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, become due on the 1st 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.

portionately from the first day of the month in which the liability to a special tax commenced to the 1st day of July following. . . . . No tax is refundable if a corporation ceases to do business during the year. (Reg. 50, Art. 1.)

Scope of tax.

LAW. Section 1000. (a) tion ..

(1) Every domestic corpora

Definition of domestic corporations.

REGULATION. The tax applies to every domestic corporation. The term "corporation" includes associations, joint-stock companies and insurance companies, but not partnerships properly so-called. The term "domestic" means created or organized in the United States, including only the States, the Territories of Alaska and Hawaii, and the District of Columbia. A corporation is liable to the tax whether it is a creature of statute or of contract and whether or not it is organized for profit or has a capital stock represented by shares. (Reg. 50, Art. 11.)

PERSONAL SERVICE CORPORATIONS NOT INCLUDED.-Personal service corporations, as defined in the law, are taxed as partnerships for income and profits tax purposes. Such corporations retain their corporate identity but are not subject to the capital stock tax because personal service corporations are specifically exempt under section 231 of the law.

ASSOCIATIONS WHICH ARE INCLUDED.—

REGULATIONS. Associations and joint-stock companies include associations, common law trusts and organizations by whatever

"Corporations whose fiscal years end at dates other than June 30 may submit figures based on their own fiscal years. (Instructions 2. form 707.)

766

"All special taxes shall become due on the 1st day of July, 1891, and on the 1st day of July in each year thereafter, or on commencing any trade or business on which such tax is imposed. In the former case the tax shall be reckoned for one year, and in the latter case it shall be reckoned proportionately from the 1st day of the month in which the liability to a special tax commenced to the 1st day of July following." [Section 3237, Revised Statutes, as amended by Section 53 of the act of October 1, 1890 (26 Stats., 567).]

"Massachusetts trusts" were held to be exempt from the excise tax in Eliot v. Freeman, et al. [220 U. S. 178 (T. D. 1686)], and corporations in hands of a receiver are exempt. (T. D. 2424.) In Crocker v. Malley (249 U. S. 223) certain types of Massachusetts trusts were held not to be "associations," of the corporate type.

name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the members or shareholders on the basis of the capital stock which each holds or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. . . . . (Reg. 50, Art. 12.)

An organization the membership interests in which are transferable without the consent of all the members, however the transfer may be otherwise restricted, and the business of which is conducted by trustees or directors and officers without the active participation of all the members as such, is an association and not a partnership. A partnership bank conducted like a corporation and so organized that the interests of its members may be transferred without the consent of the other members is a joint-stock company or association within the meaning of the statute. A partnership bank the interests of whose members can not be so transferred is a partnership. (Reg. 50, Art. 13.)

Where trustees hold real estate subject to a lease and collect the rents, doing no business other than distributing the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among the trustees and of consenting to a modification of the terms of the trust, no association exists. If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute. (Reg. 50, Art. 14.)

As the tax is imposed upon the privilege of doing business as a corporation the foregoing article appears to be, too sweeping in its terms. The courts may be expected to interpret the law so as to exclude rather than include doubtful cases.9

LIMITED PARTNERSHIPS WHICH ARE NOT INCLUDED.

REGULATION. So-called limited partnerships of the type authorized by the statutes of New York and most of the States are partnerships and not corporations within the meaning of the statute. Such limited partnerships, which can not limit the liability of the general partners, although the special partners enjoy limited liability so long as they observe the statutory conditions, which are dissolved by the death or attempted transfer of the interest of a general partner, and which can not take real estate or sue in the partnership name, are

'Crocker v. Malley, 249 U. S. 223.

so like common law partnerships as to render impracticable any differentiation in their treatment for tax purposes. Michigan and Illinois limited partnerships are partnerships. A California special partnership is a partnership. (Reg. 50, Art. 15.)

LIMITED PARTNERSHIPS WHICH ARE INCLUDED.—

REGULATION. On the other hand, limited partnerships of the type of partnerships with limited liability or partnership associations authorized by the statutes of Pennsylvania and of a few other States are only nominally partnerships.10 Such so-called limited partnerships, offering opportunity for limiting the liability of all the members, providing for the transferability of partnership shares, and capable of holding real estate and bringing suit in the common name, are more truly corporations than partnerships and must pay the tax as corporations. In all doubtful cases limited partnerships will be treated as corporations unless they submit satisfactory proof that they are not in effect so organized. Michigan and Virginia partnership associations are corporations. Such a corporation may or may not be a personal service corporation. (Reg. 50, Art. 16.)

Article 1506 of Regulations 45, issued in regard to income and profits taxes, originally provided that "Michigan and Virginia partnership associations are corporations"; but this article was amended by T. D. 2943 (November 6, 1919) to exclude Virginia partnership associations.

Insurance Companies

LAW. Section 1000 (c) . . . . The taxes imposed by this section shall apply to mutual insurance companies, . . .

REGULATIONS. Insurance companies having capital stock, as distinguished from mutual insurance companies, are taxable like other corporations, whether domestic or foreign. In ascertaining the fair value of their capital stock for the purpose of the tax, however, such deposits and reserve funds of insurance companies as they are required by law or contract to maintain or hold for the protection of or payment to or apportionment among policyholders, and reserves which represent actually accrued liabilities, the credits to which are deducted from gross income as ordinary and necessary business expenses, are to be omitted from the calculation. But if the fair average value is estimated from the market price of the shares of stock of the company, no deduction for deposits or reserves is proper from the total value so established. (Reg. 50, Art. 41.)

"See page 513 for statement as to which Pennsylvania corporations are not of the corporate type.

The tax applies to domestic and foreign mutual insurance companies. A mutual protective association organized under a statute, whose only source of revenue is the assessments paid by its members and whose net income for each year is paid into a reserve fund, constituting the sole resource of the company, aside from current assessments, for the payment of losses, is an insurance company within the meaning of the statute. A voluntary unincorporated association of employees formed for the purpose of relieving sick and aged members and the dependents of deceased members is an insurance company, whether the fund for such purpose is created wholly by membership dues or partly by contributions from the employer. (Reg. 50, Art. 61.)

Corporation Must be "Doing Business" to be Taxed

....

LAW. Section 1000. (a) . . . . (1) . . . . shall pay annually a special excise tax with respect to carrying on or doing busi

ness,

REGULATION. The tax is imposed "with respect to the carrying on or doing business" by a corporation. It may be described generally as a tax upon the doing of business in the capacity of a corporation, association or insurance company. "Business" is a very comprehensive term and embraces everything about which a person can be employed. Every corporation that is doing business, and no corporation that is not carrying on or doing business, is subject to the tax. As corporations are organized to do business, every existing corporation will be presumed to be subject to the tax unless it submits proof satisfactory to the Commissioner that it is not doing business. The distinction is between the mere ownership of property and the actual doing of business in the corporate capacity. The fair test is whether a corporation has reduced its activities to the owning and holding of property and the distribution of its avails, and doing only the acts necessary to continue that status, or is still active and is maintaining its organization for the purpose of continued efforts in the pursuit of its corporate objects and such activities as are essential to those purposes. (Reg. 50, Art. 17.)

When a corporation claims that it is not doing business it should complete the first five lines of form 707 and attach full explanation of grounds for claiming exemption.

"Doing business" illustrated.

REGULATION. Corporations organized for the purpose of doing business and actually engaged in such activities as buying timber lands