid for them in stock by the successor corporation and not the original cost which was higher (A. R. R. 761). A cor

poration amended its charter in 1911, and in 1914 changed the name and transferred its assets to a new corporation; for the valuation of assets the original cost of acquisition should be used, as no change in entity resulted (I. T. 1420). A corporation charter expired in September, 1917, and under the state laws it was allowed to continue until dissolution or reorganization. It reorganized later but no values greater than cost were allowed to be used (A. R. R. 988). A corporation while changing domicile and charter in 1914, but without changing its capitalization, surplus or stock ownership, was not allowed to use values greater than those permitted the predecessor corporation (A. R. R. 844). In case a corporation is reorganized without change of identity, cash paid for intangibles by the old corporation will govern in valuing the intangibles of the new corporation; but if the intangibles were acquired for stock, the 25% limitation should be applied to the stock of the new corporation at the beginning of the taxable year. With a change of identity through reorganization, the value of intangibles will be dependent upon the new amount of cash or stock paid for them (I. T. 1523).

SPECIAL CASES

In Sections 327-8 of both the 1918 and 1921 acts a special provision was made for excess profits taxes coming under the following heads:

(a) Where invested capital could not be determined. (b) Foreign corporations.

(c) Where it was impossible to separate tangible from intangible values paid in or to separate property paid in for stock from property turned in for bonds.

(d) Where, due to abnormal conditions affecting income or invested capital, or both, the tax as ordinarily computed would have worked an "exceptional hardship" on the corporation. This did not apply where large profits were made on a normal invested capital nor where 50% or more of the gross income proceeded from a Government war contract (Art. 911-4).

In these special cases the excess profits tax was that por