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assessment of taxes for the year 1917 under section 209 of the Reyenue Act of 1917.

The M Company was organized in March, 1917, for the purpose of doing a brokerage business in metals. The company has paid-in capital stock of dollars issued in three shares. Its gross sales for the year 1917 amounted to 183x dollars and its cost of goods sold amounted to 165x dollars. The only expense of the corporation consisted of a salary of 16x dollars paid to its president, who owns one share of stock, and fx dollars paid for incorporation and legal services. Its net income was, accordingly, 16x dollars and its balance sheet at the close of December 31, 1917, shows capital stock, fæ dollars, surplus, 16x dollars, this latter amount representing the net income of the year as stated. The treasurer and the secretary of the corporation are its other stockholders.

The Income Tax Unit denied the right of assessment under section 209, and because of the relation of the corporation's income to its invested capital the tax was assessed under the provisions of section 210 of the Revenue Act. This assessment resulted in an excess profits tax of y per cent of net income, resulting in an additional tax of 4.c dollars.

The taxpayer under his contention for assessment under section 209 claims that 99 per cent of the business of the company consisted of brokerage collected on sales made to the N Company, that the arrangement with this company was that it should be furnished with a certain product in quantities such as they might order, and that the broker should be paid a certain brokerage over and above the mill price, the mill price being known to the purchasers. The taxpayer made the collections from the N Company and paid to the mills the price of the product purchased. It is stated that it was so arranged that capital was not necessary in these transactions, since the N Company was required to pay for the product furnished it prior to the date on which the M Company was required to pay the mills. The corporation accordingly rests its case on its claim that it transacts brokerage business only, that it has a mere nominal capital of kæ dollars, and that during the year of 1917 it was the personal equation of its president that made it possible for this corporation to conduct any business whatever.

The Income Tax Unit contends that the corporation was trading as a principal, making contracts direct with the purchaser and assuming responsibility thereunder, and that accordingly its tax can not be adjusted under section 209 of the Revenue Act.

Article 73 of Regulations 41, revised, provides that: Agents and brokers requiring and using no capital or merely a nominal capital in their business are taxable under article 15, but commission houses regularly employing a substantial amount of capital, whether to lend to principals or to earry goods on their own account, are not deemed to be agents or brokers and are taxable under the provisions of article 16.

In the instant case it is clearly apparent that only nominal capital was employed in the business. No advances were made to the manufacturer, and collections from the purchaser only passed through the hands of the brokers. The goods were shipped direct to the purchaser, and therefore the officers of the corporation required no offices and no clerical assistance. It was merely a matter of securing orders for the product and placing these orders with the manufacturer. It was admitted in conference that under the contracts with the purchaser the M Company might be sued, but in view of the recognition by the purchaser that the M Company was merely acting in a brokerage capacity, without capital to insure recovery under any breach of contract, the real responsibility rested in the manufacturer, and that in event there should be any right of action it would rest against the purchaser. In view of this, the representatives of the taxpayer contend that for the purpose of arriving at a proper tax the Department should look beyond corporate form if it is considered the corporation was trading as a principal.

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The Committee recognizes that it is only on the theory that the M Company might be held responsible under its contracts that assessment under section 209 can be denied. It considers, however, that the nominal capital of the corporation clearly establishes the fact that it was not contemplated it should be held responsible except by way of personal service to both the buyer and seller, and accordingly the corporation clearly comes within the contemplation of the section of the Act itself which provides that a corporation doing business on a nominal capital, or without any capital, should be assessed for excess profits tax at the rate of 8 per cent on its net income.

The Committee accordingly recommends, in the instant case, that the action of the Income Tax Unit be reversed and that assessment of the excess profits tax of this corporation be made in accordance with the provisions of section 209 of the Revenue Act.

SECTION 200, ARTICLE 1524: Personal service

corporation : certain corporations excluded.

15-21-1558 A. R. M. 120

REVENUE ACT OF 1917.

Held, that the M Company is not entitled to classification and assessment under the provisions of section 209 of the Revenue Act of 1917 but that the comparatives used in arriving at the assessment made under the provisions of section 210 and articles 18, 24, and 52 of Regulations 41, should be reconsidered,

The Committee is in receipt of a memorandum from the Income Tax Unit inquiring whether, upon the basis of the facts hereinafter stated, the M Company is entitled to classification and assessment under the provisions of section 209 of the Revenue Act of 1917, and also whether the comparatives used in arriving at the assessment made under the provisions of section 210 and articles 18, 24, and 52 of Regulations 41 should be reconsidered.

It appears that the M Company was organized June, 1916, with an authorized capital stock of y shares of no par value, all of which is owned by A, president and treasurer. The corporation is the successor of a business formerly conducted by A personally and since the date of organization has been engaged in business as importer and exporter. The net worth of all the assets at the commencement of business amounted to approximately 2 dollars. The corporation has filed income and profits tax returns for 1917 and has computed its excess profits tax at the 8 per cent rate under the provisions of section 209 of the Revenue Act of 1917. The Income Tax Unit in the audit of the returns for 1917 has denied clas

sification under the provisions of section 209 and has made assessment under the provisions of section 210 and articles 18, 24, and 52 of Regulations 41. It appears from the comparatives found by the Income Tax Unit that the rate of tax is y per cent of the net income and that an additional assessment of x dollars has been made.

The Income Tax Unit in the audit of the returns has increased the net income for the taxable year 1917 to 3x dollars as against 4x dollars reported by the corporation. This increase is due to the disallowance of organization expenses and certain losses which are held not to be closed transactions. Approximately 75 per cent of the total income was derived from commissions and 25 per cent from trading as a principal. The business of the corporation consisted of two branches: (a) That of representative or broker for foreign principals upon a commission basis, and (6) that of trading as a principal.

The taxpayer admits that it engaged in business for its own account and that profits were realized and losses sustained as a result of such trading. It is contended, however, that the percentage of profits derived from trading is not sufficient to preclude the corporation from classification and assessment under the provisions of section 209. The foreign correspondents cabled funds or opened letters of credit in favor of the corporation and thus placed it in a position to finance transactions without using its own capital.

The profits derived from trading as a principal are approximately 25 per cent of the total adjusted net income, or 4x dollars. These profits are derived from transactions which are more than incidental and indicate clearly that capital, whether invested or borrowed, is essential in the conduct of the business.

Section 209 of the Revenue Act of 1917 reads as follows:

That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $3,000 and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.

The Committee has carefully considered all the facts in this case and is brought irresistibly to the conclusion that since approximately 25 per cent of the adjusted net profits for 1917 was derived from trading as a principal the corporation can not properly be classified and assessed under the provisions of section 209 of the Revenue Act of 1917.

However, the Committee concurs in the opinion of the Income Tax Unit that the corporation is properly assessable under the provisions of section 210 and articles 18, 24, and 52 of Regulations 41. * * *

SECTION 201.—DIVIDENDS. SECTION 201. ARTICLE 1541: Dividends.

(See 1-21-1370, and 6-21-1426; sec. 213(a), art. 32.) So-called dividends credited to accounts of subscribers who are employees.

SECTION 201, ARTICLE 1541 : Dividends.

7-21–1441

O. D. 801 A stock dividend paid in true preferred stock is exempt from tax the same as though the dividend were paid in common stock; however, if the stock issued and distributed as a dividend ranks with or prior to the interest of general creditors (with respect to the payment of either interest or principal), it can not be considered true preferred stock, and must be treated as income to the recipient.

SECTION 201, ARTICLE 1541: Dividends.

14-21-1538

O. D. 859 A corporation declared a dividend payable in stock of the company at par. In making the distribution of fractions of shares scrip certificates were issued. In order to facilitate the disposal for the stockholders of their scrip, where they did not desire to purchase additional scrip to entitle them to a full share of new stock, the corporation sold in the open market as an agent of the stockholders the scrip certificates received for fractional shares of dividend stock. The sale was entirely optional with the stockholders.

Held, that the scrip certificates received as a dividend do not represent a cash dividend but a stock dividend and are not subject to

tas.

SECTION 201, ARTICLE 1541 : Dividends.

17-21-1589

0. D. 887 The question is presented as to whether Missouri corporations can legally declare a stock dividend.

It is a well established rule of law that where a corporation has net or surplus profits, it may in the absence of statutory or charter prohibition declare a stock dividend.

Section 3348 of the corporation laws of the State of Missouri, 1917 edition, provides in part as follows:

DIVIDENDS MAY BE DECLARED, WHEN.-Dividends of the profits made by the corporation may be declared by the trustees or directors thereof every six months, or oftener, as the directors may elect; but no such dividends shall be made and paid to stockholders while such corporation is in an insolvent condition; * * * or any dividend the payment of which would render it insolvent, or which would diminish the amount of its capital stock,

Section 3354 of the corporation laws of the State of Missouri, 1917 edition, provides in part as follows:

MAY INCREASE OR DIMINISH CAPITAL, WHEN.--Any corporation now existing or which may hereafter be formed for any of the purposes contemplated by this article, may increase or diminish its capital stock by complying with the provisions of this article, in any amount within the limits of this article, and may extend its business to any other purposes authorized by this article, subject to the provisions and liabilities thereof, * * *. And any corporation increasing its capital stock shall, before the same shall take effect, cause to be paid up of such increase of capital not less than fifty per cent in lawful money of the United States; * * *

Section 3348, above quoted, specifically authorizes the declaration of dividends from profits made by the corporation, without distinguishing between “stock” and “cash " dividends. Section 3354, above quoted, authorizes increases in capital stock, providing, however, that before such increases shall take effect there shall be paid up not less than fifty per cent of such capital increases.

As the declaration of stock dividends is not specifically prohibited, it is held that from the information submitted, no reason is apparent why Missouri corporations incorporated under the laws referred to above can not legally declare stock dividends out of surplus when an amount of money or property equivalent in value to the full par value of the stock distributed as a dividend has been accumulated and is permanently added to the stock of the corporation.

the Surplus full ted

SECTION 201, ARTICLE 1541: Dividends.

24-21-1681

T. D. 3170
INCOME TAX--REVENUE ACT OF 1916. DECISION OF COURT.

1. INCOME-DIVIDENDS PAID IN DEBENTURE Bonds.
A dividend paid in debenture bonds of the corporation is income

to the stockholders. 2. DIVIDEXDS PAID IN DEBENTURE Bonds—DISTINGUISHED FROM STOCK DIVIDENDS.

Where a dividend is paid in debenture bonds, the stockholders receive property in the form of securities available for disposition in the market, and entirely severed or distinguished from their control of the property as stockholders, which securities call for the payment of cash and do not invest the holder with merely a differ

ent form of holding of stock. 3. PRIORITY OF GENERAL CREDITORS OVER RECIPIENTS OF DIVIDEND PAID IN

DEBENTURE BONDS.

There is no question between persons receiving a dividend paid in debenture bonds and general creditors where the corporation is solvent, and any priority one might have over the other is immaterial.

TREASURY DEPARTMENT,
OFFICE OF COMMISSIONER OF INTERNAL REVENUE,

Washington, D.C. To collector's of internal revenue and others concerned:

The appended decision of the United States District Court, Eastern District of New York, dated March 17, 1921, in the case of Richard R. Doerschuck v. United States of America and three companion cases, is published for the information of internal revenue officers and others concerned.

M. F. WEST, Acting Commissioner of Internal Revenue. Approved: May 28, 1921. A. W. MELLON,

Secretary of the Treasury.

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