tion of the net income in excess of the $3,000 exemption as the average tax of "representative corporations" bore to their average net income in excess of the specific exemption, except that in either case the $3,000 exemption did not apply when computing the tax of a foreign corporation. The corresponding relief provision in the 1917 act was Section 210, and the conditions were approximately the same, so that corporations granted relief under Section 210 of the 1917 act have generally been given the advantages of Section 327-8 of the 1918 act. A corporation with a small amount of capital stock paid in acquired valuable lease without paying a bonus therefor. Its income was derived from subletting the leased property and could not be said to proceed from non-capital sources; hence the corporation was denied the benefits of Sections 327-8 (A. R. R. 315). Where a corporation acquired a patent, the fair value of which at the time of acquisition could not fairly be ascertained, the tax was properly levied under Section 210 of the 1917 act (A. R. R. 70). A liquidating corporation will be allowed the benefits of Section 327-8 only where the income is wholly disproportionate to the invested capital (T. B. M. 53, 60). Where officers of a corporation received a merely nominal salary or no salary at all, the benefits of the relief provisions could be invoked (A. R. R. 326). During 1918 the invested capital of a corporation was made disproportionate on account of large borrowings, while its income was increased abnormally through the receipt of the proceeds from an insurance policy on the life of an officer. The relief sections were applied (A. R. R. 327). Inefficient management does not entitle a corporation to the relief provisions (A. R. R. 338). The limitation on intangibles acquired by the issue of stock does not warrant the taxing of the corporation under Sections 327-8 (A. R. R. 599). The provisions of Sections 327-8 were applicable to cases of hardship caused by abnormal conditions affecting the capital or income of the corporation during the pre-war period (L. O. 1000). Where the pre-war period was abnormal, due to unusually large expenditures for development and because similar industries were not sufficiently parallel, a corporation was allowed to apply the special case section to the pre-war period (A. R. R. 104). A corporation received a great many patents and formulas from its president, but due to conservative accounting both tangible and intangible assets were grossly understated. The corporation was allowed to file an amended return under the special case section (A. R. R. 110). The changing from a cost plus basis to ordinary contractual basis did not change the status of special cases in excluding corporations 50% or more of whose income was derived from Government contracts (A. R. M. 89). If the mixed aggregate of tangible and intangible assets could not be determined, the corporation tax should be adjusted under the special case section of the 1917 act (A. R. R. 459). Abnormal conditions affecting the income of a corporation due to a large business contract did not entitle it to assessment under the special case section (A. R. R. 518). Good-will set up to offset a stock issue and insufficient depreciation did not make the ratio of income and invested capital such as to be assessed under the special case section (A. R. R. 599). A corporation deriving income from Government contracts on the "per unit" basis was not prevented from filing a claim for assessment under the special case section (O. D. 321). Merely because the taxes were high did not justify giving relief under the special case section of the act of 1918 (T. B. M. 7). Abnormal conditions in special cases may arise from (a) the time and manner of organization (b) intangibles (c) income abnormal in one year (L. O. 1109, revoking L. O. rogo). SUMMARY It has been shown that invested capital owes its importance to the necessity therefor in the calculation of corporate excess profits taxes. On page 176 the table shows that every addition to or subtraction from invested capital might mean a decrease or increase, respectively, in the tax payable from 1919 to 1921, inclusive, of as much as 5.04% of such addition or subtraction. Invested capital as a factor in computing an income tax has been harshly criticized. The strongest indictment against it is that the resulting tax is unequally applied. Bearing in mind the general proposition that the higher the invested capital the lower the tax, it follows that corpora tions which were conservatively organized many years ago paid more income taxes from 1917 to 1921, inclusive, than newer corporations with large and sometimes fictitious capitalizations. While certain restrictive measures were provided by Congress, such as the limitation on reorganizations after March 3, 1917, the 25% maximum of outstanding capital stock which could be attributed to good-will, and the special relief section, it is to be noted that only extraordinary conditions surrounding the income or invested capital of a corporation would entitle it to relief. Conservative financing and changes in the value of the dollar were primary economic factors any consideration of which would, for practical purposes, be out of the question. Both would have involved endless questions of fact and would have added much to the already unprofitable burdens of income tax administration. The study of invested capital was a salutary one for business in general. It raised questions that could not be solved, but it focused attention to matters of organization and made necessary the differentiation between paid-in capital, earned surplus, and surplus arising from revaluation of assets. If invested capital is again brought into a tax law, future difficulties in its computation will be only a small fraction of past difficulties, not merely because of the body of well-established precedent but because of a fact of much great business significance: namely, that corporate officers, and even accountants and attorneys, have increased their knowledge of business investment an hundred-fold. |