If on June 30, 1920, or prior, a corporation formally decides to liquidate no return need be made thereafter.

Period of doing business determines tax liability.

REGULATION. The tax being payable in advance does not apply to any corporation which was not engaged in business during any part of the fiscal year preceding the year for which the tax is due, but if it was in business even one day of the preceding year and one day of the taxable year it is subject to the tax. There is no relation between the amount of the tax payable and the length of time the corporation was in business. A corporation engaged in business during a part of the preceding year, but not engaged in business at the beginning of the taxable year, is not required to make any return if it is dissolved or in process of dissolution, but if it is only tem porarily inactive and subsequently during the year engages in business it should file a return in the month in which it recommences business. A corporation organized after the beginning of a taxable year is not subject to the tax for the remaining portion of the year in which it was organized, but when one corporation succeeds another on July 1 of any year and pursuant to an agreement entered into between the respective organizations during the preceding fiscal year ceases to do business at that time, the business being carried on thereafter by the new concern, the new corporation is liable to the tax. "Engaged in business" in the case of a foreign corporation means engaged in business in the United States. (Reg. 50, Art. 51.)

"Doing business" by railroad corporation under federal control.

REGULATION. A corporation owning a railroad controlled and operated by the Government is exempt from liability for a given tax year only in case it does no business during such year. The liability of a corporation which actually does business is not affected by the control over its railroad exercised by the Government. . . . .13 (Reg. 50, Art. 20.)

Corporations Which Are Not Subject to the Tax

LAW. Section 1000. (c) The taxes imposed by this section shall not apply in any year to any corporation which was not engaged in business (or in the case of a foreign corporation not engaged in business in the United States) during the preceding year ending June 30, nor to any corporation enumerated in section 231.

"For detailed procedure regarding railroads, see Reg. 50, Arts. 20 and 21, and T. D. 2800, March 12, 1919.

Exempt corporations. In addition to corporations not "doing business" the fourteen classes of corporations enumerated in section 231 of the income tax law are exempt. For details, see page 51.

Rate and Computation of Tax for Domestic Corporations

....

LAW. Section 1000. (a) ... (1) Every domestic corporation shall pay annually a special excise tax . . . . equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000. In estimating the value of capital stock the surplus and undivided profits shall be included; . . . .

(b) In computing the tax in the case of insurance companies such deposits and reserve funds as they are required by law or contract to maintain or hold for the protection of or payment to or apportionment among policyholders shall not be included.

(c) . . . . and in the case of every such domestic [mutual insur. ance] company the tax shall be equivalent to $1 for each $1,000 of the excess over $5,000 of the sum of its surplus or contingent reserves maintained for the general use of the business and any reserves the net additions to which are included in net income under the provisions of Title II, as of the close of the preceding accounting period used by such company for purposes of making its income tax return.

REGULATION. The tax is at the rate of $1 for each full $1,000 of the fair average value of the capital stock of a corporation in excess of the prescribed deduction. The tax is not upon the par value of the capital stock, but upon its fair average value for the preceding fiscal year ending June 30. As regards domestic corporations it is on an entirely different basis from the excess profits tax, which is concerned with invested capital and not with the present fair value of the capital. Moreover, the fair value of the entire capital stock of a corporation is not necessarily the product of the market value of each share multiplied by the number of shares. For the method of computation of the tax see article 102. Stock in the treasury of a corporation is not regarded as outstanding unless pledged as security for a debt. No deduction is allowed corporations organized in the United States for capital invested outside the United States. If a corporation is doing any business, it is taxed on its entire capital, even though most of it may not be employed in the business. (Reg. 50, Art. 22.)

Mutual insurance companies, domestic-How taxable.—
REGULATION. The tax is $1 for each full $1,000 of the excess

over $5,000 of the sum of (a) the surplus or contingent reserves maintained for the general use of the business and (b) any reserves the net additions to which are included in net income for the purpose of the income tax, in both cases figured as of the close of the last taxable year of the company. The net addition required by law to be made within the taxable year to reserve funds, including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds and, in the case of corporations issuing policies covering life, health and accident insurance combined in one policy issued on the weekly premium payment plan continuing for life and not subject to cancellation, including such portion of the net addition not required by law made within the taxable year to reserve funds as is needed for the protection of the holders of such combination policies, is not included in net income for the purpose of the income tax. See Regulations 45 and particularly articles 568-570 thereof. (Reg. 50, Art. 62.)

Mutual insurance companies, foreign-How taxable.

REGULATION. The tax is $1 for each full $1,000 of the same proportion of the sum of (a) and (b) in the last article which the reserve fund upon business transacted within the United States is of the total reserve upon all business transacted, calculated as of the close of the last taxable year of the company. (Reg. 50, Art. 63.)

Preferred and common stock.-As many corporations have more than one class of stock, provision must be made for a calculation which gives due weight to the fair value of the entire outstanding capitalization. It is believed that a short and simple rule will settle any apparent difficulties in determining a proper valuation.

As to preferrED STOCK.-If preferred stock has a market value the actual number of shares of preferred stock outstanding multiplied by the average market value of each share will produce the desired result. If preferred stock has no market value, but if its book value is in excess of par, and if some value is ascribed to the common stock, the preferred stock should be listed at par.

There are, however, many classes of preferred stocks. When there is no cumulative provision as to dividends; no or

only partial preference as to assets; a low rate of dividend, or other factors which, as compared with similar preferred stocks having a market value, would tend to lower the fair value of the preferred stock, full weight must be given to all factors and that value must be placed upon each share of preferred stock which can be supported as being a fair value.

AS TO COMMON STOCK.-If it be borne in mind that the one base of the tax is the net worth of the corporation, it will simplify the calculations whenever more than one class of stock is concerned. In all cases (exclusive, of course, of corporations the market value of whose shares can be ascertained) the fair value of a corporation's entire capitalization will have to be determined. This should be done regardless of the different classes of shares, if any. After a trustworthy estimate has been made, the aggregate valuation placed upon the one or more classes of preferred stock should be deducted, and the balance remaining will represent the proper valuation for the common stock.

Methods of ascertaining fair value.—

REGULATIONS. Every domestic corporation shall make return on form 707 (revised), regardless of the par value of its capital stock. The fair average11 value of the capital stock of a corporation and the tax payable thereon shall be determined in accordance with the instructions in the form, which provides in exhibit A for the book value of the capital stock, in exhibit B for the market value, and in exhibit C for the value based on capitalizing the earnings. All the information called for must be given in every case where it is procurable. (Reg. 50, Art. 101.)

"Form 707 (revised 1919) calls for the total stock outstanding on the last day of the corporation's fiscal year. The law [section 1000 (a-1)] provides that the amount of the tax shall be computed on the basis of the "fair average value of its capital stock for the preceding year."

REGULATION. "If a corporation has increased or decreased its capital stock during the fiscal year, a statement should be attached to the back of the return setting forth the number of shares of stock outstanding each month, with the average fair value of the stock for that month, computed under one of the three cases." (T. D. 2503, June 25, 1917.)

The fair average value of capital stock, the statutory basis of the tax, is not necessarily the book value, or the market value, or even the earning value, although it is often more directly dependent upon the last. It should usually be capable of appraisal by officers of the corporation having special knowledge of the affairs of the corporation and general knowledge of the line of business in which it is engaged. Provision is accordingly made in exhibit C of form 707 (revised) for the tentative determination of the fair value of the capital stock by capitalizing the net earnings of the corporation on a percentage basis fixed by its officers as fairly representing the conditions obtaining in the trade and in the locality. If possible, illustrations drawn from similar corporations should be cited in support of the percentage adopted. But such fair value must not be set at a sum less than the reconstructed book value shown by exhibit A or the market value shown by exhibit B, unless the corporation is materially affected by extraordinary conditions which justify a lower figure. In any such case a full explanation must accompany the return. The Commissioner will estimate the fair value of the capital stock in cases regarded as involving any understatement or undervaluation. (Reg. 50, Art. 102.)

The capital stock tax except on domestic mutual insurance companies is measured by the fair value of the total capital stock, including the surplus and undivided profits, for the year preceding the taxable year, whether the conduct of the business is profitable or otherwise.15

REGULATION. The surplus and undivided profits must be included in estimating the fair average value of the capital stock; that is to say, the capital stock, representing the entire ownership of the property of a corporation, necessarily includes the surplus and undivided profits. If the fair average value is determined from the book value they are included in the assets; if from sales, they are necessarily taken into consideration in establishing the market price, and if from net income, they are more or less reflected through the earnings. (Reg. 50, Art. 24.)

For the purpose of this tax the fair value of the entire capital stock of a going concern, regardless of stock ownership or the ability of individual stockholders to liquidate their holdings, is required. The sales prices for any number of shares of stock less than a majority interest are not necessarily indicative of the fair value of the entire capital stock. The capital

Form 707, page 4, instructions. (See Appendix.)