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As a means of raising additional revenue, Congress in 1916 imposed an excise tax, commencing January 1, 1917, on corporations for the privilege of doing business. In view of the income and excess profits taxes imposed upon corporations this tax should have been discontinued, but instead of taking such action Congress merely increased the rate and reduced the exemption. The provisions of the 1918 law were made retroactive to July 1, 1918.

The rate now in force for domestic corporations is $12 for each full $1,000 of the average fair value of the capital stock for the year preceding the taxable year in excess of the exemption of $5,000. The rate is comparatively low and the exemption such that the total tax is not excessive.

In his report for 1919 the Commissioner states: “The early regulations touching valuations have been radically elaborated and modified until under present approved methods it has become necessary to individualize each case, considering all elements and factors which throw light on values and harmonizing them so far as possible in the ultimate values found.”

This is an admission that the earlier regulations were wrong. The early administration of the law did not reflect credit on the Treasury. Originally an attempt was made to divide corporations into a few classes and value the capital stock of all companies in each on practically the same basis.

Theoretically, the tax is on the privilege of doing business in a corporate capacity, but it is difficult to assess a tax on the

"Title IV of the revenue act of September 8, 1916, Public No. 271, 64th Congress.

The former rate was 50 cents for each $1,000 and the exemption was $99,000. *Foreign corporations, however, are not permitted any deduction.

"fair" value of capital stock without considering past earnings, so that in this respect the tax amounts to a duplication of the income tax. This condition is overcome to some extent by reason of the fact that the capital stock tax is an allowable deduction from gross income in determining the net income subject to the income and excess profits taxes.

When the law was enacted all the arguments as to the difficulty of administering a property tax were ignored. The injustice of placing a burden upon an unprofitable business was brushed aside. The tax does not apply to individuals and partnerships. It is somewhat similar to various state laws imposing what are known as taxes on “corporate excess.” Tax commissions have frequently commented on this system of taxation as having caused much difficulty, and litigation has been frequent. Apparent market value is never taken as conclusive, because the courts will permit a taxpayer to point out any unfairness in an assessment based thereon. Earning power is never taken as the sole factor of valuation because earnings fluctuate too greatly.

All the corporations (educational, fraternal, etc.) exempt under the income tax law are also exempt from this tax. In addition, many corporations organized for profit but not “doing business," as interpreted by the Supreme Court of the United States, are also exempt. This applies to lessor, inactive and similar corporations.

The tax is due in advance and the next return will be due in July, 1920. The law [section 1000 (a-1)] provides that the computation of the tax of a domestic corporation shall be based on “the fair average value of its capital stock for the preceding year.” Therefore, the return due in July, 1920, will be based on the average value, etc., during the year July I, 1919, to June 30, 1920—the government's fiscal year.“

*The following provision is made on form 707 for a corporation's fiscal year which ends at some date other than June 30: "In item 7 on page i hereof the taxpayer will show the closing date of its fiscal year ended between July 1, 1919, and June 30, 1920, if other than June 30, and the information furnished under exhibits A, B and C will be as of the year or years ended on such date.”

The Treasury has issued regulations which are reproduced in the following pages, governing the preparation of returns, etc. The law is wisely silent as to many details which usually encumber tax bills.

In his report for 1919 the Commissioner states that "the audit of all 1917 and 1918 returns and assessments has been practically completed, except as to delinquents."

For convenience the text of the law and of Regulations 50 will be reproduced herein.

Domestic Corporations
Taxable period.-

Law. Section 1000. (a) That on and after July 1, 1918, in lieu of the tax imposed by the first subdivision of section 407 of the Revenue Act of 1916– .

REGULATION. The tax became effective as of July 1, 1918, and is to be paid annually in advance for each year beginning July 1, in lieu of the capital stock tax imposed by the Revenue Act of 1916. The tax for the first year ending June 30, 1919, although necessarily not payable in advance, must be paid upon notice and demand by the collector. . . . . Special taxes, of which this is one, becoine due on the ist day of July in each year, or on commencing any trade or business on which such tax is imposed. In the former case the tax is reckoned for one year, and in the latter case it is reckoned pro

[Former Procedure] Regulations 38 were issued October 19, 1916. Regulations 38 (revised) were issued August 9, 1918. In the opinion of the author the requirements of the 1916 regulations were reasonable but T. D. 2503 (June 25, 1917) imposed new methods of ascertaining the "fair value” of the corporate stock which were fallacious, not in accord with the law and unenforceable.

As the valuation of capital stock is the basis for the assessment of the tax, the importance of a correct formula for calculating "fair value" should not be underestimated. Detailed criticism of the regulations will be found in Income Tax Procedure, 1918, pages 628 to 677.

Regulations 38 (revised, 1918) did not continue the former objectionable instructions. Therefore, it is considered unnecessary to repeat in this book most of the comments on the original regulations. But taxpayers whose returns for the fiscal year ended June 30, 1918, and earlier periods have not been examined or finally settled should refer to the 1918 edition of this manual.

From information which has come to the author it seems that very many close corporations were over-assessed, but that practically no corporation whose stock was listed on an exchange was so treated. The corporations which were over-assessed should apply for a refund.

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