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Q. Two corporations are closely connected in business. Are they compelled to make a combined return, instead of separate returns?

A. If the corporations are "affiliated" within the meaning of the statute, they are required to file one return on a consolidated basis both for the income tax and the war-profits and excess-profits.tax.

The tax will be computed in the first instance as a unit and will then be assessed upon respective corporations in such proportions as may be agreed upon among them, or in the absence of any such agreement, then on the basis of the net income properly assignable to each.. Only one exemption of $2,000 is allowed in computing the Income Tax and only one exemption of $3,000 in computing the War-Profits and Excess-Profits Tax.

There shall be taken out of such consolidated net income and invested capital, the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions or other income derived from government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income, and the remainder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capital and net income.

Q. What is meant by the words “affiliated corporations"?

A. The statute defines such corporations as follows:

Two or more Domestic Corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

Q. What is the rate of the income tax?
A. For the year 1919 and subsequent years, 10 per cent.
Railroad corporations under federal control are taxed at

special rates as provided in sections 230 and 301 of the statute.

Q. What constitutes gross income of a corporation?

A. Gross income means the same as gross income in the case of an individual. See page 12. Section 233 of the Act, however, contains special provisions as to life insurance companies, mutual marine insurance companies and foreign corporations.

Q. What items can a corporation deduct from its gross income in computing the amount of its taxable income?

A. (1) Ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business including a reasonable allowance for salaries or other compensation for services actually rendered and including rentals or other payments required to be made as a condition to the continued use or possession of property, to which the corporation has not taken or is not taking title, or in which it has no equity.

(2) Interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from taxation under the Income Tax Law, as income to the taxpayer, or in the case of a foreign corporation the proportion of such interest, which the amount of its gross income from sources within the United States bears to the amount of its gross income, from all sources, within and without the United States.

(3) Taxes paid or accrued within the taxable year, imposed (a) by the authority of the United States except income, war-profits and excess-profits taxes; or (b) by the authority of any of its possessions except the amount of income, war-profits and excess-profits taxes allowed as a credit under Section 238; or (c) by the authority of any State or Territory or any county, school district, municipality or other taxing subdivision of any State or Territory, not including those assessed against local benefits of a

kind tending to increase the value of the property assessed; or (d) in the case of a domestic corporation by the authority of any foreign country, except the amount of foreign income, war-profits and excess-profits taxes, allowed as a credit under Section 238; or (e) in the case of a foreign corporation by the authority of any foreign country (except income war-profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed) upon the property or business. No deduction is allowed for the payment of the tax at the source by corporations paying interest on bonds without deduction.

(4) Losses, sustained during the taxable year and not compensated for by insurance or otherwise.

(5) Debts, ascertained to be worthless and charged off within the taxable year.

(6) Dividends received from a corporation which is subject to the income tax, and also amounts received as dividends from a personal service corporation, out of earnings upon which the income tax has been imposed.

(7) Depreciation-A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business including a reasonable allowance for obsolescence.

(8) Depreciation-Paragraph (8) of Section 234 contains provisions permitting special deduction for buildings, machinery and other facilities acquired on or after April 6, 1917, and contributing to the prosecution of the war and also in the case of mines, oil and gas wells and other natural deposits and timber.

(9) Loss by falling prices, etc.-If it is shown to the satisfaction of the Commissioner of Internal Revenue that during the taxable year 1919 a taxpayer has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for the taxable year 1918, or from the actual payment after the close of the taxable year 1918 of rebates in pursuance of contracts entered into during the year 1918 upon sales made during the year 1918, then the amount of such loss shall be deducted from the net income for the taxable year 1918 and the tax for such year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination will be credited or refunded to the taxpayer.

(10) Interest received upon obligations of the United States and bonds issued by the War Finance Corporation, and which is included in gross income as being in excess of the amount exempted from the war-profits and excess-profits tax. This deduction is, of course, permitted for the income tax only.

(11) War-profits and Excess-profits tax assessed for the same taxable year.

If a corporation makes a return for a fiscal year beginning in 1918 and ending in 1919, the war-profits and excessprofits tax applicable to a portion of the fiscal year shall be credited against the income for the same portion of the fiscal year.

(12) $2,000 exemption-A fixed exemption of $2,000 is allowed domestic corporations.

Note: Certain additional deductions are allowed Insurance Companies (see Sec. 234 of the Act).

Q. May premiums on life insurance policies be deducted?

A. Premiums paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any trade or business carried on by the taxpayer cannot be deducted when the taxpayer is directly or indirectly a beneficiary under such policy.

Q. Our corporation pays income taxes in a foreign country and to possessions of the United States, may we have such taxes credited against the United States tax?

A. In the case of a domestic corporation, the total income, war-profits and excess-profits taxes payable to the United States, will be credited with the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign

paid on ansvee or of any by the ta

country upon income derived from sources therein, or to any possession of the United States.

If such taxes are refunded or the accrued tax is not paid in whole or in part the Commissioner must be notified at once.

Q. Our corporation owns a majority of the voting stock of a foreign corporation which transacts no business and derives no income from sources within the United States. Can the dividends received from said foreign corporation be deducted in computing the net income of our corporation?

A. No, because such foreign corporation is not taxable for Federal Income, War-profits and Excess-profits Taxes.

Q. Since our corporation is taxable on the dividends received from such foreign corporation, may our corporation have any credit for the income, war-profits and excessprofits taxes paid by such foreign corporation to any foreign country?

A. A domestic corporation which owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States which the amount of any dividends (not allowed as a deduction) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: provided, that in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not allowed as a deduction) received by such domestic corporation during the taxable year.

Q. Our corporation is about to sell its business and in addition to the purchase price of the business, the vendee has agreed to pay whatever amount of additional income, war-profits and excess-profits taxes that will have to be paid because of the sale of said business. If such taxes are paid by the vendee, will the amount thereof constitute

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