In reply you are advised that in accordance with section 240 of the Revenue Act of 1918 it will be necessary for the New Jersey corporation and the New York corporation above mentioned to file a consolidated return, excluding the foreign corporation. (Letter to a subscriber of The Corporation Trust Company, signed by Acting Deputy Commissioner P. S. Talbert, and dated April 23, 1919.)

DISTRIBUTION OF THE TAX AMONG THE SUBSIDIARIES.

LAW. Section 240. (a) . . . . In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated 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. . . . .

RULING. In connection with the assessment and payment of income and profits taxes of affiliated corporations, the opinion apparently prevails among taxpayers that the tax must be assessed against and paid by each corporation within an affiliated group. Unless a subsidiary has made a payment, the Bureau greatly prefers that the parent or principal reporting corporation take up and pay the entire tax, making any desired adjustment thereof by charging the affiliated corporations through their own records.

The amount reported by the subsidiary in answer to question 9, form 1122, will be used as the basis for assessment and payment. If the subsidiaries have reported an apportionment in this manner, but the parent corporation has paid the tax instalments on account of such subsidiaries, an amended form 1122 showing "none" in answer to question 9, should be filed. If the last condition obtains, but the taxpayer insists upon apportionment, the collector of the subsidiary's district will request abatement of such portion of the subsidiary's tax as may have been previously paid by the parent corporation in another district.

As a basis for such advice, the latter collector will secure from the parent corporation a schedule showing apportionment of the total tax and instalments to the respective affiliated corporations. If a subsidiary has filed a tentative return and paid an instalment of the tax, it should be assessed the amount shown on form 1122, and will pay future instalments as they fall due. (I. T.-Mim. 2221, August 8, 1919.)

AFFILIATED PUBLIC SERVICE CORPORATIONS.

RULING. "T. D. 2662, issued March 6, 1918, provided in 'B' that railroads, gas, electric, water and other public service corporations when operated independently and not physically connected or

merged particularly when situated in different jurisdictions and subject to regulation by Public Service Commission-will not be required or permitted, without special permission obtained in advance, to make a consolidated return.

"The Revenue Act of 1918, section 240, makes statutory provision for consolidated returns, both for income and for war profits and excess profits tax purposes, setting forth quite definitely just what shall be considered to be affiliated corporations. The amplifying regulations of the Department as contained in Regulations 45, Part II-A, contain nothing indicating that the rule relating to public service corporations laid down by the Department in connection with the Revenue Act of 1917 will be held to apply to the Revenue Act of 1918, section 240.

"We shall appreciate word from the Department as to whether or not public service corporations which otherwise would be deemed to be affiliated corporations are to be taken out of that class because of the fact that they are public service corporations and otherwise meet the conditions outlined in T. D. 2662."

In reply you are advised that subdivision (b) of T. D. 2662, issued March 6, 1918, in connection with the Revenue Act of October 3, 1917, does not apply to the Revenue Act of 1918. In other words, public service corporations which otherwise would be deemed to be affiliated corporations are not to be taken out of that class because of the fact that they are public service corporations and otherwise. meet the conditions outlined in T. D. 2662. (Letter to The Corporation Trust Company, signed by Acting Commissioner J. H. Callan, and dated April 17, 1919.)

ONLY ONE $2,000 CREDIT PERMITTED IN A CONSOLIDATED

RETURN.

LAW. Section 240. (a) . . . . There shall be allowed in computing the income tax only one specific credit of $2,000 (as provided in section 236); . .

TAXABLE YEAR WHEN AFFILIATED CORPORATIONS HAVE DIFFERENT FISCAL YEARS.

REGULATION. In the case of all consolidated returns, consolidated invested capital must be computed as of the beginning of the taxable year of the parent or principal reporting company and consolidated income must be computed on the basis of its taxable year. Whenever the fiscal year of one or more subsidiary or other affiliated corporations differs from the fiscal year of the parent or principal corporation, the Commissioner should be fully advised by the taxpayer in order that provision may be made for assessing the tax in respect of the period prior to the beginning of

the fiscal year of the parent or principal company. See section 226 of the statute and article 431.47 (Art. 638.)

RULING. In any case where an affiliated corporation has made its income tax return on the basis of a taxable year different from that on the basis of which a consolidated excess profits tax return in which it is included has been made under the provisions of articles 77 and 78 of Regulations 41 and T. D. 2662, an amended income tax return may be made on the basis of the same taxable year as the consolidated return, even though notice was not given within the time prescribed in articles 211 to 215. In such a case an amended income tax return shall also be made for any unaccounted for portion of the corporation's taxable year.

Collectors of internal revenue may accept returns made under the provisions of this Treasury decision. (T. D. 2805, March 14, 1919.)

The manner in which the adjustment shall be made to cover the fraction of the subsidiary's fiscal year is indicated in the following letter:

RULING. "A corporation owns all the capital stock of another corporation. The corporation owning the capital stock makes its income. tax return on fiscal year basis ending March 31, 1919-the other corporation makes its income tax return on calendar year basis ending December 31. . . . . The question therefore arises as to the return for the three-month period of the corporation whose fiscal year ends December 31, and it appeared to us that if your ruling would be to the effect that the return should be made on the basis of the fiscal year of the parent corporation, such corporation being the corporation holding 95 per cent of the stock of the second corporation, that there should be a return made for the corporation whose year ended December 31 for the period between December 31, 1917, and March 31, 1918, and then a consolidated return made for the year March 31, 1918, to March 31, 1919. The corporation whose taxable year ends December 31 and whose stock is held by corporation having its taxable year end March 31 is a public service corporation. I assume from letter of Acting Commissioner J. H. Callan to The Corporation Trust Company, dated April 17, 1919, that it would make no difference whether one or both corporations were public service corporations and they would not be taken out of the class of affiliated corporations because of that fact. . . . .

"On the foregoing state of facts will you, therefore, wire us: First: Should there be a consolidated return filed? Second: Shall the corporation whose taxable year ends December 31 file an income

"See page 73.

tax report for the period between December 31, 1917, and March 31, 1918? Third: Should the taxpayer file a statement giving the reasons for filing the return for the period between December 31 and March 31? Fourth In computing the normal tax on income for the three-month period should the exemption be $500, one-fourth of the $2,000 allowed, under section 236? Fifth: If the company whose stock is owned by the principal company is a public service. corporation would a consolidated return be required?"

(Answer to above inquiry.) Consolidated return including parent and fully owned public service subsidiary corporation should be filed for fiscal year parent ended March 31, 1918. Tax is computed in first instance on basis of twelve-month period ended March 31, 1918, with full deductions under Revenue Act of 1918 and then prorated. With return file complete statement facts. (Letter of inquiry from The Cleveland Trust Company, Cleveland, Ohio, and the answer thereto, signed by Acting Commissioner J. H. Callan, and dated May 20, 1919.)

Miscellaneous "Information" Returns

Corporation returns of dividends paid.-In order that the Treasury may be able to check the returns of those who receive dividends the law provides that, upon request by the Commissioner, corporations must file returns of dividends paid.

LAW. Section 254. That every corporation subject to the tax imposed by this title and every personal service corporation shall, when required by the Commissioner, render a correct return duly verified under oath, of its payments of dividends, stating the name and address of each stockholder, the number of shares owned by him, and the amount of dividends paid to him.48

The following regulation makes it clear that the return may be required in the discretion of the Commissioner.

REGULATION. When directed by the Commissioner, either specially or by general regulation, every domestic or resident foreign corporation and every personal service corporation shall render a

[Former Procedure] The 1917 law specified that the return include information regarding "the tax years and the applicable amounts in which such dividends were earned." This was necessary because in 1917 dividends were taxable at the rates which were in force during the years to which the dividends were applicable, under the rule that dividends were deemed to have been paid out of most recently accumulated surplus. (1917 law, section 26.) The 1918 law also omits the blanket phrase "whether made in cash, its equivalent or in stock" (see section 201).

return on form 1097 of its payments of dividends and distributions to stockholders for such period as may be specified, stating the name and address of each stockholder, the number and class of shares owned by him, the date and amount of each dividend paid him, and when the surplus out of which it was paid was accumulated. (Art. 1051.)

Returns under systems of "information at source" and "payment at source."-Returns by withholding agents, treated in more detail later, are required of the various classes of withholding agents covered by the regulations.

Corporations paying interest on bonds and similar forms of indebtedness are required to report the amount withheld in any month on or before the 20th day of the following month, using for this purpose form 1012. At the close of the year and on or before March 1 of the following year, these monthly returns are summarized on an annual return, using form 1013.

The monthly returns referred to above are not required by the statute, but are demanded under regulations prescribed by the Commissioner as a convenience in reporting this tax. Their purpose is to enable the Treasury to audit and check from month to month the items therein reported, and thus avoid congestion at the close of the year. The annual reports, however, are required by the statute, and failure to file them subjects the withholding agent to penalties the same as those for failure to file the annual returns of net income."9 An extension of time may be obtained for filing the list returns in the same manner and for the same reasons as those applying to returns of net income.50

Tax withheld from income other than bond interest will be accounted for on income tax form 1042, and separate reports of the payments entered in form 1042 will be made on form 1098.

Employers, tenants and debtors must report annually on

"See page 125. See page 64.