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appeals in those cases, but since the aggregate tax was not far different from the original single assessment, he agreed to withhold the appeals if the bureau would approve the certificate. This it was possible to do, after going into the merits of the case, and the certificate was approved. Before the refund was finally made, the commissioner acquiesced in the Mather Paper Co. case, so that it is probable that the allocation of tax will be hereafter revised.

Case 11: In the case of the M Company there was a certificate of overassessment for 16x dollars for the fiscal year ended June 30, 1918. The taxpayer filed seven returns for this year, four under the 1917 law and three under the 1918 law. The bureau made an audit in which it allowed a small change in depreciation but 17x dollars for amortization. Employees' bonuses were based on a percentage of profits and were accrued as liabilities at the end of the year, though not paid until the succeeding year. These deductions were adjusted upon that basis. Late in 1917, to avoid double taxation, its branch was separately incorporated, and the taxpayer sought to have the bureau ignore the corporate entity by having sales to the subsidiary regarded as consignments, through including goods shipped abroad in inventories instead of in sales. This the bureau rejected and no appeal has been filed on the deficiency set up for the fiscal 1919 year, to which the decrease in income would inure, if the taxpayer's. contentions were conceded. Special assessment was allowed for the fiscal 1918 year under section 210 of the 1917 law and section 327 of the 1918 law, tased largely on failure to capitalize intangibles at incorporation in 1904. The data sheets were investigated as to choice of comparatives, and the audit was. approved.

Case 12: During this particular month I had a conference here in the case of the M Company involving two charges against B amounting to 217:0 dollars, deducted from 1917 net income. This case involves amounts generally larger than other cases in the department. Its invested capital lies somewhere in excess of 125,000x dollars. It is impossible to determine the true amount, for various reasons.

At the conference above mentioned sundry other issues were discussed, and additional data were requested and later filed. The parent company had some y subsidiaries, engaged in the same or closely related businesses, and there were small certificates of overassessment to various subsidiaries. The major certificate was to the parent, for 1917, in the amount of 221v dollars, but was later reduced (pursuant to ruling here) to 2110 dollars and reported to the congressional Joint Committee on Internal Revenue Taxation in 1927. Major adjustments in the case involved paid-in surplus claimed of 29,126 dollars on assets acquired by the subsidiary N Company, at organization in from the O Company, which claim was rejected in a memorandum by this office and is now involved in a suit pending in a district court; the proper treatment of intercompany interest; affiliations ; so-called donations of sundry assets; contested claims for damages to plant and equipment and for services; the effect on invested capital of acquisition of subsidiary stocks at a discount; bond interest and discount; basis of determining gain or loss on land sales; losses ; capital changes due to restatement of corporate surplus accounts, etc. ; restoration of assets charged to expense in prior years; balancing of intercompany indebtedness accounts, etc. The audit as approved set up an excess-profits tax for 1917 of 851x dollars, but is subject to further reduction hereafter if the court suit is successful.

Case 13: This corporation engaged in the manufacture of munitions and before the United States entered the war had developed plants of great size and cost for the manufacture of supplies for foreign belligerents. Upon the entry of this country into the war, its plants were converted in part and supplemented by sundry additions. Its war work ceased soon after the armistice, but its peace-time activities required abandonment of many of the war-time facilities. Due to the fact that so many costs of plant were incurred prior to April 6, 1917, and therefore they were not subject to amortization, claim was made for deductions from gross income for loss of useful value. On assets acquired subsequent to April 6, 1917, there could have been prosecuted successfully a claim for technical amortization. The claim was thoroughly investigated by engineers and auditors in the field and in this city, and many briefs and exhibits, such as Government contracts and settlements, were submitted. The bureau held that claims against the Government were accruable in 1918, when contract deliveries were stopped, because expressly covered by existing contracts, although final settlements were not effected until after 1918. A deduction was allowed in 1918 for loss on a dividend distribution in securities at a lower market value

than the cost basis, in harmony with 0. D. 262 (C. B. 1, 28, and A. R. R. 435, C. B. 4, 27). Another issue of major importance was the proper deduction for munitions taxes, according to the Supreme Court's decisions in the Anderson and Yale & Towne cases (T. D. 3839; 269 U. S. 422). Certificates of overassessment were approved for years 1915–1919, inclusive, aggregating 300x dollars.

I might add, also, that during the month I attended the conference with the taxpayer's agents on the M Company case for 1918 and 1919, but this case was Attorney A's and was not disposed of by me. One other case was returned because incomplete.


The following report involves cases considered during a month. During the month there were considered and disposed of seven cases. These 7 cases involved a total of 32 overassessments and involved overassessments totaling $10,290,415.24. he cases considered by me during the month selected were not necessarily all finally disposed of in the general counsel's office during the same month.

Case 1.-Issues:
) (1) Reorganization and merger.

(2) Liquidations of subsidiary corporations.
(3) Intangible value.

Twelve certificates of overassessment of the parent and subsidiaries: were involved for the years 1912 to 1918, inclusive.

The A Company case for 1918 involved a determination of net. income in the amount of 2,392 dollars and invested capital in the amount of 20,239x dollars. This determination of invested capital involves increase in capital totaling 5,043x dollars and decreases in capital totaling 1,409x dollars. The increases in capital and the decreases in capital involved a study of a number of issues and an examination of a large amount of written evidence respecting the issues. The following brief outline of the principal items which were investigated will illustrate the importance of the issues involved, the magnitude of the effect upon invested capital, and the difficulty in the comprehension of and decision on the issues.

(a) The A Company owned the stock of certain subsidiary companies which were liquidated in 1912 and 1913. There are a large number of decisions of the bureau relating to liquidations. The effect. of decisions is that profit resulting from liquidations of subsidiary corporations is taxable income and that such taxable income resulting therefrom is includable in the surplus of the recipient. The study of liquidations involves particularly S. O. 131 (C. B. 1-1, p. 18), and L. 0. 1108 (C. B. III-1, p. 412). In making its original return the A Company did not include in its surplus the greater part of the profits on the dissolution of the subsidiary companies. These profits, which must be added to surplus and included in invested capital, amounted to 2,289x dollars in addition to the surplus shown on the original return. The consideration of this additional surplus involved a study of the balance sheets of the liquidated corporations, a consideration of the values in the property received on the liquidation, as well as the law issues relating to the right of inclusion of the


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appreciation in property values of the liquidated subsidiaries at the time of their liquidation.

(6) The A Company made a number of arbitrary reductions in its good-will account totaling 1,387x dollars, principally at the dates of the sales of certain assets and the receipts of liquidation dividends from a subsidiary. Although the sales and the dividends resulted in large realized profits it failed to include them in its surplus account, but instead utilized these realizations of large profits to effect reductions in the book value of good will. The effect of these errors in the accounting practice was to reduce the account below the actual cost of the good will. Under the decision of the United States Supreme Court in LaBelle Iron Works v. United States (256 U. S. 377), the taxpayer was entitled to the actual cost of its good will and also to the profits on sales of assets as a part of invested capital. The restoration of the profits to surplus and the restoration of the goodwill account to its proper basis involved a careful study of the balance sheets of the corporation.

(c) The Company acquired substantially all the common stock of two predecessors, the B Company and the C Company. Later the A Company acquired the preferred stock of the two predecessor corporations. In purchasing this stock the taxpayer was compelled to pay 1,001x dollars in excess of the par value of the stock purchased. İt erroneously treated this 1,001x dollars as a loss and reduced its earned surplus. In accordance with article 867 of Regulations 65 the property acquired must be valued at the price paid therefor and accordingly there will be no loss sustained. The restoration of this amount to invested capital involved a study of the balance sheets and the transactions and agreements leading up to the consolidation.

(d) There were numerous minor adjustments of errors in the taxpayer's accounts and tax returns, such as the adjustment of accrued assets and liabilities which caused an addition to invested capital of 13x dollars. Under section 326 (c) of the act of 1918 the taxpayer was required to deduct from invested capital a percentage thereof equal to the percentage which the amount of inadmissible assets is of the total amount of admissible and inadmissible assets. Correcttions of the taxpayer's capital due to this section 326 (c) required consideration of the inadmissibles deduction. This revision of the inadmissibles deduction resulted in reduction of that deduction by the amount of 348x dollars, thereby similarly increasing the statutory invested capital. This adjustment required consideration of the inadmissibles of the corporation.

The decreases in statutory invested capital in the amount of 1,409x dollars involved consideration of the following five items:

(a) The taxpayer, the present A Company, is a continuation of the A Company under a new name. In the A Company acquired more than 90 per cent of the outstanding shares of the B Company and the C Company. In accordance with the bureau's practice there was eliminated from invested capital the surpluses of the two companies whose stocks were acquired as of the date of acquisition. This resulted in a decrease in invested capital of 815x dollars.

(6) The taxpayer credited to surplus the value of certain stock dividends which it had received. Following the subsequent decisions in Eisner v. Macomber (252 U. S. 189), and in accordance with article 859, regulations 45, the stock dividends were eliminated from the

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surplus account. This issue and decision resulted in a decrease in invested capital of 304.c dollars.

(c) The taxpayer issued certain dividends in scrip which it failed to deduct from invested capital in its original return. The bureau held that such dividends should be treated as the equivalent of cash and consequently should be deducted from invested capital. Article 1546 of regulations 45. The deduction on this account in invested

. capital was 168x dollars.

(d) The taxpayer included in invested capital in its original return the values of certain stocks as they stood upon its books. Although these stocks were worth the amount stated on the books the taxpayer had acquired them at a lower price. The bureau eliminated the difference from invested capital, making a deduction of 20« dollars.

(e) Prior to the profits-tax years the taxpayer transferred to the D Co. tangible assets, cash, and good will in exchange for 200x dollars of its stock. The tangible assets so transferred were worth 100x dollars, and the value of 100x dollars was placed on the good will. The D Co. was included in a consolidated return with the A Co. The 100x dollars good-will value was eliminated since this value was not proven.

The case necessitated a study of the right to affiliation of a number of subsidiary corporations, a study of a reorganization in other reorganization a few years later, and several liquidations. All of these issues were complicated and required a study of much evidence relating to the accounts of the corporation, transactions and agreements, and corporate resolutions resulting in the reorganizations and liquidations, and also many decisions relating to these transactions under the income and profits tax laws.

Case II.-Issue: (1) Inventory.


240 dollars 1919

81 x dollars This taxpayer at the end of the year 1916 discounted its inventory by the amount of 50x dollars, at the end of 1917 by the amount of 170x dollars, and at the end of 1918 by the amount of 150x dollars. These discounts in inventory were made by the former management of the corporation and the discounts were made by application of a certain percentage, so that in effect there was created a reserve for depreciation of inventory. After this method of statement of the

. inventories up to December 31, 1918, there was a change in the management of the corporation, and at December 31, 1919, there was no percentage or arbitrary discount of the inventories. The revenue agents at two times investigated the books of the taxpayer, and the revenue agents at first were of the opinion that the taxpayer should not be permitted to revise the inventories for all of the years so as to place them on one consistent basis. On the last report the revenue agent came to a different conclusion and was of the opinion that it was proper to restore all of the inventories to their true original basis; that is, without application of any percentage discount at any periods from January 1, 1917, to December 31, 1919. The case involved a study of the taxpayer's right under all the circumstances involved to a revision of all inventories for all of the profits tax years so that all of the profits tax years would be reported upon a consistent basis. The revision of inventory resulted in decreasing the cost of goods for 1917 about 120x dollars and increasing the income accordingly. It resulted in decreasing the income for 1918, 20x dollars. It resulted in decreasing the income for 1919, 150x dollars. This change in inventory resulted also in a change of statutory invested capital. After a study of the circumstances relating to the taking of the inventories and the decisions relating thereto, and the effect upon tax liability and the right of the Government to make .additional assessments for any years involved, and the right of the taxpayer to overassessments for any of the years involved, it was decided that the taxpayer was entitled to a revision of all the inventories upon the one consistent basis.

Case III.-Issue: (1) The installment basis of accounting and report of income.



510 dollars. 1919.

300 dollars. The taxpayer during the taxable year was a dealer in household furniture and conducted its business almost entirely upon the installment basis and sold its goods upon installment contracts.

By section 1208 of the Revenue Act of 1926 the provisions of section 212 (d) of the Revenue Act of 1926 were made retroactive so as to apply in the computation of income upon the installment basis for taxable years under the acts of 1916, 1917, 1918, 1921, and 1924, subject, however, to any bar occurring by the statutory limitation upon claims properly applicable as to any of the taxable years. T. D. 3921 promulgates rules for the computation of income on the installment basis under the installment provisions of the revenue act of 1926 and prescribes that no payment received in a taxable year shall be excluded in computing the amount of income to be returned for the taxable year on the ground that they were received under a sale, the total profit from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income.

The Income Tax Unit had prepared overassessments in this case in the total amount of 142x dollars for the three years 1918, 1919, and 1920. In the unit's preparation of those certificates of overassessment as first submitted to this office the unit had not included in income of any taxable year the amount of installment payments actually received in the taxable year when those installment payments were upon contracts the total profits from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income. After consideration of the circumstances relating to the taxpayer's change to installment basis and the taxpayer's brief and the revenue agent's reports and the schedules showing income of the taxpayer for each of the years involved, it was recommended that the unit make a further investigation of the profits realized upon the installment basis for each of the years 1918, 1919, and 1920, so as to ascertain definitelv what profit was made upon cash collections in the years

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