surance companies subject to tax imposed by section 243 or section 246 of the 1921 law were exempted from the capital stock tax.* The 1924 Act re-enacts the capital stock tax, effective July 1, 1924. Regulations 64 interpreting the law are in most particulars the same as those under the 1921 Act.

The rate now in force for domestic corporations is $15 for each full $1,000 of the fair average value of the capital stock for the year preceding June 30, as is in excess of the exemption of $5,000. The rate is comparatively low and the exemption such that the total tax is usually not excessive.

In his report for 1919 the Commissioner stated: "The early regulations touching valuations have been radically elaborated and modified until under present approved methods it has become necessary to individualize each case, considering all elements and factors which throw light on values and harmonizing them so far as posIsible in the ultimate values found."

This amounts to an admission that the earlier regulations were wrong. The early administration of the law did not reflect credit on the Treasury. Originally an attempt was made to divide corporations into a few classes and value the capital stock of all the companies in each class on practically the same basis. During recent years, however, there has been a continuous improvement in administration. This appears to have been emphasized by several important court decisions which sustained the Commissioner's position.

There remains, however, an objectionable and fairly general tendency on the part of the Treasury to use Exhibit A as the sole basis for the determination of the tax. It is hardly a mere coincidence that balance sheets reflect in most cases higher values than either Exhibits B or C. The capitalized earnings seem to be ignored except in those comparatively rare cases where the effect is to increase the tax. As will be explained later, taxpayers may insist on the basis which is the most "fair."

While it is true that the cost of collection appears to be relatively

[Former Procedure] Section 1000 (c) of 1918 law read "The taxes imposed by this section shall apply to mutual insurance companies." Stock companies were taxable as ordinary corporations (Reg. 50, Art. 22). Organizations doing business on reciprocal or inter-indemnity plan were subject to tax. (C. B. 4, page 272; L. O. 1063.)

3

[Former Procedure] The rate under the 1916 law was 50 cents for each $1,000, and the exemption was $99.000. The rate was increased to $1 and the exemption reduced to $5.000 by the 1918 law. The provisions of the 1918 law (passed February 24, 1919) were made retroactive to July 1, 1918.

6

Foreign corporations, however, are not permitted any exemption.

slight, such slight cost may be ascribed to the fact that the additional assessments are in most cases relatively so small that taxpayers are inclined to pay rather than engage in protracted correspondence or litigation with the Capital Stock Tax Division of the Bureau of Internal Revenue. In other words, the low cost of collecting additional taxes is due to the fact that taxpayers are not disposed to litigate comparatively small overassessments.

Theoretically, the tax is on the privilege of doing business in a corporate capacity, but it is difficult to assess a tax on the "fair" value of capital stock without considering past earnings, so that in many cases the tax amounts to an additional income tax.

As a matter of fact, the Senate Committee on Finance, in reporting on H. R. 6715, proposed to repeal this tax but to increase the income tax to 14 per cent, a tacit acknowledgment that the purpose of the capital stock tax is to levy additional income tax by a subterfuge.

The difficulty of equitable assessment of the tax is only one of several good reasons why the tax should be repealed. The effect of the present administration of the tax is to cause the payment of a tax on fictitious figures, for whether the tax is based on Exhibit "A," "B" or "C," these bases are still unreliable as a measure of tax, nor are they all the factors which enter into the determination of fair value of the stock of a corporation. Fixed assets were in a great many cases acquired at peak prices and are not now earning a fair return; the capitalized earnings, including abnormal returns, are not a fair criterion; and as for stock market quotations, any observer of the truly representative stocks knows that there is not infrequently a marked difference between these quotations and the fair value of the assets as shown by the books or by the earnings.

The tax is a tax on capital (being assessed whether a concern makes money or not), but it is not assessed on all types of organizations wherein capital is employed. Partnerships should not escape such a tax, nor in equity, should any other business subject to income tax be exempt.

As an indirect device to collect further tax from corporations it reminds one, in its operation, of the poll tax as it was levied in England in the time of Queen Anne; the tax was not only assessed upon all conceivable conditions but, if the victim broke down under the exactions, the sorrowing relatives had to pay a tax before they were allowed to bury him.

All the corporations (educational, fraternal, etc.) exempt under the income tax law are also exempt from this tax. In addition, many corporations organized for profit but not "doing business," as interpreted by the Supreme Court of the United States, are also exempt. This applies to lessor, inactive and similar corporations.

The tax is payable in advance and the next return will be due in July, 1925. The law [section 700 (a)] provides that the computation of the tax of a domestic corporation shall be based on "the fair average value of its capital stock for the preceding year." Therefore, the return due on or before July 31, 1925, will be based on the average value, etc., during the year July 1, 1924, to June 30, 1925– the government's fiscal year."

8

The Treasury has issued regulations which are reproduced in the following pages, governing the preparation of returns, etc. The law is wisely silent as to many details which usually encumber tax bills.

Effective date.9

Domestic Corporations

REGULATION. This is a special (excise) tax (with respect to carrying on or doing business) and like all special taxes is due and pay

7 [Former Procedure] The following provision was made on form 707 (prior to revision 1922) for a corporation's fiscal year which ended at some date other than June 30: "In item 7 on page I hereof the taxpayer will show the closing date of its fiscal year ended between July 1, 1921, and June 30, 1922, if other than June 30, and the information furnished under exhibits A, B and C will be as of the year or years ended on such date, which should be used annually." In form 707 issued for the 1925 returns, the taxpayer was requested to "Furnish under Exhibit A a condensed balance sheet as of June 30, 1924, if possible, but in no case earlier than December 31, 1923." 8

[Former Procedure] Regulations 38 were issued October 19, 1916. Regulations 38 (revised) were issued August 9, 1918. Regulations 50 were issued April 29, 1919. Regulations 50 (revised) were issued June 21, 1920. Regulations 64 (under the 1921 Act) were issued June 15, 1922. Regulations 64, revised in accordance with the 1924 Act, were issued July 29, 1924. In the opinion of the author the requirements of the 1916 regulations were reasonable, but T. D. 2503 (June 25, 1917) imposed new methods of ascertaining the "fair value" of the corporate stock which were fallacious, not in accord with the law and unenforceable.

As the valuation of capital stock is the basis for the assessment of the tax, the importance of a correct formula for calculating "fair value" should not be underestimated. Detailed criticism of the regulations will be found in Income Tax Procedure, 1918, pages 628 to 677.

From information which has come to the author it seems that very many close corporations were over-assessed, but that practically no corporation whose stock was listed on an exchange was so treated. The corporations which were over-assessed should apply for a refund if it is not too late.

9

[Former Procedure] A business enterprise, which qualified under section 229 of the 1921 Act and elected to be taxed as a corporation, was re

able annually in advance from July 1 of each year. No portion of the tax so paid is refundable to a corporation which ceases to do business during the year. (Reg. 64, Rev. Art. 2.)

The foregoing regulation is based on section 3237, Revised Statutes, 10 which applies to the assessment of special taxes. As to corporations organized and beginning corporate activities after July 1 in any year, however, section 3237 is superseded by the act imposing the federal capital stock tax. Section 700 (b) of the law, quoted on page 1593, specially provides that the tax "shall not apply in any year to any corporation which was not engaged in business . . . during the preceding year ending June 30." This limitation is recognized in article 28 of Regulations 64, Revised, which will be found on pages 1594.

DEFINITION OF DOMESTIC CORPORATIONS.

REGULATIONS. A domestic corporation is a corporation created or organized in the United States, or under the law of the United States or any State or Territory. (Reg. 64, Rev., Art. 9.)

The term "corporation" includes associations and joint-stock companies, whether created by statute or by contract," but not partnerships, properly so called. It is immaterial whether the companies were organized for profit or have a capital stock represented by shares. (Reg. 64, Rev., Art. 3.)

In a recent case, 13 the constitutionality of the tax was attacked in so far as it concerned a domestic corporation the business of which

quired to file a capital stock tax return and pay the tax for the six months' period, January 1 to June 30, 1921, and the twelve months' period, July 1, 1921, to June 30, 1922.

10

LAW. All special taxes shall become due on the 1st day of July, 1891, and on the 1st day of July in each year thereafter, or on commencing any trade or business on which such tax is imposed. In the former case the tax shall be reckoned for one year; and in the latter case it shall be reckoned proportionately, from the 1st day of the month in which the liability to a special tax commenced to the 1st day of July following. [Section 3237, Revised Statutes, as amended by section 53 of the act of October 1, 1890 (26 Stats., 567).]

"Certain corporations are specifically exempted from the tax by the statute. See Chapter III.

12

[Former Procedure] The 1918 law specifically included insurance companies in the scope of the tax.

13 National Paper & Type Co. v. Edwards, 292 Fed. 635 (T. D. 3493). As the record was not filed in the U. S. Supreme Court until December 8, 1923 (Docket No. 688, October Term, 1923), which was beyond the statutory period for appeal, the case was dismissed. Early in 1924, an action similar to that

"was confined to the exportation of goods from the United States to foreign countries and the sale of goods to export commission merchants in this country, with the interest and purpose that the same should be exported." The court held that "the tax is not invalid in so far as or because the property or capital is employed in the export trade."

PERSONAL SERVICE CORPORATIONS.-Personal service corporations as defined under the Revenue Act of 1918 are not now exempt from capital stock tax. Such corporations for the purposes of the capital stock tax as well as for the purposes of the income tax are subject to the same provisions of the law as other corporations.

ASSOCIATIONS AND LIMITED

CLUDED.

PARTNERSHIPS WHICH ARE IN

REGULATION. Associations and joint-stock companies include organizations, by whatever name known," which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributable among the members or shareholders on the basis of the capital stock held by each, or, where there is no capital stock, on the basis of the proportionate share of capital which each has or has invested in the business or property of the organization. (Reg. 64. Rev., Art. 4.)

17

Corporations in hands of a receiver are exempt.15 "Massachusetts Trusts" were held to be exempt from excise tax in Eliot v. Freeman, et al.16 and in Crocker v. Malley, certain types of Massachusetts trusts were held not to be "associations" of the corporate type. See footnotes 48 and 49, page 43 of Chapter II. In an important recent decision, however, it was held that certain "Massachusetts trusts" were associations and subject to capital stock tax under the 1918 Act but not under the 1916 Act (Hecht v. Malley).18 Following

against former Collector Edwards was brought by the company against Collector Bowers (1921 Act, for tax paid in 1922) in the United States District Court for the Southern District of New York, the contentions and fundamental points at issue being the same as in the Edwards case. The case, National Paper & Type Co. v. Bowers, was decided by U. S. Supreme Court, December 15, 1924 (not yet reported). It was held that the tax was not a burden on export trade and hence was not unconstitutional.

14 Includes certain trusts. See page 43.

15

16 T. D. 2424.

16

17

220 U. S. 178, 55 L. Ed. 424, 31

249 U. S. 233. 63 L. Ed. 573, 39 18 Advance Opinions 68 L. Ed. 510.

Sup. Ct. 360.

Sup. Ct. 270, 2 A. L. R. 1601.
See page 43.