2.20 First in-first out rule. In determining the cost or the selling price of articles, or the net income with respect to articles which were manufactured, produced, or acquired by the taxpayer on different dates, the taxpayer, unless he can identify the particular articles with respect to which the cost, selling price, or net income is to be determined, shall be deemed to have sold the articles in the order in which they were manufactured, produced, or acquired, by the taxpayer.*t

SECTION 501 (H) OF THE ACT

(h) If the taxpayer made any purchase or sale otherwise than through an arm's-length transaction, and at a price other than the fair market price, the Commissioner may determine the purchase or sale price to be that for which such purchases or sales were at that time made in the ordinary course of trade. 2.21 Fair market price and transactions not at arm's length. If any purchase or sale price required to be determined under the provisions of title III of the Act was paid or received otherwise than through an arm's-length transaction and otherwise than at the fair market price of the article or commodity or service in question, the Commissioner may determine such purchase or sales price to be that for which such purchases or sales were at that time made in the ordinary course of trade. Generally, "fair market price" means the price which a purchaser, not under compulsion and willing to buy, would pay to a seller not under compulsion and willing to sell, in good faith. Sales to or purchases from a corporation owned or controlled by the taxpayer or subject to the same common ownership or control as the taxpayer, will be subject to special scrutiny to determine whether they are arm's-length transactions and were made at the fair market price at which purchases and sales were made at that time in the ordinary course of trade.*t

SECTION 501 (L) OF THE ACT

(1) The taxes imposed by subsection (a) shall be imposed on the net income from the sources specified therein, regardless of any loss arising from the other transactions of the taxpayer, and regardless of whether the taxpayer had a taxable net income (under the income-tax provisions of the applicable Revenue Act) for the taxable year as a whole; except that if such application of the tax imposed by subsection (a) is held invalid, the tax under subsection (a) shall apply to that portion of the taxpayer's entire net income for the taxable year which is attributable to the net income from the sources specified in such subsection.

2.22 Losses on transactions not involving net income from sources specified in section 501 (a) of the Act. The taxes imposed by title III of the Act are imposed on net income for the taxable year in question (see section 504 of the Act, § 2.5) arising from each of the sources specified in section 501 (a) of the Act (see § 2.3) even though the taxpayer sustained a loss from his entire business for that year under title I of the Revenue Act applicable for such year. (See § 2.11.)

Example: Under the provisions of title I of the Revenue Act of 1934, as amended, the net income of taxpayer A for the calendar year 1935 was $500, while taxpayer B for the same year sustained a net loss of $500. Both taxpayer A and taxpayer B during 1935

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**For statutory and source citations, see note to § 2.1.

realized a net income of $1,000 from the sale of articles with respect to which a Federal excise tax was imposed but not paid. The amount of such Federal excise tax in each case was $1,000 and the full amount thereof was shifted to purchasers of the articles. Both A and B are liable under the provisions of title III of the Act to a tax on net income of $1,000, i. e., a tax of $800.*+

SECTION 502 OF THE ACT

There shall be credited against the total amount of the taxes imposed by this title an amount equivalent to the excess of—

(a) The amount of the other Federal income and excess-profits taxes payable by the taxpayer for the taxable year, over

(b) The amount of the other Federal income and excess-profits taxes which would have been payable by the taxpayer for the taxable year if his net income were decreased by the amount of net income taxable under this title.

2.23 Credit for other taxes on income. The taxes imposed by title III of the Act are in addition to all other taxes imposed on income (see section 501 (a) of the Act and § 2.2). Section 502 of the Act, however, provides for a credit against the total amount of taxes imposed by title III with respect to a taxable year equal to the amount by which other Federal income and excess-profits taxes, payable by the taxpayer with respect to such year, would have been diminished by excluding from the computation of those taxes the net income taxable under title III. No credit may be obtained with respect to any Federal income or excess-profits taxes for any taxable year unless the taxpayer was liable to pay an amount of such income or excess-profits taxes for such year, and no credit may exceed the amount such taxpayer was liable to pay. The net income taxable under title III which is excluded in computing the credit under section 502 of the Act is that portion of net income under section 501 (a) (1), 501 (a) (2), or 501 (a) (3) to which the 80 percent rate is applicable in computing the amount of tax under such sections.*t

2.24 Redetermination of tax. If subsequent to the filing of the return "selling price" is reduced by amounts paid by the taxpayer to vendees (see §2.1 (g)), or net income from the sale of articles with respect to which the tax is imposed but not paid is reduced by any "tax adjustment" (see § 2.1 (k), 2.12), and as a result thereof, the amount of tax paid pursuant to the return as filed is in excess of the amount of tax due after allowance of the reductions abovementioned, the taxpayer, upon filing a proper claim for refund, may obtain a refund or credit for such excess. (See sections 321 and 322 of title I of the Act and regulations issued thereunder.)*† CROSS REFERENCE: For overpayments, see §§ 3.322-1 to 3.322-8.

SECTION 505 OF THE ACT

With respect to the following income, the tax under this title shall be in force in any possession of the United States (including the Philippine Islands); such tax shall (without regard to the residence or citizenship or place of organization of the taxpayer) be collected by the appropriate internal-revenue officers of such possession; and the proceeds thereof shall accrue to the general government of such possession: (a) Any income specified in subsection (a) (1) and (3) of section 501 if the Federal excise tax with respect to the articles in question accrued in such possession; and (b) any income specified in subsection

**For statutory and source citations, see note to § 2.1.

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(a) (2) of section 501 if the reimbursement specified therein relates to articles sold in such possession by the taxpayer under this title and if the geographical scope of the Federal excise tax in question extended to such possession. Income taxable as provided in this section shall not be otherwise taxable under this title. In applying section 501 to such income, the gross income and deductions shall be determined in accordance with the Federal Revenue Act applicable to the taxable year. In applying section 502 to such income, income taxes paid to such possession shall be deemed to be Federal income taxes.

2.25 Application of the tax to possessions of the United States. (a) Under section 505 of the Act the tax under title III of the Act is in force in possessions of the United States (including the Philippine Islands) under the following circumstances:

(1) If the Federal excise tax with respect to articles accrued in a possession of the United States (including the Philippine Islands) (for example, articles processed from a commodity, the processing of which in the possession was subject to a tax under the Agricultural Adjustment Act), the net income specified in subsection (a) (1) or (a) (3) of section 501 of the Act is subject to tax (that is, net income from the sale of the articles with respect to which the Federal excise tax was imposed but not paid, or net income from refunds or credits from the United States of the Federal excise tax erroneously or illegally collected with respect to the articles), to the extent that the burden of such taxes was shifted to others.

(2) If an article with respect to which a Federal excise tax was imposed was sold in a possession of the United States to which such tax extended (even though such tax did not accrue with respect to the specific article sold in the possession, as in (a) (1)), any net income specified in subsection (a) (2) of section 501 of the Act is subject to the tax under title III (that is, the net income from reimbursement received from vendors of amounts representing Federal excise tax burdens included in prices paid to such vendors) to the extent that the amount of the burden of such tax was shifted to others.

(b) Income taxable as provided in section 505 of the Act in a possession of the United States is not otherwise taxable under title III. Thus, any net income subject to the tax in a possession would not also be subject to the tax in the United States.

(c) In determining net income and the portion thereof which is subject to tax in a possession of the United States the provisions of section 501 of the Act are applicable. Gross income and deductions for the purpose of computing the amount of net income subject to tax shall be determined in accordance with the Federal Revenue Act applicable to the taxable year in question (see § 2.10), and for the purposes of the credits provided for in section 502 of the Act (see §2.23), any income taxes paid by the taxpayer to a possession of the United States shall be deemed to be Federal income taxes.*†

SECTION 606 (a) and (b) oF THE REVENUE ACT OF 19281

(a) Authorization. The Commissioner (or any officer or employee of the Bureau of Internal Revenue, including the field service, authorized in writing by the Commissioner) is authorized to enter into an agreement in writing with any

'Amended by sections 801 and 802 of the Revenue Act of 1938, enacted at midnight, May 27, 1938, which read as follows:

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*For statutory and source citations, see note to § 2.1.

person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal-revenue tax for any taxable period ending prior to the date of the agreement.

(b) Finality of agreements. If such agreement is approved by the Secretary, or the Undersecretary, within such time as may be stated in such agreement, or later agreed to, such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact

(1) the case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the United States, and

(2) in any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded.

SECTION 506 OF THE ACT

Any person who is liable for the tax imposed by this title and who has filed any claim or claims for refund of any amount paid or collected as tax under the Agricultural Adjustment Act, as amended, may apply to the Commissioner of Internal Revenue for an adjustment of such liability for tax in conjunction with such claim or claims for refund, and thereafter, the Commissioner, for such purposes, may, in his discretion, consider such liability and such claim or claims as one case and, in his discretion, may enter into a written agreement with such person for the settlement of such case by such payment by, or refund to, such person as may be specified in such agreement. Such agreement shall be a final settlement of the liability for tax and the claim or claims for refund covered by such agreement, except in case of fraud, malfeasance, or misrepresentation of a material fact. In the absence of fraud or mistake in mathematical calculation, any action taken or any consideration given by the Commissioner pursuant to this section shall not be subject to review by any court, or any administrative, or accounting officer, employee, or agent of the United States.

2.26 Closing agreements. (a) Agreements for the final determination of the tax imposed by title III of the Act may be entered into between the taxpayer and the Commissioner as follows:

(1) An agreement under section 606 (a) and (b) of the Revenue Act of 1928 (45 Stat. 874; 26 U.S.C. 1660) for the final determination of the tax imposed by title III.

(2) An agreement under section 506 of the Act for the final determination of the tax imposed by title III and of the amount of any refund to the taxpayer pursuant to a claim filed under title VII of the Act for refund of any amount paid or collected as tax under the Agricultural Adjustment Act.

(b) A closing or final agreement under section 606 (a) and (b) of the Revenue Act of 1928 may relate to any taxable period ending prior to the date of the agreement. Such an agreement may be executed even though under such agreement the taxpayer is not liable for any tax for the period covered by the agreement. The matter agreed upon may relate to the total tax liability of the taxpayer or it may relate to one or more separate items affecting the tax liability of the taxpayer. Accordingly, there may be a series of agreements relating to the tax liability for a single taxable period.

SEC. 801. CLOSING AGREEMENTS AS TO FUTURE TAX LIABILITY.

Section 606 (a) of the Revenue Act of 1928 is amended by striking out the words "ending prior to the date of the agreement".

SEC. 802. APPROVAL OF CLOSING AGREEMENTS.

Section 606 (b) of the Revenue Act of 1928 is amended by striking out "is approved by the Secretary, or the Under Secretary", and inserting in lieu thereof the following: "is approved by the Secretary, the Under Secretary, or an Assistant Secretary".

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(c) An agreement under section 506 of the Act may relate to any taxable period ending prior to the date of the agreement. Such an agreement may be executed only if the taxpayer for the tax period or periods (1) is liable for the tax imposed by title III, (2) has filed the required return of tax (see § 2.27), (3) has paid any tax shown to be due by any such return, and (4) has filed a claim or claims for refund under title VII of the Act.

If the taxpayer has fulfilled the foregoing requirements, he may file an application with the Commissioner on the prescribed form requesting that the Commissioner consider his liability for the tax under title III in conjunction with his claim or claims for refund under title VII. Such form shall be filled out in accordance with the instructions printed thereon and in accordance with the regulations in this part. The Commissioner may grant such application and may consider the taxpayer's liability for tax under title III and the taxpayer's claim or claims for refund under title VII as one case. (d) In his discretion, the Commissioner may enter into a written agreement with the taxpayer under section 506 of the Act, or section 606 (a) and (b) of the Revenue Act of 1928. Any such agreement shall be a final settlement of the matters covered by such agreement. (e) A claim for refund under title IV of the Revenue Act of 1936 will not be considered in connection with any agreement under section 506 of the Act.**

SUBPART C-RETURNS, RECORDS, AND PAYMENT OF TAX

SECTION 503 (A) AND (B) OF THE ACT

(a) All provisions of law (including penalties) applicable with respect to taxes imposed by Title I of this Act, shall, insofar as not inconsistent with this title, be applicable with respect to the taxes imposed by this title, except that the provisions of sections 101, 131, 251, and 252 shall not be applicable.

(b) Every person (1) upon whom a Federal excise tax was imposed but not paid, or (2) who received any reimbursement specified in subsection (a) (2), or (3) who received a refund or credit of Federal excise tax, shall make a return under this title, which return shall contain such information and be made in such manner as the Commissioner, with the approval of the Secretary, shall prescribe. For any taxable year ended prior to the date of the enactment of this Act the return shall be filed, and the total amount of the taxes shall be paid, not later than the fifteenth day of the third month after the date of the enactment of this Act, in lieu of the time otherwise prescribed by law.

SECTION 51 (c) OF THE ACT

(c) Persons under disability. If the taxpayer is unable to make his own return, the return shall be made by a duly authorized agent or by the guardian or other person charged with the care of the person or property of such taxpayer. SECTION 3165 OF THE UNITED STATES REVISED STATUTES, REENACTED BY SECTION 1115 OF THE REVENUE ACT OF 1926

Every collector, deputy collector, internal-revenue agent, and internal-revenue officer assigned to duty under an internal-revenue agent, is authorized to administer oaths and to take evidence touching any part of the administration of the internal-revenue laws with which he is charged, or where such oaths and evidence are authorized by law or regulation authorized by law to be taken.

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**For statutory and source citations, see note to § 2.1.