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purchase of stock and securities of a subsidiary corporation for the same purpose, will constitute capital employed in the transaction of business in the United States. A foreign corporation may not escape taxation by organizing or purchasing stock of another corporation to own the facilities which the taxpayer needs in its business. . . . . (Reg. 50, Art. 33.)

A foreign corporation may employ capital in the transaction of its business in the United States in various ways, as for example, in the investment of funds in property in the United States used in its business, in stocks and securities of subsidiary corporations as explained in preceding article, in bills and accounts receivable representing business done in the United States, in merchandise kept here for sale, in materials manufactured here, and in deposits in United States banks maintained for use in business here. In general, approximately such proportion of the entire capital of a foreign corporation will probably be employed in the transaction of its business in the United States as the gross amount of its business in the United States bears to its total gross business, but this is not always true, for a corporation may conceivably transact a greater or less volume of business in one country than in another on the same amount of capital. (Reg. 50, Art. 34.)

Basis of tax, foreign corporation.

REGULATION. The basis of the tax is the average amount of capital employed in the transaction of business in the United States during the preceding fiscal year. It will usually be sufficient to determine the amount of capital so employed at the beginning of such year and the amount so employed at the end of such year and to divide the sum of such amounts by two. However, where there have been material changes in the amount of capital the average amount should be determined with due regard to the times at which such changes occurred. The foreign corporation may, if desired, compute the average amount of capital employed on a monthly basis. (Reg. 50, Art. 35.)

Capital "employed” includes borrowed capital.

RULING. Following question submitted on behalf our client the .......... Company, a foreign corporation. Referring article 33, Regulations 50, is capital stock tax to be computed on entire amount of capital employed in this country irrespective of whether that capital consists in part of company's own capital and in part of borrowed capital? Kindly wire reply collect. (Answer.) Your wire 25th capital stock tax is imposed upon capital employed irrespective of its nature whether borrowed, paid in or earned. (Telegram of inquiry from E. G. Shorrock & Co., Seattle, Washington, and the reply. thereto, signed by Deputy Commissioner J. Hagerman, and dated October 30, 1919.)

Return by foreign corporations.• REGULATION. Every foreign corporation shall make return on form 708 (revised), irrespective of the amount of capital employed in this country in the transaction of its business. The capital actually employed in the transaction of the business of a foreign corporation in the United States and the tax payable thereon shall be calculated in accordance with the instructions on the form.25 .... (Reg. 50, Art. 103.)

28 See Appendix.



For a number of years, the state of New York has depended upon a very unsatisfactory personal property tax for both state and local purposes. This scheme of taxation has been very unpopular, and justly so, with the taxpayers. Various commissions and committees which have investigated the situation have recommended that the system be abolished and a general income tax substituted. The conclusions set forth in the report of the Joint Legislative Committee on Taxation, filed February 14, 1916, are of interest in regard to both the personal income tax and the franchise tax.

The legislature submitted to the committee the question "How can the state most equitably and effectually reach all property which should be subjected to taxation and avoid conflict and duplication of taxation on the same property?"

Without passing upon the broad questions of public policy involved in the adoption of a new tax system, which questions should more properly be decided by the legislature as a whole, this committee, in answer to the specific question submitted to it, desires to state that all the evidence presented and all our investigations, the results of which are presented in full in this report, tend to show that the end sought for will be accomplished best by: (1) the abolition of the present tax on personal property; (2) the withdrawal of general business corporations from the provisions of section 182 of the tax law; and (3) the imposition of an income tax on individuals and general business corporations, including manufacturing corporations.

On June 14, 1917, a general franchise tax law (Emerson Law) was passed, imposing a tax on manufacturing and mercantile corporations. The tax was computed upon the basis of the net income reported to the federal government and was at the rate of 3 per cent of such income. In 1919 this law

'Final report of the Committee on Taxation of the City of New York (New York, 1916), page 64 et seq. Report of the Joint Legislative Committee on Taxation (in Senate, February 14, 1916), page 206 et seq.

was amended to make it more general in its scope and to increase the rate of tax to 41/2 per cent for the taxable year.

It was not until 1919 that the legislature passed the personal income tax act. The law was approved May 14, 1919, and was made effective "for the calendar year nineteen hundred and nineteen, or for any taxable year ending during the year nineteen hundred and nineteen."2 When a taxpayer had . a taxable year ending in 1919, the tax applied only to the net income arising after January 1, 1919.

The author does not discuss herein section 352 of the law which purports to exempt income-paying property from the personal property tax. The city of New York is placing an unreasonable interpretation on this section of the law. The legality of its position is questionable and it is expected that the legislature will amend the law and clarify the situation.

The law very closely follows the provisions of the federal Revenue Act of 1918. It is evident that the federal act was used as a model. In effect, the present provisions of the federal act relating to individuals have been revised to accord with the taxing powers of a particular state. Many of the provisions will be found to agree verbatim with those of the federal law and it may be stated, as a general rule, that no change appears in the phraseology of the law except where it was necessary to bring the taxable income within the jurisdiction of the state.

Knowing that it was the intention of the legislature so to follow the federal law, it is natural that the forms of returns and the regulations which have been issued recently should be patterned after those which have been issued by the Treasury. The court and Treasury decisions that have been rendered in regard to cases under the federal law will act as valuable precedents.

The object of this chapter is to explain in a general way the administrative provisions of the act, and to indicate the

'Section 351.

differences between the state and federal laws, so that advantage may be taken of the points of similarity.

Rulings and Regulations. In preparing this chapter The A. B. C. of the Personal Income Tax (Bulletin No. I), issued May 29, 1919, and the Comptroller's Regulations, issued in January, 1920, have been used. In addition to these sources, the various rulings, issued from time to time by the comptroller, have also been considered.

Income and Deductions

The differences between the New York law and the federal law relating to income and deductions may best be shown by illustrations which follow.

The two illustrations have been designed with the idea of bringing out all possible differences and might appear incongruous if a particular taxpayer were in mind.





GOVERNMENT NEW YORK Income from business

Net profit from business conducted as

sole proprietor ..................... $16,700.00 $16,700.00

The net taxable income from this business, for the purpose of the return to the state of New York, would be computed in accordance with the principles relating to income and deductions set forth below. It is assumed for the purposes of this illustration that taxable net income of this business is the same for both federal and New York taxes.

Differences arise in respect of the follow

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