acquired by the corporation in 189 can not be satisfactorily determined. The Committee accordingly recommends that the action of the Income Tax Unit, in disposing of this case under section 210 of the Revenue Act of 1917, be sustained. SECTION 327, ARTICLE 901: Treatment of special cases. (See 17-21-1588; sec. 200, art. 1523.) Application of section 210, Revenue Act of 1917, when a corporation was ultraconservative in its capitalization. SECTION 327, ARTICLE 901: Treatment of special cases. (See 21-21-1645; sec. 200, art. 1523.) Brokerage business in metals. SECTION 327, ARTICLE 901: Treatment of special cases. REVENUE ACTS OF 1917 AND 1918. 22-21-1668 A. R. R. 518 Recommended, that the action of the Income Tax Unit in denying the M Company special consideration under section 210 of the Revenue Act of 1917, and under sections 327 and 328 of the Revenue Act of 1918, be sustained. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in denying assessment under section 210 of the Revenue Act of 1917, and sections 327 and 328 of the Revenue Act of 1918. The M Company was organized and incorporated in 1906 with capital stock issued and outstanding amounting to 8x dollars. Of this amount a dollars was issued to A and charged to good will on the books of the corporation. This contribution was in recognition of the experience of A and his success as a salesman in the territory in which the corporation was located. The corporation filed its returns for the fiscal year ended May 31, 1918, computing income and profits taxes under the provisions of section 201, and under the provisions of section 328 at the rate of 50 per cent of its net income. The corporation subsequently filed a claim for consideration under the provisions of section 210 of the Revenue Act of 1917, and sections 327 and 328 of the Revenue Act of 1918, based on the following reasons: 1. That the case of the taxpayer is an exceptional one, and its invested capital can not be used as the basis for assessing the excess profits tax without resulting in an unduly burdensome tax, because the invested capital is seriously disproportionate to the taxable income. 2. That the income of the taxable year represents the fruits of activities antedating the taxable year. 3. That the operation of section 207 would place it at a disadvantage in competing with representative concerns. 61360°-21--26 The books of the corporation have been examined by a revenue agent and its invested capital has been clearly established. This is recognized by the taxpayer who relies, under the above contentions, principally on the value of the services of A who is president of the corporation and who, in 1917, acquired practically all of the stock of the corporation, and upon the fact that in 1916 a very satisfactory contract was made from which it is claimed about one-fourth of the income of the company is derived. This contract, in effect, provided for the purchase of a finished product to be made from steel at a price which would yield a reasonable profit over all costs, whatever they might prove to be. It is stated, however, that the purchase amounted to more than a normal year's supply and that delivery has not yet been completed. The taxpayer was accordingly able to supply its customers at the high prevailing prices in the year 1918 and to realize the correspondingly large profits. Its net income for the fiscal year ended May 31, 1917, was 8 dollars and its net income for the fiscal year ended May 31, 1918, was 22 dollars. The invested capital at the beginning of the fiscal year ended May 31, 1917, was 30 dollars and at the beginning of the fiscal year ended May 31, 1918, was 38 dollars, while at the close of the fiscal year ended May 31, 1918, it was 612 dollars, which reflected the undistributed income of 22 dollars for that year. The income and profits taxes assessed by the Unit for the fiscal year ended May 31, 1918, amounted to 12 dollars, which amount, deducted from the income for the year, leaves a balance of 10 dollars for dividends, or approximately 27 per cent of the invested capital at the beginning of the taxable year. It is contended that A's personality is a most important factor in the business and that possibly consideration should be given for assessment of the company's taxes under section 209 of the Revenue Act of 1917, but this section of the law manifestly is not applicable because of the amount of capital employed in the business nor can A's services be considered as creating an abnormal condition because he had been constantly employed in the development of the business since its incorporation and the value of his services was recognized in the first instance by the corporation's contribution of a dollars of its stock which it charged to good will. Section 210 of the Revenue Act of 1917 provides for an equitable adjustment of the tax when the invested capital of a corporation can not be satisfactorily determined, and in giving recognition to the intent of this section, article 52 of Regulations 41 provides that when invested capital is seriously disproportionate to taxable income because of the realization in one year of the earnings of capital unproductively invested through a period of years or of the fruits of activities antedating the taxable year, adjustment of the tax may be made under the provisions of section 210. The Committee, after careful consideration of all the facts in the instant case, finds that the business of the M Company gradually and satisfactorily developed from the date of its incorporation with consistent earnings in the years 1916, 1917, and 1918 available for dividends. The capital stock of the company was only 8 dollars and yet at the beginning of the year 1916 the company has a surplus of 22x dollars. In the final analysis of the case it would seem that taxpayer's conn substantially rests only on an abnormal condition brought about by a business contract which resulted in material advantage to the taxpayer by virtue of circumstances which, in the year 1918, were reflected in very high prices for the product of this corporation. It is not thought this is such an abnormal condition as might be contemplated under article 52 of Regulations 41 or under section 327 of the Revenue Act of 1918. The contract was a simple business proposition which, like many other contracts, resulted in large profits during the year 1918 and it might be said in corresponding losses in subsequent years. The right to claim such losses is recognized in certain sections of the Revenue Act of 1918 and in the regulations promulgated thereunder. Surely, under such conditions, there is no good reason why a corporation receiving large profits in the year 1918 in the ordinary conduct of its business should not pay taxes under the prescribed provisions of the law without special consideration under the equitable provisions of the law. The ratio of excess profits tax, in the instant case, is something in excess of 50 per cent, but there are other corporations having similar favorable contracts made in the ordinary course of business which paid tax at equally as high a rate. The Committee accordingly recommends that the action of the Income Tax Unit in denying the M Company special consideration under section 210 of the Revenue Act of 1917 and under sections 327 and 328 of the Revenue Act of 1918, be sustained. Held, that a corporation, organized in October, 1917, which acquires the business and properties of a partnership as of January 1, 1917, the ownership continuing identical as does the business, can not make a return for the entire year, as if it were a corporation, using the invested capital of the partnership as of January 1, 1917, as its invested capital. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in denying this corporation, which was organized in October, 1917, the right of filing a corporate return for the full taxable year 1917, by treating the partnership prior to October, 1917, as if it were a corporation. The M Company was incorporated October, 1917, taking over the partnership business of two brothers. By a written agreement, between the corporation and the partnership, the corporation acquired all of the assets of the partnership, including the business, as of January 1, 1917, and assumed its obligations from that date. Except for one or two statutory shares the two partners received the entire capital stock of the corporation. All necessary adjustments were made to state the balance sheet as of January 1, 1917, and certain transactions of the partners were revoked in order that the identical book values and liabilities as of January 1, 1917, might be assumed by the corporation under the agreement with the partners. It is stated that the corporation, between October, 1917, and January 1, 1918, paid dividends to its stockholders, offered to pay its capital stock tax for said year of 1917, and at the proper time in 1918 filed its corporate return with the Federal Government covering the entire year 1917, using as its invested capital the invested capital of its predecessor as of January 1, 1917. The corporation, in making an appeal to this Committee to sustain its action in filing a corporation return for the full taxable year 1917, relies upon section 204 and section 208 of the Revenue Act of 1917, and upon section 330 of the Revenue Act of 1918. Section 204 of the Revenue Act of 1917 established a basis for prewar data, while section 208 has to do with invested capital at date of reorganization, consolidation or change in ownership. It does not apply retroactively to the beginning of the taxable year but is applicable only to the value of assets immediately transferred. Section 330 (articles 931, 932, 933 of Regulations 45) approves the practice followed by the taxpayer for the year 1917, except for the important provision that the net income of a trade or business from January 1, 1918, to date of reorganization, if reorganized on or before July 1, 1919, may be taxed as that of a corporation. There was no provision in the 1917 law for treating a partnership in the taxable year as if it were a corporation and Congress did not see fit to make section 330 of the 1918 Act retroactive to include the taxable year 1917 at the rates of taxation then in effect. The Committee does not consider that it can read into the 1917 law, under any of the sections therein, an authority to disregard, for taxation or otherwise, the important distinctions between a partnership and a corporation. It is accordingly recommended that the action of the Income Tax Unit in denying this corporation the privilege of using the invested capital of the partnership as of January 1, 1917, and of considering the income of the partnership during the taxable year 1917 as if it were the income of the corporation, be sustained under section 208 of the Revenue Act of 1917. SECTION 330, ARTICLE 931: Scope of reorgani zations. 21-21-1657 O. D. 930 Where under the laws of a State a charter granted to a corporation is limited to a period of years, the renewal of such charter merely prolongs the existence of the original corporation and does not of itself constitute a reorganization within the meaning of the excess profits tax laws. SECTION 330, Article 933: Election to be taxed as corporation. (See 13-21-1529; sec. 204, art. 1603.) Application of section 204 of the Revenue Act of 1918 to organizations incorporated prior to July 1, 1919. SECTION 331.-VALUATION OF ASSETS UPON REORGANIZATION. SECTION 331, ARTICLE 941: Valuation of asset upon change of ownership. 5-21-1424 O. D. 789 The M Company was incorporated for the purpose of acquiring that part of the business of the N Company, a foreign corporation, which it carried on in the United States and Canada. The M Company issued common and preferred stock to the N Company, in the amount of a dollars, in exchange for its business in the United States and Canada. The domestic corporation requested permission to set up on its books as invested capital several increases over the amounts carried on its books for the same items by the foreign corporation. Held, that where a foreign corporation has been taxed on its activities in this country, and its activities in Canada and this country are subsequently taken over by a domestic corporation organized for that purpose, and fifty per centum or more of the stock of the domestic corporation is held by the foreign corporation, the assets of the domestic corporation are to be valued under section 331, Revenue Act of 1918. In the case presented the domestic corporation may set up on its books as invested capital the assets taken over from the foreign corporation at such values as could have been established had the previous owner been required to set up invested capital as a domestic corporation. SECTION 331, ARTICLE 941: Valuation of asset upon change of ownership. (See 8-21-1470; sec. 326, art. 831.) Valuation of assets upon a reorganization and the changing of a partnership into a corpora tion. SECTION 331, ARTICLE 941: Valuation of asset upon change of ownership. 11-21-1512 A. R. R. 409 The Committee has had under consideration the appeal of the M Corporation from the action of the Income Tax Unit in denying the corporation an item of a dollars, or the statutory percentage thereof, carried on the books of the corporation as "good will, trade-marks, and foreign agencies." The M Corporation was incorporated April, 1917, with a capital stock of 100y shares, taking over the net assets of the N partnership as a going concern as of January 1, 1917, and in addition thereto the sum of a dollars in cash. The consideration for the net assets of the partnership and the additional cash was the sum of 4 dollars to be paid by the corporation issuing to the partners, or to their nominees, the entire issue of capital common stock of the corporation consisting of 100y shares. Certain adjustments were made of salaries of the partners to offset the credit for earnings from January 1, 1917, to April, 1917. The journal entry made to open the books of the corporation was in the following expression: Net value of the tangible assets of the partnership---- 2x dollars Cash to be paid in--- Good will, trade-marks, and foreign agencies To capital stock... a dollars x dollars 4r dollars |