(b) Resulting From Transactions Prior to Consolidated Return Period.

No deduction shall be allowed during a consolidated return period for intercompany accounts receivable or other obligations resulting from intercompany transactions during the period of filing separate returns.

(c) Limitation on Allowance after Consolidated Return Period.

The rules applicable to the allowance of losses upon the sale of bonds shall be applicable to the allowance after the consolidated return period as a bad debt of an intercompany account receivable or other obligation resulting from an intercompany transaction during the consolidated return period. (See article 35.)

ART. 41.-Net Losses.

(a) Consolidated Net Loss for 1929 or subsequent Taxable Year. A net loss sustained by an affiliated group for any taxable year (that is, 1929 or any subsequent taxable year) for which a consolidated return is made or is required shall be allowed, in the same manner, to the same extent, and upon the same conditions as if the group were a single corporation, as a deduction (1) in computing the consolidated net income of such group for the succeeding taxable years, or (2) if consolidated returns are not made or required, then in computing the net income of the parent corporation for such years, or (3) if the parent becomes a subsidiary in another affiliated group which makes a consolidated return, then in computing the consolidated net income of such other group for such years. In no case will any such net loss be allowed in computing the net income of a subsidiary (whether on a separate return or a consolidated return of another affiliated group of which the subsidiary has become a member).

(b) Consolidated Net Loss for Years prior to 1929.

A consolidated net loss sustained for either of the two taxable years immediately preceding the taxable year 1929, in the case of a parent corporation and one or more other corporations which made a consolidated return for such year, shall, if such parent is a member of an affiliated group which makes a consolidated return for the taxable year 1929 or the next succeeding taxable year, be allowed as a deduction in computing the consolidated net income of such group for 1929 or the next succeeding taxable year in the same manner, to the same extent, and upon the same conditions as if such group were a single corporation and the same taxpayer, except that no part of any such consolidated net loss which has previously been allowed, or is allowable, as a deduction in computing the net income of any such corporation which is not a member of such affiliated group during 1929 or the next succeeding taxable year, shall be allowed as a deduction in computing such consolidated net income for 1929 or the next

Art. 41

§ 141

succeeding taxable year. In no case will any such consolidated net loss be allowed in computing the net income for the taxable year 1929 or the next succeeding taxable year of a subsidiary (whether on a separate return or a consolidated return of another affiliated group) which during any part of the taxable year 1929 or the next succeeding taxable year is a member of an affiliated group for which a consolidated return is made.

(c) Net Loss Sustained by Separate Corporation Prior to Consolidated Return Period.

A net loss sustained by a corporation prior to the date upon which its income is included in the consolidated return of an affiliated group (including any net loss sustained prior to the taxable year 1929) shall be allowed as a deduction in computing the consolidated net income of such group in the same manner, to the same extent, and upon the same conditions as if the consolidated income were the income of such corporation; but in no case in which the affiliated status is created after January 1, 1929, will any such net loss be allowed as a deduction in excess of the cost or the aggregate basis of the stock of such corporation owned by the members of the group. (d) Taxable Year.

Any period of less than 12 months for which either a separate return or a consolidated return is filed, under the provisions of article 13, shall be considered as a taxable year.

ART. 42.-Credit for Foreign Taxes.

The credit allowed a domestic corporation for taxes paid or accrued during the consolidated return period to any foreign country or to any possession of the United States (under section 131 of the Act) shall be computed and allowed as if the affiliated group were the taxpayer.

ART. 43.-Bases of Computation.

In determining consolidated net income all members of the affili ated group shall adopt that method of accounting which clearly reflects the consolidated net income. A method of accounting which does not treat with reasonable consistency all items of gross income and deductions of the various members of the group shall not be regarded as clearly reflecting the consolidated net income. For example, one member of the group will not be permitted to report items of income or deductions on the cash basis of accounting, while another member of the same group reports the same or similar items on the accrual basis. H. F. MIRES,

Acting Commissioner of Internal Revenue.

Approved January 3, 1929.

A. W. MELLON,

Secretary of the Treasury.

APPENDIX [REGULATIONS 75]

(Articles 711 to 715, inclusive, and article 735 of Regulations 74) ART. 711. Consolidated returns of affiliated corporations for 1929 and subsequent taxable years. The regulations prescribed under section 141 (b), and applicable to the making of consolidated returns by affiliated corporations for the taxable year 1929 and subsequent taxable years, and to the determination, computation, assessment, collection, and adjustment of tax liabilities under consolidated returns for such years, have been promulgated as Regulations 75. For convenience, Regulations 75 are reprinted in the appendix to these regulations. For definition of taxable year, see section 48.

ART. 712. Formation of and changes in affiliated group.-An affiliated group of corporations, within the meaning of section 141, is formed at the time that the common parent corporation becomes the owner directly of at least 95 per cent of the stock (as defined by section 141 (d)) of another corporation. A corporation becomes a member of an affiliated group at the time that one or more members of the group become the owners directly of at least 95 per cent of its stock. A corporation ceases to be a member of an affiliated group at the time that the aggregate of its stock owned directly by the members of the group becomes less than 95 per cent.

ART. 713. Corporations to be included in consolidated returns for 1929 and subsequent taxable years.-A consolidated return must include every domestic corporation which is a member of the affiliated group; but shall not include a foreign corporation (except as provided in section 141 (h) and article 714); a corporation organized under the China Trade Act, 1922; a corporation entitled to the benefits of section 251; or an insurance company subject to the tax imposed by section 201 or 204, in the case of a consolidated return for corporations subject to the tax imposed by section 13; or a corporation subject to the tax imposed by section 13, in the case of a consolidated return for insurance companies subject to the tax imposed by section 201 or 204.

ART. 714. Foreign corporations which may be treated as domestic corporations. In the case of a domestic corporation owning or controlling, directly or indirectly, 100 per cent of the capital stock (exclusive of directors' qualifying shares) of a corporation organized

Art. 714

under the laws of Canada or of Mexico and maintained solely for the purpose of complying with the laws of such country as to title and operation of property, such foreign corporation may, at the option of the domestic corporation, be treated for income tax purposes for 1928 and subsequent taxable years, as a domestic corporation. The option to treat such foreign corporation as a domestic corporation so that it may be included in a consolidated return must be exercised at the time of making the consolidated return.

ART. 715. Allowance of specific credit.-Only one specific credit of $3,000 (see section 26 (b) and article 301) shall be allowed against the consolidated net income of an affiliated group which makes a consolidated return, and this only in case the consolidated net income of the group does not exceed $25,000. If the consolidated net income of the group is more than $25,000, the tax imposed by section 13, 201, or 204 shall not exceed the tax which would be payable if the $3,000 credit were allowed, plus the amount of the net income in excess of $25,000. In cases where a consolidated return is made by an affiliated group for a fractional part of a year, the provisions of section 47 and article 371 are applicable. If the separate return of a corporation becoming a member or ceasing to be a member of an affiliated group making a consolidated return, is made for a period of less than 12 months, such return is for a fractional part of a year within the meaning of section 47 (e), and the specific credit of $3,000, if allowable, shall be reduced as therein provided. (See article 371.)

ART. 735.-Taxable year of affiliated corporations making consolidated return. In the case of a consolidated return of affiliated corporations, the consolidated net income must be computed on the basis of the taxable year (calendar year or fiscal year) of any one of the affiliated corporations, except, if the affiliated group of corporations has a parent corporation, the consolidated net income must be computed upon the basis of the taxable year of the parent corporation. However, if the corporations properly made a consolidated return for the taxable year 1927, the consolidated net income for the taxable year 1928 must be computed on the basis of the same taxable year upon which the 1927 return was made, unless permission to change is granted by the Commissioner. If pursuant to this article the taxable year of a group of corporations affiliated under the provisions of section 142 (c) (2) would be a fiscal year beginning in 1928, a consolidated return for a fractional part of a year may be filed by such affiliated corporations for the period between the close of the previous fiscal year of the group and December 31, 1928. In such cases the period beginning January 1, 1929, shall be included in the return or returns for the taxable year 1929.

PRINCIPAL PROVISIONS OF THE REVENUE ACT OF 1926, THE REVENUE ACT OF 1924, AND THE REVISED STATUTES RELATING TO INCOME TAXES FOR 1928 AND SUBSEQUENT TAXABLE YEARS

REVENUE ACT OF 1926

RETURNS TO BE PUBLIC RECORDS

SEC. 257. [Revenue Act of 1926.] (a) Returns upon which the tax has been determined by the Commissioner shall constitute public records; but, except as hereinafter provided in this section and section 1203, they shall be open to inspection only upon order of the President and under rules and regulations prescribed by the Secretary and approved by the President. Whenever a return is open to the inspection of any person a certified copy thereof shall, upon request, be furnished to such person under the rules and regulations prescribed by the Commissioner with the approval of the Secretary. The Commissioner may prescribe a reasonable fee for furnishing such copy.

(b) (1) The Secretary and any officer or employee of the Treasury Department, upon request from the Committee on Ways and Means of the House of Representatives, the Committee on Finance of the Senate, or a select committee of the Senate or House specially authorized to investigate returns by a resolution of the Senate or House, or a joint committee so authorized by concurrent resolution, shall furnish such committee sitting in executive session with, any data of any character contained in or shown by any return.

(2) Any such committee shall have the right, acting directly as a committee, or by or through such examiners or agents as it may designate or appoint, to inspect any or all of the returns at such times and in such manner as it may determine.

(3) Any relevant or useful information thus obtained may be submitted by the committee obtaining it to the Senate or the House, or to both the Senate and the House, as the case may be.

(c) The proper officers of any State may, upon the request of the governor thereof, have access to the returns of any corporation, or to an abstract thereof showing the name and income of the corporation, at such times and in such manner as the Secretary may prescribe. (d) All bona fide shareholders of record owning 1 per centum or more of the outstanding stock of any corporation shall, upon making request of the Commissioner, be allowed to examine the annual income returns of such corporation and of its subsidiaries. Any shareholder who pursuant to the provisions of this section is allowed to examine the

§ 257 (1926)