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Treasury Department

ureau of Interna Revenue


Interna Revenue uetn
Cumuatve uetn 19 1-1
NU RY- UN 19 1
C 1 D
OCT 2 1965
I .1.
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SP CI L TT NTION d rc te h cautonary notce on ths page that pub-
shed rungs of the ureau do not have the force and effect
of Treasury Decsons and that they are appcabe ony to facts presented n the pubshed case
Treasury Department : : : : : ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn 19 1-1
NU RY- UN , 19 1
IN T IS ISSU
Introductory Notes III
Contents II
Rungs Nos. 105 9-10761
oard of Ta ppeas 1-20
Reguatons 110; Reguatons 103 and 109, amended 21-186
Income Ta
Part I ( . Interna Revenue Code and 1939 and
19 0 cts; . 1938 ct) 187 300
Part II (1937 and 1936 cts) 301313
Part III (1935 and 193 or Pror cts) .... 31 397
mpoyment Ta es 398- 23
Msceaneous Ta es
state and Gft Ta es 2 - 9
Saes Ta es, Stamp Ta es, etc 50- 78
Msceaneous Rungs and Commttee Reports . . . 79 576
Inde 577-589
The rung reported n the I at em a 1 Revenue uetn re for the nformaton of ta payers and ther counse aa
showng the trend of offca opnon n the admnstraton of the ureau of Interna erenue; the rung other than
Treasury Decsons have none of the force or effect of Treasury Decsons and do not commt the Department to
any nterpretaton of the aw whch has not been formay approved and promugated by the Secretary of the
Treasury. ach rung embodes the admnstratve appcaton of the aw and Treasury Decsons to the entre
state of facts upon whch a partcuar case rests. It s especay to be noted that the same resut w not neces-
sary be reached n another case uness a the matera facts are dentca wth those of the reported case. a t a
ot aways feasbe to pubsh a compete statement of the facts underyng each rung, there can be no assurance
that any new case s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
rungs pubshed from tme to tme may appear to reverse rungs prevousy pubshed.
Offcers of the ureau of Interna Revenue are especay cautoned aganst reachng a concnson n any case
merey on the bass of smarty to a pubshed rung, and shoud base ther |udgment on the appcaton of a
pertnent provsons of the aw and Treasury Decsons to a the facts n each case. These rungs shoud be used
aa ads n studyng the aw and ts forma constructon as made n the reguatons and Treasury Decsons pre-
vousy ssued.
In addton to pubshng a Interna Revenue Treasury Decsons, t s the pocy of the ureau of Interna
Revenue to pubsh a rungs and decsons, ncudng opnons of the Chef Counse for the ureau of Interna
Revenue whch, because they announce a rung or decson upon a nove queston or upon a queston n regard
to whch there e sts no prevousy pubshed rung or decson, or for other reasons, are of such mportance aa
to he of genera nterest. It s aso the pocy of the ureau to pubsh a raugs or decsons whch revoke,
modfy, amend, or a feet n any manner whatever any pubshed rung or decson. In many nstances opnons
of the Chef Counse for the ureau of Interna Revenue are not of genera nterest because they announce no
new rung or no new constructon of the revenue aws but smpy appy rungs aready made pubc to certan
stuatons of fact whch are wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons.
Therefore, the numbers assgned to the pubshed opnons of the Chef Counse for the ureau of Interna
Revenue are not consecutve. No unpubshed rung or decson w be cted or reed upon by any offcer or
empoyee of the ureau of Interna Revenue as a precedent n the dsposton of other cases. Uness otherwse
specfcay ndcated, a pubshed rungs and decsons hare receved the consderaton and approva of the
Chef Counse for the ureau of Interna Revenue.
UNIT D ST T S GO RNM NT PRINTING OFFIC : W S INGTON : 1W1
For sab hy the Superntendent of Documents, Washngton, D. C - Sec back of tte for prces
LI R RY
UNI RSITY OF C LIFORNI
D IS
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The Interna Revenue uetn servce for 19 1 w consst of
weeky buetns and semannua cumuatve buetns.
The weeky buetns w contan the rungs and decsons to be
made pubc and a Treasury Department decsons (known as Treas-
ury decsons) pertanng to Interna Revenue matters. The sem-
annua cumuatve buetns w contan a rungs and decsons
(ncudng Treasury decsons) pubshed durng the prevous s
months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C, for 3 per year; foregn, .25. Snge
copes of the weeky uetn, 5 cents each.
New subscrbers and others desrng to obtan the 1919, 1920, and
1921 Income Ta Servce may do so from the Superntendent of Docu-
ments at prces as foows: Dgest of Income Ta Rungs No. 19
(contanng dgests of a rungs appearng n Cumuatve uetns
1 to 5, ncusve), 50 cents per copy; Cumuatve uetns Nos. 1 to 5,
contanng n fu a rungs pubshed snce pr, 1919, to and n-
cudng December, 1921, as foows: No. 1, 30 cents; No. 2. 25 cents;
No. 3, 30 cents; No. , 30 cents No. 5, 25 cents.
Persons desrng to obtan the Saes Ta Cumuatve uetns for
anuary- une and uy-December, 1921, may procure them from the
Superntendent of Documents at 5 cents per copy.
Persons desrng to obtan the Interna Revenue uetn servce for
the years 1922 to 19 1, ncusve, may do o at prces as foows:
Year.
Cumuatve uetn.
Frst 6 months. Second 6 months
Prce,
(cents)
1922
1923
192
1925
1926
1927
1928
1029
1930
1931
1932
1933
193
1935
1936
1937
1938
1939
19 0
19 1
1-1
II-
III-
I - 1
-
I-1
II-1
III-1
I -1
-
I-1
II-1
III- 1
I - 1
-1
1937- 1
1938- 1
1939-1
Part 1
Part 2
19 0- 1
19 1- 1
1-2
11-2
III- 2
I - 2
-2
I-2
II-2
II1-2
I -2
-2
I-2
I1-2
III- 2
I - 2
-2
1937- 2
1938- 2
1939- 2
19 0- 2
0, 30
30, 0
50, 50
0, 35
0, 30
0, 0
35, 50
50, 55
50, 50
65, 30
30, 30
30, 50
50, 60
50, 50
55, 5
60,50
60, 50
50
SI
60
30, 60
5
Persons desrng to obtan the servce n dgest form may do so at
prces as foows: Dgest No. 13 (1922-192 ), 60 cents; Dgest No. 17
(1925), 25 cents; Dgest No. 21 (192G), 15 cents; Dgest No. 22 (1925-
1927), 35 cents; and Dgest (ncome ta rungs ony, pr, 1919, to
December, 1930, ncusve), 1.50.
nqures n regard to these pubcatons and subscrptons shoud
be sent to the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C.
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn 19 1-1, n addton to
a decsons of the Treasury Department (caed Treasury decsons)
pertanng to Interna Revenue matters, contans opnons of the
Chef Counse, and rungs and decsons pertanng to ucome, estate,
gft, saes, capta stock, e cess profts, empoyment, soca securty,
and msceaneous ta es, as ndcated on the tte page of ths uetn,
pubshed n the weeky uetns (19 1, Nos. 1 to 26, ncusve) for
the perod anuary 1 to une 30, 19 1. It aso contans a cumuatve
st of announcements reatng to decsons of the Unted States oard
of Ta ppeas pubshed n the Interna Revenue uetn Servce
from anuary 1, 19 0, to une 30, 19 1.
Income Ta rungs are prnted n three parts. The rungs n
Part I are prnted as Part I, (Interna Revenue Code and Revenue
cts of 1939 and 19 0) and (Revenue ct of 1938), the aw
headngs cofrespondng wth the sectons of the Code and 1939 and
1938 cts, respectvey, and the reguatons headngs correspondng
wth the secton headngs of Reguatons 103 and the artce headngs
of Reguatons 101. Rungs under the- Revenue cts of 1937 and 1936
are prnted as Part II, the aw headngs correspondng wth the
secton headngs of those cts and the reguatons headngs corre-
spondng wth the artce headngs of Reguatons 9 . Rungs
under the Revenue cts of 1935 and 193 or pror cts are prnted
as Part III, the aw headngs correspondng wth the secton head-
ngs of the Revenue ct of 193 and the reguatons headngs cor-
respondng wth the artce headngs of Reguatons 86.
Rungs under Ttes III and I of the Soca Securtv ct and
under Subchapters and C, Chapter 9, of the Interna Revenue
Code n force pror to anuary 1, 19 0, are pubshed under artce
headngs of Reguatons 91 and 90, respectvey; rungs under Sub-
chapters and C, Chapter 9, of the Code n force on or after anuary
1, 19 0, are pubshed under the secton headngs of Reguatons 106
and 107, respectvey; rungs under the Carrers Ta ng ct of 1937
and under Subchapter , Chapter 9, of the Code are pubshed
under the artce headngs of Reguatons 100; and rungs under
Tte III of the Revenue ct of 1936 Ta on un|ust enrchment
are coded under the sectons of that ct and the artce headngs of
Reguatons 95.
R I TIONS.
The foowng abbrevatons are used throughout the uetn:
, , C, etc. The names of ndvduas.
. R. M. Commttee on ppeas and Revew memorandum.
. R. R. Commttee on ppeas and Revew recommendaton.
. T. coho Ta Unt.
. T. oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court decson.
C. S. T. Capta Stock Ta Dvson.
C. T. Ta es on mpoyment by Carrers.
D. C. Treasury Department crcuar.
( I)
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. T. state Ta Dvson.
G. C. M. Genera Counse s, ssstant Genera Counse s, or Chef Counse s
memorandum.
I. R. . Interna Revenue uetn.
I. T. Income Ta Unt.
M, N, , Y, Z, etc. The names of corporatons, paces, or busnesses, accordng
to conte t.
Mn. Mmeographed etter.
MS. Msceaneous Dvson.
O. or L. O. Soctor s aw opnon.
O. D. Offce decson.
Op. . G. Opnon of the ttorney Genera.
P. T. Processng Ta Dvson.
S. T Saes Ta Dvson.
S. Sver Ta Dvson.
S. M. Soctor s memorandum.
So. Op. Soctor s opnon.
S. R. Soctor s recommendaton.
S. S. T. Ta es on mpoyment by others than Carrers.
T.- Tobacco Dvson.
T. . M. dvsory Ta oard memorandum.
T. . R. dvsory Ta oard recommendaton.
T. D. Treasury decson.
and y are used to represent certan numbers, and when used wth the word
doars represent sums of money. .
The practce of promugatng Treasury Decsons that embody
court decsons reatng to the nterna revenue has been dscontnued..
ereafter opnons of the courts, wth approprate headnotes for the
nformaton and gudance of ta payers and offcers and empoyees of
the ureau of Interna Revenue, w be pubshed n the Interna
Revenue uetn wthout forma approva and promugaton by the
Secretary of the Treasury.
NNOUNC M NT R L TING TO O RD OF T PP LS D CISIONS.
Under the provsons of the recent Revenue cts, reatng to ap-
peas to the oard of Ta ppeas, the Commssoner may acquesce
n the decson of the oard or he may, f the appea was heard by
the oard pror to the passage of the 1926 ct, cause to be nsttuted
a proceedng n court for the coecton of any part of a ta determned
by the Commssoner to be due but dsaowed by the oard, pro-
vded that such proceedng s commenced wthn one year after
fna decson of the oard. s to appeas heard by the oard after
the passage of the 1926 ct, the Commssoner may, wthn s months
after the oard s decson s rendered, fe a petton for a revew of
the decson by a Crcut Court of ppeas or by the Unted States
Court of ppeas for the Dstrct of Coumba; however, as to dec-
sons rendered on and after une 7, 1932, pettons for revew must be
fed wthn three months after the decson s rendered. In order
that ta payers and the genera pubc may be nformed as to whether
or not the Commssoner has acquesced n a decson of the oard of
Ta ppeas dsaowng a ta determned by the Commssoner to be
due, announcement w be made n the weeky uetn at the earest
practcabe date. notce that the Commssoner has acquesced or
has nonacquesced n a oard decson reates, however, ony to the
ssue or ssues decded n favor of the ta payer. Dessons so ac-
quesced n shoud be reed upon by offcers and empoyees of the
ureau of Interna Revenue as precedents n the dsposton of other
cases before the ureau.
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CONT NTS.
6m
6037.
SMI.
50 2.
SOU.
S0 .
501S.
50 6.
50 7.
Court decsons:
1 80
1 81
1 82
1 83
1
1 8S
1
1 87
1 88
1 89
1 90
1 91
1 92
1 93
1 9
1 95
1 96
1 97
1 9S
1 99
1SO0
1501
1502
150 .
1505.
1508.
1507.
1508.
Rung No.
19 1-1-10555
19 1-1-10556
19 1-1-10553
19 1-1-10552
19 1-1-1055
19 1-3-10570
19 1-6-1058
19 1-5-10588
19 1-8-10593
19 1-6-10591
19 1-6-10595
19 1-7-10607
19 1-7-10005
19 1-10-10631
19 1-10-10632
19 1-10-10633
19 1-12-10655
19 1-19-10712
19 1-18-10702
19 1-19-10713
19 1-22-10727
19 1-23-107 0
19 1-23-107 1
19 1-2 -107 5
19 1-2 -107 6
19 1-2 -107 7
19 1-2 -107 8
19 1-26-10759
19 1-26-10760
19 1-3-10567
19 1-3-10668
19 1-3-10569
19 1-5-10581
19 1-6-10591
19 1-8-10692
19 1-7-10598
19 1-7-10599
19 1-7-10600
19 1-7-10001
19 1-8-10611
19 1-11-10638
19 1-11-10839
19 1-11-106 1
19 1-11-106 0
19 1-11-108 2
19 1-11-108 3
19 1-13-10002
19 1-13-10683
19 1-1 -10607
19 1-16-10(378
19 1-15-10079
19 1-1.5-10675
19 1-15-10676
19 1-18-10685
19 1-16-10686
19 1-16-10687
19 1-17-10696
19 1-19-16707
19 1-19-10709
19 1-19-10708
19 1-19-10710
19 1-21-10721
19 1-21-10722
19 1-23-10733
19 1-23-10735
19 1-23-16736
19 1-23-10737
19 1-23-10738
19 1-25-10752
19 1-26-10758
Page.
18
20
09
08
13
605
78
502
89
270
117
187
S1
195
38
2
79
88
69
280
25
200
255
82
8
233
76
227
2 2
375
378
380
383
289
.50
339
5
7
8
3 6
36
33
38
3
1
3
31
315
7
363
357
319
321
360
36
360
516
302
3 2
32
3
320
330
358
370
371
39
391
52
71
Rung.
Chef Counse s memoranda
22100
22332.
2236 .
22366.
22 61.
22 91.
22 99.
22503.
22S19.
22525.
2255
22.5.56
22580
22613
22636
22617.
226.56
22682
22689.
22730
oard of Ta ppeas:
31110
332 1.
67867
73891.
73892
73893.
7389 .
73895.
76377.
76815.
76816.
823.50.
83199.
83936.
8 638.
80178.
80179.
80518.
86.861.
87127.
87128.
87 1.
87675.
8-892
88970.
88988.
89950.
90012.
90.599.
9IM5.
920S3.
92099.
921 SO.
92373..
93013.
931 0.,
93255.
93.113..
933 0..
93302..
93.500..
93601..
9350 ..
93503..
93.501..
93517..
93.589..
93718..
Rung No.
Pago.
19 1-9-10618
2 6
19 1-6-10.577
228
19 1-1-105.51
296
19 1- -10575
210
19 1-2-10559
295
19 1-2-10560
37
19 1-8-10010
272
19 1-5-10578
265
19 1- -1057
330
19 1-8-10612
8.50
19 1-8-10609
193
19-11 18-10699
2 3
19 1-11-10637
310
19 1-11-100
59
19 1-19-10706
301
19 1-15-10677
362
19 1-16-10888
381
19 1-21-10719
293
19 1-21-10720
307
19 1-25-10751
225
19 1-26-10755
21
19 1-11-10635

19 1-11-10835

19)1-11-10635

19 1-8-10808
6
19 1-8-10008
9
19 1-S-1O0O8

19 1-8-10808
6
19 1-8-10808
6
19 1-8-10808
9
19 1-8-10808
7
19 1-8-10608
7
19 1-2-105.58
2
1911-19-10703
8
1911-19-10703
2
1911-11-10635
8
19 1-23-10729
6.16
1911-23-10729
6,16
19 1-21-10719
10
1911-11-10835
8
19 1-7-10596
15
19 1-7-10598
15
19 1-11-10835
8
19 1-19-10703
2
19 1-5-10570
8
1911-19-10703
3
19 1-9-10617
8
19 1-25-107 9
19
1911-19-10703
9
19 1-19-10701
5
19 1-26-107.5
7
19 1-19-10703
7
19 1-21-1071S
9
19 1-9-10617
6
1911 1-10.519
7
19 1-6-10.587

19 1-13-10857
11,20
19 1-6-10587
7
19 1 -7-10.590
2, 12
19 1-17-10692

19 1-23-10729
8
1911-2.5-10719
3
1911 2,5-10719

19 1-25 107 9
3
19 1-2.5-107 9
3
1911-25-107 9
8
19 1-3-10563
17
19 1-17-10092
6
18 1-10-108S2

( )
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I
Rung.
Rung No.
Pago.
oard of Ta ppeas Con.
93821
11) 1- -10571
8,18
93 39
19 1-10-1062
8
19 1-20-1071
9
9 75
19 1-20-1071
9
9 76.
19 1-20-1071
9
0 86
19 1-19-10703
3
8 768
19 1-25-107 9
9
9 78
19 1-21-10718
7,10
9 7S6
19 1-21-10718
10
19 1-21-10718
10
9 820
19 1-21-10718
7,10
9 821
19 1-21-10718
7,10
9 886
19 1-6-10587
1
95026
19 1-5-10576
2
95 1
19 1-3-10563
17
85 51
19 1-18-10698
1,9
19 1-8-1000.8
12.13
9. /17
19 1-17-10692
5
9:.n9o I I IIIIIIII r
19 1-10-1062
2
19 1-13-10657
5, 16
957
19 1-11-10635
12
957 6
19 1-11-10635
12
95776
1911-2-10558
9
95901
19 1-5-10576
S
95953
19 1-25-107 9
2,13
19 1-23-10729
8
90036
19 1-10-1062
6
96037
19 1-10-1062
7
96038
19 1-10-1062
10
9631
19 1-25-107 9
16
90360
19 1-10-1062
9
90373
19 1-8-10608
11
90 98
19 1- -10571
13
19 1-15-10670
2
96520
19 1-2-10558

19 1-10-1062
17
19 1-12-10650
13
96827
19 1-25-107 9
11,20
19 1-25-107 0
11,20
95831
19 1-25-107 9
11,20
909 8
19 1-10-1062
17
9701
19 I-1-I05 9
16
970 5
19 1-18-10698
18
97116
19 1-1-105 9
18
9723
19 1-11-10635
12
972150
19 1-2-10558
12.19
97305
19 1-12-10650
2
97311
19 1-20-1071
17
97312
19 1-20-1071
19
97388
19 1-20-1071
16
97 01.
19 1-1 -1066
19
19 1-11-10635
16
97132
19 1-3-10563
1
97 39.
19 1-1 -1006
12
97 2
19 1-13-10657
7
97 7
19 1-22-1072
11
19 1-16-10682
13
97673
19 1-9-10617
19
97713
19 1-13-10657
7
9771
19 1-13-10657
7
97715
19 1-2-10558
9
97716
19 1-13-10657
7
977 0
10 1-17-10692
13
9781
19 1-9-101.17
8
97902
1911-25-107 9
13
97917
19 1-13-10657
10
97037
19 1-11-10635
19
97938
19 1-17-10692
13
97939
19 1-8-10608
3
979 3
19 1-7-10596
12,17
979S8
19 1-25-107 9
1
98020
19 1-7-10506
9
9802 ..
19 1-5-10576
11
98057
19 1-7-10506
6
98112.
19 1-12-10650
9
98131
19 1-17-10602

98188
19 1- -10571
8,18
98207
19 1-5-10576
2,8
19 1-8-10f S
12
19 1-20-1071
1,12
19 1-20-1071
1,12
19 1-10-1062
2
98503
19 1-10-1062
11
19 1-7-10596
2,12
Rung.
Rung No.
Pago,
oard of Ta ppeas Con.
98726
19 1-26-1075
15,16
98766..,
19 1-11-10635
12
98770
19 1-12-10650
6
98835
19 1-25-107 9
IS
98895
19 1-19-10703
18
98898
19 1-20-1071
9
9890O
19 1-2-10558
2,
98901
19 1-2-10558
2,
98902.
19 1-2-10558
2,
99038 .
19 1-8-10608
9
19 1-10-1062
6
99171
19 1-26-1075
,1
99197
19 1-11-10635
19
99210
19 1-7-10596
8
19 1-23-10729
16
99262
19 1-25-107 9
10,19
99266
19 1-21-10718
16
99280
. 19 1-5-10576
2,10
99300
19 1-2-10558
7
99301
19 1-2-10558
7
19 1-16-10682
19
99 39
19 1-12-10650
12
99 83
19 1-16-10682
19
99.507
19 1-16-10682
16
99522
19 1-2-10558
2.
19 1-2-10658
2,
19 1-2-1C |8
2,
99532
19 1-21-10718
18
99562
19 1-9-10617

99579.
19 1-1 -1066
10,11
99599
19 1-1 -1006
7
99655
19 1-26-1075
13,19
99752
19 1-10-1062
11
19 1-20-1071
17
99961
19 1-23-10729
9,10
99999
19 1-7-10596
2, 12
100008
19 1- -10571
11
100025
19 1-23-10729
11
100036
19 1-23-10729
10
19 1-25-107 9

1002 1
19 1-12-10650
6
19 1-2 -107 2
7
100 10
19 1-8-10608
1
100 21
19 1-13-10657
11
100 0
19 1-26-1075
9
100 1
19 1-26-1075
9
100
19 1-23-10729

100 82
19 1-10-1062
7
100516
19 1-26-1075
7
100552
19 1-7-10596
15
100S6
19 1-25-107 9
18
100865
19 1-25-107 9
18
1009
19 1-20-1071
17
101161
19 1-15-10670
1
101162
19 1-15-10670
12
101163
19 1-15-10670
1
10116 .
19 1-15-10670
17
101165
19 1-15-10670
17
101166
19 1-15-10670
1
101167.
19 1-15-10670
20
101168
19 1-15-10670
1
101169
19 1-15-10670
18
101170
19 1-15-10670
1
101259
19 1-26-1075
13
101260
19 1-26-1075
18
10126
19 1-23-10729
3,1
101268
19 1-25-107 9
18
101269
19 1-25-107 9
18
101295.
19 1-20-1071
13
12
101308
19 1-16-10682
7
101309
19 1-16-10682
7
101330
19 1-23-10729
2
1013 7
19 1-21-10718
6
101358
19 1-9-10617
S
101676
19 1-25-107 9
8
102055
19 1-25-107 9
13,15
103776
19 1-20-1071
17
103 06
19 1-25-107 9
8
Offce decsons (I. T.):
3 39
19 1-1-10550
267
3 0
10 1-2-10561
375
3 1
19 1-3-1056
203
3 2
1911-3-10556
212
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II
Offce decsons (I. T.) Con.
3 3.
Rung No.
19 1-3-10566
19 1- -10572
19 1- -10573
19 1-6-10588
19 1-6-10589
1 1-6-10590
19 1-7-10597
19 1-7-10606
19 1-8-10016
19 1-9-10619
19 1-9-10620
19 1-10-10625
19 1-10-10628
19 1-11-10036
19 1-12-106. .
19 1-12-10652
19 1-13-10658
19 1-13-10659
19 1-13-10660
19 1-13-10661
19 1-1 -10668
19 1-15-1067
19 1-15-10672
19 1-15-10673
19 1-16-1068
19 1-16-10689
19 1-17-10893
19 1-17-1069
19 1-18-10700
19 1-19-1070
19 1-10-10705
19 1-20-10715
19 1-20-10716
19 1-20-10717
19 1-22- 0725
19 1-23-10730
19 1-23-10731
19 1-23-10732
19 1-2 -107 3
19 1-2 -107
19 1-25-10750
19 1-26-10756
19 1-8-10613
19 1-9-10621
19 1-10-10630
19 1-11-106 0
19 1-15-10680
19 1-17-10895
Pace.
261
236
250
191
206
258
2 1
28
205
25
292
193
20
236
232
236
209
251
268
287
257
ass
238
252
231
382
191
271
252
192
207
.t

270
2- ;
212
262
27
288
397
207
2 0
15
02
398
00
08
12
Rung.
Offce decsons (S. 8. T.)-
Contnurd.
15
18
17
18
Offce decsons (S. T.):
912
913
91 _
915
816
917
918
Offce decsons (MS.):
233
23
235
236
237
2 0
Offce decsons (T.|:
79
80
81
82
83
Mmeographs:
298 (rev.)
61 8
8175
818
520
Msceaneous:
Legsaton
Commttee reports.
Rung No.
Msceaneous.
19 1-21-10723
19 1-22-10726
19 1-23-1073
19 1-25-10753
19 1-2-10562
19 1-8-1061
19 1-12-10853
19 1-12-1065
19 1-16-10690
19 1-16-10691
19 1-19-10711
19 1-1-10557
19 1-5-10582
19 1-9-10623
19 1-1 -10668
19 1-15-10671
19 1-17-10697
19 1-23-10739
19 1-26-10761
19 1-5-10585
19 1-9-10622
19 1-1 -10669
19 1-18-10701
19 1-22-10728
19 1-11-106 5
19 1-5-10583
19 1-10-1063
19 1-1 -10665
19 1-26-10757
19 1-7-10602
19 1-10-10027
19 1-11-106 7
I . 1 I. , SI
19 1-7-10603
19 1-7-1060
19 1-10-10628
19 1-10-10629
19 1-11-106 8
19 1-11-106 9
19 1-11-10618
19 1-18-10656
19 1-16-10683
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CONT NTS OF CUMUL TI ULL TINS CI. T.) 1 to 5; S. T. FOR 1920 ND 1921; INT RN L
R NU 1-1,1-2, II-. II-2. III-. I 2, I -1, I -2. -, -2. I-1, I-2. II-1, II-2. III-1, 1II-2.
U.-1, I -2. -. -2. I-, I-2. II-1. 1I-2. III-1, III 2. I -1. I -2. -1. -2. 1937-1. 1937-2.
1938-1. 1938-2. 1939-1 (P RT 1 ND P RT 2). 1939-2. 19 0-1. 19 0-2. ND 19 1-1.
Cumuatve uetn
Income Ta :
December, 1919 (No. 1)
anuary- une, 1920 (No. 2) _
uy-December, 1920 (No. 3)
anuary- une, 1921 (No. )
uy-December, 1921 (No. 5)..
Saes Ta :
1920 (S. T. 1-20)
anuary- une, 1921
uy-December, 1921..
Interna Revenue uetn:
anuary- une, 1922 (No. 1-1)
uy-December, 1922 (No. 1-2)
anuary- une, 1923 (No. II 1)
uy-December, 1923 (No. II-2)
anuarv- une, 192 (No. III-)
uy-December, 192 (No. III-2)
anuary- une, 1925 (No. I -1)
uy-December, 1925 (No. I -2)
anuary- une, 1926 (No. -)._.
uy-December, 1926 (No. -2)
anuary- une, 1927 (No. I-1)
uy-December, 1927 (No. I-2)
anuary- une, 1928 (No. II-1)
uy-December, 1928 (No. II-2)
anuary- une, 1929 (No. III-1)
uy-December, 1929 (No. III-2)
anuary- une, 1930 (No I -)
uy-December, 1930 (No. I -2)...
anuary- une, 1931 (No. -)
uv-December, 1931 (No. -2)
anuary- une, 1932 (No. I-1)
uy-December, 1932 (No. I-2).
anuary- une 1933 (No. II-1)...
uy-December, 1933 (No. II-2)
anuary- une, 193 (No. III-1)
uy-December, 193 (No. III-2)
anuary- une, 1935 (No. I -1)
uy-December, 1935 (No. I -2)
anuary- une, 1936 (No. -1)
uy-December, 1936 (No. -2)
anuary- une, 1937 (1937-1)..
uy-December, 1937 (1937-2)
anuary- une, 1938 (1938-1)...
uy-December, 1938 (1938-2)
anuary- une, 1939 (1939-1 Part 1 and Part 2).
uy-December, 1939 (1939-2)
anuary- une, 19 0 (19 0-1)..
uy-December, 19 0 (19 0-2)..
anuary- une, 19 1 (19 1-1)..
(vn)
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O RD OF T PP LS.
CUMUL TI LIST OF NNOUNC M NTS R L TING TO
D CISIONS OF T UNIT D ST T S O RD OF T
PP LS PU LIS D IN T INT RN L R NU UL-
L TIN S R IC FROM NU RY 1, 19 0, TO UN 30, 19 1,
INCLUSI .
( nnouncements reatng to the acquescence or nonaequescence of the Commssoner In
decsons of the Unted States oard of Ta p| eas, as pubshed In the weeky Interna
Revenue uetns from December 22, 102 . to December 31, 1031, Incusve, are prnted n
Cumuatve uetn -2, pages 1-1O0. Those prnted In w eeky uetns from anuary 1, 1932,
to December 31, 1939, ncusve, are pubshed In Cumuatve uetn 193 -2, pages 1-73. The
st beow, therefore, contans ony such announcements pubshed In the weeky uetns
from anuary 1, 19 0, to uno 30, 19 1, ncusve.
The Commssoner acquesces n
Unted States oard of Ta ppeas:
Ta payer.
19 1-26-1075
the foowng decsons of the
Docket
No.
oard of Ta ppeas.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
T raser 1
dar, Mrs. Cornea, estate of
der, . P
ffated nterprses, Inc.1
en, Laura, estate of
mercan Lberty O Co.
mercan Socety of Cnematographers, Inc
nderson, ohn, transferee of estate of Frank
urrdge - -;. __
pe rewng Co., Inc
ppeby, ohn S.s.,
tantc Land Co., The
ugustus, zabeth G
o.
91958
95 51
97988
96603
89703
98 87
98 88
96 11
9333
91977
9 080
100 10
96061
1
3

2
0
3
2
10
1(1
1
3
0
228
38
1 12
300
721
76
675
9
1109
18
7
1200
cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
cquescence reates ony to the ssue, What amounts consttute reasonabe aowance for servces per-
formed In 1935 and 1930 by the wves of the two prncpa ocers of the corporaton
state ta decson.
cquescence reates ony to the Issue, Dd the respondent err In ncudng In pettoner s consodated
ncome for 1932 and 1933, sub|ect to depeton, the sums of 25,727.65, 27, 21.09, and W0. 5.27 whch pet-
toner s affate, the Woord Producton Co., pad durng sad years to owners of o payment contracts on
Its Pnkston ease
cquescence reates ony to the ssue. Was the sum of 150 whch was added by the Commssoner to
ohn S. ppeby s ncome, ta abe to hm
ungNo. 1075 ncudes a acquescence and nonacqucscence notces pubshed In the Interna
Revenue uetn servce from anuary 1, 19 0, to une 30, 19 1.
(1)
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2
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
.
aker, Inc.. mert .
anfed, T. .1
ank of merca Natona Trust Savngs ssoca-
ton, trustee of Tonnngsen Trust
ekns, atherne, estate of2
ekns et a., Mo W., e ecutors of estate of ath-
erne ekns2
echer, arret obrook
enaga et. u ., rthur 3
erks County Trust Co., aeged successor trustee of
Mortgage Trust Certfcate Poo
ack Motor Co., Inc
enhem Co., Ltd
ohn, Chares . - -
ondhoders Commttee5.
rggs- an Co_
rnk et a.,
Trusts ,
C, Trustees of Mnne M Fay
, and S ...
rtt, Car M
rookman, Murray.
C.
Can, mma Wetmuer, e ecutr of estate of
ohn . Can, Sr.7
Can, Sr., ohn ., estate of7
Caneo, arry F
Carey-Reed Co.8
Carey Trust (Second)
Carter, Shrey, estate of
Castner Garage, Lmted
Cavett et a., ., e ecutors of estate of W. T.
aes --
Center Investment Co
Chamberan et u ., Lowe
Cherokee Co
Chrvser Corporaton
Caborne et a., ustn Legh, e ecutors of
estate of Laura en 7
the
9236G
I 9 01 |
f 93313 )
98688
99999 |
99280
87675
87675
9 879
87638
98207
97232
95026
95953
90 52
90 86
90 87
92562
98900-
98902
99522-
9952
95566
95871
101330
101330
/ 66150
906 1
83936
93611
93917
98502
93208
82350
96 10
93962
97305
89703
10
2
3
38
38
2
36
2
1
2
3
0
0
2
3
11
3
3
1
36
1
0
3
0
3
3
1
2
0
1 cquescence reates ony to the ssue, Is the pettoner entted to a deducton of 6,5 6.96 for the year
1937. as and for a debt ascertaned to be worthess and charged off durng that year
1 Pror nonacquescence pubshed n Cumuatve uetn 1939-1 (Part 1). page 0, wthdrawn.
1 Nonacquescence pubshed n Cumuatve uetn 1938-1, page 35, wthdrawn.
cquescence reates ony to the ssue. Where a ta payer ses stock to a trust created by hm for the bene-
ft of hs daughter, does the transacton fa wthn secton 2 (a)6 of the Revenue ct of 193 so that no deduct-
be oss resuts
cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
cquescence s as to resut ony.
T state ta decson.
Pror nonacquescence pubshed In Cumuatve uetn 1939-2. page , wthdrawn.
6 cquescence s ony as to the Issue, Do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
by them aganst the purchase of stock n the Loca Federa Savngs and Loan ssocaton nto whch the
budng and oan assocaton was converted, represent ncome In 1935 sub|ect to norma ta and surta
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3
cquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Cohen Sons Co.,
Cohen Testamentary Trust, oeC
Coumba O Cas Co.1
Combs Lumber Co
Cook Drng Co.
Coocdge, Norman u... -
Cooper, ugene ., admnstrator of the estate of
Lews F. Cooper
Cooper, Lews F., estate of
Cooperatve Insurance
Cooperatve Power Pant
Crabb, Doores
Crawford Musc Corporaton
D.
Daas Tte Guaranty Co. .
Dashe, C. R.
Davdson, Cnton 8
Davdson, r. Cnton
Davdson, Fora S.s
Davson- oseph Campau Reaty Co., Inc
Dean, Mason L.
Dearng, Roy ., estate of
Dearng, R. ., estate of, and trust estate
Dearng, Mrs. R. .7 -
Dearng et u ., Ws R.7
Dearng, Ws R., e ecutor of estate of Roy .
Dearng 7
Dearng, Ws R., e ecutor of estate and trust
estate of R. . Dearng 7
DeLong, Davd .
Deube, George -
Dstrct ond Co.
Doenz, nton
Doar, gnes arr
Doar, . arod, estate of.
97039
96231
9062
915 3
82231
92289
9 088
9 088
95292
95291
95002
/ 85389
88290
90160
75056
93500
93503
9350
93502
97306
61205
69832
8 195
8 193
8 19
8 196
8 192
. 8 197
8 195
8 193
8 19
10126
92055
950
88970
9 86
93311
97283
98728
97282
98727
2
2
1
1
38
0
0
10
1
1
1
0
0
86
3
3
3
1
85
86
36
86
86
30
30
3
2
0
1
1
1
1 cquescence does not reate to Issue pertanng to aocaton of cost of equpment on the property n
queston.
cquescence reates ony to the Issue, whether the far market vaue of future o payments, under the
drng and sae of ease contracts, shoud be ncuded n cross Income of pettoner for the year 1932. Pre-
vous acquescence pubshed n Cumuatve uetn 1939-2, page 8, affrmed as to ths ssue ony.
cquescence reates ony to the ssue whether or not (|cttoncr s an Insurance company as that term
Is used n secton 701(c) 2 of the Revenue ct of 193 .
Nonacquescence pubshed n Cumuatve uetn 1937-2, pace 30, wthdrawn.
1 cquescence wth respect to ssue nvovng the ta abty of certan commssons on fe nsurance
oontracU s as to resut ony.
Pror nonacquescence pubshed In Cumuatve uetn 1937-2, pace 36, wthdrawn.
T Pror nonacquescence pubshed n Cumuatve uetn 1938-1, pace 39, wthdrawn.
1 cquescence reates ony to the Issue, Is the 1 ,000 cash receved by the wttoner on February 6, 1938,
from Francs . Lapont a part of the consderaton of the pettoner s mercan roach Machne Co.
stock
Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 7, wthdrawn.
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cqukscences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Doar, et a., Robert II, e ecutors of estate of .
arod Doar -
Downng et u ., Rchard 1
.
nhorn, Ma
more Mng Co., Inc
verson Corporaton
qutabe Lfe ssurance Socety of the Unted
States, The - - --
state Pannng Corporaton 8
usts, ugustus .
vans, Mary .7
wng, Sherman --
F.
Farre, Robert S...
Fay, Mnne M, Trust, , C, and S .
Ferree, C. .
Frst Mortgage onds
Fsh, Isaac, estate of
Ftch, F. W -
Feschmann, Raou
Femng, Mrs. nna Maud 11
Femng- mbc Corporaton u
Femng, Wam ...
Foyd, Incorporated -
Foreman, Frank C -
Forrester o Co. -
Frend et a., Mton ., trustees of estate of enry
Frend
Frend, enry, estate of
Frost Co., G. C -
97282
98727
99171
73893
96520
93281
31110
332 1
57867
93501
71637
95527
93013
100139
98900-
98902
)99522-
I 9952
615 2
90 52
90 86
90 87
96527
933 0
98131
90305
92958
9 690
92959
/ 92957
9 689
99562
93915
937 8
90672
91 15
90672
91 15
100
1
3
86
2
0
33
3
30
12
10

2
32
0
2
3
0
1
1
n
3
0
3
0
10

cquescence reates ony to the ssue nvovng the deductbty of 95.7 as a bad debt.
1 Pror nonacquescence pubshed n Cumuatve uetn 1938-1, page 0, wthdrawn.
1 cquescence reates ony to the ssue nvovng the far market vaue of certan pedged coatera on
the date of Its surrender.
Pror nonacquescence pubshed n Cumuatve uetn -1, page 31 (1936), wthdrawn.
1 cquescence wth respect to ssue nvovng the ta abty of certan commssons on fo nsurance
contracts s as to resut ony.
Pror nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
T cquescence reates to a ssues e cept as to the deductbty of attorney s fees and abstract fees n-
curred ncdenta to the estabshment of forfeture of a ease and obtanng rewssesson of the eased premses.
I Pror nonacquescence pubshed n Cumuatve uetn 19 0-2, page 11, wthdrawn.
cquescence s as to resut ony.
Nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
II cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
11 cquescence reates ony to the foowng ssues: ( ) Dd each of the communtes of ay rube and
we and Wam Femng and wfe constructvey receve o aynents of 60,8 S.f5 and 53, 01.35, resec-
tvey, for 193 and 1935 from the Femng- mbe Corporaton, and O) was a certan ,000 reservaton n
connecton wth the transfer by Wam Femng n 193b of a easehod nterest n the tchtcr ease,
etc., ta abe to tfao pettoners
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5
cquescences Contnued.
Ta payer.
G.
G. . R. O Corporaton...
Gardner, . Ws M
Garand et u ., Wam . .
Gayord, Inc., Robert ...
George ros. Co
Gespe, Maud
Gmore, een, estate of, transferee of estate of
Frank 0. urrdgc - --
Graff, verett D
Grm, Cfford D...
Gruy, oseph, ndependent e ecutor of estate of
Luce Gruy - -
Gruy, Luce, estate of
Gump, fred S., estate of - - -
Gump et a., Camo R., e ecutors of estate of -
fred S. Gump
aes, George .1
aes, Mrs. Oneta
aes, r., W. T. -
aes, W. T.p estate of .
arrs Trust Savngs ank et a., e ecutors of es-
tate of Isaac Fsh --
awaan Trust Co., Ltd., trustee of oe Cohen
Testamentary Trust
eath, arret .
eer, dward .
ggns, ugene
ghand Farms Corporaton
rsch, L. ..
onokaa Sugar Co
ooper, ames P., estate of510
ooper, Mathde ., admnstratr of estate of
ames P. ooper510
oover, erbert W
opkns,
,
tm
Docket
No.
92R0
92115
93589
955 7
96953
932 8
98770
93231
92212
93919
95901
95901
90650
90656
93210
93209
93211
93208
96527
96231
90599
9 79
9 795
80052
85961
95690
95782
101358
85776
85776
9097
91753
oard of Ta ppeas.
oume.
n
2
3
1
1
3
0
0
0
2
2
2
2
0
0
0
0
2
12
38
1
39
2
2
3
)
1
2
1
Oft ta decson.
cquescence reates ony to the ssue, f the benefcares of a certan trust be treated as donees, were
the gfts made to them gfts of present Interests or future nterests
cquescence wth respect to the decson of une 28,19 0 ( 2 . T. ., 321), reates to the Issue nvovng
the ta abty of nterest from muncpa bonds Issued under the Caforna Muncpa Improvement Dstrct
ct of pr 20, 1915. cquescence wth respect to the decson of February 27. 1911 ( 3 . T. ., 731),
reates to the ssue nvovng the ta abty of the ncome from o certan trust estabshed hy the pettoner
for the support of hs wfe, the ony ssue presented at the second hearng and decded party n favor of the
pettoner and party for the respondent.
cquescence s as to resut ony.
state ta decson.
cquescence s ony as to the ssue, do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners In anuary, 1935, but apped
by them aganst the purchase of stock In the Loca Federa Savnsrs and Loan ssocaton, nto whch the
budng and oan assocaton was converted, represent ncome In 1935 sub|ect to norma ta and surta
Pror nonacquescence pubshed In Cumuatve uetn 1939-1 (Part 1), page 50, wthdrawn.
cquescence reates to the ssue pertanng to the trust for the pettoner s mnor son manue.
cquescence reates ony to the Issue, Dd the pettoner reaze ta abe gan as the resut of recevng
n award for compensatory damages
cquescence reates ony to the determnaton of the vaue of tho stock of Wam . ooper Son
Co. on ugust 3,1933.
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c tr sc NC s Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume. Page.
ote stora, Inc.1
oward, Grace dams, estate of
oward et a., George dams, e ecutors of estate of
Grace dams oward
uey Php ardware Co
umme-Ross Fbre Corporaton
umphreys, Murray
yde, Mdred ., estate of
yde, Suffok erks, Marguerte1
vde, Ws O., admnstrator of estate of Mdred
. yde...
Ide, ohn
Industra Cotton Ms Co., Inc.
Isand Securtes, Lmted
.
ask, Sophe, tradng as Whte ouse akery
oe Co
ohnston, . dward
ones, Carre L., estate of
ordan Creek Pacers
oseph, Wam
.
ahn, ea5
ahn, Isdor 5
ahn, Lenora
aufmnnn, oe W
aufmann, Mdred ..
eer, Charotte
esser O Gas Co
esau Petroeum Corporaton-
mbe, ay 8 ---
mbe, Mrs. ema 1
eberg, ce G. .7
eberg, ce G. ., e ecutr of estate of Robert
. eberg, Sr.
eberg, Sr., Robert ., estate of7
nowes, dwn C. F
97230
99 51
99851
92801
93077
87899
95182
81 17
93257
95182
1013 7
92186
99082
1002 1
96535
93768
91831
98057
99210
96036
73895
73891
7389
95082
95083
93026
930 1
95760
92956
9 67
92955
9 673
86178
86178
86179
91 95
2
2
2
0
0
2
2
0
2
3
3
3
13
1
1
1
3
3
36
36
36
1
1
1
1
2
1
1
3
3
3
0
759
9
9
7S0
820
857
738
1120
738
799
107
1
321
825
550
1279
131
273
95
95
95
08
08
78
31
69
9 0
9 0
277
277
277
860
cquescence s as to resut ony.
cquescence on the foowng ssue Is as to resut ony; In determnng the net ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded tho rent due under a ong-term ease,
the essee havng mproved, the premses wth an offce budng whch woud become the essor s property
on forfeture, the trust on the accrua bass havng accrued the. rent but aso havng charged t to a reserve
for uncoected rents
Un|ust enrchment ta decson. cquescence s as to resut ony.
1 state ta decson.
Pror nonacqueseence pubshed n Cumuatve uetn 1938-1, page 6, wthdrawn.
cquescence reates ony to the foowng ssues: (a) Dd each of the communtes of ay mbe and
wfe and Wam Femng and wfe constructvey receve o payments of 60,8 8.65 and 53, 01.35, respec-
tvey, for 193 and 1935 from the emng- mbe Corporaton, and (6) was a certan ,000 reservaton n
connecton wth the transfer by Wam Femng n 1936 of a ease-hod Interest n the chtor ease,
etc., ta abe to the pettoners
cquescence reates to a ssues e cept that nvovng a bad-debt deducton of 20 .60.
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cquescences Contnued. .
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
L.
Lster, Caroyn Faust, transferee
Laster, . C., transferee
Laster, dward Carro, transferee
Laster Incorporated, . C
Lawrence, Wam amton 1
Lawson et u ., dward C
Lawson, Roberta C
Leary, Sr., . .
Leary, Myra L.1
Legg , Mdred Sheppard, estate of
Letts, r., rthur --
Levy, en
Lpstate et u ., Php arry
Lousve Fre rck Works, Inc., The
Lucas, eury M
Lyon, Incorporated
M.
MacConaughey, arry
Macon, Dubn Savannah Raroad Co
MacPherson, Mae Recor
Madgan et u ., . P
Ma|estc O Corporaton 5
Maery et u ., Otto T.
Manufacturers Lfe Insurance Co., The
Marborough ouse, Inc., et a.
Marborough Investment Co.
Marthe, Louse, transferee of estate of Frank 0.
urrdge
Martn, Thomas W
Mc pne Land Deveopment Co., Ltd., . .._
McCormac, Gertrude ., trustee for . . Mc-
Cormac, r
McCormac, r., . . (trust)
Mc nght, fred, admnstrator of estate of Thomas
Spruance
9771 3
97716 3
97713 3
97 2 3
10036
99300 2
99301 2
768 5 3
768 6 3
899 2 0
92857 1
96037 3
93255 3
100 82 3
100516
93858 1
965 6 2
99832
92052 1
90592 0
92083 39
101308
101309 d
96380 2
92373 2
908 5 3
90 52
90 86 f 0
90 87
90 52
90 86 f 0
90 87
93333 0
93916 0
99599 3
93920 I 0
93920 0
9 78
9 820 f 3
9 821
77 19
77 20
81391
81392 m .
8680
86S05
9 02
9 03
cquescence s as to resut ony.
Pror nonacquascenee pubshed In Cumuatve uetn 1937-1, page 1, wthdrawn.
state ta decson.
1 Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 57, wthdrawn.
cquescence reates to a ssues e cept the ssue, Is the pettoner entted to a 1935 oss deducton for
the undeprecated cost of certan casng and other ease equpment whch coud not be removed from a
certan o we whch the pettoner ceased to operate, durng that year, because such operaton had
become unproftabe
cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
McLean et u ., Marrs.
G
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cqttescences Contnued.
Ta payer.
oard of Ta ppeas.
oume.
Page.
Medca Dagnostc ssocaton.
Mbank, Dunevy 1
Mooney ectrc Co.
Monarch Lfe Insurance Co.
Moock ectrc Suppy Co., The
Morrs Pan Co. of St. oseph, The
Morrson ond Co., Ltd
Mortgage Trust Certfcate Poo
Morton, rthur F
Mott, Dee Furey
Myers, George R
N.
Nchos, . C
Ncoa, arry T.
Norweb, mery May oden .
O.
Ortz, ce duPont ..
O Suvan Rubber Co.,
Inc. (n dssouton).
P.
96563
93050
96076
86861
87 1
9628
9781
93362
95986
98207
91 9
71903
9 76
89169
93821
98188
92575
93159
97399
2
1
2
38
1
2
1
2
2
1
35
2
2
2
1
2.
2
610
101
78
716
1209
1190
669
720
1238
7 2
195
6 0
618
899
179
173
721
Pan- mercan Lfe Insurance Co. 8 638 38 1 30
Parker, . rooks 101676 369
Parrsh, Percva... - -- 103 06 1
Patton, T. - 93918 0 7 9
Peck Peck (New York) 99288 2 651
Peck Peck Corporaton, The 9931 2 651
Perkns, Raph 96126 1 1225
Phnev odng Co., Inc 88988 3 215
Perce, D. W 92278 1 1261
Pnkney Packng Co. 8892 2 823
Pttsburg Canners, Inc 93560 1 67
Punkett, Theodore R 9 017 1 700
Pontare , Mchae 10 83199 35 872
Porter et a., . oward trustees, dentfed as
Porter Propertes Trustees, Ltd 95762 2 681
Porter Propertes Trustees, Ltd. 95762 2 681
Producers O Corporaton 93839 3 9
Pupn, Mchae I., estate of 92177 38 1218
cquescence s ony wth respect to the ta abty of the ncome from the wfe s trust
cquescence reates ony to tno deductbty n 1930 of the amount pad to tho Frst Natona ank of
St. Lous n connecton wth the qudaton of the Frankn mercan Trust Co., such acquescence beng
ony n the resut.
Pror nonacquescenoe pubshed In Cumuatve uetn 1939-1 (Part 1), page 56, wthdrawn.
Nonacquescence pubshed n Cumuatve uetn 1937-1, page 3, wthdrawn.
8 cquescence reates ony to the ssue, Is the pettoner entted tft a deducton of 13,225 as a bad debt
for the year 1935T
Gft ta decson.
cquescence reates ony to the ssue, whether the pettoner s entted to any deducton as the resut
of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of the year 193 .
1 Parta nonacquoscence pubshed In Cumuatve uetn 1939-1 (Part 1), page 59, wthdrawn.
cquescence reates ony to the ssue, Was the pettoner entted to a oss on an nvestment of 17,250
In the Fourteenth Carnege Co. for the year 192 T
10 Pror nonacquescence pubshed n Cumuatve uetn 1939-2, page 63, wthdrawn.
11 state ta decson.
Pror nonacquescenoe pubshed n Cumuatve uetn 1939-1 (Part 1), page 60, wthdrawn.
G
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1
3
-
0
1
-
2
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9
cquescencks Contnued.
Docket
No.
oard of Ta ppeas.
oume.
R.
Regas Reaty Co.1 - -
Retsa Drng Co
Rtche, Montgomery . W., admnstrator d. b. n.
of estate of Mrs. Cornea dar
Robnson, W. C --- -
Rooke, Robert L --
Rosenstock, nna, ndvduay and as e ecutr of
estate of Isaac M. Rosenstock 1
Rosenstock, Isaac M., estate of 1
Ross ros. orse Mue Co
Ross, Mary Catherne
Ross, W. R -- -
Ross, ndrew .
Rotorte Corporaton
Rowey, dward G., transferee of estate of Frank
O. urrdge
.
; ecutor of
Safe Depost Trust Co. of Ratmorc
estate of Mdred Sheppard Legg ..-
St. Lous Unon Trust Co. et a., e ecutors of estate
of Carre L. ones -
Scanon, Robert .
Scheffen, Lucy S., estate of -
Schcsnger, Rosa 5 --
Schey et u ., uan Larcombe
Schoekopf, r., acob F - -
Schutz et u ., Nes
Schuman Carrage Co., Ltd
Seavey Farshem rokerage Co...
Second Carey Trust
Seward Cty Ms...
Shamrock O Gas Co
Sharp et u ., . Cec
Sheden Land Co.
Shenandoah aey Natona ank (Shrey Carter
estate)
Sherman, Dors ond 7
Sver, Ma
Smon, ose, estate of
Smon et a., ose P., e ecutors1
Sav, rthur M ---
Smth, Chares G
Smth, Madene Weder
96360
.-,77f,
97715
95 51
99038
98112
91686
91686
9 76
9 75
f 9 7
98898
96 70
88606
93332
899 2
91831
98020
99961
73892
99 0
76377
/100 0
100 1
90012
91618
93611
92099
98588
/ 97 25
97 26
93196
93917
95300
100186
918 0
918 0
9 768
9391
95003
3
2
3
3
3
1
1
3
3
3
1
0
0
0
11
2

36
2
35

3
1
1

2
2
2
0
1
2
0
0
3
0
1
1 cquescence Is as to resut ony.
state ta decson.
Un|ust enrchment ta decson.
Oft ta decson.
Pror nonacqucscence pubshed n Cumuatve uetn 1018-1. paee 55, wthdrawn.
cquescence reates ony to the ssue, whether certan osses suffered by pettoner as the resut of fore-
cosures of propertes owned by the pettoner are deductbe n the year of forecosure or n the year n
whch tbe equty of redempton e pred.
cquescence reates ony to the year 1935.
G
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U
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t
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)

o
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

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6
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#
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e
10
cquescences Contnued.
oard of Ta ppeas.
oume.
Smth, arvara Pupn, admnstratr of estate of
Mchae I. Pupn 11
Smoak, ott ...
Smyth, r., Francs G., transferee of estate of Frank
O. urrdge
Smyth, erbert C, transferee of estate of Frank O.
urrdge.
Smyth, erbert C, admnstrator of the estate of
een Gmore, transferee of estate of Frank O.
urrdge
Spor, Sr., Cypran ., estate of 1
Spratt, Chares N
Sprngford, erbert
Spruance, Mrs. ortense
Spruance, Thomas, estate of
Staey, ugustus .
Staey, mma L.
Standard O Co. (and affated subsdares).
Staney, Wam
Stern, son L. S.
Strecker, Lous
Suffok erks, Marguerte yde .
Sutana O Corporaton (Deaware).
Sunset-Luce Co
Suteffe Co., The
Swastka O Gas Co
Tabott, atherne ., estate of1
Tabott et a., arod ., e ecutors of estate of
atherne . Tabott1
Tayor et us., arden F
Tefhune, Wesey .
Thatcher, ster ., transferee of estate of Frank O.
urrdge
Tmmernan, Lous F
Tte Guarantee Trust Co. et a., e ecutors of es-
tate of Lucy S. Scheffen
Tonnngsen Trust, ohn and Paune
Tomey, eannette Wrght, admnstratr of estate
of Me Langey Wrght 1
Traser, Rchard ., estate of
Trevor, my
92177
100036
93331
93232
93231
92588
97917
972 7
/ 9 785
9 786 I
9 78
9 820
9 821
88772
88773
86516
96558
9313
96038
81 17
93257
90078
90079
9396
9 235
90861
97128
97128
99262
9389
93335
96317
99961
99280
99579
91958
89820
38
3
0
0
0
0
3
1
3
3
1
1
3
1
0
3
0
0
2
-11
0
2
2
3
0
0
2
1
3
3
1
0
1218
907
9
9
9
92
503
1001
221
221
752
752
973
1233
756
273
1120
1195
2 6
1009
797
1081
1081
563
7 9
9
188
137
37
551
228
12 0
state ta decson.
Pror nonacquesecnce pubshed In Cumuatve uetn 1939-1 (Part 1), page 60. wthdrawn.
Gft ta decson.
1 cquescence reates ony to the ssue, Is the pettoner ta abe on the ncome of a trust whch was created
for the support and mantenance of hs wfe and mnor chd
cquescence on the foowng ssue s as to resut ony: In determnng the not ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded the rent due under a ong-term ease, the
essee havng Improved the premses wth an offce budng whch woud become the essor s property on
forfeture, the trust on the accrua bass havng accrued the rent but aso havng charged t to a reserve for
uncoected rents
cquescence reates ony to the Issue, whether gans were reazed n 1936 or n 1937 from saes made on
the ast two days of December. 1938.
cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
G
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U
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t
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)

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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

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6
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e
11
cquescences Contnued.
Ta payer.
U.
Unon Guardan Trust Co
Unon Shpbudng Co., aeged transferee.
Unted States Fdety Guaranty Co
Co-
aey Lumber Co. of Lod
aey Tractor qupment Co.
auaton Servce Co., The
W.
Water, Wam
Washngton Raway ectrc Co.
Wegeforth, Le S
Weder, r., ames F
Wheeer, een vans 1
Wco , se .
Wco , Gayord P.
Wco , Mabe I.1
Wson, ohn P.1
Wson, Morrs
Wnston ros. Co.
Wnthrop, eekman
Wocott, Frank
Wof, dth ..
Wood, F zabeth
Wood, Orrn G. 7
Woods Lumber Co.
Word, nna
Word, T. T
Word Suppy Co., T. T
Wrght, Me Langey, estate of
Young, Du os I0..
Y.
Docket
No.
9 687
100025
91398
98503
99752
8735
100 21
95878
96373
f 97537
99162
92 35
9 708
95005
95528
96830
96831
96827
931 0
9802
59270
79850
10000S
92 29
9500
92 89
97 7
935 3
935 2
935
99579
783 5
oard of Ta ppeas.
oume.
1
3
0
3
39
3
2
II
2
0
2
1
2
3
3
3
2
2
29
36
2
1
1
0
1
1
I
1
3
3
Page.
1306
11 3
1010
1
962
23
311
811
9 1
12 8
633
686
2 6
931
931
931
1260
125
905
31
1151
1231
686
90
88
965
965
965
551
0 8
1 cquescence reates to a ssues e cept as to the deductbty of attorney s fees and abstract fees n-
curred ncdenta to the estabshment of forfeture of a ease and obtanng repossesson of the eased
premses.
cquescence reates ony to the ssue. re the pettoners ta abe n 193 as benefcares under the
wu of George N. Wco upon ncome earned n 193 by the estate durng admnstraton
I cquescence reates ony to the ssue, Where ta payer creates a trust for the fetme of hs adut daugh-
ter. Is the trust ncome ta abe to the grantor under the provsons of secton 166 of the Revenue ct of 1931
Pror nonacquescence pubshed n Cumuatve uetn 1II-2, page 38 (193 ), wthdrawn.
1 Nonacquescence pubshed n Cumuatve uetn 1937-2, page 56, wthdrawn.
Oft ta decson.
cquescence reates ony to the ssues nvovng (1) the vauaton of 38S shares of rown Paper M
stock, and (2) the queston whether the renqushment of a power to prevent future amendments to a trust
nstrument consttutes a compete gft.
cquescence Is as to resut ony wth respect to the ssue. Were the operatons of the pettoner, the
Woods Lumber Company of Tennessee, and tho Woods Lumber Company, Inc.. of rkansas, the
operatons of a snge ta abe entty, so that the oss sustaned by tho rkansas busness coud be used to
reduce ta abe ncome of the Tennessee corporaton
state ta decson.
II cquescence reates ony to ths ssue, Was the e change of certan certfcates of ownershp n a trust
tor underyng portfoo stock represented there by an e change of dfferent assets, resutng n a capta oss
Prevous nonacquescence pubshed n Cumuatve uetn -2, page 51 (1936), wthdrawn wth respect
to ths ssue ony.
G
e
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(
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Y
o
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k

U
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v
e
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s

t
y
)

o
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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12
The Commssoner docs NOT acquesce n the foowng decsons of
the Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
Treser 1
cme reweres (transferee)
ffated nterprses, Inc.2
abama sphatc Lmestone Co
en, . Wadegh, estate of.
en, ohn
en, r., et a., ona
en, r., et a., ona, e ecutors --.
en et a., ctor
ng, Noyes ., estate of
mbrose et u ., W. D
mercan Lberty O Co.
mercan Lght Tracton Co
ppeby, dgar S., estate of --
p|prby et a., dgar T., e ecutors of estate of
dgar S. ppeby
ppeby, ohn S.
rmour, Lota S
tknson, Wam G. (aso known as Pau Cava-
nagh)
vaon Paper Co., transferor
.
ard et u ., Warner G. and ua Doe.
anfed, T. .
ateman, Lady Maran -
eck, Martn
edford Trust, dward T
e et a., Maude ., e ecutors of estate of Ida .
Whte
ernhemer Co., 8. . M. --.
ngham, Mary Ly (Fager), estate of
shop Trust Co., Ltd., e ecutor of estate of ohn
. McCandess
ase, . F
91958
101296
96603
91793
93811
93812
93809
93811
93810
87136
957
957 5
98 87
98 88
9723
938S6
93886
9 080
88151
. 93150
95500
101162
97 39
93313
98688
99999
98766
99 39
97260
93575
88978
9 985
979 3
9829
1
3
2
1
1
1
2
3
2
1
1
1
1
2
3
2
2
3
3
2
1
1
0
2
2
228
721
390
32
206
191
1 05
76
1121
18
18
18
777
1037
5 1
970
769
69
1 7
7 8
525
2 9
823
1309
1232
1 Nonacquescence reates ony to that part of the oard s opnon whch hods, wthout supportng ev-
dence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
Nonacquescence reates ony to the ssue, Is the pettoner sub|ec to surta as a persona hodng com-
pany under sectons 351 of the Revenuo cts of 193 and 193G
state ta decson.
Nonacquescence reates to a ssues e cept the Issue. Dd the respondent err In ncudng n pettoner s
consodated ncome for 1932 and 1933. sub|ect to depeton, the sums of 25,727.55, 27, 21.09, and 0, 5.27
whch pettoner s affate, the Wofford Producton Co., pad durng sad years to owners of o payment
contracts on ts Pnkston ease
Nonacquescence reates to a ssues e cept the ssue wth respect to the 150 added by the Commssoner
to the pettoner s ta abe Income.
Nonacquescence reates ony to the ssue, Shoud the ta abe Income of the pettoner for the year 1935
be ncreased, for the reason that a certan oss sustaned durng that year by the partnershp, of whch be s a
member, resuted from the short sae of property, wthn the meanng of secton 117(e) of the Revenue
ct of 193 7
Gft ta decson.
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1
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1

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13
Nonacqt|esctnceb Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Page.
ohn, Chares .
ondhoders Commttee .
onfs, F. G., estate of1
onfs Trust, F. G :vf
onfs et a., een G., e ecutors of estate of F. G.
onfs
ranch, Caude R
rdgeport Cty Trust Co. et a., The, e ecutors of
estate of Noyes . ng ..
rsto, ennet .
rown, ntonette - --
ruckner, rnod
uck, sworth ...
urnett, O. L.. -
umqust, ert
Caforna rewng ssocaton.
Co
Carte Ms, Inc
Caspersen, Freda R
Caughey, Caroyn G., estate of
Cavanagh, Pau (aso known as Wam G. tkn-
son)
Cavett et a., ., e ecutors of estate of W. T. aes ..
Centra anover ank Trust Co., e ecutor of
estate of W. M. L. Fske -
Centra Loan Investment Co.T
Chamberan, Park
Chaparra O Co
Chase, Gertrude -
95953
90 52
90 86
90 S 7
91501
931 8
91501
9 2 8
87136
96289
977 3
97507
93330
902 8
101259
101295
86776
87378
88616
97698
92765
99655
95500
93208
102055
82565
88067
97552
97902
9385
93855
93856
93857
96 96
96589
936 8
9062
977 0
97938
3
0
0
0
0
0
1
2
2
2
1
0

3
1
2
0

2
0

39

3

1
2
2
1
1
3
3
38
953
881
1079
1085
1079
10 3
191
263
693
3
99
60
8
721
93
89
758
385
1037
12
227
981
10
57
39
30
11 2
1110
213
38
263
10
291
Chase Natona ank of the Cty of New York,
The, trustee under agreements wth mercan
Depostor Corporaton
Cary, P. T. (Patrck)
Coe, Rufus S
Coona Trust Co. et a., e ecutors
Coumba O Gas Co.
Coumba Rver Paper Ms
Cook Drng Co. .
Nonacqoescence reates ony to the ssue, Dd the oss resutng from the e changes of and contracts
for ome Owners Loan Corporaton bonds consttute a capta oss
1 Nonacquescenoe reates to ssue pertanng to bases for deprecaton of pettoner s assets.
Prevous acquescence pubshed n Interna Revenue uetn 19 0-15, page 1, wthdrawn.
state ta decson.
Gft ta decson.
1 N onacqucscence s ony as to the ssue. Is the cash receved by pettoners n 11135 from the Loca Federa
Savngs and Loan ssocaton, whch Is admtted to be Income, ta abe as ordnary ncome or as capta
I sn
cquescence pubshed In Cumuatve uetn 1939-3, page 6, wthdrawn.
1 . onacquesrence reates to ssue pertanng to aocaton of cost of equpment on the property In queston.
onacquescenco reates ony to the ssue whether the pettoner s entted to deduct the costs Incurred
n drng wes- Pror acquescence pubshed In Cumuatve uetn 1939-2, page 8, wthdrawn u to ths
ssue ony.
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1
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1

2
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1
Nonacquescence8 Contnued.
Corporate Investment Co
Corpus Chrst Termna Co.
Covngton et u ., George W .
Credt ance Corporaton..
Crchton. ate
Crown Zeerbach Corporaton, transferee.
Cushman, Louse C, transferee of estate of Mary
W. Cushman 1
Cushman, Mary W estate of 1 -
D.
Daas Tte Guaranty Co.
Deerng, Frank C, estate of
Deerng et a., oseph Godfrey, e ecutors of the
estate of Frank C. Deerng
Deaware Termna Corporaton
DeLong, Davd .s
Denhom Mc ay Co
Denver Natona ank et a., trustees u/w F. G.
onfs
Downng et u ., Rchard 5
Dunnng, enry .
Durkhemer, S. F
dwards Drng Co. .
as, dna
mhrst, Dorothy Whtney.
ston Co., Ltd...
verson Corporaton T
rb et a., rthur L., e ecutors of estate of Ges W.
Mead 8
states dmnstraton, Inc., admnstrator of
estate of Zachary Smth Reynods 1
vans, Mary oyd
vans, Mary .
78363
88103
98283
100561
97025
101161
101163
101166
101168
101170
92881
/ 92882
92883
90 66
95996
95996
86105
10126
89606
931 8
99171
92629
95209
75931
90827
850 0
85880
95298
9660
93281
97566
86395
97 32
95527
3
0
0
0
0
0
0
3
39
0
3
1
1
35
1
1
2
0
1
2
2
2
1155
9
601
1020
90
5 1
9 7
9 7
1021
983
983
1179
1185
767
1085
11 7
1101
585
3 1
1109
3 8
208
615
2
1 5
851
2 6
1 state ta decson.
Nonacquescence reates ony to the ssue nvovng the ta abty of an amount of 0,000 transferred
from Premum reserve account to Undvded profts account pursuant to resouton of the board
Of drectors on uy 5, 193 .
Nonacquescence reates ony to the ssue nvovng the amount of gan recogntabe n 1936 upon the
recept of cash and stock In the Sundstrand Machne Too Co. for stock n the mercan roach Machne
Co.
Prevous acquescence pubshed n Interna Revenue uetn 19 0-15, page 1, wthdrawn.
Nonacquescence reates ony to the ssue whether Mrs. Inna Downng s abe for any part of the de-
fcency.
Nonacquescence reates ony to the Issue whether the pettoner s entted to deduct the costs ncurred
In drng o wes. Pror acquescence pubshed n Cumuatve uetn 1939-1, page 11, wthdrawn as
to ths ssue ony.
1 Nonacquescence reates ony to the ssue, Was the ncome resutng from the recept of surrendered
coatera n e tngushment of a debt persona hodng company ncome
1 Gft ta decson.
Nonacquescence reates ony to the deductbty of attorney s fees and abstract fee.s ncurred ncdenta
to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
G
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2
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1
3
-
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1
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2
1

2
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15
Nonacquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
w.
F. . . O Co....
Facon Co
Farmers Gnners Cotton O Co
Farmers Unon Cooperatve change.
Frst Mortgage onds 1
Frst Trust Depost Co. et a., guardans.
Fske, W. M. L., estate of
Femng, Mrs. nna Maud
Femng- mbe Corporaton
Femng, Wam 1 .-
Fower et u ., ohn O
Frazer, Frederc --
Gadan Co., Ltd
Gardner, . Ws 1
Gannn et u ., . P
Goss Gos , Lucy M.
Goodman, dwn
Greene, . Crawford, guardan of estate of ce .
Lester
Greve, Wam M
Grote et u ., en
92960
92001
93 36
100552
90 52
90 8G
90 87
907 9
90750
90751
102055
92958
9 690
92959
92957
9 689
91162
91 12
96605
92115
87127
87128
90391
87799
93 0
96315
97522
9 2
9 3
93210
93209
93211
93208
96 0
90 0
92882
9 79
9 795
92225
98726
1
1
1
2
10
1

1
1
1
0
1
3
11
12
II
II
11
2
II
aes, George .
aes, Mrs. Oneta
aes, r., W. T.
aes, W. T., estate of ..
asey, Lan ohnson, e ecutr of estate of
Rchard emmons asey
asey, Rchard emmons, estate of
artford-Connectcut Trust Co., The, e ecutor of
estate of Mary W. Cushman 11
eer, dward .
ercues Motor Corporaton
ghand, Cec ., e ecutor of estate of rg L.
ghand
Nonacqaescence reates to Issue pertanng to bases for depredaton of pettoner s assets.
Nonacquesoence Is ony wth respect to the hodng that the pettoners woud reaze no ta aho Income
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
they recovered the cost of the e changed property from the o payments receved.
1 Gft ta decson.
1 Nonacquescenoe reates ony to the Issue, In the ease of a gft of securtes In trust, shoud the trust ho
treated as the donee, resutng n ony one e cuson, or shoud the beneucures be treated as donees, resutng
m one e cuson for each benefcary
1 Nonacquescenoe s ony as to the ssue, Is the cash receved by pettoners n 1935 from the Loca Fedora
Savngs and Loan ssocaton, whch s admtted to be ncome, ta abe as ordnary ncome or as capta gan
1 state ta decson.
Nonacquescence reates to the ssue whether pettoner was ta abe on the ncome derved from certan
rttes paced In certan agency accounts wth a Dank n pettoner s name as trustee for hs mnor ohdru.
10
2
12
10
1
0
3
G
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f
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U
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2
0
1
3
-
0
1
-
2
1

2
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:
5
3

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#
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16
Nonacquescence8 Contnued.
Ta payer.
oume.
ghand Farms Corporaton 1
ghand, rg L., estate of
offman, atherne M
offman, W. W
offman etu ., W. W
ooper, ames P., estate of 25
ooper, Mathde ., admnstrat of estate of
ames P. ooper21
opknson, esse
ughes Too Co.
.
95690
98726
967 1
967 2
92 1
85776
85776
9701
90002
arvs, r., mus, guardan of Wam D. P.
arvs
arvs, Wam D. P., an nfant
ewe Mnng Co
ohnson County Reaty Co
ohnson, are F
ohnson et a., Thomas M., trustees.
ohnston, atherne S., estate of .
onas, Louse
.
ansas Cty, St. Lous Chcago R. R. Co
eogg, Cornea . W., e ecutr of estate of
Frederck R. eogg 1
eogg, F. W
eogg, Frederck R., estate of
enan et a., Wam R., r., trustees u/w Mary
Ly (Fager) ngham
ennedy Mnng Mng Co.
mbe, ay
mbe, Mrs. ema
eberg, ce G. .
eberg, ce G. ., e ecutr of estate of Robert
. eberg, Sr.5
eberg, Sr., Robert ., estate of 5
yce, . S., estate of
yce, M. P., admnstrator
napp, George O
Lamont, zabeth
Lester, ce ., an ncompetent, estate of .
9 886
891 3
95135
891 3
9 985
99507
92956
9 67
92955
9 673
86178
86178
86179
9017
9017
91699
97 07
93 0
96315
2
3
0
1
1
2
0
99227
3
99227
3
99266
3
9631

97388
3
86776
1
87378
1
1
88616
86395
2
91010
0
2
0
2
0
0
3
1
1
3
3
3
1
1
0
3
1
Nonacquesocnce reates to a Issues e cept the ssue. Dd the pettoner reaze ta abe gan as the resut
of recevng an award for compensatory damages
1 state ta decson.
Nonacquescence reates ony to the ssue, Was the sum of 132,3 5.73, representng the net proceeds of
certan fe nsurance poces assgned by the decedent to a certan trust, propery ncudbe n the gross
estate; and, f so, may the sum of 0,000 be e cuded under the provsons of secton 302(g) of the Revenue
ct of 1926
Nonacquescence s ony wth respect to the hodng that the pettoners woud reaze no ta abe ncome
from the e change of ther o, equpment, and persona property nterest for contngent o payments unt
they recovered the cost of the e changed property from the o payments receved.
Nonacquescence reates ony to the ssue Invovng a bad-debt deducton of 20 .(0.
Gft ta decson.
G
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d

f
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Y
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U
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t
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)

o
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2
0
1
3
-
0
1
-
2
1

2
0
:
5
3

G
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2
0
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7
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1
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b
3
2
9
6
8
0
6
P
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17
Nonacqukscences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Lpe, Gordon C
Lpe, Suzanne
Lpe, r., Ward C.
M.
Ma|estc O Corporaton 1
Marborough ouse, Inc., et a. _
Marborough Investment Co. .
Marsha, erbert --
Marsha, Margaret Whte (formery Margaret
Whte Wood)
Mason et a., Sam ., coadmnstrators of estate of
Sas . Mason
Mason, Sas ., estate of -
Masterson, nna za
McCandess, ohn ., estate of
McGue, G. Percy, estate of
McGue, M. dth, e ecutr of estate of G. Percy
McGue r -
McGovern, Inc., Patrck
McLean et u ., Marrs
Mead, Ges W., estate of
Mesta, L. W
Mche, Morrs
Mchgan Sca Co
Mbank, Duncvy s
Mooney ectrc Co.
Morehead, atharne oyd
Morrc, ohn dgery, estate of.
Mueer Co., C. F
N.
ona ank of Commerce of San ntono, Te ..
tona ank of Commerce of Seatte
tona ank of Topeka, ans., admnstrator of
state of ohn dgery Morrc
ona Paper Products Co., transferor
Nebraska rdge Suppy Lumber Co
Neustadt et a., gnes, trustees u/w Sgmund
Neustadt
eustadt, Sgmund, Trust under w of
Newport Industres, Inc
90750
W7.-.I
907 9
9(1380
90 52
90 SC.
90 87
90 52
90 86
90 87
99559
909 8
1009
1009
93517
979 3
98 6
98 6
918 6
91170
91171
97566
96531
97311
96786
93050
96072
95 1
103776
8596
96331
9316
89720
103776
101165
908 6
99935
99935
92331
1
2
0
0
1
3
3
3
2
2
1
1
0
1
1
2
3
1
1
2
2
3
0
0
0
8
3
0
3
3
0
1 Nonacquescence reates ony to the ssue, Is the pettoner entted to a 1935 oss deducton for the unde-
precated cost of certan casng and other ease equpment whch coud not be removed from a certan o
ve whch the pettoner ceased to operate durng that year, because such operaton had become unproft-
abe
Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s assets.
1 Gft ta decson.
state ta decson.
1 Nonacquescence s ony wth respect to the ta abty of the ncome from the so-caed short term trusts.
Nonacquescence reates ony to the ssue, Is the pettoner entted to a credt under secton 2f(c)2 of
the Revenue ct of 1936 n the amount of 13,810, representng 2 per cent of the argest amount of bonds at
any one tme outstandng durng 193t
cquescence as to one ssue pubshed n Cumuatve uetn 1939-2. page 28, wthdrawn.
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18
Nonacquescences Contnued.
Tapayer.
oard of Ta ppeas.
No.
oume.
Page.
97325
2
73
9732
2
73
93821
98188
-
899
93159
2
173
97116
2
91
90515
1
9567
1
952
96186

8985
0
1001
96126
1
1225
98835
3
10 1
92883
0
9 7
970 5
3
297
101260

8
9616
1
27
92387
0
1051
99532

36
8639
2
1 5
86395
2
1 5
9128
1
62
9128
1
62
85905
39
927
95922
1
220
95SS0
1
832
95880
1
832
8639
2
1 5
95218
2
190
101169
3
5 1
98895
3
829
100865
3
1177
101269
3
1177
10086
3
1177
101268
3
1177
Newton, r., ames
Newton Trust, ames .
Ncoa, arry T.1.

O.
Ortz, ce duPont
P.
Pacfc Grape Products Co.
Page O Co.
Pamer, Careton
Perkns, Raph
P- Group...
Phoen State ank Trust Co., trustee under
deed of trust from Mary W. Cushman, as trustee
and transferee
Pedras Negras roadcastng Co
Prce et u ., .
Prouty, Ove .
R.
Reaty Operators, Inc
Rebsamen Motors, Ino
Reynods, R. ., estate of
Reynods, Zachary Smth, estate of .
Rhodes, Mame D., estate of .
Rhodes et a., ugh D., admnstrators of estate of
Mame D. Rhodes
Rchardson, unsford
Rubnsten, Wton
Rust, r., et a., . ., e ecutors of estate of . .
Rust.-
Rust, . ., estate of
S.
Safe Depost Trust Co. of atmore, trustee under
ws of R. . Reynods and atherne S. ohns-
ton, and deed of atherne S. ohnston
Sanford Cotton Ms, Inc. ---
Santary Products Corporaton, The, transferor
Schrndapp, Car .s
Schwabacher, bert
Schwabacher, ames
Schwabacher, May
Schwabacher, Sophe D
Nonacquesccnee reates ony to the Issue, Is the ncome of a trust pad to the pettoner s dvorced and
remarred wfe ta abe to hm, as the grantor
1 Nonacqcsoence reates to a ssue e cept the ssue, whether the pettoner s entted to any deducton
as the resut of the satsfacton of the defct e stng n her husband s brokerage accounts at the end of tno
year 193 .
Nonacquesoence reates ony to the ssue, Dd the pettoner sustan a oss n the amount of (13,903.30
on the sae of second preferred and common stock of tho Cutch Machne Foundry Co.
state ta decson
Gt ta decson.
Sec O. C. M. 22 0 (page 20 , Cumuatve uetn 19 0-2).
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19
Nonacquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Seerey, ohn
Sheden Land Co.1
Sherman, Dors ond 2
Sobe, Inc.. N
Soomon, mea s
Spor Co., Inc., C.
Spreckes, doph
Stacy, Mar|ore Lpe
8tanart Co., Ltd
Sten, Nathan
Stern, son L. S. _.
Stewart, ames R.
Straus, Fredrch
Straus, Meer
Straus, Mortz
Strong Manufacturng Co., The_
Swope, Lorenzo W., estate of
T
Tavor et u ., arden F.6
Thompson, Mary ., e ecutr of estate of Wam
G. Thompson 7
Thompson, Wam G., estate of7
Tte Guarantee Trust Co., trustee under deed of
trust from dward T. edford, dated December 1,
1928
Tobn Packng Co., Inc., The
Towne, Wam Stark
Traser, Rchard ., estate of8
Trco Securtes Corporaton
U.
Unon Trust Co. of the Dstrct of Coumba, The
e ecutor of estate of Caroyn G. Caughey 7
W
Waker, Wam T.
Warner, ack L.
Washngton Pup Paper Corporaton, transferor
Watson, rchbad R
97673
93196
95300
93822
97937
9035
9 621
95639
99 20
96606
83178
9313
89950
83181
83180
83179
95626
936 8
99262
96358
963 8
97260
99 83
99197
91958
85176
99655
92600
97 01
10116
87873
880 8
89650
97312
92215
3
2
1
0
3
0
1
3
2
0
0
39
0
1
1
3
1
1
2
3
2
1
1

0
2
3
2
3
2
1 Nonacquescenee reates ony to the Issue whether pettoner Is entted to a deducton for an asserted
oss on an aeged sae of certan and to another corporaton.
Oft ta decson.
Nonacquescenee reates ony to the year 193f.
N or.acquescence reates ony to the ssue, Where termnaton of a trust coud occur ony at the eecton
of the grantor wth concurrence of attorneys who represented two wrsons nterested n the trust, s the
nt eat of the attorneys a substanta adverse nterest
1 Pror acquescence pubshed n Cumuatve uetn 1939-1 (Part 1), page 3 , wthdrawn.
Nonacquescenee reates ony to the ssue nvovng the e change n 1936 of 600 shares of Pressed Stee
Car Co. (N. .) for stock and rghts n Pressed Stee Car Co. (Pa.)
state tat decson.
Nonacquescenee reates ony to that part of the oard s opnon whch hods, wthout supportng
evdence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
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20
Nonacquesckncf.s Contnued.
oard of Ta ppeas.
Ta payer.
Docket
No.
oume.
Page.
West Producton Co
88997
1
10 3
Western Wa ed Paper Co. of Caforna, transferor.
101167
3
5 1
95528
2
2 6
Whte, Ida ., estate of
93575
1
525
96830
3
931
96831
3
931
96827
3
931
931 0
2
1260
92 89
0
90
Nonacquescence reates ony to the deductbty of attorney s fees and abstract fees ncurred ncdenta
to the estabshment of forfeture of a ease and obtanng repossesson of the eased premses.
Non acquescence reates ony to the ssue. re the pettoners ta abe n 1936 as benefcares under
the w of mma Lyman Wco upon ncome earned n 193.5 by the estate durng admnstraton
Non acquescence reates to the ssues. Whether the ncome of a 2-year trust created for the beneft of
the ta payer s adut son s ta abe to the grantor under secton 166 of the Revenue ct of 103 , and whether
the capta gans of a fetme trust created for the benct of an adut daughter are ta abe to the grantor under
secton 167 of the Revenue ct of 193
Gft ta decson.
Non acquescence reates ony to the ssue, Is the vaue of fe nsurance poces to be determned by the
cost to purchase smar contracts as determned by the Commssoner, or s the vaue mted to the cash
u render vaue as contended by pettoner
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CONSOLID T D C SS PROFITS T R GUL TIONS.
(R GUL TIONS 110.)
19 1-12-10656
TITL 26 INT RN L R NU . C PT R I. SU C PT R . P RT 33.
Reguatons reatng to consodated returns of affated corpora-
tons prescrbed under secton 730(b) of the cess Profts Ta ct
of 19 0 (Subchapter of Chapter 2 of the Interna Revenue Code as
added by the Second Revenue ct of 19 0).
Tabe of Contents.
statutory and nteoductobt provsons.
Secton 730 of the Interna Revenue Code, as added by the Second Revenue
ct of 19 0.
Secton 7 of the cess Profts Ta mendments of 19 1 (amendng secton
730(e) (6) of the Interna Revenue Code).
G N R L PRO ISIONS.
Secton.
33.0 Introductory.
33.1 Prvege of Makng Consodated Returns.
33.2 Defntons.
(a) Code.
(6) ffated Group.
(c) Consodated Return Perod.
(d) Subsdary.
(e) Ta .
(f) Consodated Return.
g) Terms Defned n Interna Revenue Code, as amended.
ppcabty of Other Provsons of Law.
DMINISTR TI PRO ISIONS.
33.10 ercse of Prvege.
(a) When Prvege Must be ercsed.
(6) ffect of Tentatve Returns.
Sectons 33.0 to 33. Issued under the authorty contaned n secton 730(b) of the In-
terna Revenue Code, added by secton 201 of the Second Revenue ct of 19 0 (Pubc, No.
801, 70th Cong., 3d sess.).
(21)
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Secton.
33.11 Consodated Returns for Subsequent Years.
(a) Consodated Returns Requred for Subsequent Years.
(6) ffect of Separate Returns When Consodated Return Requred.
(c) When ffated Group Remans n stence.
(d) When ffated Group Termnates.
33.12 Makng Consodated Return and Fng Other Forms.
(a) Consodated Return Made by Common Parent Corporaton.
(b) uthorzatons and Consents Fed by Subsdares.
(c) ffatons Schedue Fed by Common Parent Corporaton.
(d) Persons uafed to Swear to Returns and Forms.
(e) Sgnatures n Case Subsdary as Left ffated Group.
83.13 Change n ffated Group Durng Ta abe Year.
(a) Genera Rue.
(b) Formaton of ffated Group fter egnnng of Year.
(c) Compete Termnaton of ffated Group Pror to Cose of Ta abe
Year.
(d) ddton to ffated Group of a Subsdary Durng Year.
(e) mnaton from ffated Group of a Subsdary Durng Year.
( ) Perod of 30 Days or Less May be Dsregarded.
(g) Separate Returns for Perods Not Incuded n Consodated Return.
(h) Tme for Makng Separate Returns for Perods Not Incuded n
Consodated Return.
33.1 ccountng Perod of an ffated Group.
33.15 Labty for Ta .
(a) Severa Labty of Members of ffated Group.
(b) Labty of a Corporaton n ankruptcy or Recevershp.
(c) Labty of Subsdary fter Wthdrawa.
(d) ffect of Intercompany greements.
(e) Labty of Transferee Not ffected.
83.16 Common Parent Corporaton gent for Subsdares.
(a) Scope of gency of Common Parent Corporaton.
(b) ffect of Wthdrawa of Subsdary.
(c) ffect of Dssouton of Common Parent Corporaton.
83.17 Wavers.
(a) ffect of Waver Gven by Common Parent Corporaton.
(b) cceptance of Wavers from Common Parent Corporaton and
eged Subsdary.
83.18 Faure to Compy wth Reguatons.
(a) cuson of a Subsdary from Consodated Return.
(b) Common Parent Corporaton Incorrecty Desgnated n Conso-
dated Return.
(c) Incuson of One or More Subsdares Not Members of ffated
Group.
(d) ffect of uthorzaton and Consent Fed Pursuant to Notce.
(e) ocaton of Payments n the vent of Change by One or More
Corporatons to Separate Returns.
COMPUT TION OF T , R COGNITION OF G IN O LO S, ND SIS.
83.30 Computaton of Ta .
(a) In Case of bnormates.
(6) In Case of Merchant Marne Contracts.
(c) In Case of Profts from Mnng Strategc Metas.
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Secton.
33.31 ases of Ta Computaton,
(a) Defntons.
(1) Consodated net ncome.
(2) Consodated net short-term capta gan.
(3) Consodated net ong-term capta gan.
( ) Consodated net ong-term capta oss.
(5) Consodated net operatng oss deducton.
(6) Consodated net operatng oss carry-over.
(7) Consodated net operatng oss.
(8) Consodated norma-ta net ncome.
(9) Consodated ad|usted net ncome.
110) Consodated credt for dvdends receved.
(11) Consodated credt reatng to nterest on Government
obgatons.
(12) Consodated e cess profts net ncome.
(13) Consodated secton 711(a) ad|ustment.
(1 ) Consodated ad|usted e cess profts net ncome.
(15) Consodated e cess profts credt.
(16) Consodated e cess profts credt based on nvested capta.
(17) Consodated nvested capta for the ta abe year.
(18) Consodated average nvested capta for the ta abe year.
(19) Consodated nadmssbe asset ad|ustment.
(20) Consodated accumuated earnngs and profts as of the
begnnng of the ta abe year.
(21) Consodated e cess profts credt based on ncome.
(22) Consodated average base perod net ncome.
(23) Consodated e cess profts net ncome for consodated base
perod year endng after May 31, 19 0.
(2 ) Consodated base perod e cess profts net ncome for con-
sodated base perod year.
(25) Consodated base perod defct for consodated base perod
year.
(26) Consodated base perod years.
(27) Consodated net capta addton.
(28) Consodated net capta reducton.
(29) Consodated day capta addton.
(30) Consodated day capta reducton.
(31) Consodated e cess profts credt carry-over.
(32) Consodated unused e cess profts credt.
(33) ghest bracket amount of the affated group.
(6) Computatons.
(1) Net ncome of the severa affates.
(2) Dvdends receved and other factors.
() Dvdends receved.
() Short-term capta gans and osses and ong-term
capta gans and osses.
() Net operatng oss.
(v) verage nvested capta.
(v) ccumuated earnngs and profts or defct.
(v) dmssbe and nadmssbe assets.
(v) ase perod e cess profts net ncome or defct.
(v) Day capta addton or reducton,
(z) cuded capta.
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Secton.
23.31 ases of Ta Computaton Contnued.
(b) Computatons Contnued.
(3) Consodated net operatng oss carry-over, mtaton on
porton based on osses sustaned pror to ncuson n
consodated return.
( ) Consodated net operatng oss carry-over, mtaton on
certan of secton 122 ad|ustments.
(5) Consodated net operatng oss carry-over, mtaton on
ad|ustments to osses from second precedng ta abe year.
(6) Consodated e cess profts credt carry-over, mtaton on
porton based on unused credt sustaned pror to ncuson
n consodated return.
(7) Consodated e cess profts credt carry-over, mtaton on
ad|ustment to carry-over from second precedng ta abe
year.
(8) Consodated e cess profts credt based on nvested capta,
mtaton on porton attrbutabe to certan nsurance
companes.
(c) Statements and Schedues for Subsdares.
(d) Net Operatng Loss Deducton fter Consodated Return Perod.
(e) Unused cess Profts Credt fter Consodated Return Perod.
(/) Ta abe Year of Less Than Tweve Months.
33.32 Method of Computaton of Income for Perod of Less Than Tweve Months.
83.33 Gan or Loss from Sae of Stock or onds.
83.3 Sae of Stock ass for Determnng Gan or Loss.
(a) Scope of Secton.
(6) Saes Whch Do Not reak ffaton.
(c) Saes Whch reak ffaton Made Whe Seng Corporaton s
Member of ffated Group.
(d) Saes fter Seng Corporaton as Ceased to be Member of
ffated Group.
( ) Defnton of Loss, Consodated Loss, and Net Loss or Net
Operatng Loss.
83.35 Sae of onds ass for Determnng Gan or Loss.
83.36 Lmtaton on owabe Losses on Sae of Stock or onds.
(a) Genera Rue.
(6) uafcaton of Genera Rue.
33.37 Lqudatons Recognton of Gan or Loss.
(a) Durng Consodated Return Perod.
(6) fter Consodated Return Perod.
33.38 ass of Property.
(a) Genera Rue.
(6) Intercompany Transactons.
(c) ass fter Lqudaton.
(d) ass Not ffected by cquston or Sae of Stock
83.39 Inventores.
(a) Consodated Return for Frst Year of ffaton.
(6) Consodated Return fter Separate Return by ffates.
(c) Separate Returns Made fter Consodated Returns.
(d) ase Perod Years.
83. 0 ad Debts.
(a) Deducton Durng Consodated Return Perod.
(6) Lmtaton on owance fter Consodated Return Perod.
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Fee on.
33. 1 Sae and Retrement by Corporaton of ts onds.
(a) Issued at Dscount or Premum.
(6) cquston of onds by Issung Company.
33. 2 Capta Loss Lmtaton and Carry-over.
33. 3 Credt for Foregn Ta es.
33. Methods of ccountng.
(a) In Genera.
(6) Combnaton of Methods.
(c) Change to ccrua Method.
S CTION 730(b) OF T C SS PROFITS T CT OF 10 0 (SU C PT R OF
C PT R 2 OF T INT RN L R NU COD S DD D Y T S COND
R NU CT OF 19 0).
C. 730. CONSOLID T D R TURNS.
(a) Prvege to Pe Consodated Returns. n affated group of cor-
poratons sha, sub|ect to the provsons of ths secton, have the prv-
ege of makng a consodated return for the ta abe year n eu of
separate return The makng of a consodated return sha be upon
the condton that a the corporatons whch have been members of
the affated group at any tme durng the ta abe year for whch the
return s made consent to a the reguatons under subsecton (b) pre-
scrbed pror to the ast day prescrbed by aw for the fng of such
return; and the makng of a consodated return sha be consdered as
such consent. In the case of a corporaton whch Is a member of the
affated group for a fractona part of the year the consodated
return sha Incude the Income of such corporaton for such part of
the year as It s a member of the affated group.
(b) Reguatons. The Commssoner, wth the approva of the Secre-
tary, sha prescrbe such reguatons as he may deem necessary n
order that the ta abty of any affated group of corporatons mak-
ng a consodated return and of each corporaton In the group, both
durng and after the perod of affaton, may be returned, determned,
computed, assessed, coected, and ad|usted, In such manner as ceary
to refect the e cess profts ta abty and the varous factors neces-
sary for the determnaton of such abty, and In order to prevent
avodance of such ta abty.
(c) Computaton and Payment of Ta . In any case n whch a con-
sodated retnrn s made the ta sha he determned, computed, as-
sessed, coected, and ad|usted n accordance wth the reguatons under
subsecton (b) proscrbed pror to the ust day prescrbed by aw
for the fng of such return. Ony one s| efc e empton of 5,000
provded n secton 710(b)(1) sha be aowed for the entre affated
group of corporatons.
(d) Defnton of ffated Group . s used In ths secton, an aff-
ated group means one or more chans of ncudbe corporatons con-
nected through stock ownershp wth a common parent corporaton
whch s an ncudbe corporaton f
(1) t east 95 per centum of each cass of the stock of each of
the ncudbe corporatons (e cept the common parent corporaton)
Subchapter cess Profts Ta .
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26
Is owned drecty by one or more of the other ncudbe corpora-
tons; and
(2) The common parent corporaton owns drecty at east 95
per centum of each cass of the stock of at east one of the other
ncudbe corporatons.
s used n ths subsecton, the term stock does not ncude nonvotng
stock whch s mted and preferred as to dvdends.
(e) Defnton of Incudbe Corporaton . s used n ths secton, the
term ncudbe corporaton means any corporaton e cept
(1) Corporatons e empt from the ta Imposed by ths sub-
chapter.
(2) Foregn corporatons.
(S) Corporatons organzed under the Chna Trade ct, 1922.
( ) Corporatons entted to the benefts of secton 251, by reason
of recevng a arge percentage of ther Income from possessons
of the Unted States.
(5) Persona servce corporatons.
(6) Insurance companes sub|ect to ta aton under secton 201,
20 , or 207.
(f) Incudbe Insurance Companes. Despte the provsons of para-
graph (6) of subsecton (e), two or more domestc nsurance companes
each of whch s sub|ect to ta aton under the same secton of Chapter 1
sha be consdered as ncudbe corporatons for the purpose of the
appcaton of subsecton (d) to such nsurance companes aone.
(g) Subsdary Formed to Compy Wth Foregn Law. In the case of a
domestc corporaton ownng or controng, drecty or ndrecty, 100
per centum of the capta stock (e cusve of drectors quafyng shares)
of a corporaton organzed under the aws of a contguous foregn coun-
try and mantaned soey for the purpose of compyng wth the aws
of such country as to tte and operaton of property, such foregn cor-
poraton may, at the opton of the domestc corporaton, be treated for
the purpose of ths subchapter as a domestc corporaton.
(h) Suspenson of Runnng of Statute of Lmtatons. If a notce under
secton 272(a) n respect of a defcency for any ta abe year Is maed
to a corporaton, the suspenson of the runnng of the statute of mta-
tons, provded n secton 277, sha appy n the case of corporatons
wth whch such corporaton made a consodated return for such
tattbe year.
S C. 7. CONSOLID T D R TURNS OF INSUR NC COMP NI S
OT R T N LIF OR MUTU L. ( C SS PROFITS T
M NDM NTS OF 19 1.)
Secton 730(e)(6) of the Interna Revenue Code s amended to read
as foows:
(6) Insurance companes sub|ect to ta aton under secton
201 or 207.
Secton 33.0 Introductory.
These reguatons, authorzed by secton 730(b)1 of the Interna
Revenue Code as added by the Second Revenue ct of 19 0, are pre-
1 The report of the Commttee on Fnance (Rept. No. 211 , 78th Cong., 3d sess., p. 17)
accompanyng the Second Revenue ct of 19 0 contans the foowng statement:
The reguatons whch the Commssoner s authorzed to prescrbe are sueh reguatons
as he may deem necessary n order that the ta abty of any affated group of cor-
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27
scrbed as a suppement to the e cess profts ta reguatons appcabe
generay under the Code. They are appcabe to a ta abe years
begnnng after December 31, 1939.
The severa sectons of these reguatons have been gven numbers
correspondng respectvey to the secton numbers of pror ncome ta
consodated returns reguatons but, n accordance wth the rues of
the Federa Regster, preceded by the Code number 33.
poratons makng a consodated return and of ench corporaton n the group, both durng
and after the perod of affaton, may be returned, determned, computed, assessed, co-
ected, and ad|usted, n such manner as ceary to refect the e cess-profts ta abty
and the varous factors necessary for the determnaton of such abty, and n order to
prevent avodance of such ta abty n addton to the matters whch, n the ght of
current and prevous consodated returns reguatons, are e pected to be covered In deta
In the reguatons to be ssued by the Commssoner, are the e tent to whch and the
manner n whch the foowng Items, among others, w be computed and gven effect n
determnng the e cess-profts-ta abty of an affated group: (a) quty nvested capta,
borrowed capta, and Invested capta, (b) admssbe and nadmssbe assets, and e cuded
capta, (c) net capta addtons and reductons, (d) consodated net operatng osses,
net operatng osses Incurred by members of the group n ta abe years pror to that for
whch the consodated return Is fed, and the net operatng oss deducton of members of
the group n ta abe years foowng that for whch the consodated return was fed, and
(e) e cess-profts net ncome and ad|usted e cess-profts net ncome.
The report of the Commttee on Ways and Means ( ept. No. 1860, 75th Cong., 3d sess.,
p. ) accompanyng the revenue b of 1938 (the pertnent provsons of whch were
reenacted wthout change n substance In the Interna Revenue Code) contans the foow-
ng statement n regard to ncome ta consodated returns reguatons :
mong the matters to be detaed In reguatons whch the Commssoner Is e pected
to prescrbe under the provsons of subsecton (b) of ths secton are (a) the treatment
of ntcr-corapany dvdend dstrbutons, (b) of defntons of the net ncome, the ad|usted
net Income, and the speca cass net ncome of the affated group, and (c) the com-
putaton of the net operatng oss, the basc surta credt, the dvdend carry-over, the
dvdends pad credt, and the capta gans and osses, Insofar as these severa factors
may pertan to the case of an affated group.
Wth respect to the correspondng Income ta secton of the Revenue ct of 1928, the
report of the Commttee on Fnance (S. Rept. No. 960, 70th Cong., 1st sess., p. o) accom-
panyng the revenue b of 1928 contans the foowng statement (a smar statement
beng contaned aso n the statement of the managers on the part of the ouse, accom-
panyng the conference report upon the b, see . ept. No. 1882, 70th Cong., 1st sess.,
pp. 16-17) :
mong the reguatons whch t s e pected that the Commssoner w prescrbe are:
(1) The e tent to whch gan or oss sha be recognzed upon the sae by a member of the
affated group of stock Issued by any other member of the affated group or upon the
dssouton (whether parta or compete) of a member of the group; (2) the bass of prop-
erty (ncudng property ncuded In an nventory), acqured, durng the perod of affa-
ton, by a member of the affated group, ncudng the bass of sucb property after such
perod of affaton: (3) the e tent to whch and the manner n whch net osses sustaned
by a corporaton before It became a member of the group sha be deducted In the conso-
dated return ; and the e tent to whch and the manner n whch net osses sustaned
durng the perod for whch the consodated return s fed sha be deducted In any ta abe
year after the affaton s termnated In whoe or n part; ( ) the e tent to whch and
the manner n whch gan or oss 1b to be recognzed, upon the wthdrawa of one or more
corporatons from the group, by reason of transactons occurrng durng the perod of
affaton; and (5) that the corporaton fng the consodated return must desgnate one
of ther members as the agent for the group, n order that a notces may be maed to the
agent, defcences coected, refunds made, nterest computed, and proceedngs before the
oard of a ppeas conducted as though the agent were the ta payer.
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G N R L PRO ISIONS.
Sec. 33.1 Prvege of Makng Consodated Returns.
(a) Secton 730 gves to the corporatons of an affated group the
prvege of makng a consodated e cess profts ta return for the
ta abe year n eu of separate returns. Ths prvege, however,
s gven upon the condton that a corporatons whch have been
members of the affated group at any tme durng the ta abe year
for whch the return s made consent to these reguatons, and any
amendments thereof duy prescrbed pror to the ast day prescrbed
by aw for the fng of the return; and the makng of the con-
sodated return s consdered as such consent. The ast day pre-
scrbed by af for the fng of the return ncudes the ast day of the
perod of any e tenson of tme granted by the Commssoner.
( ) The ta abty of the members of the affated group for
such year w be determned n accordance wth such reguatons and
wthout regard to any changes made subsequent to the ast day pre-
scrbed by aw for the fng of such return of the rues theren
prescrbed.
Sec. 33.2 Defntons.
(a) Code.
The term Code means the Interna Revenue Code, as amended,
and the sectons of statutory aw referred to n these reguatons,
uness otherwse stated, are sectons of that Code.
(b) ffated Group.
The term affated group ncudes the common parent corpora-
ton and every other corporaton for the perod durng whch such cor-
poraton s a member of the affated group wthn the meanng of
secton 730. It does not ncude (1) any corporaton whch under sec-
ton 730 cannot be ncuded n a consodated return, (2) an nsurance
company ta abe under secton 201 or 207 n the case of a consodated
return for corporatons ta abe under secton 13, 1 , or 20 , (3) a
corporaton ta abe under secton 13, 1 , or 20 n the case of a
consodated return for nsurance companes ta abe under secton
201 or 207, ( ) an nsurance company ta abe under secton 201 n
the case of a consodated return for nsurance companes ta abe
under secton 207, or (5) an nsurance company ta abe under secton
207 n the case of a consodated return for nsurance companes ta -
abe under secton 201.
In the case of a domestc corporaton ownng or controng, drecty
or ndrecty, 100 per cent of the capta stock (e cusve of drectors
quafyng shares) of a corporaton organzed under the aws of
Canada or of Me co and mantaned soey for the purpose of com-
pyng wth the aws of such country as to tte and operaton of prop-
erty, such foregn corporaton may, at the opton of the domestc cor-
poraton, be treated for e cess profts ta purposes as a domestc cor-
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29
poraton. The opton to treat such foregn corporaton as a domestc
corporaton so that t may be ncuded n a consodated return must
be e ercsed at the tme of makng the consodated return, and cannot
be e ercsed at any tme thereafter. If the eecton s e ercsed to
treat such foregn corporaton as a domestc corporaton, t must be
ncuded n the consodated return of the affated group of whch t
s a member for each year thereafter for whch such group makes or s
requred to make a consodated return.
n affated group of corporatons, wthn the meanng of secton
730, s formed at the tme that the common parent corporaton becomes
the owner drecty of at east 95 percent of each cass of the stock (us
defned by secton 730(d)) of another corporaton. corporaton
becomes a member of an affated group at the tme that one or more
members of the group become the owners drecty of at east 95 per-
cent of each cass of ts stock. corporaton ceases to be a member
of an affated group when the members of the group cease to own
drecty at east 95 percent of each cass of ts stock.
(c) Consodated Return Perod.
The term consodated return perod means the frst ta abe year
begnnng after December 31, 1939, or any subsequent ta abe year,
for whch a consodated return s made or s requred, ncudng the
perod durng whch a subsdary corporaton s engaged n dstrbutng
ts assets n qudaton.
(d) Subsdary.
The term subsdary means a corporaton (other than the common
parent corporaton) whch s a member of the affated group durng
any part of the consodated return perod.
(e) Ta .
The term ta means the e cess profts ta mposed by the cess
Prots Ta ct of 19 0, and ncudes any nterest, penaty, addtona
amount, or addton to the ta , payabe n respect thereof.
(/) Consodated Return.
The term consodated return means a consodated e cess profts
ta return.
(g) Terms Defned n Interna Revenue Code, as amended.
Terms whch are defned n the Code, as amended, sha, when used
n these reguatons, have the meanng assgned to them by the Code,
as amended, uness specfcay otherwse defned. (See, for e ampe,
ad|usted net ncome, secton 13; norna-ta net ncome, secton 13
as amended by secton 201 of the Revenue ct of 1939: speca cass
net ncome, secton 1 pror to ts amendment by secton 201 of the
Revenue ct of 1939; net ncome, secton 21; gross ncome, secton
22; ta abe year and fsca year, secton 8; defcency, secton
271; and the terms defned n secton 3797, partcuary the terms per-
son, stock, and corporaton. )
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Sec. 33.3 ppcabty of Other Provsons of Law.
ny matter n the determnaton of whch the provsons of these
reguatons are not appcabe sha be determned n accordance wth
the provsons of the Code or other aw appcabe thereto.
DMINISTR TI PRO ISIONS.
Sec. 33.10 ercse of Prvege.
(a) When Prvege Must be ercsed.
The prvege of makng a consodated return under these regua-
tons for any ta abe year of an affated group must be e ercsed
at the tme of makng the return of the common parent corporaton
for such year. Under no crcumstances can such prvege be e ercsed
at any tme thereafter. The fng of separate returns for a ta abe
year does not consttute an eecton bndng upon the corporatons n
subsequent years. If the prvege s e ercsed at the tme of makng
the return, separate returns cannot thereafter be made for such year.
(See, however, secton 33.18, reatng to the mproper ncuson n
the consodated return of the ncome of a corporaton.)
(6) ffect of Tentatve Returns.
In no case w the prvege under paragraph (a) be consdered as
e ercsed at the tme of makng a so-caed tentatve return (made,
for e ampe, n order to obtan an e tenson of tme for makng the
return requred by aw). owever, f any such tentatve return s
made upon the bass of a consodated return or a separate return,
the ret urn requred by aw must be made upon the same bass, uness
upon the makng of the return requred by aw (ether a separate
return or a consodated return, as the case may be) the payments
theretofore made and to be made are ad|usted n a manner satsfactory
to the Commssoner.
Sec. 33.11 Consodated Returns for Subsequent Years.
(a) Consodated Returns Requred for Subsequent Tears.
If a consodated return s made under these reguatons for any ta -
abe year, a consodated return must be made for each subsequent
ta abe year durng whch the affated group remans n e stence
uness (1) a corporaton (other than a corporaton created or organ-
zed, drecty or ndrecty, by a member of the group) has become a
member of the group durng such subsequent ta abe year, or (2) one
or more provsons of these reguatons, whch have been consented to,
have been amended n a manner adversey affectng the nterests of the
group or any of ts members, or (3) the Commssoner, pror to the
tme of makng the return, upon appcaton made by the common par-
ent corporaton and for good cause shown, grants permsson to change.
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(b) ffect of Separate Returns When Consodated Return
Requred.
If the makng of a consodated return s requred for any ta abe
year, the ta abty of the members of the affated group sha be
computed n the same manner as f a consodated return had been
made, even though separate returns are made; amounts assessed upon
the bass of separate returns sha be consdered as havng been as-
sessed upon the bass of a consodated return; and amounts pad upon
the bass of separate returns sha be consdered as havng been pad
by the common parent corporaton. In such cases the makng of sepa-
rate returns sha not be consdered as the makng of a return for the
purpose of computng any perod of mtaton or any defcency. If
a consodated return for such ta abe year s thereafter made, such
return sha for the purpose of computng perods of mtaton and
any defcency be consdered as the return for such year.
(c) When ffated G-roup Remans n stence.
For the purposes of these reguatons, an affated group sha be
consdered as remanng n e stence f the common parent corporaton
remans as a common parent and at east one subsdary remans
affated wth t, whether or not such subsdary was a member of the
group at the tme the group was formed and whether or not one or
more corporatons have become subsdares or have ceased to be
subsdares at any tme after the group was formed.
(d) When ffated Group Termnates.
For the purposes of these reguatons, an affated group sha be
consdered as termnated f the common parent corporaton ceases to
be the common parent or f there s no subsdary affated wth t.
Sec. 33.12 Makng Consodated Return and Fng Other Forms.
(a) Consodated Return Made by Common Parent Corporaton.
consodated return sha be made on Form 1121 by the common
parent corporaton for the affated group. Such return sha be fed
at the tme and n the offce of the coector of the dstrct prescrbed
for the fng of a separate return by such corporaton.
(b) uthorzatons and Consents Fed by Subsdares.
ach subsdary must prepare dupcate orgnas of Form 1122 ,
consentng to these reguatons and authorzng the common parent
corporaton to make a consodated return on ts behaf for the ta -
abe year and authorzng the common parent (or, n the event of ts
faure, the Commssoner or the coector) to make a consodated
return on ts behaf (as ong as t remans a member of the affated
group), for each year thereafter for whch, under secton 33.11(a),
the makng of a consodated return s requred. One of such forms
as prepared by each subsdary sha be attached to the consodated
return, as a part thereof; and the other sha be fed, at or before the
tme the consodated return s fed, n the offce of the coector for
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the dstrct prescrbed for the fng of a separate -return by such sub-
sdary. No such consent can be wthdrawn or revoked at any tme
after the consodated return s fed.
(c) ffatons Schedue Fed by Common Parent Corporaton.
The common parent corporaton sha prepare Form 851 ( ffa-
tons Schedue), whch sha be attached to the consodated return,
as a part thereof.
(d) Persona uafed to Swear to Returns and Forms.
ach return or form requred to be made or prepared by a corpora-
ton must be sworn to by the persons authorzed under secton 52 to
swear to returns of separate corporatons. In cases where recevers
or trustees n bankruptcy are operatng the property or busness of
corporatons, each return or form requred to be made or prepared by
such corporaton must be e ecuted by the recever or trustee, as the
case may be, pursuant to an order or nstructons of the court, and be
accompaned by a copy of such order or nstructons.
(e) Sgnatures n Case Subsdary as Left ffated Group.
Snce Form 1122 s requred even though, durng the ta abe year
of the common parent corporaton, the subsdary (because of a ds-
souton or sae of stock, or otherwse) has ceased to be a member of
the affated group, t may be advsabe for the common parent to
obtan the proper sgnature to the form pror to the tme the sub-
sdary ceases to be a member of the group.
Sec. 33.13 Change n ffated Group Durng Ta abe Year.
(a) Genera Rue.
cept as herenafter provded, a consodated return must ncude
the ncome of the common parent corporaton and of each.subsdary
for the entre ta abe year of the affated group.
(b) Formaton of ffated Group fter egnnng of Tear.
If an affated group s formed after the begnnng of the ta abe
year of the corporaton whch becomes the common parent corpora-
ton, the consodated return must ncude the ncome of the common
parent for ts entre ta abe year (e cudng any porton of such year
durng whch ts ncome s ncuded n the consodated return of
another affated group) and the ncome of each subsdary from the
tme t became a member of the affated group.
(c) Compete Termnaton of ffated Group Pror to Cose of
Ta abe Year.
If an affated group s termnated pror to the cose of the ta abe
year of the group, the consodated return must ncude the ncome
of the common parent corporaton for ts entre ta abe year (e cud-
ng any porton of such year durng whch ts ncome s ncuded n
Ths secton as no bearng npon the queston whether a consodated return may or
must be made, but reates ony to the effect of changes In the affated group durng the
ta abe year.
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33
the consodated return of another affated group) and of each sub-
sdary for the perod pror to the termnaton. (See paragraphs (c)
and (d) of secton 33.11, n determnng whether the group has term-
nated.)
(d) ddton to ffated Group of a Subsdary Durng Tear.
If a corporaton becomes a member of the affated group durng
the ta abe year of the group, the consodated return must ncude ts
ncome from the tme when t became a member of the group.
(e) mnaton from ffated Group of a Subsdary Durng
Tear.
If a subsdary ceases to be a member of the affated group durng
the ta abe year of the group, the consodated return must ncude
ts ncome for the perod durng whch t was a member of the group.
(/) Perod of 30 Days or Less May be Dsregarded.
subsdary may at ts opton be consdered as havng been a mem-
ber of the affated group durng the entre ta abe year of the group
(or durng the entre perod of the e stence of the subsdary, whch-
ever s shorter) f the perod durng whch t was not a member of
such group does not e ceed 30 days. If a corporaton has been a mem-
ber of the affated group for a perod of ess than 31 days durng
the ta abe year of the group, t may at ts opton be consdered as
not havng been a member of the group durng the ta abe year. n
opton under ths paragraph must be e ercsed at or before the tme
when the consodated return s made.
(g) Separate Returns for Perods Not Incuded n Consodated
Return.
If a corporaton, durng ts ta abe year (determned wthout regard
to the affaton), becomes a member of an affated group, ts ncome
for the porton of such ta abe year not ncuded n the consodated
return of such group must be ncuded n a separate return (or, f a
member of another affated group whch makes a consodated return
for such perod, then n suc consodated return). If a corporaton
ceases to be a-member of the affated group durng the ta abe year
of the group, ts ncome for the perod after the tme when t ceased
to be a member of the group must be ncuded n a separate return (or,
f t becomes a member of another affated group whch makes a con-
sodated return for such perod, then n such consodated return).
(/t) Tme for Makng Separate Returns for Perods N e Incuded
n Consodated Return.
If a corporaton, durng ts ta abe year (determned wthout re-
gard to the affaton), becomes a member of an affated group, the
separate return requred for the porton of such ta abe year durng
whch t was not a member of the group must be made on or before
the oth day of the thrd month foowng the cose of ts ta abe year
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(determned wthout regard to affaton). For e ampe, Corporaton
P, reportng ts ncome on a caendar year bass, acqures on anuary
1,19 1, a the stock of Corporaton S, whch reports ts ncome on a
fsca year bass endng March 31. P and S eect to make a conso-
dated return for the caendar year 19 1. The separate return of S
for the ta abe perod pr 1, 19 0, to December 31, 19 0, shoud be
made on or before une 15,19 1.
Sec. 33.1 ccountng Perod of an ffated Group.
The ta abe year of an affated group whch makes a consodated
e cess profts ta return sha be the same as the ta abe year of the
common parent corporaton; and, upon havng eected to fe conso-
dated returns, each subsdary corporaton sha, not ater than the
cose of the frst consodated e cess profts ta ta abe year endng
thereafter, adopt an annua accountng perod, fsca year or caendar
year as the case may be, n conformty wth that of the common parent.
If a change of accountng perod s made by a subsdary n order
to conform wth that of the common parent and f the requrements
of Secton 19. 6-1, Reguatons 103, reatng to notce of change, can
not otherwse be comped wth, such notce sha be furnshed at or
before the tme of fng the consodated return.
Wth respect to computatons for years nvoved n the change to
the consodated bass, see secton 33.32.
Sec. 33.15 Labty for Ta .
(a) Severa Labty of Members of ffated Group.
cept as provded n paragraphs (b) and (c), the common parent
corporaton and each subsdary, a member of the affated group
durng any part of a consodated return perod, sha be severay
abe for the ta (ncudng any defcency n respect thereof) com-
puted upon the consodated ad|usted e cess profts net ncome of the
group.
(b) Labty of a Corporaton n ankruptcy or Recevershp.
If, at the tme of fng a consodated return, one or more, but not
a, of the members of the affated group are n bankruptcy under the
aws of the Unted States or n recevershp n any court of the Unted
States or of any State, Terrtory, or the Dstrct of Coumba, then
the abty under paragraph (a) of each such member of the group
wth respect to the perod covered by such return sha not e ceed such
porton of the consodated ta abty for such perod as the seve a
corporatons ncuded n the consodated return may, sub|ect to the
approva of the Commssoner, agree upon, or, n the absence of such
an agreement, an amount equa to ts abty for such year computed
as f a separate return had been fed.
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(c) Labty of Subsdary fter Wthdrawa.
If a subsdary has ceased to be a member of the affated group, ts
abty under paragraph (a) sha reman unchanged, e cept that
f such cessaton occurred pror to the date upon whch any defcency
s assessed and resuted from a bona fde sae of stock for far vaue,
the Commssoner may, f he beeves that the assessment or coecton
of the baance of the defcency w not be |eopardzed, make assess-
ment and coecton of such defcency from such former subsdary
n an amount not e ceedng the porton thereof aocabe to t upon
the bass of ts e cess profts net ncome used n the computaton of
the defcency.
(d) ffect of Intercompany greements.
ny agreement entered nto by one or more members of the affated
group wth any other members of such group or wth any other person
sha n no case have the effect of reducng the abty prescrbed
under ths secton.
(e) Labty of Transferee Not ffected.
Ths secton sha not be consdered as e tngushng or dmnshng
any abty, at aw or n equty, of a transferee of property of a ta -
payer, ncudng any abty under any provson of aw, State or
Federa, reatng to abtes pursuant to corporate dssouton or
transfer or dstrbuton of assets, whether or not n connecton wth a
merger or consodaton.
Sec. 33.16 Common Parent Corporaton gent for Subsdares.
(a) Scope of gency of Common Parent Corporaton.
cept as provded n paragraphs (b) and (c) of ths secton
The common parent corporaton sha be for a purposes, n respect
of the ta for the ta abe year for whch a consodated return s made
or s requred, the soe agent, duy authorzed to act n ts own name n
a matters reatng to such ta , for each corporaton whch durng any
part of such year was a member of the affated group. The corpo-
ratons, other than the common parent, sha not have authorty to act
for or to represent themseves n any suc matter. For e ampe, a
correspondence w be carred on drecty wth the common parent;
notces of defcences w be maed ony to the common parent, and
the mang to the common parent sha be consdered as a mang to
each such corporaton; the common parent w fe pettons and con-
duct proceedngs before the oard of Ta ppeas, and any such pet-
ton sha be consdered as havng aso been fed by each such corpora-
ton ; the common parent w fe cams for refund or credt; refunds
w be made drecty to and n the name of the common parent and
w dscharge any abty of the Government n respect thereof to
any such corporaton; and the common parent n ts name w gve
wavers, gve bonds, and e ecute cosng agreements, offers n com-
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36
promse, and a other documents, and any waver or bond so gven,
or agreement, offer n compromse, or any other document so e ecuted,
sha be consdered as havng aso been gven or e ecuted by each such
corporaton. Notwthstandng the provsons of ths paragraph, how-
ever, any notce of defcency, n respect of the ta for a consodated
return perod, w name each corporaton whch was a member of the
affated group durng any part of such perod, and any assessment
(whether of the orgna ta or of a defcency) w be made n the
name of each such corporaton (but a faure to ncude the name of
any such corporaton w not affect the vadty of the notce of def-
cency or the assessment as to the other corporatons); and any notce
or demand for payment, any dstrant (or warrant n respect thereof),
any evy (or notce n respect thereof), any notce of a en, or any
other proceedng to coect the amount of any assessment, after the
assessment has been made, w name the corporaton from whch such
coecton s to be made. The provsons of ths paragraph sha appy
whether or not a consodated return s made for any subsequent year,
and whether or not one or more subsdares have become or have ceased
to be members of the group at any tme. Notwthstandng the prov-
sons of ths paragraph, the Commssoner may, f he deems t advs-
abe, dea drecty wth any member of the group n respect of ts
abty, n whch event such member sha have fu authorty to act
for tsef.
(b) ffect of Wthdrawa of Subsdary.
For the purpose of the asserton, assessment, and coecton of any
defcency, and of a credt or refund of any amount pad by a former
subsdary as a defcency determned under secton 33.15(c), but for
no other purpose, the agency of the common parent corporaton n re-
spect of any subsdary whch has ceased to be a member of the aff-
ated group sha be termnated upon the e praton of 30 days (or
pror thereto f the Commssoner consents) from the date upon whch
such subsdary fes wrtten notce wth the Commssoner that t
has ceased to be a member of the affated group and that t s term-
natng such agency. For e ampe, f a subsdary has ceased to be a
member of the group (and f the 30-day perod has e pred) pror to
the mang of a notce of defcency to the common parent, a separate
notce of defcency w be maed n due course to the subsdary n
respect of ts defcency f t becomes necessary to enforce ts abty.
(c) ffect of Dssouton of Common Parent Corporaton.
If the common parent corporaton contempates dssouton, or g
about to be dssoved, or f for any other reason ts e stence s about
to termnate, t sha forthwth notfy the Commssoner of such fact
and desgnate, sub|ect to the approva of the Commssoner, another
member of the affated group to act as agent n ts pace, to the same
e tent and sub|ect to the same condtons and mtatons as are ap-
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37
pcabe to the common parent. If the notce thus requred s not
gven by the common parent, the remanng members of the group
may, sub|ect to the approva of the Commssoner, desgnate another
member of the group to act as such agent, and notce of such desgna-
ton sha be gven to the Commssoner. Unt a notce n wrtng
desgnatng a new agent has been receved by the Commssoner, any
notce of defcency or other communcaton maed to the common
parent sha be consdered as havng been propery maed to the agent
of the group; or, f the Commssoner has reason to beeve that the
e stence of the common parent has termnated, he may, f he deems
t advsabe, dea drecty wth any member of the group n respect
of ts abty.
Sec. 33.17 Wavers.
(a) ffect of Waver Gven by Common Parent Corporaton.
ny consent gven by the common parent corporaton (or by an
agent n accordance wth paragraph (c) of secton 33.16) e tendng
the tme wthn whch an assessment may be made or dstrant or
proceedng n court begun, n respect of the ta for a consodated
return perod, sha be appcabe (1) to each corporaton whch was
a member of the affated group durng any part of such perod
(whether or not any such corporaton has ceased to be a member of
the group), and (2) to each corporaton the ncome of whch was
ncuded n the consodated return, or whch fed Form 1122 , for
such perod, even though t s subsequenty determned that such cor-
poraton was not a member of the group.
(b) cceptance of Wavers from Common Parent Corporaton and
eged Subsdary.
In no case w a separate waver be accepted from a corporaton
the ncome of whch was ncuded n the consodated return (for
e ampe, a corporaton whch the Commssoner determnes was not
a member of the affated group), or whch fed Form 1122 , uness
a waver s aso obtaned from-the common parent corporaton, or
uness the Commssoner s deang drecty wth such corporaton to
enforce ts abty.
Sec. 33.18 Faure to Compy wth Reguatons.
(a) cuson of a Subsdary from Consodated Return.
If there has been a faure to ncude n the consodated return the
ncome of any subsdary, or a faure to fe any of the forms requred
by these reguatons, notce thereof sha be gven the common parent
corporaton by the Commssoner, and the ta abty of each mem-
ber of the affated group sha be determned on the bass of separate
returns uness such ncome s ncuded or such forms are fed wthn
the perod prescrbed n such notce, or any e tenson thereof, or uness
under secton 33.11 a consodated return s requred for such year.
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38
(b) Common Parent Corporaton Incorrecty Desgnated n Con-
sodated Return.
If a consodated return ncudes a corporaton as the common
parent and such corporaton was not (under the provsons of secton
730) the common parent, the ta abty of each corporaton ncuded
n the return w be computed n the same manner as f separate re-
turns had been made, uness, upon appcaton, the Commssoner
approves the makng of a consodated return, or uness under secton
33.11 a consodated return s requred for such year.
(c) Incuson of One or More Subsdares Not Members of ffated
Group.
If a consodated return ncudes a corporaton as a subsdary and
such corporaton was not a member of the affated group durng the
consodated return perod, the ta abty of such corporaton w be
determned upon the bass of a separate return (but see paragraph
(a)), and the consodated return sha be consdered as ncudng ony
the corporatons whch were members of the group durng such perod.
If the consodated return ncudes two or more corporatons whch are
not members of the group but whch consttute a separate affated
group, the ta abty of the corporatons consttutng the separate
group w be computed n the same manner as f separate returns had
been made by such corporatons, uness the Commssoner, upon app-
caton, approves the makng of a consodated return for the separate
group, or uness under secton 33.11 a consodated return s requred
for the separate group.
(d) ffect of uthorzaton and Consent Fed Pursuant to Notce.
If Form 1122 s fed by any corporaton, pursuant to a notce un-
der paragraph (a) of ths secton, such corporaton sha bo consdered
for a purposes as havng |oned n the makng of the consodated
return.
(c) ocaton of Payments n the vent of Change by One or More
Corporatons to Separate Returns.
In any case n whch amounts have been assessed and pad upon the
bass of a consodated return and the ta abty of one or more of
the corporatons ncuded n the consodated return s to be computed
n the same manner as f separate returns had been made, the amounts
so pad sha be aocated between the affated group composed of the
corporatons propery ncuded n the consodated return and each of
the corporatons the ta abty of whch s to be computed on a
separate bass, n such manner as the corporatons ncuded n the
consodated return may, sub|ect to the approva of the Commssoner,
agree upon, or, n the absence of an agreement, upon the bass of the
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e cess profts net ncome used n the computaton of the e cess profts
ta shown upon the consodated return.
COMPUT TION OF T , R COGNITION OF G IN OR LOSS, ND SIS.
Sec. 33.30 Computaton of Ta .
In the case of an affated group whch makes or s requred to make
a consodated e cess profts ta return for any ta abe year begnnng
after December 31,1939, the e cess profts ta abty of each corpora-
ton for the perod durng such year that t was a member of such
group sha be computed n accordance wth the provsons of secton
710 upon the consodated ad|usted e cess profts net ncome of the
group (determned n accordance wth these reguatons) e cept
(a) In case of abnormates. If the affated group for any ta abe
year s sub|ect to the provsons of secton 721 (reatng to abnorma-
tes)
(1) The ta abty of the group for the ta abe year n whch the
whoe of the abnorma ncome woud, wthout regard to secton 721,
be ncudbe, sha not e ceed the sum of () the ta computed upon
the consodated ad|usted e cess profts net ncome of the group com-
puted wthout the ncuson n gross ncome of the porton of the net
abnorma ncome whch s attrbutabe to any other ta abe year, pus
() the aggregate of the ncrease n the e cess profts ta whch woud
have resuted for each prevous ta abe year to whch any porton of
such net abnorma ncome s attrbutabe, computed as f an amount
equa to such porton had been ncuded n the gross ncome for such
prevous ta abe year of the corporaton dervng such porton;
(2) The ta abty of the group for any future ta abe year sha
be the ta computed upon the consodated ad|usted e cess profts net
ncome of the group computed wth the ncuson n gross ncome of
the net abnorma ncome attrbutabe to such future ta abe year, but
sha not e ceed the sum of () the ta computed upon the consodated
ad|usted e cess profts net ncome of the group computed wthout the
ncuson n e cess profts net ncome of the porton of the net abnorma
ncome whch s attrbutabe to such year, and () the decrease n the
ta for the prevous ta abe year n whch the whoe of such abnorma
ncome woud wthout regard to secton 721 be ncudbe, whch re-
suted by reason of the e cuson of the whoe or a part of the abnorma
ncome from the gross ncome for such prevous ta abe year; but the
amount of such decrease sha be dmnshed by the aggregate of the
ncreases n the ta whch have resuted for the ta abe years nterven-
ng between such prevous ta abe year and such future ta abe year
because of the ncuson n gross ncome of the portons of such net
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abnorma ncome attrbutabe to such ntervenng years. Whether or
not an abnormaty e sts sha be determned n the ght of the aggre-
gate busness and of the coectve e perence durng the four prevous
ta abe years of the severa members of the group.
(b) In case of Merchant Marne contracts. If the affated group
for any ta abe year ncudes a corporaton sub|ect to the provsons
of secton 726 (reatng to corporatons competng contracts under
the Merchant Marne ct of 1936), the ta abty of the group sha
be the ta under secton 710 computed on the consodated ad|usted
e cess profts net ncome or the ta computed n accordance wth the
provsons of secton 726 (b), whchever s the esser. The computaton
under secton 726(b) sha be made as f the consodated ad|usted e -
cess profts net ncome and the payments made or to be made to the
Unted States Martme Commsson were the ad|usted e cess profts
net ncome of and payments made or to be made by a separate corpora-
ton.
(c) In case of profts from mnng strategc metas. If the affated
group for any ta abe year ncudes a corporaton a porton of the n-
come of whch s, pursuant to secton 731, e empt from ta by reason
of such corporaton havng engaged n the mnng of strategc metas,
the ta abty of the group sha be an amount whch bears the same
rato to the ta computed on the consodated ad|usted e cess profts
net ncome as the porton of the consodated ad|usted e cess profts
net ncome not e empt from ta bears to the entre consodated ad-
|usted e cess profts net ncome. The porton of the consodated
ad|usted e cess profts net ncome not e empt from ta sha be deter-
mned n the same manner as f the consodated ad|usted e cess prof-
ts net ncome were the ad|usted e cess profts net ncome of a separate
corporaton.
Wth respect to the abty of the severa members of the group,
see secton 33.15.
Sec. 33.31 ases f Ta Computaton.
(a) Defntons.
In the case of an affated group of corporatons whch makes or s
requred to make a consodated e cess profts ta return for any ta -
abe year, and e cept as otherwse provded n these reguatons
(1) The consodated net ncome sha be the combned net ncome
of the severa affated corporatons
() Mnus any consodated net operatng oss deducton,
() Pus any consodated net short-term capta gan, and
() Pus or mnus, as the case may be, any consodated net
ong-term capta gan or consodated net ong-term capta oss;
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(2) The consodated net short-term capta gan sha be the e cess
of the sum of the short-term capta gans of the severa affated cor-
poratons over the sum of the short-term capta osses of such
corporatons;
(3) The consodated net ong-term capta gan sha be the e cess
of the sum of the ong-term capta gans of the severa affated cor-
poratons over the sum of the ong-term capta osses of such cor-
poratons ;
( ) The consodated net ong-term capta oss sha be the e cess
of the sum of the ong-term capta osses of the severa affated
corporatons over the sum of the ong-term capta gans of such
corporatons;
(5) The consodated net operatng oss deducton sha be an amount
equa to the consodated net operatng oss carry-over reduced by the
amount, f any, by whch the consodated net ncome (computed wth
the e ceptons and mtatons provded n secton 122(d)) e ceeds the
consodated norma-ta net ncome (computed wthout any net oper-
atng oss deducton) but sha not e ceed the amount of the conso-
dated norma-ta net ncome computed wthout the beneft of such
deducton;
(6) The consodated net operatng oss carry-over sha be the
sum of
() The amount of the consodated net operatng oss, f any,
for the frst precedng ta abe year,
() The amount of the consodated net operatng oss, f any,
for the second precedng ta abe year reduced by the e cess, f
any, of the consodated net ncome (computed wth the e cep-
tons and mtatons provded n secton 122(d)) for the frst
precedng ta abe year over the consodated net operatng oss
for the thrd precedng ta abe year,
and, wth respect to net operatng osses sustaned by a corporaton
for ta abe years pror to the frst ta abe year n respect of whch ts
ncome s ncuded n the consodated return
() The amount of the net operatng oss, f any, sustaned by
such corporaton for the frst precedng ta abe year, and
(v) The amount of the net operatng oss, f any, sustaned by
such corporaton for the second precedng ta abe year reduced
by the e cess, f any, of the net ncome of such corporaton for the
frst precedng ta abe year or, f the ncome of such corporaton
s ncuded n the consodated return for the frst precedng ta -
abe year, ether the net ncome of such corporaton ncreased by
the separate net short-term and ong-term capta gans of such
corporaton or the consodated net ncome for such year (com-
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puted n ether case wth the e ceptons and mtatons provded
n secton 122(d)), whchever s the esser, over the net operatng
oss of such corporaton for the thrd precedng ta abe year;
(7) The consodated net operatng oss sha be an amount equa to
the e cess of the combned net operatng osses of the severa affated
corporatons havng net operatng osses (computed sub|ect to the
e ceptons and mtatons provded n secton 122(d)) over the sum
of
() The combned net ncome of the severa affated corpora-
tons havng net ncome (ad|usted wth respect to the e ceptons
and mtatons provded n secton 122(d) n connecton wth the
computaton of net operatng osses), and
() The consodated net short-term capta gan and the con-
sodated net ong-term capta gan;
. (8) The consodated norma-ta net ncome sha be the conso-
dated ad|usted net ncome mnus the consodated credt for dv-
dends receved;
(9) The consodated ad|usted net ncome sha be the consodated
net ncome mnus the consodated credt reatng to nterest on certan
obgatons of the Unted States and Government corporatons;
(10) The consodated credt for dvdends receved sha be an
amount equa to 85 percent of the aggregate dvdends, of the cass
wth respect to whch credt s aowed by secton 26(b), receved by
the severa affated corporatons, but not n e cess of 85 percent of the
consodated ad|usted net ncome;
(11) The consodated credt reatng to nterest on certan obga-
tons of the Unted States and Government corporatons sha be an
amount equa to the aggregate of the nterest, of the cass wth respect
to whch credt, s aowed by secton 2G(a), receved by the severa
affated corporatons;
(12) The consodated e cess profts net ncome sha be the conso-
dated norma-ta net ncome ncreased or decreased, as the case may
be, by the consodated secton 711(a) ad|ustment;
(13) The consodated secton 711(a) ad|ustment sha be the net
amount of the aggregate ad|ustments provded by secton 711(a)(1)
or 711(a) (2), as the case may be, computed and determned n the case
of each affated corporaton, e cept as otherwse provded n () of
ths secton, n the same manner and sub|ect to the same condtons as
f a separate return were fed, but wthout regard to the ad|ustments
provded for n secton 711(a)(1)( ) or 711(a)(2)(D) on account
of the e cess of gans over osses from certan saes or e changes of
deprecabe property and secton 711(a)(1)(F) or 711(a)(2)( ) on
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account of dvdends receved, ncreased or decreased, as the case may
be, by the sum of
() The e cess of the aggregate gans of the severa corpora-
tons from saes or e changes of property hed for more than
18 months sub|ect to the aowance for deprecaton provded n
secton 2-3(1) over the aggregate osses of the severa corporatons
from saes or e changes of such property, and
() The e cess of the aggregate amount of the dvdends re-
ceved by the severa corporatons of the cass wth respect to
whch ad|ustment s provded for n secton 711(a)(1)(F) or
711 (a) (2) ( ), as the case may be, over the consodated credt for
dvdends receved;
(1 ) The consodated ad|usted e cess profts net ncome sha be
the consodated e cess profts net ncome mnus the sum of
() specfc e empton of 5,000.
() The consodated e cess profts credt, and
() The consodated e cess profts credt cany-over;
(15) The consodated e cess profts credt sha be
() The consodated e cess profts credt based on nvested
capta, or
() In the case of an affated group one or more of the mem-
bers of whch woud have been entted n a separate return to an
e cess profts credt based on ncome, and sub|ect to the provsons
of secton 712(c), ether the consodated e cess profts credt
based on ncome or the consodated e cess profts.credt based
on nvested capta, whchever resuts n the esser ta ;
(16) The consodated e cess profts credt based on nvested cnpta
sha be 8 percent of the consodated nvested capta for the ta abe
year;
(17) The consodated nvested capta for the ta abe year sha be
the consodated average nvested capta for such year reduced by
the consodated nadmssbe asset ad|ustment;
(18) The consodated average nvested capta for the ta abe year
sha be the sum of
() The combned average nvested capta for the ta abe year
of the severa affated corporatons computed n the case of each
corporaton wthout ncudng any accumuated earnngs and
profts, and
() The consodated accumuated earnngs and profts as of
the begnnng of such ta abe year;
(19) The consodated nadmssbe asset ad|ustment sha be an
amount whch bears the same rato to the consodated average n-
vested capta as the aggregate nadmssbe assets of the severa
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affated corporatons bear to the aggregate admssbe and nad-
mssbe assets of such corporatons;
(20) The consodated accumuated earnngs and profts as of the
begnnng of the ta abe year sha be an amount equa to the e cess
of the combned accumuated earnngs and profts as of the begnnng
of such year of the severa affated corporatons havng accumuated
earnngs and profts over the combned defct n accumuated earnngs
ard profts as of the begnnng of such year of the severa affated
corporatons havng such defcts;
(21) The consodated e cess profts credt based on ncome sha
be
() 95 percent of the consodated average base perod net
ncome,
() Pus 8 percent of the consodated net capta addton, or
() Mnus 6 percent of the consodated net capta reducton;
(22) The consodated average base perod net ncome sha be,
whchever s the greater
() n amount whch bears the same rato to the e cess of the
aggregate of the consodated base perod e cess profts net ncome
for each of the consodated base |)erod years over the aggregate
of the consodated base perod defcts n e cess profts net ncome
for any of such years, e cudng the greatest, whch 12 bears to
the tota number of months n the consodated base perod, or
() n amount whch bears the same rato to the e cess of the
aggregate consodated e cess profts net ncome for each of the
ta abe years n the second haf of the consodated base perod
over the aggregate of any consodated defcts n e cess profts
net ncome n such second haf, pus one-haf of the amount, f any,
by whch such e cess n the second haf of the consodated base
perod e ceeds such e cess n the frst haf of such perod, whch
12 bears to the tota number of months n the second haf of
the consodated base perod, but n an amount not greater than
the hghest consodated e cess profts net ncome (paced on an
annua bass, when necessary) for any ta abe year n the conso-
dated base perod.
(2:5) For the purpose of (a)(22)() of ths secton, the conso-
dated e cess profts net ncome for any consodated base perod year
endng after May 31, 11) 0, sha be an amount not greater than the
sum of
() n amount whch bears the same rato to the consodated
e cess profts net ncome for such year as the number of months
before une 1, 19 0, bears to the tota number of months n such
ta abe year, pus
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() n amount whch bears the same rato to the consodated
e cess profts net ncome for the ast precedng ta abe year as
the number of months after May 31,19 0, n the ta abe year bears
to the number of months n such precedng ta abe year, but not
n e cess of the consodated e cess profts net ncome for such ast
precedng ta abe year.
() If the number of months n such ast precedng ta abe
year s ess than the number of months after May 31, 19 0, there
sha be added to the amount ascertaned under () an amount
whch bears the same rato to the consodated e cess profts net
ncome for the second precedng ta abe year as the e cess of such
number of months after May 31, 19 0, over the number of months
n such precedng ta abe year, bears to the number of months
n such second precedng ta abe year.
(2 ) The consodated base perod e cess profts net ncome for a
consodated base perod year sha be an amount equa to the combned
base perod e cess profts net ncome for such year of the affated
corporatons whch woud have been entted n separate returns to an
e cess profts credt based on ncome, reduced by the sum of the defcts
n e cess profts net ncome for such year, n the case of any such
corporatons;
(25) The consodated base perod defct n e cess profts net ncome
for a consodated base perod year sha be an amount equa to the
aggregate of the defcts for such year, n the case of the affated
corporatons whch woud have been entted n separate returns to an
e cess profts credt based on ncome reduced by the combned base
perod e cess profts net ncome of any such corporatons for such
year;
(26) The consodated base perod years sha be, as the case may be
() The base perod years of the common parent corporaton
f such common parent corporaton woud have been entted n
a separate return to an e cess profts credt based on ncome, or
() The four successve 12-month perods begnnng on the date
n 1936 correspondng to the date on whch begns the frst ta abe
year for whch a consodated return s fed f the common parent
corporaton woud not be entted separatey to an e cess profts
credt based on ncome;
(27) The consodated net capta addton for the ta abe year sha
be the e cess, dvded by the number of days n the ta abe year, of
the aggregate of the consodated day capta addton for each day
of the ta abe year over the aggregate of the consodated day capta
reducton for each day of the ta abe year;
(28) The consodated net capta reducton for the ta abe year
sha be the e cess, dvded by the number of days n the ta abe year,
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of the aggregate of the consodated day capta reducton for each
day of the ta abe year over the aggregate of the consodated day
capta addton for each day of the ta abe year;
(29) The consodated day capta addton for any day of the ta -
abe year sha be the combned day capta addtons of the severa
affated corporatons for such day, computed wthout regard to the
ad|ustment for e cuded capta, reduced by the e cess, f any, of the
combned e cuded capta of the severa corporatons for such day over
the combned e cuded capta of the severa corporatons for the frst
day foowng the cose of the ast consodated base perod year;
(30) The consodated day capta reducton for any day of the
ta abe year sha be the combned day capta reductons of the sev-
era affated corporatons for such day;
(31) The consodated e cess profts credt carry-over sha be the
um of
() The consodated unused e cess profts credt for the frst
precedng ta abe year,
() The consodated unused e cess profts credt for the sec-
ond precedng ta abe year reduced by the amount, f any, by
whch the consodated e cess profts net ncome for the frst pre-
cedng ta abe year e ceeds the sum of ( ) the consodated e -
cess profts credt for such frst precedng ta abe year pus ( )
the consodated unused e cess profts credt for the thrd preced-
ng ta abe year,
and, wth respect to the unused e cess profts credt of a corporaton
for ta abe years pror to the frst ta abe year n respect of whch ts
ncome s ncuded n the consodated return
() The unused e cess profts credt, f any, of such corpora-
ton for the frst precedng ta abe year, and
(v) The unused e cess profts credt, f any, of such corpora-
ton for the second precedng ta abe year reduced by
( ) The e cess, f any, of the e cess profts net ncome of
such corporaton for the frst precedng ta abe year over
the sum of the e cess profts credt of such corporaton for
the frst precedng ta abe year and the unused e cess profts
credt of such corporaton for the thrd precedng ta abe
year, or
( ) If the ncome of such corporaton s ncuded n the
consodated return for the frst precedng ta abe year, the
esser of the amount of such e cess or the e cess, f any, of the
consodated e cess profts net ncome for the frst precedng
ta abe year over the sum of the consodated e cess profts
credt for the frst precedng ta abe year and the unused
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e cess profts credt of such corporaton for the thrd pre-
cedng ta abe year.
(32) The consodated unused e cess profts credt sha be the
e cess of the consodated e cess profts credt for any ta abe year
begnnng after December 31,1939, over the consodated e cess profts
net ncome for such ta abe year, computed on the bass of the e cess
profts credt appcabe to such ta abe year.
(33) The hghest bracket amount of the affated group sha be
500,000 or the combned hghest bracket amounts of the severa aff-
ated corporatons, whchever s the smaer.
(b) Com put at ons.
(1) The net ncome of the severa affated corporatons sha be
computed n accordance wth the provsons coverng the determnaton
of net ncome of separate corporatons, e cept
() There sha be emnated unreazed profts and osses n
transactons between members of the affated group and dv-
dend dstrbutons from one member of the group to another mem-
ber of the group (referred to n these reguatons as ntercompany
transactons),
() No net operatng oss deducton sha be taken nto account,
and
() No capta gans or osses sha be taken nto account.
Intercompany profts and osses whch have een reazed by the group
through fna transactons wth persons other than members of the
group, and ntercompany transactons whch do not affect the con-
sodated ta abe net ncome, sha not be emnated. s used n ths
paragraph, the term net ncome ncudes the case n whch the aow-
abe deductons of a member (not ncudng any net operatng oss
deducton) e ceed ts gross ncome.
(2) For a ta abe year for whch a consodated return s made or
s requred, the dvdends receved of the cass wth respect to whch
credt s aowed by secton 26(b), the nterest receved of the cass
wth respect to whch credt s aowed by secton 26(a), the short-
term capta gans and osses and the ong-term capta gans and osses
as defned n secton 117(a), the net operatng oss as defned n secton
122(a), the average nvested capta for the ta abe year, the accumu-
ated earnngs and profts or defct n accumuated earnngs and prof-
ts as of the begnnng of the ta abe year, the admssbe and nadms-
sbe assets, the base perod e cess profts net ncome, the defct n
e cess profts net ncome for a base perod year, the day capta add-
ton for any day of the ta abe year, the day capta reducton for
any day of the ta abe year, the e cuded capta wthn the meanng
of secton 713(g) (3), and the hghest bracket amount sha be com-
puted and determned n the case of each affated corporaton n the
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same manner and sub|ect to the same condtons as f a separate return
were fed, e cept
() In the computaton of the dvdends receved, there sha
be e cuded a dvdends receved from other members of the
affated group;
() In the computaton of short-term capta gans and osses
and ong-term capta gans and osses, there sha be emnated
any gans or osses arsng n ntercompany transactons;
() In the computaton of the net operatng oss, the pro-
vsons of ths secton pertanng to the determnaton of net n-
come sha appy;
(v) In the computaton of average nvested capta (whch,
under ths secton, may be a mnus amount), the foowng ad-
|ustments sha be made
( ) There sha be e cuded any accumuated earnngs
and profts;
( ) There sha be e cuded from borrowed capta the
amount of any outstandng ndebtedness of the corporaton
owng to another member of the affated group;
(C) Intercompany dstrbutons made durng the ta abe
year sha be dsregarded;
(D) Money or property pad n for stock, or as pad-n
surpus, or as a contrbuton to capta, durng the ta abe
year by one member of the group to another member of the
group sha be dsregarded;
( ) Wth respect to the stock of another member of the
affated group hed wth a bass for determnng oss upon a
sae or e change f ed, drecty or ndrecty, by reference to
the bass of such stock n the hands of any precedng owner
(not ncudng a member of the group from whch such stock
was acqured durng a consodated ncome or e cess profts
ta return perod), there sha be subtracted from average n-
vested capta otherwse computed an amount equa to such
bass ad|usted pursuant to the provsons of secton 113, e cept
that no ad|ustment sha be made wth respect to
(aa) Transactons referred to n (C) and (D), and
(bb) Losses of the ssung corporaton subsequent to
the acquston of such stock whch osses were ncuded
n a consodated ncome or e cess profts ta return;
(F) In the case of a subsdary the stock of whch s hed
by another member of the affated group wth a bass for
determnng oss upon a sae or e change not f ed, ether
drecty or ndrecty, by reference to the bass of such stock
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9
n the hands of any precedng owner (not ncudng a mem-
ber of the group from whch such stock was acqured durng
a consodated ncome or e cess profts ta return perod),
there sha be e cuded as of the date on whch such subsdary
became a member of the affated group wthn the meanng
of secton 730(d) that porton of ts average nvested capta
attrbutabe to. the shares of stock so hed; there sha aso
be e cuded, as of the date of any subsequent acquston, that
porton of ts average nvested capta attrbutabe to shares
of stock smary acqured and hed by other members of
the affated group; no addton sha be made on account of
money or property thereafter pad n for stock by any other
member of the group or as pad-n surpus or a contrbuton
to capta pad n wth respect to shares of stock sub|ect
to the provsons of ths paragraph; and no reducton sha
be made on account of any dstrbuton thereafter made to
any other member of the group; stock of one member of the
group ndrecty acqured through the acquston of stock
of another member of the group sha, to the e tent the stock
of such other member s of the character descrbed n ths
paragraph, be deemed to be of the same character; thus, f
the P Corporaton acqures for cash a the stock of the S
Corporaton whch n turn owns a the stock of the S2 Cor-
poraton, the consodated average nvested capta of the
P-S S2 group w be the average nvested capta of the P
Corporaton (pus ts accumuated earnngs and profts and
any earnngs and profts accumuated by S1 and S2 after
acquston by P) regardess of the manner n whch S1 ac-
qured the stock of S2;
(G) Wth respect to dstrbutons made n a consodated
ncome or e cess profts ta return perod pror to the ta abe
year by one member of the group to another member of the
group, the average nvested capta of the dstrbutee sha not
be ncreased by any amount n e cess of the amount by whch
the average nvested capta of the dstrbutor or ts earnngs
and profts, accumuated before March 1,1913, were decreased;
( ) The average nvested capta of a corporaton whch
s a member of the affated group for ony a part of the ta -
abe year sha be ts aggregate day nvested capta com-
puted wth the ad|ustments set forth n ths secton for each
day of such ta abe year durng whch t s a member of the
group (e cudng the day on whch t became a member)
dvded by the number of days n the ta abe year of the
affated group;
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50
(v) In the computaton of accumuated earnngs and profts or
the defct n accumuated earnngs and profts as of the begnnng
of the ta abe year, the foowng ad|ustments sha be made
( ) In the case of a subsdary the stock of whch s hed,
by other members of the affated group wth a bass for deter-
mnng oss upon a sae or e change not f ed, ether drecty
or ndrecty, by reference to the bass of such stock n the
hands of any precedng owner (not ncudng a member of
the group from whch such stock was acqured durng a con-
sodated ncome or e cess profts ta return perod), there
sha be e cuded as of the date on whch such subsdary
became a member of the group wthn the meanng of secton
730(d) that porton of ts earnngs and profts or defct n
earnngs and profts prevousy accumuated and propery
aocabe to the shares of stock so hed; there sha be e cuded
as of the date of any subsequent acquston any earnngs and
profts or defct n earnngs and profts prevousy accu-
muated and propery aocabe to any shares of stock sm-
ary acqured and hed by another member of the group; and
stock of one member of the group ndrecty acqured through
the acquston of stock of another member of the group sha,
to the e tent the stock of such other member s of the char-
acter descrbed n ths paragraph, be deemed to be of the same
character;
( ) There sha be e cuded profts and osses unreazed
by the affated group refected n the openng nventory of
the ta abe year, whether or not a consodated return was
fed for the precedng ta abe years, together wth a other
unreazed profts and osses refected n transactons between
members of the affated group n pror ta abe years for
whch a return was made or was requred on a consodated
bass, ether under the Second Revenue ct of 19 0 or under
pror ncome or e cess profts ta cts;
(C) No reducton sha be made wth respect to any nter-
company dstrbutons made durng the ta abe year;
(D) Wth respect to dstrbutons n stock, as defned by
secton 718(c)(1), made pror to the ta abe year by one
member of the affated group to another member of the
group, the accumuated earnngs and profts of the dstrbutee
sha not be ncreased n any amount n e cess of that by
whch the sum of the average nvested capta and the accumu-
ated earnngs and profts of the dstrbutor s decreased;
( ) Wth respect to dstrbutons made n a pror ta abe
year for whch a return was made or was requred on a con-
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51
sodated bass, ether under the Second Revenue ct of 10 0
or under pror ncome or e cess profts ta cts, by one
member of the group to another member of the group, the
accumuated earnngs and profts of the dstrbutee ha
not be ncreased by any amount n e cess of the amount by
whch ether the average nvested capta or the earnngs
and profts of the dstrbutor were decreased;
(F) If the nvested capta of the affated group s com-
puted pursuant to the provsons of (b)(v)(F) of ths sec-
ton, proper ad|ustment sha be made wth respect to the
amount of any reazatons pror to the begnnng of the
ta abe year upon any unreazed apprecaton or depreca-
ton n assets prevousy refected n consodated average
nvested capta;
(G) In the case of a corporaton whch s a member of the
affated group for ony a part of the ta abe year, the accu-
muated earnngs and profts or the defct n accumuated
earnngs and profts as of the begnnng of the ta abe year
sha be an amount equa to ts accumuated earnngs and
profts or ts defct n accumuated earnngs and profts as of
the begnnng of the ta abe year of the group or the begn-
nng of the day foowng the day on whch t becomes a
member of the group, as the case may be, mutped by the
number of days of such year durng whch t s a member of
the group (e cudng the day on whch t becomes a member)
and dvded by the tota number of days n such year;
(v) In the computaton of admssbe and nadmssbe
assets
( ) There sha be e cuded a ntercompany tems,
( ) Inventores sha be computed pursuant to the prov-
sons of secton 33.39, and
(C) Proper ad|ustment sha be made wth respect to any
unreazed apprecaton and deprecaton n assets refected
n consodated average nvested capta;
(v) In computng base perod e cess profts net ncome or
the defct n e cess profts net ncome for a base perod year n
the case of any affated corporaton whch woud have been
entted n a separate return to an e cess profts credt based on
ncome
( ) The base perod years of such corporaton sha be
the same as the consodated base perod years;
( ) If two or more members of the affated group (n-
cudng any component corporaton of any such member as
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52
defned n secton 7 0 (b) and (g)) -were affated wth each
other durng any of the base perod years wthn the meanng
of secton 730, whether or not consodated ncome ta returns
were fed for such years, there sha be e cuded ntercompany
profts and osses resutng from transactons between such
corporatons for such years to the e tent that such profts and
osses woud otherwse be taken nto account;
(C) The short-term capta gans reazed and short-term
capta osses sustaned by the severa affated corporatons
durng any of the base perod years sha be treated as the
short-term capta gans or osses of the group as a snge cor-
poraton, and, for the purpose of computng, n the case of
the severa corporatons, the net short-term capta oss carry-
over to the succeedng base perod year, any net short-term
capta oss of the group for the year computed pursuant to
the provsons of ths paragraph sha be aocated to the sev-
era corporatons havng net short-term capta osses for such
year n amounts proportonate to such net osses;
(D) In the computaton under secton 713(d) (2), reatng
to that porton of the base perod durng whch the corpora-
ton was not n e stence
(aa) There sha be e cuded that porton of the day
nvested capta of the corporaton for the frst day fo-
owng the cose of the ast consodated base perod year
whch was pad to t by another member of the affated
group, and
(bb) The term precedng ta abe year means the ast
consodated base perod year;
( ) The amount to be e cuded under secton 711(b) (1)
( ) on account of an e cess of gans from the sae or e -
change of property hed for more than 18 months sub|ect
to the aowance for deprecaton provded n secton 23(1)
over osses from such saes or e changes sha be an amount
whch bears the same rato to the e cess of the aggregate of
such gans over the aggregate of such osses of the severa
affated corporatons as the e cess of such gans over such
osses of the partcuar corporaton bears to the sum of such
e cesses of the severa members of the group havng such an
e cess;
(F) The amount of the ad|ustment under secton 711(b)
(1) (F) reatng to repayment of processng ta es to vendees
sha be computed wthout regard to any repayment or credt
to another member of the affated group;
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(G) In the case of a corporaton whch s a member of the
affated group for ony a part of the ta abe year, the amount
to be ncuded wth respect to each base perod year sha be
mted to an amount whch bears the same rato to ts base
perod e cess profts net ncome or the defct n e cess profts
net ncome for such year, as the case may be, as the number of
days of the ta abe year durng whch t was a member of the
group (e cudng the day on whch t becomes a member)
bears to the tota number of days n the ta abe year;
(v) In computng the day capta addton or the day
capta reducton for any day of the ta abe year
( ) There sha be ncuded capta addtons and reduc-
tons made after, but not before, the cose of the ast conso-
dated base perod year wth respect to
(aa) ffated corporatons whch woud have been
entted n a separate return to an e cess profts credt
based on ncome, and
(bb) Subsdary corporatons the stock of whch was
acqured by other members of the affated group n a
transacton not nvovng the ssuance of stock by such
other members;
( ) There sha be ncuded capta addtons and reduc-
tons made after December 31,1939, wth respect to a other
affated corporatons;
(C) No ad|ustment sha be made wth respect to e cuded
capta;
(D) No addton sha be made for money or property pad
n for stock, or as pad-n surpus, or as a contrbuton to
capta by one member of the affated group to another mem-
ber of the group whether or not a consodated return was
fed for the year of the transacton;
( ) No reducton sha be made wth respect to dstrbu-
tons made to other members of the affated group whether
or not a consodated return was fed for the year of the
dstrbuton;
( ) In computng e cuded capta for the purpose of secton
713(g)(3)-
( ) No ncrease or decrease sha be made by reason of
transactons between members of the affated group occurrng
subsequent to the cose of the ast consodated base perod
year, whether or not a consodated return was fed for the
year of the transacton, and
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( ) The ad|usted bass of stock of any members of the
group hed by other members of the group sha be deter-
mned wthout takng nto account any ad|ustment wth re-
spect to osses of the ssung corporaton subsequent to the
acquston of such stock whch osses were ncuded n a con-
sodated ncome or e cess profts ta return;
(3) In no case sha there be ncuded n the consodated net operat-
ng oss carry-over under (a)(6) () and (v) of ths secton (reatng
to net operatng osses sustaned by a corporaton n years pror to the
frst ta abe year n respect of whch ts ncome s ncuded n the con-
sodated return) an amount n e cess of the net ncome of such corpo-
raton (computed wth the e ceptons and mtatons provded n
secton 122(d)) ncuded n the computaton of the consodated net
ncome for the ta abe year ncreased by the separate net short-term and
ong-term capta gans of such corporaton.
( ) If a porton of the consodated net operatng oss carry-over
arses pursuant to the provsons of (a) (6) () or (v) of ths secton
(reatng to osses sustaned by a corporaton pror to the frst ta abe
year n respect of whch ts ncome s ncuded n the consodated
return), the consodated net operatng oss deducton sha not be ess
than the amount of such porton reduced by the amount, f any, by
whch the net ncome of such corporaton (computed wth the e cep-
tons and mtatons provded n secton 122(d)) e ceeds the norma-
ta net ncome of such corporaton (computed wthout any net operat-
ng oss deducton but takng nto account any net ong-term capta
oss), or, n the case of two or more such corporatons, the sum of such
portons so reduced.
(5) If, n the computaton of the consodated net operatng oss
carry-over for the second consodated return perod n respect of
whch the ncome of a corporaton s ncuded n the consodated
returns of the group, there s nvoved the net operatng oss separatey
sustaned by such corporaton for the second precedng ta abe year
together wth a consodated net operatng oss for the second precedng
ta abe year, or f, for the second consodated return perod n re-
spect of whch the ncome of two or more members of the affated
group s ncuded n the consodated returns of the group, there are
nvoved the net operatng osses separatey sustaned by such cor-
poratons for the second precedng ta abe year, no porton of the
consodated net ncome for the frst precedng ta abe year sha be
taken nto account more than once n gvng effect to the provsons of
(a)(6) () and (v) of ths secton (reatng to the computaton of
that part of the consodated net operatng oss carry-over attrbutabe
to osses of the second precedng ta abe year).
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(6) In no case sha there be ncuded n the consodated e cess
profts credt carry-over for any ta abe year under (a) (31) () and
(v) of ths secton wth respect to the unused e cess profts credt of a
corporaton for years pror to the frst ta abe year n respect of whch
ts ncome s ncuded n the consodated return an amount n e cess
of the porton thereof whch coud have been avaed of by such cor-
poraton as an e cess profts credt carry-over f a separate return had
been fed for such ta abe year.
(7) If, n the computaton of the consodated e cess profts credt
carry-over for the second consodated return perod n respect of
whch the ncome of a corporaton s ncuded n the consodated re-
turns of the group, there s nvoved the separate unused e cess profts
credt of swch corporaton for the second precedng ta abe year to-
gether wth a consodated unused e cess profts credt for the second
precedng ta abe year, or f, for the second consodated return perod
n respect of whch the ncome of two or more members of the aff-
ated group s ncuded n the consodated returns of the group, there
are nvoved the separate unused e cess profts credts of such corpora-
tons for the second precedng ta abe year, no porton of the e cess
of the consodated e cess profts net ncome over the consodated e -
cess profts credt for the frst precedng ta abe year sha be taken
nto account more than once n gvng effect to the provsons of
(a) (31) () and (v) of ths secton (reatng to the computaton of
that part of the consodated e cess profts credt carry-over attrbut-
abe to unused e cess profts credts of the second precedng ta abe
year).
(8) If an nsurance company ta abe under secton 20 s ncuded
n a consodated return wth other corporatons ta abe under secton
13 or 1 and f, n the computaton of the nvested capta of such com-
pany, there are ncuded any unearned premum reserves, the porton of
the consodated e cess profts credt based on nvested capta whch s
attrbutabe to such unearned premum reserves sha not be greater
than the e cess, f any, of the porton of the consodated e cess profts
net ncome attrbutabe to such company over the porton of the con-
sodated e cess profts credt attrbutabe to such company computed
wthout the ncuson n nvested capta of such reserves. The porton
of the consodated e cess profts credt attrbutabe to unearned pre-
mum reserves sha be the e cess of such credt computed wth the
ncuson of such reserves n nvested capta over such credt com-
puted wthout the ncuson of such reserves. The porton of the con-
sodated e cess profts net ncome attrbutabe to such company sha
be the e cess of such net ncome computed wth the ncuson of such
company n the consodated return over such net ncome computed
wthout the ncuson of such company. The porton of the conso-
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56
dated e cess profts credt attrbutabe to such company computed
wthout the ncuson of unearned premum reserves sha be the e cess
of such credt computed wth the ncuson of such company wthout
such reserves n nvested capta over such credt computed wthout
the ncuson of such company. Wth respect to any amount e cuded
from the consodated e cess profts credt by vrtue of the provsons
of ths paragraph, there sha be aowed as a part of the consodated
e cess profts credt carry-over n subsequent ta abe years an amount
not n e cess of the porton of the consodated e cess profts net ncome
attrbutabe to such company n the subsequent ta abe year over the
porton of the consodated e cess profts credt attrbutabe to such
company n such subsequent year computed wth the ncuson of
unearned premum reserves. The porton of the consodated e cess
profts credt attrbutabe to such company computed wth the ncu-
son of unearned premum reserves sha be the e cess of such credt
computed wth the ncuson of such company n the consodated
return over such credt computed wthout the ncuson of such
company.
(c) Statements and Schedues for Subsdares.
The statement of gross ncome and deductons and the severa
schedues requred by the nstructons on the return must be prepared
and fed by the common parent corporaton n coumnar form so
that the detas of the tems of gross ncome, deductons, nvested
capta, and credts, for each member of the affated group may be
ready audted. Such statements and schedues sha ncude n
coumnar form a reconcaton of surpus for each such corporaton,
together wth a reconcaton of the consodated surpus. Conso-
dated baance sheets as of the begnnng and cose of the ta abe year
of the group, taken from the books of the members of the group, sha
accompany the consodated return prepared n a form smar to
that requred for reconcaton of surpus.
(d) Net Operatng Loss Deducton fter Consodated Return
Perod.
consodated net operatng oss sustaned by an affated group
durng any consodated return perod of the group sha be used n com-
putng the net ncome n the return of the common parent corporaton
(or n the consodated return of another affated group of whch
such common parent becomes a member) for a ta abe year subse-
quent to the ast consodated return perod of the group n the
same manner, to the same e tent, upon the same condtons, and sub-
|ect to the same mtatons as f the group had been a snge corpora-
ton (the common parent corporaton) when such oss was sustaned;
but no net operatng oss sustaned durng a consodated return perod
of an affated group sha be used n computng the net ncome of a
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57
subsdary (or the consodated net ncome of another affated group
of whch such subsdary becomes a member) for any ta abe year
subsequent to the ast consodated return perod of the group. No
part of any net operatng oss sustaned by a corporaton pror to a
consodated return perod of an affated group of whch such corpo-
raton becomes a subsdary sha be used n computng the net ncome
of such corporaton for any ta abe year subsequent to the conso-
dated return perod, but any part of such net operatng oss whch,
e cept for ths restrcton, mght be so used, sha be treated as havng
been sustaned by the common parent corporaton of the group.
(e) U nused cess Profts Credt fter Consodated Return Perod.
The e cess of the consodated e cess profts credt for the ta abe
year of an affated group over the consodated e cess profts net
ncome for such year sha be used n computng the ad|usted e cess
profts net ncome of the common parent corporaton (or the con-
sodated ad|usted e cess profts net ncome of another affated group
of whch such common parent becomes a member) for a ta abe year
subsequent to the ast consodated return perod of the group n the
same manner, to the same e tent, upon the same condtons, and sub|ect
to the same mtatons as f the group had been a snge corporaton
(the common parent corporaton) when such e cess arose; but no
unused e cess profts credt for a consodated return perod of an
affated group sha be used n computng the ad|usted e cess profts
net ncome of a subsdary (or the consodated ad|usted e cess profts
net ncome of another affated group of whch such subsdary be-
comes a member) for any ta abe year subsequent to the ast con-
sodated return perod of the group.
(/) Ta abe Year of Less Than 12 Months.
ny perod of ess than 12 months for whch ether a separate
return or a consodated return s fed, under the provsons of secton
33.13, sha be consdered as a ta abe year, and the e cess profts net
ncome or the consodated e cess profts net ncome for such year, as
the case may be, sha be paced on an annua bass pursuant to the
provsons of secton 711(a)(3).
Sec. 33.32 Method of Computaton of Income for Perod of Less Than 12
Months.
If a corporaton, durng the ta abe year of the group, becomes a
member or ceases to be a member of an affated group whch makes or
s requred to make a consodated return for such year, the ncome
of such corporaton to be ncuded n the consodated return sha be
computed on the bass of ts ncome as shown by ts books f the ac-
counts are so kept that the ncome for the perod durng whch t s
a member of the group can be ceary and accuratey determned. If the
0 3 1 1 3
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58
accounts are not so kept, the ncome to be ncuded n the consodated
return sha be computed on the bass of that proporton of ts ncome
(sub|ect to the emnaton of tems e empt from ta aton and the add-
ton of tems not aowabe as deductons n computng e cess profts
net ncome) for the fu perod covered by ts books whch the number
of days for whch ts ncome s ncuded n the consodated return bears
to the number of days n the fu perod covered by ts books; but n
the dscreton of the Commssoner there may be emnated before
the proraton s made tems of ncome or deducton ceary and accu-
ratey determned to be attrbutabe to partcuar perods, and, after
the proraton s made, such emnated tems w be added to (f tems
of ncome) or deducted from (f deductbe tems) the ncome deter-
mned by proraton for the perod to whch such tems are appcabe.
The credts aowabe under secton 13 of the Code as amended sha be
gven for the perod to whch they are propery appcabe under the
facts n the case.
Sec. 33.33 Gan or Loss Prom Sae of Stock or onds.
Gan or oss from the sae or other dsposton (whether or not
durng a consodated return perod), by a corporaton whch durng
any perod of tme (ncuded n a ta abe year begnnng after Decem-
ber 31, 1939) has been a member of an affated group whch makes
or s requred to make a consodated return, of any share of stock or
any bond or obgaton ssued by another corporaton whch durng
any part of such perod was a member of the same group, sha be
determned, and the e tent to whch such gan or oss sha be recog-
nzed and sha be taken nto account sha aso be determned, n the
same manner, to the same e tent, and upon the same condtons as
though such corporatons had never been affated (see sectons 111
to 115, ncusve, and secton 117, and the reguatons thereunder),
e cept
(a) In the case of a dsposton (by sae, dssouton, or otherwse)
durng a consodated return perod to another member of the group
(see sectons 33.31 and 33.37); and
(6) That the bass for determnng the gan or oss, n the case of
shares of stock hed durng any part of a consodated return perod,
sha be determned n accordance wth secton 33.3 ; and
(c) s provded n sectons 33.35 and 33.36 (mposng certan mta-
tons upon osses otherwse aowabe upon saes of stock or bonds).
Sec. 33.3 Sae of Stock ass for Deternunng Gan or Loss.
(a) Scope of Secton.
For the purpose of computng e cess profts net ncome, ths secton
prescrbes the bass for determnng the gan or oss upon any sae
or other dsposton (herenafter referred to as sae ) by a corpora-
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59
ton whch s (or has been) a member of an affated group whch
makes (or has made) a consodated ncome or e cess profts ta return
for the ta abe year 1929 or any subsequent ta abe year, of any share
of stock ssued by another member of such group (whether ssued
before or durng the perod that t was a member of the group and
whether ssued before, durng, or after the ta abe year 1929), and
hed by the seng corporaton durng any part of a perod for whch
a consodated return s made or requred under these reguatons.
For the bass n the case of saes whch do not break the affaton,
see paragraph (6).
For the bass n the case of saes whch break the affaton and
whch are made wthn the perod durng whch the seng corpora-
ton s a member of the affated group (whether or not durng a con-
sodated return perod), see paragraph (e).
For the bass n the case of saes made after the seng corporaton
has ceased to be a member of the affated group, see paragraph (d).
For the bass n the case of saes of bonds, see secton 33.35.
(6) Saes Whch Do Not reak ffaton.
If, notwthstandng any such sae, the ssung corporaton remans
a member of the affated group, the bass sha be determned and
ad|usted n the same manner as f the seng corporaton and the
ssung corporaton had never been members of an affated group.
ut see secton 33.38(5).
(c) Saes Whch reak ffaton Made Whe Seng Corporaton
u Member of ffated Group.
If the sae s made wthn a perod durng whch the seng corpo-
raton s a member of the affated group (whether or not durng a
consodated return perod), and f, as a resut of such sae, the ssung
corporaton ceases to be a member of the group, the bass sha be
determned as foows:
(1) The aggregate bases of a shares of stock of the ssung corpo-
raton hed by each member of the affated group (e cusve of the
ssung corporaton) mmedatey pror to the sae sha be determned
separatey for each member of the group and ad|usted n accordance
wth the Code, but wthout regard to any ad|ustment under the ast
sentence of secton 113(a) (11) wth respect to osses of the ssung
corporaton sustaned by such corporaton after t became a member
of the affated group and ncuded n a consodated ncome or e cess
profts ta return of the group.
(2) From the combned aggregate bases as determned n subpara-
graph (1) there sha be deducted the sum of
() osses of such ssung corporaton sustaned durng ta -
abe years for whch consodated ncome ta returns were made
or were requred (ncudng ony the ta abe year 1929 and subse-
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60
quent ta abe years) after such corporaton became a member of
the affated group and pror to the sae of the stock to the e tent
that such osses coud not have been avaed of by such corporaton
as a net oss or net operatng oss n computng ts net ncome for
such ta abe years f t had made a separate return for each of such
years,
() Wth respect to each of such ta abe years for whch con-
sodated returns were made or were requred both for ncome and
for e cess profts ta purposes, the e cess, f any, of a osses of
such ssung corporaton for such year, propery ad|usted n the
computaton of consodated e cess profts net ncome, over the
amount of such osses for such year computed under () to the
e tent that such e cess coud not have been avaed of by such
corporaton as a net operatng oss n computng ts e cess profts
net ncome for such ta abe years f t had made a separate e cess
profts ta return for each of such years, and
() Wth respect to each of such ta abe years for whch con-
sodated returns were made or were requred for e cess profts ta
purposes ony, a osses of such ssung corporaton for such
year, propery ad|usted n the computaton of consodated e cess
profts net ncome, to the e tent that such osses coud not have
been avaed of by such corporaton as a net operatng oss n
computng ts e cess profts net ncome for such ta abe years f t
had made a separate e cess profts ta return for each of such
years.
For any ta abe year (whether begnnng pror to anuary 1, 19 0, or
on or after such date) n whch the group sustaned a consodated oss
not avaed of n subsequent years as a deducton under net oss or net
operatng oss provsons, the amount deducted under ths paragraph
sha be reduced by an amount equa to that proporton of such con-
sodated oss whch the oss of the ssung corporaton for the year n
whch such oss was sustaned bears to the aggregate osses of the
members of the group for such year.
(3) The sum of the aggregate bases of a shares of stock, after
makng the deducton under subparagraph (2), sha then be appor-
toned among the members of the affated group whch hed stock of
the ssung corporaton, by aocatng to each such member that propor-
ton of the sum of the aggregate bases so reduced whch the aggregate
bass of the stock n the ssung corporaton hed by such member bears
to the sum of the aggregate bases.
( ) The aggregate bass as determned under subparagraph (3) for
each member of the affated group sha then be equtaby appor-
toned among the severa casses of stock of the ssung corporaton
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hed by such member accordng to the crcumstances of the case
ordnary by aocatng to each cass of such stock that proporton of
the aggregate bass whch the bass of each cass of such stock hed by
t at the tme of the sae s to the sum of the bases of the severa casses
of such stock hed by t.
(5) The bass of each share of stock of each cass hed by a member
of the affated group sha then be determned by dvdng the bass
apportoned to such cass under subparagraph ( ) by the tota number
of shares of such cass hed by t.
(d) Saes fter Seng Corporaton as Ceased to e Member of
ffated Group.
If the sae s made after the seng corporaton has ceased to be a
member of the affated group, such bass sha be determned n ac-
cordance wth paragraph (c) of ths secton, e cept that
(1) The aggregate bases (under paragraph (c) (1)) sha be deter-
mned for a shares of the ssung corporaton hed by each member
of the group mmedatey pror to the tme the seng corporaton
ceased to be a member of the group (rather than mmedatey pror to
the sae);
(2) The aocatons (under paragraph (c)(3)) sha be made to
each member of the group whch hed stock of the ssung corpora-
ton mmedatey pror to the tme the seng corporaton ceased to be
a member of the group (rather than to the members hodng such
stock at the tme of the sae); and
(3) The bass of each share of stock hed by the seng corporaton
(determned, as above, as of the tme the seng corporaton ceased to
be a member of the group) sha then be ad|usted n accordance wth
the Code (see, partcuary, sectons 111 to 115, ncusve), n order to
determne the bass at the tme of the sae.
(e) Defnton of Loss, Consodated Z ws, and N-et Loss or
Net Operatng Loss.
s used n ths secton the term oss means the e cess over the
gross ncome of the ssung corporaton of the sum of ts aowabe
deductons (not ncudng any net oss or net operatng oss deduc-
ton) pus the proportonate part propery attrbutabe to such cor-
poraton of the credts reatng to nterest on certan Government
obgatons and dvdends receved aowabe n computng conso-
dated norma-ta net ncome, the consodated speca cass net ncome,
or consodated net ncome sub|ect to ta ; the term consodated oss
means the e cess of the sum of the osses, separatey computed, over
the sum of the norma-ta net ncome, the speca cass net ncome, or
the net ncome sub|ect to ta , separatey computed, of the severa
members of the affated group, determned n accordance wth the
provsons of the Code, or the Revenue ct, and pursuant to the pro-
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vsons of consodated returns reguatons, appcabe to the perod;
and the term net oss or net operatng oss means the net oss or
net operatng oss, as the case may be, determned n accordance wth
the provsons of the Code, or the Revenue ct, and pursuant to the
provsons of consodated returns reguatons, appcabe to the
perod.
Sec. 33.35 Sae of onds ass for Determnng Gan or Loss.
In the case of a sae or other dsposton by a corporaton, whch s
(or has been) a member of an affated group whch makes (or has
made) a consodated ncome or e cess profts ta return for the ta -
abe year 1929 or any subsequent ta abe year, of bonds or obgatons
ssued by another member of such group (whether or not ssued whe
t was a member of the group and whether ssued before, durng, or
after the ta abe year 1929), the bass of each bond or obgaton, for
determnng the gan or oss upon such sae or other dsposton, sha
be determned n accordance wth the Code (see, partcuary, secton
113), but the amount of any oss otherwse aowabe sha be decreased
by the e cess (f any) of the aggregate of the deductons computed
under paragraph (c) (2) of secton 33.3 over the sum of the aggre-
gate bases of the stock of the ssung corporaton as computed under
paragraph (c) (1) or (c ), as the case may be, hed by the members
of the group. (See, aso, secton 33. 0, reatng to dsaowance of oss
upon ntercompany bad debts.)
Sec. 33.36 Lmtaton on owabe Losses on Sae of Stock or onds.
(a) Genera Rue.
No oss sha be aowed under secton 33.33, 83.3 , or 33.35 upon the
sae or other dsposton of stock or bonds or obgatons to the e tent
that such oss s attrbutabe to (1) transfers of assets wthn the aff-
ated group (by sae, gft, or otherwse) wthout consderaton or at
markedy fcttous vaues, durng the perod n whch the corporatons
were affated (whether or not a consodated return was made and
whether before, durng, or after the frst ta abe year begnnng after
December 31, 1939), or (2) a dstrbuton durng a perod n whch
the corporatons were affated of earnngs or profts accumuated
pror to the date upon whch the dstrbutng corporaton became a
member of the group.
(b) uafcaton of Genera Rue.
Paragraph (a) of ths secton sha not be consdered as n any way
mtng the operaton of the provsons of the Code reatng to the
bass for determnng gan or oss upon the sae or other dsposton of
property (see sectons 111 to 115, ncusve), but as beng n ampfca-
ton of and not n substtuton for such provsons; sub|ect, however,
to ths quafcaton: that to the e tent that the transfers of assets re-
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ferred to n paragraph (a) are taken nto account under the terms of
the Code n makng ad|ustments n the bass, such transfers w not
be taken nto account n denyng osses under paragraph (a).
Sec. 33.37 Lqudatons Recognton of Gan or Loss.
(a) Durng Consodated Return Perod.
Gan or oss sha not be recognzed upon a dstrbuton durng a
consodated return perod, by a member of an affated group to an-
other member of such group, n canceaton or redempton of a or any
porton of ts stock, e cept
(1) Where such dstrbuton s n compete qudaton and redemp-
ton of a of the stock (whether n one dstrbuton or a seres), fas
wthout the provsons of secton 112(b)(6), and s the resut of a
bona fde termnaton of the busness and operatons of such member
of the group, n whch case t sha be treated as a sae of the stock, the
ad|ustments specfed n sectons 33.3 and 33.35 w be made, and
secton 33.36 w be appcabe; and
(2) Where such a dstrbuton wthout the provsons of secton
112(b) (6) s one made n cash n an amount n e cess of the ad|usted
bass of the stock.
When the busness and operatons of the qudated member of thn
affated group are contnued by another member of the group, t
sha not be consdered a bona fde termnaton of the busness and
operatons of the qudated member. (Wth respect to the acqu-
ston of ts bonds by the ssung company, see secton 33. 1(6).)
For the purpose of determnng whether an affated corporaton
recevng property n a qudatng dstrbuton quafes under the
provsons of secton 112(b)(6)( ), the aggregate amount of the
stock of the qudated corporaton owned by the severa members
of the affated group on the date of the adopton of the pan of qu-
daton and at a tmes subsequent thereto and pror to the recept of
the property n qudaton sha be consdered as owned by the
dstrbutee.
(b) fter Consodated Return Perod.
ny such dstrbuton after a consodated return perod, whether
n compete or parta qudaton, e cept a compete qudaton wthn
the provsons of secton 112(b)(6), sha be treated as a sae of the
stock, and the ad|ustments specfed n sectons 33.3 and 33.35 w
be made, and secton 33.36 w be appcabe.
Sec. 33.38 ass of Property.
(a) Genera Rue.
Sub|ect to the provsons of paragraphs (b) and (c) and e cept
as otherwse provded n secton 33.3 , the bass durng a consodated
return perod for determnng the gan or oss from the sae or other
dsposton of property, or upon whch e hauston, wear and tear,
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obsoescence, amortzaton, and depeton are to be aowed, sha be
determned and ad|usted n the same manner as f the corporatons
were not affated (see sectons 111 to 115, ncusve), whether sucb.
property was acqured before or durng a consodated return perod.
Such bass mmedatey after a consodated return perod (whether
the affaton has been broken or whether the prvege of makng a
consodated return s not e ercsed) sha be the same as mmedatey
pror to the cose of such perod.
(b) Intercompany Transactons.
The bass prescrbed n paragraph (a) sha not be affected by reason
of a transfer durng a consodated return perod, other than upon
qudaton as provded n (c) (whether by sae, gft, dvdend, or
otherwse), from a member of the affated group to another member
of such group.
(c) ass fter Lqudaton.
(1) Where property s acqured durng a ta abe year begnnng
after December 31, 1939, upon a dstrbuton descrbed n secton
33.37(a) n whch gan or oss s recognzed to the dstrbutee, the
bass of such property sha be ts far market vaue at date of
acquston.
(2) Where property s acqured durng a ta abe year begnnng
after December 31, 1939, upon a dstrbuton n whch gan or oss to
the dstrbutee s not recognzed pursuant to the provsons of secton
112(b) (6), the bass of such property sha be the same as t woud be
n the hands of the transferor.
(3) Where property s acqured durng a ta abe year begnnng
after December 31, 1939, upon a dstrbuton (not a compete qu-
daton wthn the provsons of secton 112(b)(6)) n whch gan or
oss to the dstrbutee s not recognzed as provded n secton 33.37(a),
the bass of such property sha be the same as the bass (determned n
accordance wth sectons 111 to 115, ncusve, and secton 33.3 ) of the
stock e changed therefor, ad|usted
() For the transfer of assets wthn the affated group by the
dstrbutng corporaton (by sae, gft, or otherwse) wthout
consderaton or at markedy fcttous vaues, durng the perod
for whch the corporatons were affated (whether or not a con-
sodated return was made and whether before, durng, or after
the frst ta abe year begnnng after December 31,1939);
() For dstrbutons durng a perod n whch the corporatons
were affated of earnngs or profts accumuated pror to the date
upon whch the dstrbutng corporaton became a member of the
group; and
() For cash receved n the dstrbuton.
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(d) azs Not ffected by cquston or Sae of Stock.
Nether the acquston of stock of a corporaton nor ts sae or other
dsposton sha affect the bass of the property of such corporaton
for determnng gan or oss or upon whch e hauston, wear and tear,
obsoescence, amortzaton, and depeton are to be aowed.
Sec. 33.39 Inventores.
(a) Consodated Return For Frst Tear of ffaton.
If the ncome of an affated corporaton s ncuded n a consodated
return for the perod mmedatey foowng the date upon whch such
corporaton became a member of the affated group, the vaue of ts
openng nventory to be used n computng the consodated net ncome
sha be the proper vaue of the cosng nventory used n computng
ts net ncome for the precedng ta abe year.
(b) Consodated Return fter Separate Return by ffates.
If a corporaton whch s a member of the affated group for the
frst consodated return perod was a member of the group n the
precedng ta abe year, the vaue of ts openng nventory to be used
n computng the consodated net ncome for the frst consodated
return perod sha be the proper vaue of the cosng nventory used
n computng ts net ncome for the precedng ta abe year decreased
n the amount of profts or ncreased n the amount of osses refected
n such nventory whch arose n transactons between members of
the affated group and whch have not been reazed by the group
through fna transactons wth persons other than members of the
group.
(c) Separate Returns Made fter Consodated Returns.
If a corporaton whch was a member of an affated group n a
consodated return perod makes or s requred to make a separate
return for the succeedng ta abe year, the vaue of ts openng nven-
tory to be used n computng ts net ncome for such succeedng ta -
abe year sha be the proper vaue of ts cosng nventory used n
computng consodated net ncome for the ast consodated return
perod.
(d) ase Perod Tears.
For each of the base perod years, proper ad|ustment wth respect
to unreazed profts or osses n transact ons between members of the
affated group (ncudng any component corporaton of any such
member as defned n secton 7 0 (b) and (g)) whch were affated
wth each other durng such year wthn the meanng of secton 730
sha be made n the openng and cosng nventores of each such
affated corporaton whch woud have been entted n a separate
return to an e cess profts credt based on ncome.
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Sec. 33. 0 ad Debts.
(a) Deducton Durng Consodated Return Perod.
No deducton sha be aowed durng a consodated return perod
to any member of the affated group on account of worthessness
n whoe or n part of any obgaton (ncudng accounts recevabe,
bonds, notes, debts and cams of whatsoever nature) of any other
member of the group.
(b) Lmtaton on owance fter Consodated Return Perod.
The rues appcabe to the aowance of osses upon the sae of
bonds sha be appcabe to the aowance after the consodated re-
turn perod as bad debts of obgatons (ncudng accounts recev-
abe) of a member of an affated group acqured n any way by
another member of the group pror to or durng the consodated return
perod. (See secton 33.36.)
Sec. 33. 1 Sae and Retrement by Corporaton of ts onds.
(a) Issued at Dscount or Premum.
If a corporaton whch durng any ta abe year (begnnng after
December 31, 1939) has been a member of an affated group whch
makes or s requred to make a consodated return, has ssued ts
bonds at a dscount or premum (whether before, durng, or after
the frst ta abe year begnnng after December 31, 1939, and whether
or not durng a consodated return perod), deducton w be aowed
for the amortzaton of the dscount, and ncome ncuded for the
amortzaton of the premum, n the same manner, to the same e tent,
and upon the same condtons as f the corporaton had never been
affated, e cept that no deducton for amortzaton of dscount sha
be aowed, and no ncome sha be ncuded for amortzaton of
premum, durng a perod for whch a consodated return s made,
on bonds of one member of the group owned by another member of
the group.
(b) cquston of onds by Issung Company.
If a corporaton whch durng any ta abe year (begnnng after
December 31, 1939) has been a member of an affated group whch
makes or s requred to make a consodated return, acqures ts bonds
(whether or not from another member of such group and whether or
not durng a consodated return perod), gan or oss sha be recog-
nzed n the same manner, to the same e tent, and upon the same
condtons as f the corporaton had never been affated, e cept that,
f such bonds are acqured from another member of the group durng
a consodated return perod, n determnng the gan or oss to the
ssung company from such acquston, the bass thereof to such
other member of the group sha be deemed the purchase prce.
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Sec. 33. 2 Capta Loss Lmtatons and Cany-Over.
The provsons of sectons 23(g) and (k), 117(d) and (e), and
122(d) wth respect to gans and osses from saes or e changes of
capta assets sha be apped, n respect of such gans and osses sus-
taned durng a consodated return perod, as f the affated group
were the ta payer.
Wth respect to a net short-term capta oss sustaned by a corpora-
ton n a year pror to the frst consodated return perod n respect
of whch the ncome of such corporaton s ncuded n the consodated
return, such oss (n an amount not n e cess of the net ncome of such
corporaton for such year or n e cess of the net short-term capta gan
of such corporaton for the frst consodated return perod) sha, for
the purposes of secton 117(e), reatng to a net short-term capta
oss carry-over, be treated as f such net short-term capta oss had
been sustaned by the affated group.
consodated net short-term capta oss sustaned by the affated
group durng the ast consodated return perod of the group (n an
amount not n e cess of the consodated net ncome for such year)
sha be treated n the succeedng ta abe year, sub|ect to the e cepton
provded n secton 117(e), as a short-term capta oss of the common
parent corporaton. No porton of any consodated net short-term
capta oss sustaned durng a consodated return perod of an aff-
ated group sha be used n computng short-term capta osses of a
subsdary for any subsequent ta abe year.
Sec. 33. 3 Credt for Foregn Ta es.
The credt aowed to an affated group for ta es pad or accrued
durng the consodated return perod to any foregn country or to any
possesson of the Unted States (under secton 131 as made appcabe
and quafed by secton 729) sha be computed and aowed as f the
affated group were the ta payer, and as f the aggregate ta es pad
by the severa members of the group and the credts aowed for ncome
ta purposes wth respect to such payments were payments made by
and credts aowed to the group.
Sec. 33. Methods of ccountng.
(a) In Genera.
For the purpose of determnng consodated e cess profts net n-
come, a members of the affated group sha adopt that method of
accountng whch ceary refects the consodated e cess profts net
ncome. method of accountng whch does not treat wth reasonabe
consstency a tems of gross ncome and deductons of the varous
members of the group sha not be regarded as ceary refectng the
consodated e cess profts net ncome. For e ampe, one member of
the group w not be permtted to report tems of ncome or deduc-
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tons on the cash method of accountng, whe another member of the
same group reports the same or smar tems on the accrua method.
The provsons of ths paragraph are sub|ect to the e ceptons stated
n paragraph (b).
(b) Combnaton of Methods.
For the purpose of determnng consodated e cess profts net n-
come, f the members of an affated group have estabshed dfferent
methods of accountng, each member may retan such method wth the
consent of the Commssoner, provded that the consodated e cess
profts net ncome s ceary refected, and, provded further that nter-
company transactons affectng consodated e cess profts net ncome,
between members of the group sha be emnated and ad|ustments on
account of such transactons sha be made wth reference to a unform
method of accountng, to be seected by the members of the group wth
the consent of the Commssoner.
(c) Change to ccrua Method.
In the case of a corporaton whch prevousy has reported ts ncome
(whether n a separate or a consodated return) n accordance wth
a method other than the accrua method and s requred under ths
secton to report ts ncome for the ta abe year under the accrua
method, tems of ncome whch accrued pror to the ta abe year but
were propery omtted n the determnaton of net ncome under the
method of accountng formery foowed sha be ncuded n the ncome
for the ta abe year of the change n accountng method, and tems of
ncome whch were propery ncuded n the determnaton of net
ncome under the method of accountng formery foowed sha not
be ncuded n the ncome for the ta abe year of the change, or any
subsequent year. In such a case, deductons whch accrued pror to
the ta abe year but whch were propery omtted n the determnaton
of net ncome under the method of accountng formery foowed sha
be aowed for the ta abe year of the change n accountng method,
and deductons whch were propery ncuded n the determnaton
of net ncome under the method of accountng formery foowed sha
not be aowed n the determnaton of net ncome for the ta abe year
of change or any subsequent year.
Gut T. everng,
Commssoner of Interna Revenue.
pproved March 1 ,19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
1 Ped wth the Dvson of the Federa Regster March 1 , 19 1, 8.31 p. m.)
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INCOM T R GUL TIONS 103 ND C SS PROFITS T R GU-
L TIONS 109 , M ND D.
19 1-18-10702
T. D.50 5
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RTS 19 ND
30. INCOM T ND C SS PROFITS T .
Reguatons 103 and 1C9 amended to conform to the cess Profts
Ta mendments of 19 1.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 103 Part 19, Tte 26, Code of
Federa Reguatons, 19 0 Sup. and Reguatons 109 Part 30, Tte
26 of such Code, 19 1 Sup. to the cess Profts Ta mendments of
19 1 (Pubc aw 10, Seventy-seventh Congress), approved March 7,
19 1, such reguatons are amended as foows:
R GUL TIONS 103.
Paragraph 1. There s nserted mmedatey precedng secton
19.23(a)- the foowng:
Sec. 10. Captazaton of dvertsng, tc., pendtures. ( cess
Profts Ta mendments of 19 1.)

(b) mendment to Chapter 1. Secton 23(a) of rue Interna
Revenue Code Is amended by addng at the end of a new para-
graph, appcabe to ta abe years begnnng after December 31, 1939,
readng as foows:
(3) pendtuces for advertsng and good w. If a cor-
poraton has, for the purpose of computng ts e cess profts credt
under chapter 2 , camed the benefts of the eecton provded n
secton 733, no deducton sha be aowabe under paragraph (1)
to such corporaton for e pendtures for advertsng or the pro-
moton of good w whch, under the rues and reguatons pre-
scrbed under secton 733(a) may be regarded as capta nvest-
ments.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Pab. 2. There s nserted mmedatey after secton 19.23(a)-13
the foowng new secton:
Sec. 19.23(a)-1 . pendture for advertsng or the promoton of good
tr. corporaton whch has, for the purpose of computng ts e cess profts
credt, eected under secton 733 to charge to capta account e pendtures for
advertsng or the promoton of good w whch may be regarded as capta
nvestments and whch were deducted for ta abe years begnnng after Decem-
ber 81, 1933, and pror to anuary 1, 19 0, may not deduct smar e pendtures
for ta abe years begnnng after December 31, 1939. Such a ta payer has the
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70
burden of provng that e pendtures for advertsng or the promoton of good
w whch t seeks to deduct for such ater ta abe years may not be regarded
as capta nvestments under the provsons of the reguatons prescrbed under
secton 733. For rues for determnng what e pendtures for advertsng or
the promoton of good w may be regarded as capta nvestments, and for
nformaton requred to be submtted wth respect to such e pendtures, see
secton 30.733-2 of Reguatons 109.
R GUL TIONS 109.
Pah. 3. The foowng s nserted mmedatey precedng secton
30.710-1:
Pubc Law 10, Seventy-seventh Congress, pproved March 7, 19 1.
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That ths ct may
be cted as the cess Profts Ta mendments of 19 1 .
Seo. 2. Unused cess Profts Credt. ( cess Profts Ta mend-
ments of 19 1.)
(a) Secton 710(b) (3) of the Interna Revenue Code s amended to
read as foows:
(3) Unused e cess profts credt. The amount of the e cess
profts credt carry-over for the ta abe year, computed n accord-
ance wth subsecton (c).
(b) Computaton of cess Profts Credt Cabry-oveb. Secton 710
of the Interna Revenue Code Is amended by addng at the end thereof
the foowng new subsecton:
(c) cess Profts Credt Cabby-oveb.
(1) Defnton of unused e cess profts credt. The term
unused e cess profts credt means the e cess, f any, of the e cess
profts credt for any ta abe year begnnng after December 31,
1939, over the e cess profts net Income for such ta abe year,
computed on the bass of the e cess profts credt appcabe to
such ta abe year.
(2) Computaton of e cess profts credt carry-over. The
e cess profLs credt carry-over for any ta abe year sha be the
sum of the foowng:
( ) The unused e cess profts credt for the frst preced-
ng ta abe year; and
( ) The unused e cess profts credt for the second pre-
cedng ta abe year reduced by the amount, f any, by whch
the e cess profts net ncome for the frst precedng ta abe
year e ceeds the sum of
(1) the e cess profts credt for such frst precedng
ta abe year, pus
() the unused e cess profts credt for the thrd pre-
cedng ta abe year.
Seo. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. . Secton 30.710-2 s amended as foows:
( ) That porton of the frst paragraph foowng tem ( ) s
amended to read:
(c) carry-over of the unused e cess profts credt (as defned n sec-
ton 710(c)(1)) for the two precedng e cess profts ta ta abe years,
computed as provded n secton 710(c)(2).
In the case of a ta payer whch s entted to use the e cess profts credt based
on ncome or the e cess profts credt based on Invested capta, whchever credt
resuts n the esser e cess profts ta , and whch has not dscamed the use of
ether credt, the term e cess profts credt appcabe to such ta abe year,
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71
wthn the meanng of secton 710(c) (1), means whchever credt resuts In the
arger unused e cess profts credt.
( ) There s nserted at the end of the secton the foowng:
The computaton of the e cess profts credt carry-over provded In secton
710(c) (2) may be ustrated by the foowng e ampe:
ampe. The Y Corporaton has for the years 19 0, 19 1, 19 2, and 19 3
e cess profts net Income and appcabe e cess profts credts as foows
19 0
19 1
19 2
19 3
50,000
80,000
100,000
150,000
200,000
160,000
210,000
160,000
The e cess profts credt carry-over for the year 19 3 s 0,000, computed as
foows:
The factors to be taken Into consderaton n computng such carry-over are:
(1) The unused e cess profts credt for the frst precedng ta abe
year (19 2) None
(2) The unused e cess profts credt for the second precedng
ta abe year (19 1) 50,0( 0
(3) The e cess profts net ncome for the frst precedng ta abe
year (19 2) 200,000
( ) The appcabe e cess profts credt for the frst precedng ta -
abe year (19 2) 160,000
(5) The unused e cess profts credt for the thrd precedng ta abe
year (19 0) 30,000
The carry-over s the amount of tem (1) and tem (2) reduced by the amount
by whch tem (3) e ceeds the sum of Items ( ) and (5). The amount by whch
tem (3) e ceeds the sum of Items ( ) and (5) s 10,000 ( 200,000 mnus ( 100,-
000 pus 30,000)). Item (2) reduced by such e cess s 0,000. Item (2) so
reduced pus tem (1) s 0,000 ( 0,000 pus 0).
Par. 5. The foowng s nserted mmedatey precedng secton
30.711 (a)-:
Sec. 12. dmssbe ssets or Deaers n Securtes. ( cess Profts
Ta mendments of 19 1.)

(b) Secton 711(a) (2) ( ) s amended by Insertng after companes
a perod and the foowng: Ths subparagraph sha not appy to dv-
dends on stock whch Is not a capta asset .
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 6. Secton 30.711(a)- s amended by strkng out the fourth
sentence and nsertng n eu thereof the foowng:
s to corporatons entted to use the e cess profts credt based on ncome or the
e cess profts credt based on Invested capta, whchever credt resuts n the
esser e cess profts ta , and corporatons requred to use the e cess profts credt
based on nvested capta, see sectons 712 and 7 1.
Par. 7. Secton 30.711 (a)-3 s amended as foows:
( ) That porton of the second sentence precedng the frst coon
s amended to read as foows:
Under secton 711(a) (2) no ad|ustment of norma-ta net ncome sha be made
for dvdends receved on stock whch s not a capta asset as defned In secton
117, such as stock hed prmary for sae to customers by a deaer n securtes.
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72
Otherwse the ad|ustments are the same as the ad|ustments provded In secton
711(a)(1) e cept that the foowng addtona ad|ustments are requred to be
made:
( ) Subdvson (6) of the frst paragraph s amended to read as
foows:
(6) There sha be subtracted from the norma-ta net ncome the amount of
dvdends receved from foregn corporatons on stock whch Is a capta asset,
e cept dvdends (actua or constructve) on stock of foregn persona-hodng
companes.
(C) Immedatey foowng subdvson (b) of the e ampe there
s added a new subdvson readng as foows:
(e) The corporaton hed as a capta asset the stock on whch the dvdends
were receved.
Par. 8. The foowng s nserted mmedatey precedng secton
30.711 (b)-:
Sec. 3. bnorma Deducton n ase Perod. ( cess Profts Ta
mendments of 19 1.)
Sectons 711(b) (1) (G), ( ), and (I), of the Interna Revenue Code
are amended to read as foows:
(G) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to dvdends on stock of domestc
corporatons;
( ) Payment of udgments, and So Forth. Deductons at-
trbutabe to any cam, award, udgment, or decree aganst the
ta payer, or nterest on any of the foregong, f abnorma for the
ta payer, sha not be aowed, and f norma for the ta payer, but
In e cess of 125 per centum of the average amount of such de-
ductons In the four prevous ta abe years, sha be dsaowed n
an amount equa to such e cess;
(I) Intangbe Drng and Deveopment Costs. Deductons
attrbutabe to ntangbe drng and deveopment costs pad or n-
curred n or for the drng of wes or the preparaton of wes
for the producton of o or gas, and for deveopment costs n the
case of mnes, f abnorma for the ta payer, sha not be aowed,
and f norma for the ta payer, but n e cess of 125 per centum of
the average amount of such deductons n the four prevous ta -
abe years, sha be dsaowed n an amount equa to such e cess;
and
( ) bnorma Deductons. Under reguatons prescrbed by the
Commssoner, wth the approva of the Secretary, for the deter-
mnaton, for the purposes of ths subparagraph, of the cassfca-
ton of deductons
() Deductons of any cass sha not be aowed f deduc-
tons of such cass were abnorma for the ta payer, and
() If the cass of deductons was norma for the ta -
payer, but the deductons of such cass were n e cess of 125
per centum of the average amount of deductons of such cass
for the four prevous ta abe years, they sha be dsaowed
In an amount equa to such e cess.
( ) Rues for ppcaton of Subparagraphs ( ), (I), and
( ). For the purposes of subparagraphs ( ), (I), and ( )
(I) If the ta payer was not n e stence for four prevous
ta abe years, then such average amount specfed n such sub-
paragraphs sha be determned for the prevous ta abe years
t was n e stence and the succeedng ta abe years whch
begn before the begnnng of the ta payer s second ta abe year
under ths subchapter. If the number of such succeedng years
Is greater than the number necessary to obtan an aggregate
of four ta abe years there sha he omtted so many of such
succeedng years, begnnng wth the ast, as are necessary to
reduce the aggregate to four.
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M( ) Deductons sha not be dsaowed under such sub-
paragraphs uness the ta payer estabshes that the abnor-
maty or e cess s not a consequence of an ncrease n the
gross Income of the ta payer n ts base perod or a decrease
n the amount of some other deducton n ts base perod, and
s not a consequence of a change at any tme n the type,
manner of operaton, sze, or condton of the busness engaged
n by the ta payer.
( ) The amount of deductons of any cass to be ds-
aowed under such subparagraphs wth respect to any ta abe
year sha not e ceed the amount by whch the deductons of
such cass for such ta abe year e ceed the deduct ons of such
cass for the ta abe year for whch the ta under ths sub-
chapter s beng computed.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 10 0.
Par. 9. Secton 30.711 (b)- s amended as foows:
( ) y strkng out the ast sentence n the frst paragraph.
( ) y strkng out the paragraph foowng the frst e ampe
and nsertng n eu thereof the foowng:
In computng the ta for the purpose of the ad|ustments requred by secton
711(b)(1)( ), the norma-ta net ncome or speca-cass net ncome for each
base perod yeur sha be that used In the determnaton of the avenge base
perod net ncome.
(C) y changng the ast paragraph to read as foows:
In connecton wth the ad|ustments requred to be made by secton 711(b) (1)
( ), (I), and ( ), see secton 30711(b)-2.
Par. 10. The foowng s nserted mmedatey after secton
30.711 (b)-:
Sec. 30.711 (b)-2. bnorma deductons n bate perod. d|ustments n the
e cess profts net Income for a ta abe year n the base perod are requred In
order to dsaow deductons of a cass whch Is abnorma for the ta payer, and
to dsaow the amount by whch deductons of a cass norma for the ta payer
e ceed 125 per cent of the average amount of deductons of such cass for the four
prevous ta abe years. If the ta payer was not In e stence for four prevous
ta abe years, then the average amount of deductons of any cass sha be deter-
mned for the prevous ta abe years durng whch It was n e stence and the
succeedng ta abe years whch begn before the begnnng of the ta payer s
second e cess profts ta ta abe year. If the number of such succeedng years
s greater than the number necessary to obtan an aggregate of four ta abe years
there sha be omtted so many of such succeedng years, begnnng wth the ast,
as are necessary to reduce the aggregate to four. For e ampe, u the case of a
corporaton comng nto e stence on anuary 1, 1938, and makng ts ncome ta
returns on the caendar year bass, the amount of deductons of any cass whch
may be dsaowed for the ta abe year 1939 may be determned from the average
of the deductons for the ta abe years 1938 and 19 0. The ta abe year 19 1
s the ta payer s second e cess profts ta ta abe year and therefore may not be
used.
cass of deductons s abnorma ony f the ta payer had no deductons of
that cass n the ta abe years prescrbed for determnng average deductons.
The ta payer must estabsh that the abnormaty or e cessveness of the
deducton s not a consequence of an ncrease n the gross ncome of the ta payer
n ts base perod or a decrease n the amount of some other deducton n Its base
perod, and s not a consequence of a change at any tme n the type, manner of
operaton, sze, or condton of the busness engaged n by the ta payer. For
e ampe, f n 1939 the deductons of an arpane manufacturer for wages were n
e cess of 125 per cent of the average of such deductons for the four prevous
ta abe years because of a tranng program for mechancs nsttuted by the
corporaton In 1939 to provde for an e panson n operatons, no part of the
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deductons w be dsaowed. If a corporaton dstrbutes ts product through
agents pad commssons on gross saes, and due to a rse n the prce of the
product, both the amount of gross ncome and the amount of deductons for
commssons ncreased, any resutng abnorma amount of deductons for comms-
sons w not be dsaowed. If the Gasone Corporaton n 1938 and a pror
years deducted gasone ta es pad by t as a busness e pense under secton 23(a),
but n 1939 ncuded such ta es for that year n ts deductons for ta es pad under
secton 23(c) so as to ncrease ts deductons for ta es pad for 1939 to an
amount n e cess of 125 per cent of ts average deductons of the same cass for
the four prevous ta abe years, the abnorma amount of such deducton for 1939
w not be dsaowed. s to advertsng e pendtures, the provsons of secton
733 appy before any determnatons are made under ths secton. See secton
30.733-3.
In order for the deducton of any cass to be dsaowed, the deductons of
such cass for the ta abe year n the base perod must e ceed the deductons of
the same cass for the ta abe year for whch the e cess profts ta s beng
computed, and any amount whch may e dsaowed sha be no greater than the
amount by whch the deductons of such cass for the base perod ta abe year
e ceed the deductons of the same cass for the ta abe year for whch the e cess
profts ta s beng computed. For e ampe, f a corporaton n the base perod
ta abe year 193S had a deducton of 200,000 and ts average of deductons of
the same cass for the four prevous ta abe vears was 100,000, the amount
of 75,000 (. 200,000 mnus 125 per cent of 100,000) may be dsaowed, but
ony f the deductons of ths cass n 1938 e ceed by ths or a greater amount
the deductons of the same cass n the ta abe year for whch the e cess
profts ta s beng computed. If the ta s computed for 19 0 and the deduc-
tons of ths cass for 19 0 are 100,000, the fu 75,000 s dsaowed for the
ta abe year 1938. If for 19 1 the deductons of ths cass are 125,000, the
fu 75,000 may agan be dsaowed for the ta abe year 1938 n computng
the e cess profts ta for 19 1. owever, f for 19 2 the deductons of rhs
cass are 150,000, ony 50,000 w be dsaowed for the ta abe year 1938
n determnng the e cess profts credt based on ncome for use aganst the
e cess profts net ncome for 19 2.
(a) Cassfcaton of deductons. Secton 711(b)(1) ( ) and (I) sets forth
specfc casses of deductons, the amount of whch n any base perod ta abe
year may be totay dsaowed f abnorma for the ta payer or dsaowed to
the e tent of the e cess over 125 per cent of the average of such cass If norma
for the ta payer. Secton 711(b)(1) ( ) permts the cassfcaton of other
deductons n accordance wth these reguatons. In any case, the amount of
deductons of any cass whch may be dsaowed sha be determned n the
manner prevousy set forth n ths secton.
Deductons attrbutabe to any cam, award, |udgment, or decree aganst the
ta payer, or nterest on any of the foregong are a of the same cass. There-
fore, In determnng n the case of a deducton for a udgment, for e ampe,
whether the cass of deductons s abnorma or whether the amount thereof
for any ta abe year Is n e cess of 125 per cent of average deductons of the
same cass, account must be taken not ony of the amount of deductons for
udgments, f any, aowed In precedng ta abe years, but aso of any deduc-
tons arsng out of cams, awards, and decrees, and Interest thereon.
Deductons for Intangbe drng and deveopment costs pad or ncurred n
or for the drng of wes or the preparaton of wes for the prcducton of
o or gas, and for deveopment costs n the case of mnes are a of the same
cass. Therefore, for the purpose of determnng whether the deductons for one
ta abe year are abnorma or n e cess of 125 per cent of average deductons of
ths cass, and for the purpose of determnng the amount to be dsaowed In
such event, reference must be made to the deductons of the entre cass, rather
than to any partcuar deductbe tems ncuded theren. Deductons attrbutabe
to the operaton of wes or mnes are not Incuded n ths cass.
Deductons whch do not fa wthn ether of the cnsses specfed n secton
711(b)(1) ( ) and (I) may be grouped by the ta payer, sub|ect to approva
by the Commssoner on the e amnaton of the ta payer s return, In such other
casses as are reasonabe In a busness of the type whch the ta payer conducts,
and are approprate n the ght of the ta payer s busness e perence and
accountng practce. Such a cassfcaton w be appcabe to a other ta abe
years consdered at any tme n ad|ustng deductons under ths secton, and
must be consstent wth any cassfcaton made by the ta payer under the
provsons of secton 721 and secton 722.
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(6) Statement requred. If n computng ts e cess profts net ncome for a
ta abe year n the base perod, the ta payer cams the dsaowance under
secton 711(b)(1) ( ), (I), or ( ) of any amount prevousy aowed as a
deducton, there sha be submtted a fu statement showng the computaton
of the amount to be dsaowed, the prces and gross saes of the ta payer s
product, and the condton of the ta payer s busness whch demonstrate that
the dsaowed amount s not a consequence of an ncrease n the gross Income
of the ta payer n Its base perod or a decrease In the amount of some other
deducton n ts base perod, and Is not a consequence of a change at any tme
n the type, manner of operaton, sze, or condton of the busness engaged n
by the ta payer. Ths statement sha be n dupcate and sha ncude the
foowng: (1) the computaton of the amount dsaowed, showng the amcunt
of the cass of deductons n the base perod ta ahe year for whch any part
of such amount s dsaowed, the average amount of such cass for the four
precedng ta abe years or for such ta abe years as the ta payer s requred
to use n determnng ths average amount, and the e cess amount of deductons
dsaowed; (2) a descrpton and the amount of each tem ncuded n such
cass of deductons for the ta abe year for whch such deductons are dsaowed
and for the ta abe years n the test perod, wth the amount of each and a
descrpton thereof; (3) the amount of such cass and the amount and descrp-
ton of each tem n that cass for the ta abe year for whch the e cess profts
ta s beng computed; and ( ) a other facts upon whch the ta payer rees.
Par. 11. The foowng s nserted mmedatey precedng secton
30.712-1:
Sec. 13. owance of cess Pro-ts ( ef.dt. ( cess Profts Ta
mendments of 19 1.)
Secton 712 of the Interna Revenue Code Is amended to read as
foows:
Sec. 712. cess Profts Credt owance.
(a) Domestc Corporatons. In the case of a domestc corpora-
ton whch was n e stence before anuary 1, 10 0, the e cess profts
Credt for any ta abe year sha be an amount computed under secton
713 or secton 71 , whchever amount resuts n the esser ta under
ths subchapter for the ta abe year for whch the ta under ths sub-
chapter s beng computed. In the case of a other domestc corporatons
the e cess profts credt for any ta abe year sha be an amount com-
puted under secton 71 . (For aowance of e cess profts credt In
case of certan reorganzatons of corporatons, see secton 7 1.)
(b) Fobkon Corporatons. In the case of a foregn corporaton
engaged n trade or busness wthn the Unted States or havng an
offce or pace of busness theren, the frst ta abe year of whch under
ths subchapter begns on any date In 19 0, whch was n e stence on
the day forty-eght months pror to such date and whch at any tme
durng each of the ta abe years n such forty-eght months was en-
gaged n trade or busness wthn the Unted States or had an offce or
pace of busness theren, the e cess profts credt for any ta abe year
sha be an amount computed under secton 713 or secton 71 , whch-
ever amount resuts n the esser ta under ths subchapter for the
ta abe year for whch the ta under ths subchapter s beng com-
puted. In the case of a other foregn corporatons the e cess profts
credt for any ta abe year sha be an amount computed under secton
71 .
(c) ffect of Dscamer, of Credt. If the ta payer states In
Its return for the ta abe year under ths subchapter that t dscams
the use of the credt computed under secton 713 or the use of the
credt computed under secton 71 , the credt so dscamed sha not,
for the purposes of the nterna revenue aws, be appcabe to the
computaton of the ta under ths subchapter for such ta abe year.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
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Par. 12. Secton 30.712-1 s amended to read as foows:
Sec. 30.712-1. cess profts credt; aowance. Two methods are provded for
computng the e cess profts credt: (1) The ncome method under whch the
credt s computed as provded n secton 713, and (2) the nvested capta method
under whch the credt s computed as provded n secton 71 .
In the case of the foowng corporatons, the e cess proms credt ror any ta -
abe year sha be the credt based upon ncome, computed as provded In secton
713, or the credt based on nvested capta, computed as provded n secton 71 ,
whchever credt resuts In the esser ta for the ta abe year for whch the ta
Is beng computed:
(a) domestc corporaton whch was actuay In e stence before anu-
ary 1, 19 0.
(8) domestc corporaton whch s an acqurng corporaton wthn
the meanng of secton 7 0 of Suppement and whch was constructvey n
e stence at the begnnng of ts base perod. (For computaton of e cess
profts credt based on ncome n such cases, see sectons 7 0 to 7 .)
(c) foregn corporaton (1) whch s engaged n trade or busness wthn
the Unted States, or has an offce or pace of busness theren, at any tme
durng the ta abe year; (2) the frst ta abe year of whch for the purposes
of the e cess profts ta begns on any day n 19 0; (3) whch was n e st-
ence on the date 8 months pror to such date; and ( ) whch, at any tme
durng each of the ta abe years In such 8 months, was engaged n trade or
busness wthn the Unted States, or had an offce or pace of busness there-
n. s to what consttutes beng engaged n trade or busness wthn the
Unted States, see secton 19.231-1 of Reguatons 103.
If a ta payer dscams n ts return for a partcuar ta abe year the use of
ether credt, the credt so dscamed sha not, for the purposes of the nterna
revenue aws, be appcabe to the computaton of the ta for the ta abe year
wth respect to whch the dscamer s made.
domestc corporaton whch was not actuay n e stence before anuary
1,19 0, and whch was not constructvey n e stence on the date of the begnnng
of ts base perod, and a foregn corporaton whch docs not meet the requre-
ments of (o) above, are requred to compute ther credt under the nv.ested
capta method provded n secton 71 .
Par. 13. The foowng s nserted mmedatey precedng secton
30.713-1:
Sec. . Computaton of verage ase Perod Net Income. ( cess
Pre fts Ta mendments of 19 1.)
(a) Secton 713(a)(1) of the Interna Revenue Code s amended by
strkng out subsecton (b) and nsertng In eu thereof subsec-
ton (d) , and by strkng out subsecton (c) wherever occurrng
theren and nsertng n eu thereof subsecton (g) .
(1 ) Secton 713(b) of the Interna Revenue Code s amended to read
as foows:
(b) Rase Perod.
(1) Defnton. s used n ths secton the term base perod
( ) If the corporaton was In e stence durng the whoe
of the forty-eght months precedng the begnnng of ts frst
ta abe year under ths subchapter, means the perod com-
mencng wth the begnnng of ts frst ta abe year begnnng
after December 31, 1935, and endng wth the cose of ts ast
ta abe year begnnng before anuary 1, 19 0; and
( ) In the case of a corporaton whch was In e stence
durng ony part of the forty-eght months precedng the be-
gnnng of ts frst ta abe year under ths subchapter, means
the forty-eght months precedng the begnnng of ts frst ta -
abe year under ths subchapter.
(2) Dvson nto haves. For the purposes of subsectons (d)
and (f) the base perod of the ta payer sha be dvded Into haves,
the frst haf to be composed of one-haf the entre number of
months n the base perod and to begn wth the begnnng of the
base perod.
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(c) Defct cess Profts Net Income. For the purposes of ths
eeton the term defct In e cess profts net Income wth respect to any
ta abe year means the amount by whch the deductons pus the credt
for dvdends receved e ceeded the gross Income. For the purposes of
ths subsecton n determnng whether there was such an e cess and In
determnng the amount thereof, the ad|ustments provded n secton
711(b)(1) sha be made.
(d) verage ase Perod Net Income Determnaton.
(1) Defnton. For the purposes of ths secton the average
base perod net ncome of the ta payer sha be the amount deter-
mned under subsecton (e), sub|ect to the e cepton that f the
aggregate e cess profts net ncome for the ast haf of ts base
perod, reduced by the aggregate of the defcts n e cess profts net
Income for such haf, s greater than such aggregate so reduced for
the frst haf, then the average base perod net ncome sha be the
amount determned under subsecton (f), f greater than the amount
determned under subsecton (e).
(2) For the purposes of subsectons (e) and (f), If the ta payer
was n e stence durng ony part of the 8 months precedng the
begnnng of ts frst ta abe year under ths subchapter, ts e cess
profts net ncome
( ) for each ta abe year of tweve months (begnnng wth
the begnnng of ts base perod) durng whch t was not n
e stence, sha be an amount equa to 8 per centum of the
e cess of
(I) the day Invested capta for the frst day of the
ta payer s frst ta abe year begnnng after December 31,
1939, over
() an amount equa to the same percentage of such
day nvested capta as s appcabe under secton 720 n
reducton of the average nvested capta of the precedng
ta nbe year;
( ) for the ta abe year of ess than tweve months consst-
ng of that part of the remander of ts base perod durng whch
It was not n e stence, sha be the amount ascertaned for a fu
year under subparagraph ( ), mutped by the number of days
n such ta abe year of ess than tweve months and dvded by
the number of days In the tweve months endng wth the cose
of such ta abe year.
(3) In no case sha the average base perod net Income be ess
than zero.
( ) For the computaton of average base perod net ncome n
the case of certan reorganzatons, see secton 7 2.
(e) verage ase Perod Net Income Genera verage. The aver-
age base perod net ncome determned under ths subsecton sha be
determned as foows:
(1) y computng the aggregate of the e cess profts net ncome
for each of the ta abe years of the ta payer n the base perod, re-
duced, f for more than one of such ta abe years there was a defct
In e cess profts net ncome, by the sum of such defcts, e cudng the
greatest:
(2) y dvdng the amount ascertaned under paragraph (1) by
the tota number of months n a such ta abe years; and
(3) y mutpyng the amount ascertaned under paragraph (2)
by tweve.
(f) verage ase Perod Net Income Increased arnngs n Last
at.f of ask Perod. The average base perod net ncome determned
under ths subsecton sha be determned as foows:
(1) y computng, for each of the ta abe years of the ta payer
In Its base perod, the e cess profts net Income for such year, or the
defct n e cess profts net ncome for such year;
(2) y computng for each haf of the base perod the aggregate
of the e cess profts net Income for each of the ta abe years n such
haf, reduced, If for one or more of such years there was a defct n
e cess profts net Income, by the sum of such defcts. For the pur-
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poses of such computaton, f any ta abe year s party wthn each
haf of the base perod there sha be aocated to the frst haf an
amount of the e cess profts net ncome or defct n e cess profts
net Income, as the case may be, for such ta abe year, whch bears the
same rato thereto as the number of months fang wthn such haf
bears to the entre number of months n such ta abe year; and
the remander sha be aocated to the second haf;
(3) If the amount ascertaned under paragraph (2) for the second
haf s greater than the amount ascertaned for the frst haf, by
dvdng the dfference by two;
( ) y addng the amount ascertaned under paragraph (3) to
the amount ascertaned under paragraph (2) for the second haf of
the base perod;
(5) y dvdng the amount found under paragraph ( ) by the
number of months n the second haf of the base perod and by mut-
pyng the resut by tweve;
(6) The amount ascertaned under paragraph (5) sha be the
average base perod net Income determned under ths subsecton,
e cept that the average base perod net ncome determned under
ths subsecton sha n no case be greater than the hghest e cess
profts net ncome for any ta abe year n the base perod. For the
purpose of such mtaton f any ta abe year s of ess than tweve
months, the e cess profts net ncome for such ta abe year sha be
paced on an annua bass by mutpyng by tweve and dvdng by
the number of months ncuded n such ta abe year.
(7) For the purposes of ths subsecton, the e cess profts net
ncome for any ta abe year endng after May 31, 19 0, sha not be
greater than an amount computed as foows:
( ) y reducng the e cess profts net ncome by an amount
whch bears the same rato thereto as the number of months after
May 31, 19 0, bears to the tota number of months n such ta -
abe year; and
( ) y addng to the amount ascertaned under subpara-
graph ( ) an amount whch bears the same rato to the e cess
profts net ncome for the ast precedng ta abe year as such
number of months after May 31, 19 0, bears to the number of
months n such precedng year. The amount added under ths
subparagraph sha not e ceed the amount of the e cess profts
net ncome for such ast precedng ta abe year.
(C) If the number of months n such precedng ta abe year
s ess than such number of months after May 31,19 0, by addng
to the amount ascertaned under subparagraph ( ) an amount
whch bears the same rato to the e cess profts net ncome for
the second precedng ta abe year as the e cess of such number
of months after May 31, 10 0, over the number of months n
such precedng ta abe year bears to the number of months In
such second precedng ta abe year.
(c) Secton 713(c) of the Interna Revenue Code s amended by strkng
out (c) and nsertng n eu thereof (g) .

Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 1 . Secton 30.713-1 s amended as foows:
( ) y nsertng mmedatey after the headng a new subsecton
(a) to read as foows:
(a) Introductory. In order for a corporaton to determne for any partcu-
ar ta abe year the amount of ts e cess profts credt based on ncome, t Is
necessary frst to compute the amount of the average base perod net ncome,
95 per cent of whch s the startng pont for computng the e cess profts credt
based on ncome. Two methods are provded for determnng the average base
perod net ncome: (1) The genera average method, set forth n secton 713(e)
and n subsecton (6) of ths secton, and (2) the method set forth In secton
713(f) and n subsecton (c) of ths secton, appcabe to cases In whch the
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earnngs for the ast haf of the base perod nre greater thnn those for the frst
haf. If such method resuts In a greater average base perod net Income than
that resutng from the use of the genera average meto.
( ) y strkng out the headng, the frst sentence, and the porton
of the second sentence precedng the coon, of od subsecton (a) and
nsertng n eu thereof the foowng:
(6) Computaton under the genera average method. The foowng steps
are requred for the computaton of the average base perod net ncome under
the genera average method (for computaton of e cess profts net Income for
portons of ts base perod durng whch the corporaton was not n e stence,
eee subsecton (d) of ths secton):
(C) y nsertng a new subsecton (c) mmedate after new sub-
(c) Computaton under secton 713(f); ncreased earnngs n ast haf of
base perod. The determnaton of the base perod net Income under the
method set forth n secton 713(f) s operatve ony If the aggregate e cess
profts net ncome for the ast haf of the base perod of the ta payer, reduced
by the aggregate of the defcts n e cess profts net ncome for such haf,
s greater than such aggregate so reduced for the frst haf and the average
base perod net ncome determned under secton 713(f) s greater than the
amount determned under secton 713(e). The foowng steps are requred
for the computaton of the average base perod net ncome under the method
set forth n secton 713(f) :
(1) The e cess profts net ncome or the defct In e cess profts net Income
for each of the ta abe years n the base perod (years begnnng after De-
cember 31, 1935, and before anuary , 19 0) Is to be determned as provded
In secton 711(b).
(2) The base perod s to be dvded Into haves, each of an equa number of
months. There Is to be computed for each haf of the base perod the aggre-
gate of the e cess profts net ncome for each of the tu nbe years n such haf,
reduced, f for one or mure of such years there was a defct n e cess profts
net ncome, by the sum of such defcts. In makng ths computaton, a defct
n e cess profts net ncome for any ta abe year (or n the case of more than
one defct, the greatest defct) s not counted as zero as n the case of the
computaton under the genera average method descrbed n subsecton (6) of
ths secton.
(3) The e cess of the amount ascertaned for the second haf over the amount
ascertaned for the frst haf s to be dvded by 2.
( ) The amount ascertaned under paragraph (3) s to be added to the amount
ascertaned under paragraph (2) for the second haf of the base perw.
(5) The amount found under pnragraph ( ) Is to be dvded by the number of
months n the second haf of the base perod and the resut mutped by 12.
(6) The amount ascertaned under paragraph (5) sha he the average base
perod net ncome determned under the method set forth In secton 713(f), e cept
that the average base perod net ncome so determned sha n no case be greater
than the hghest e cess profts net ncome for any ta abe year n the base perod.
For the purpose of ths mtaton f any ta abe year s ess than 12 months, the
e cess profts net Income for such ta abe year sha be paced on an annua bass
by mutpyng by 12 and dvdng by the number of months ncuded In such
ta abe year.
The computaton of the average base perod net ncome under the method set
forth n secton 713(f) may be ustrated by the foowng e umpe:
ampe. The Corporaton, whch makes ts ncome ta returns on the
caendar year bass, has the foowng amounts of e cess profts net ncome
for the ta abe years n ts base perod: 1930, 100,000; )37, 200,000; 1938,
300,000; and 1939, 00,000. Its average base perod net ncome under the
method set forth In secton 713(f) Is 00,000, computed as foows:
(1) ggregate of e cess profts net Income for ta abe years In sec-
ond haf of base perod ( 300,000 pus 00,000) 700,000
2) ggregate of e cess profts net ncome for ta abe years n
frst haf of base perod ( 100,000 pus 200,000) 300,000
(3) Item (1) ess tem (2) ( 700,000 mnus :S00,000)
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( ) Item (3) dvded bv 2 ( 00,000 dvded by 2) 200,000
(5) Sum of tem (1) pus tem ( ) ( 700,000 pus 200.000) MO, 000
(6) Item (5) paced on annua bass by dvdng t by number of
months n second haf of base perod and mutpyng by 12
(( 900,000 dvded by 2 ) mutped by 12) 50.00O
(7) ghest e cess profts net ncome for any ta abe year n base
perod (1930) 00,000
(8) verage base perod net ncome (Item (7) snce such Item s
ess than tem (0)) 00.000
The provson |ot secton 713(f)(2) reatve to the manner of computaton
of the aggregate e cess profts net ncome for each haf of the base perod
where the ta payer, because of changes n ts accountng perod or for other
reasons, has more or ess than four ta abe years n such perod, and where
part of one ta abe year Is In the frst haf and the other part Is In the second
haf of such perod, may be ustrated by the foowng e ampe:
ampe. corporaton has ta abe years n Its base perod and e cess
profts net ncomes for such years as foows:
Years n base perod.
Number of
months.
cess prof-
ts net n-
come.
egnnng
ndng
Sept 1,1936
ug. 31, 1937
12

30,000
20.000
90.000
Sept. 1, 1937
Dec. 31, 1937
an. 1,1938
Dec. 31, 1938
12
12
an. 1,1939
Dee. 31, 1939
100. 000
Tota
0
210,000
The aggregate e cess profts net ncome for the frst haf of the base perod
Ig 70,000, and for the second haf t s 1 0,000, computed as foows:
Number of
months.
cess
profts net
Income.
FIRST LT.
The ta abe year begnnng Sept. 1,1936, and endng ug. 31, 1937
12

30,000
20.000
20.000
The ta abe year begnnng Sept. 1. 1937, and endng Dec. 31, 1937
One-thrd of the ta abe year begnnng an. 1,1938, and endng Doc. 31, 1938
Tota . -
20
70.000
S CONT
LF.
Two-thrds of the ta abe year begnnng
The ta abe year begnnng an. 1, 1939,
an. 1, 1938. and endng Dec. 31, 1939..
and endng Dec. 31,1939
8
12
0.000
100. ooo
Tota
20
1 0.000
For the purpose of computng the average base perod net Income thereunder,
secton 713(f)(7) provdes certan mtatons on the amount of the e cess
profts net ncome for any ta abe year n the base perod endng after May
31, 19 0.
Secton 713(f) (7) ( ) and ( ) may be Iustrated by the foowng e ampe:
ampe. The Y Corporaton makes Its Income ta returns on the bass of
the fsca year endng September 30. It had an e cess profts net Income of
00,000 for the fsca year ended September 30, 1939. It had an e cess profts
net ncome of 000,000 for the fsca year ended September 30, 19 0, before
the appcaton of secton 713(f)(7) ( ) and ( ). oth of these ta abe
years are n Its base perod but four months of the fsca year ended September
30, 19 0, are after May 31, 19 0. Under secton 713(f)(7) ( ) and ( ) the
e cess profts net ncome of the corporaton for the fsca year begnnng
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October 1. 1939, and ended September 30, 19 0, Is 533,333.33, computed as
foows:
(1) cess profts net ncome before appcaton of secton
713(f)(7) ( ) and ( ) 600,000.00
(2) mount by whch tem (1) s to be reduced under secton
713(f)(7)( ) (four-twefths of 600,000) 200,000.00
(3) Item (1) ess tem (2) ( 600,000 mnus 200,000) 00,000.00
( ) mount to be added to tem (3) under secton 713(f)(7)( )
(four-twefths of 00,000) 133,333.33
(5) cess profts net ncome for fsca year ended September 30,
19 0, after appcaton of secton 713(f)(7) (Item (3) pus
tem ( ), or 00,000 pus 133,333.33) 533,333.33
Secton 713(f)(7)(C) may be Iustrated by the foowng e ampe:
ampe. The ast three ta abe years In the base perod of the Z Corporaton
and the number of months n, and the e cess profts net Income for, such
ta abe years are as foows:
Ta abe yean.
Number of
months.
cess
profts ne:
Income.
egnnng-
ndng-
uy 1. 193S -
une 30, 1839
12
3
12
00,000
uy 1. 1939
Sept. 30, 1939
75.000
600,000
Oct. 1,1839 -
Sept. 30, 19 0
Under secton 713(f)(7) the e cess profts net ncome of the corporaton for
the fsca year ended September 30, MO, s 508,333.33, computed as foows:
(1) cess profts net ncome before appcaton of secton 713(f) (7)
( ) and ( ) 600,000.00
(2) mount by whch tem (1) s to be reduced under secton
713(f)(7)( ) (four-twefths of 630,000) 200,000.00
(3) Item (1) ess tem (2) ( 000,000 mnus 200,000) 00,000.00
( ) mount to be added to tem (3) under secton 713(f)(7)( )
(four thrds of 75,000 but not n e cess of 75,000) 75,000. 00
(51 mount to be added to tem (3) under secton 713(f)(7)(C)
(one-twefth of 00,000) 33,333.33
(6) cess profts net ncome for fsca year ended September 30,
19 0, after appcaton of secton 713(f) (7) (sum of tems
(3), ( ), and (5), or 00,000 pus 75,000 pus 33,333.33) 508, 333. 33
(D) y changng od subsecton (b) as foows:
(a) y changng the desgnaton to (d).
b) y changng the headng to read as foows: Computaton of
e cess profts net ncome for portons of bane perod durng whch
corporaton was not n e stence; appcabe both under sectons 713(e)
and 713(f)
(c) y strkng out n the second sentence Secton 713 (b) (5) and
nsertng n eu thereof Secton 713(d) (2).
(d) y changng the e ampe to read as foows:
ampe. The Z Corporaton, a domestc corporaton whch makes ts ncome
ta returns on the caendar year bass, was organzed on uy 1, 1937. The day
nvested capta of the corporaton for anuary 1, 19 0, s 200,000. The per-
centage of such nvested capta whch woud be appcabe under secton 720 n
reducton of the average nvested capta of the corporaton on account of nad-
mssbe assets for the caendar year 1939 s 5.
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The e cess profts net ncome of e Z Corporaton for 1938 s 15,200, and for
the perod anuary 1, 1937, to une 30,1937, 7,537.53, computed as foows:
(1) Day nvested capta for anuary 1, 1910 200, 000. 00
(2) mount equa to the same percentage (5 per cent) of tem (1)
as s appcabe under secton 720 n reducton of the average
nvested capta for precedng ta abe year, 1939 ( 200,000
mutped by 0.05) 10,000. 00
(3) cess of tem (1) over tem (2) 190, 000. 00
( ) cess profts net ncome for 1930 ( 190,000 mutped by 0.08) _ 15, 200. 00
(5) cess profts net ncome for perod from anuary 1, 1937, to
/ 15,200 181
une 30, 1937( 7,537. 53
Par. 15. Secton 30.71 -1 s amended by strkng out the frst sentence
and nsertng n eu thereof the foowng:
Secton 71 appes ony to a corporaton whch under secton 712 s entted or
s requred to compute ts e cess profts credt under the nvested capta method.
Pah. 16. The foowng s nserted mmedatey precedng secton
30.720-1:
Skc.,12. dmssbe sskts of Deaers n Securtes. ( cess Profts
Ta mendments of 19 1.)
(a) Secton 720(a) (1)( ) of the Interna Revenue Code s amended
to read as foows:
( ) Stock n corporatons e cept stock n a foregn persona-
hodng company, and e cept stock whch s not a capta asset; and

Sue. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 17. Secton 30.720-1 s amended as foows:
( ) The second sentence of the frst paragraph s amended to read
as foows:
The term nadmssbe assets means (1) stock n a corporatons, domestc or
foregn, e cept stock n a foregn persona-hodng company, and e cept stock
whch s not a capta asset (such as stock hed prmary for sae to customers
by a deaer n securtes), and (2) a obgatons descrbed n secton 22(b)( ),
any part of the nterest from whch s e cudbe from gross ncome or aowabe
as a credt aganst net ncome.
( ) The frst sentence of the e ampe s amended to read as foows:
The average nvested capta of the Corporaton, not a deaer n securtes, for
Its ta abe year 19 0, determned under secton 716, s 1,000,000.
Pah. 18. Secton 30.721-1 s strcken out, and there s nserted n
eu thereof the foowng:
Sec. 5. bnormates n Income n Ta abe Perod. ( cess Profts
Ta mendments of 19 1.)
Secton 721 of the Interna Revenue Code Is amended to read as foows:
Sec. 721. bnormates n Income n Ta abe Perod.
(a) Defntons. For the purposes of ths secton
(1) bnorma ncome. The term abnorma ncome means
ncome of any cass ncudbe n the gross ncome of the ta payer
for any ta abe year under ths subchapter f It s abnorma for the
ta payer to derve ncome of such cass, or, f the ta payer normay
derves ncome of such cass but the amount of such ncome of such
cass ncudbe n the gross Income of the ta abe year s In e cess
of 125 per centum of the average amount of the gross Income of
the same cass for the four prevous ta abe years, or, f the ta -
payer was not n e stence for four prevous ta abe years, the
ta abe years durng whch the ta payer was In e stence.
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(2) Separate casses of ncome. ach of the foowng sub-
paragraphs sha be hed to descrbe a separate cass of ncome:
( ) Income arsng out of a cam, award. udgment, or
decree, or nterest on any of the foregong; or
( ) Income consttutng an amount payabe under a con-
tract the performance of whch requred more than 12 months;
or
(C) Income resutng from e poraton, dscovery, prospect-
ng, research, or deveopment of tangbe property, patents,
formuae, or processes, or any combnaton of the foregong,
e tendng over a perod of more than 12 months; or
(D) Income Incudbe n gross ncome for the ta abe year
rather than for a dfferent ta abe year by reason of a change
In the ta payer s accountng perod or method of accountng
or
( ) In the case of a essor of rea property, Income n-
cuded In gross ncome for the ta abe year by reason of the
termnaton of the ease; or
(F) Income consstng of dvdends on stock of foregn
corporatons, e cept foregn persona hodng companes.
the Income whch s cassfabe n more than one of such
subparagraphs sha be cassfed under the one whch the ta payer
Irrevocaby eects. The cassfcaton of ncome of any cass not
descrbed In subparagraphs ( ) to (F), ncusve, sha be sub|ect
to reguatons prescrbed by the Commssoner wth the approva
of the Secretary.
(3) Net abnorma ncome. The term net abnorma ncome
means the amount of the abnorma ncome ess, under regua-
tons prescrbed by the Commssoner wth the approva of the
Secretary, ( ) 125 per centum of the average amount of the gross
ncome of the same cass determned under paragraph (1), and
( ) an amount whch bears the same rato to the amount of any
drect costs or e penses, deductbe n determnng the norma-
ta net Income of the ta abe year, through the e pendture of
whch such abnorma ncome was n whoe or n part derved as
the e cess of the amount of such abnorma ncome over 125 per
centum of such average amount bears to the amount of such
abnorma ncome.
(b) mount ttrbutabe to Other Years. The amount of the
net abnorma ncome that s attrbutabe to any prevous or future
ta abe year or years sha be determned under reguatons prescrbed
by the Commssoner wth the approva of the Secretary. In the case
of amounts otherwse attrbutabe to future ta abe years, If the
ta payer ether transfers substantay a ts propertes or dstrbutes
any property In compete qudaton, then there sha be attrbutabe
to the frst ta abe year n whch such transfer or dstrbuton occurs
(or f such year s prevous to the ta abe year n whch the abnorma
Income s ncudbe In grass ncome, to such atter ta abe year) a
amounts so attrbutabe to future ta abe years not ncuded n the
gross ncome of a prevous ta abe year.
(c) Computaton or Ta for Current Ta abe Year. The ta
under ths subchapter for the ta abe year, In whch the whoe of such
abnorma Income woud wthout regard to ths secton be ncudbe,
sha not e ceed the sum of:
(1) The ta under ths subchapter for such ta abe year com-
puted wthout the ncuson n gross ncome of the porton of the
net abnorma ncome whch s attrbutabe to any other ta abe
year, and
(2) The aggregate of the ncrease n the ta under ths sub-
chapter whch woud have resuted for each prevous ta abe year
to whch any porton of such net abnorma ncome s attrbutabe,
computed as f an amount equa to such porton had been ncuded
In the gross Income for such prevous ta abe year.
(d) Computaton of Ta for Future Ta abe Year. The amount
of the net abnorma ncome attrbutabe to any future ta abe year
sha, for the purposes of ths subchapter, be Incuded n the gross
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Income for such ta abe year. The ta under t a subchapter for
such future ta abe year sha not e ceed the sum of
(1) the ta under ths subchapter for such future ta abe
year computed wthout the ncuson n e cess profts net ncome
of the porton of such net abnorma Income whch s attrbutabe to
such year, and
(2) the decrease n the ta under ths subchapter for the
prevous ta abe year n whch the whoe of such abnorma n-
come woud wthout regard to ths secton be ncudbe, whch
resuted by reason of the e cuson of the whoe or a part of the
abnorma ncome from the gross ncome for such prevous ta abe
year; but the amount of su h decrease sha be dmnshed by
the aggregate of the ncreases In the ta under ths subchapter
whch have resuted for the ta abe years Intervenng between
such prevous ta abe year and such future ta abe year because
of the ncuson n the gross ncome of the portons of such net
abnorma Income attrbutabe to such Intervenng years.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Sec. 30.721-1. bnormates n ncome n ta abe year. Secton 721 provdes
reef where abnorma ncome (as defned n secton 721(a)) for any e cess
profts ta ta abe year s attrbutabe to other ta abe years. The term abnor-
ma ncome means ncome of any cass ncudbe n the gross ncome of the
ta payer for any e cess profts ta ta abe year ( ) f t s abnorma for the
ta payer to derve gross ncome of such cass, or ( ) f the ta payer normay
derves gross Income of such cass but the amount of such ncome of such cass
Is n e cess of 125 per cent of the average amount of the gross ncome of the same
cass determned for the four prevous ta abe years or, f the ta payer was not
n e stence for four prevous ta abe years, the ta abe yenrs durng whch the
ta payer was In e stence. It s abnorma for a ta payer to derve ncome of
any cass ony f the ta payer had no gross Income of that cass for the four
prevous ta abe years. For the purpose of determnng abnorma ncome under
ths paragraph the gross ncome of the cass for the prevous ta abe years s
not to be ncreased or decreased by any aocaton under the provsons of secton
721. bnorma ncome s to b determned by consderng casses of ncome,
and not merey partcuar tems. s to the cassfcaton of ncome, see secton
30.721-2.
bnorma Income must be ad|usted, as provded n secton 721(a) (3), n order
to determne net abnorma ncome. Net abnorma ncome must then be aocated
to the varous tems ncuded n abnorma ncome. The tems of net abnorma
ncome so determned are the amounts whch mny be attrbuted to other ta abe
years under these reguatons. Net abnorma ncome and the aocated amounts
whch are tems of net abnorma Income are determned n the foowng manner:
(a) Net abnorma Income s determned as foows:
(1) The abnorma neome of each cass s computed;
(2) Such abnorma ncome s then reduced by 125 per cent of the average
amount of the gross Income of the same cass for the four prevous ta abe
years or, f the ta payer was not In e stence for four prevous ta abe years,
the prevous ta abe years durng whch t was n e stence;
(3) The abnorma ncome s further reduced by an amount whch bears
the same rato to the amount of any drect costs or e penses, deductbe n
determnng the norma-ta net Income for the ta abe year, through the
e pendture of whch such abnorma ncome was n whoe or n part derved,
as the abnorma ncome, reduced as provded n (a)(2), bears to the
abnorma ncome. The amount thus determned s the net abnorma ncome.
(6) The tems of net abnorma ncome are determned as foows:
(1) ach tem of abnorma ncome s reduced, but not beow zero, by an
amount equa to 125 per cent of the average ncome, f any, for the four
prevous ta abe years, arsng out of the same property as the ncome
represented by the tem;
(2) ach tem of abnorma ncome s further reduced, but not beow
zero, by an amount whch bears the same rato to the amount of any drect
costs or e penses, deductbe n determnng the norma-ta net ncome for
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the ta abe year, through the e pendture of whch such tem was n whoe
or n part derved, as the amount of the tem of abnorma ncome reduced
n (b)(1) bears to the amount of the tem of abnorma ncome;
(3) The aggregate ef the tems as reduced under (b) (1) and (2) s
determned;
( ) Net abnorma ncome s aocated to each tem n the proporton that
the tem, reduced as provded n (b) (1) and (2), bears to the aggregate
of the tems so reduced, determned n b) (3). The amount so aocated s
an tem of net abnorma ncome.
The foowng e ampes ustrate the computaton of tems of net abnorma
ncome:
ampe ( ). For the ta abe year 19 1, the Corporaton, whch makes Its
ncome ta returns on the caendar year bass, has gross ncome of 1.0 n,000
from udgments. Ths conssts of two tems, one of 800,000 for a |udgment
aganst and the other of 200,000 for a udgment aganst Y. Its average
ncome of ths cass for the four prevous ta abe years was 300,000. For 10 1,
t has drect deductbe e penses of 100,000 appcabe to the |udgment aynnst
. There were no drect deductbe e penses appcabe to the other udgment.
The 1,000,000 Is abnorma Income, snce t s n e cess of 12 ) per cent of the
average ncome of ths cass for the four prevous ta abe years. The tems of
net abnorma ncome represented by the |udgments are determned as foows:
(1) bnorma Income 1,000,000
(2) Less 125 per cent of average ncome ( 300,000) for the four
prevous ta abe years 375,000
(3) cess of (1) over (2) 625,000
1 ) Less an amount bearng same rato to 100,000 (deductons ap-
pcabe to tems In ths cass) as 625,000 bears to 1,000,000__ 100,000
(5) Net abnorma ncome 5 . 5. 000
(O Gross ncome on account of the |udgment aganst S00.000
(7) Less deductons appcabe to such Item 160,000
(8) mount of (6) reduced by (7) 0 0,000
(9) Gross Income on account of the |udgment aganst Y 200,000
(10) Less deductons appcabe to such Item None
(11) mount of (G) reduced by (10) 200,000
(12) ggregate of (8) and (11) 8 0,000
(13) Porton of net abnorma ncome aocated to the udgment
aganst (0 0,000/8 0,000 of 125,000) 00,000
(1 ) Porton of net abnorma ncome aocated to the udgment
aganst Y (200,000/8 0,000 of 525,000) 125,000
ampe (2). For the ta abe year 19 1, the Corporaton has 13 ,062.50
net abnorma Income from the two o eases whch It deveoped. One ease,
on the fed, produced an average of 60,000 a year durng the four prevous
ta abe years, and 85,000 n 19 1. There were 6,80f) drect e pense appcabe
to ths ease. The other ease, on the Y fed, produced no ncome In the four
prevous years. In 19 1, there were 3S,200 drect e penses appcabe to ths
ease. The ease produced 155,000 Income n 19 1. The Item of net abnor-
ma ncome represented by the ease Is 9,788.09, and the Item represented
by the Y ease s 12 ,273.81, computed as foows:
(1) Gross ncome on account of the ease 85,000.00
(2) Less 125 per cent of average ncome of ths ease for the four
prevous ta abe years (125 per cent of 60,000) 75,000.00
(3) Item (1) ess Item (2) 10,000.00
( ) Less amount bearng same rato to 6,800 (e penses appcabe
to ths ease) as 10,000 bears to 85,000 800.00
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(5) Income from ease reduced on account of average Income
and appcabe e penses 9,200.00
(6) Gross ncome on account of Y ease 155, 000.00
(7) Less 125 per cent of average ncome for the four
prevous ta abe years None
(8) Item (6) ess tem (7) 155,000.00
(9) Less amount bearng same rato to 38,200 (e -
penses appcabe to ths ease) as 155,000 bears
to 155,000 38, 200. 00
(10) Income from Y ease reduced on account of aver-
age ncome and appcabe e penses 116, 800. 00
(11) ggregate of tem (5) and tem (10) 126, 000.00
(12) Porton of net abnorma Income aocated to the ease
(9,200/126,000 of 13 ,062.50) 9,788.69
(13) Porton of net abnorma ncome aocated to the Y ease
(116,800/126,000 of 13 ,062.50) 12 ,273.81
Sec. 30.721-2. Cassfcaton of ncome. Secton 721(a)(2) ( ), ( ), (C), (D),
( ), and (F) sets forth s separate casses of Income. Income whch does not
fa wthn those provsons may be grouped by the ta payer, sub|ect to approva
by the Commssoner on the e amnaton of the ta payer s return, n such other
casses as are reasonabe n a busness of the type whch the ta payer conducts,
and as are approprate n the ght of the ta payer s busness e perence and
accountng practce.
the ncome whch reasonaby Is cassfabe In more than one cass sha be
cassfed under the one whch the ta payer rrevocaby eects. Such eecton sha
be made n the manner prescrbed In secton 30.721-3.
The cassfcaton of ncome n any year must be consstent wth the cassfcaton
made under secton 721 for prevous years. The cassfcaton must aso be
consstent wth any cassfcaton made In appyng to the ta payer secton 722 or
secton 711(b) (2) ( ), (I), or ( ).
Sec. 30.721-3. mount attrbutabe to other years. The mere fact that an tem
ncudbe n gross Income s of a cass abnorma ether n knd or n amount does
not resut n the e cuson of any part of such tem from e cess profts net ncome.
It s necessary that the tem be found attrbutabe under these reguatons n
whoe or n part to other ta abe years. Ony that porton of the Item whch s
found to be attrbutabe to other years may be e cuded from the gross ncome of
the ta payer for the year for whch the e cess profts ta Is beng computed.
Items of net abnorma Income are to be attrbuted to other years In the
ght of the events n whch such Items had ther orgn, and ony In such
amounts as are reasonabe n the ght of such events. To the e tent that
any tems of net abnorma ncome n the ta abe year are the resut of hgh
prces, ow operatng costs, or ncreased physca voume of saes due to n-
creased demand for or decreased competton n the type of product sod by
the ta payer, such tems sha not be attrbuted to other ta abe years. Thus,
no porton of an Item s to be attrbuted to other years If such tem Is of a
cass of ncome whch s n e cess of 125 per cent of the average ncome of the
same cass for the four prevous ta abe years soey because of an mprovement
n busness condtons. In attrbutng tems of net abnorma Income to other
years, partcuar attenton must be pad to changes In those years n the factors
whch determned the amount of such Income, such as changes n prces, amount
of producton, and demand for the product. No porton of an tem of net
abnorma ncome s to be attrbuted to any prevous year soey by reason of an
Investment by the ta payer n assets, tangbe or Intangbe, empoyed In or
contrbutng to the producton of such ncome.
Secton 721 has no effect upon the computaton of base perod net ncome or
of earnngs and profts and therefore does not affect the computaton of the
e cess profts credt Smary, t has no appcaton n the determnaton of
ta es other than the e cess profts ta mposed by Subchapter of Chapter 2.
mounts attrbuted to future years are to be ncuded n gross Income for such
years for e cess profts ta purposes ony. If the ta payer ether transfers
substantay a ts propertes or dstrbutes any property n compete qudaton
pror to the cose of the ast future year to whch any such amounts are attrb-
utabe, then a amounts of net abnorma Income attrbutabe to years subsequent
to both
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(a) the frst year n whch such transfer or dstrbuton n qudaton
occurs, and
(6) the ta abe year n the gross ncome of whch such abnorma ncome
woud have been ncuded e cept for secton 721
sha be Incuded n the gross ncome for the year referred to n (a) or the year
referred to In (6), whchever s the ater. For e ampe, f a ta payer reazes n
191 net abnorma Income attrbutabe to the years 19 2 to 19 6, ncusve, and
n 19 5 begns to dstrbute ts property In compete qudaton, the porton of the
net abnorma Income attrbutabe to the future year 19 6 s to be reaocated to
and Incuded n the gross ncome for 19 5 (the frst year of qudaton) n
addton to the amount aready attrbuted to that year. If the frst dstrbuton
n qudaton occurred before the year of reazaton, for e ampe, n 19 3, the
portons of the net abnorma Income attrbutabe to the future years 19 5 and
19 6 woud be Incuded n the gross ncome for 19 (the year of reazaton)
In addton to the amount aready attrbuted to that year. In nether event w
the aocatons orgnay made to 19 2,19 3, and 19 be dsturbed.
Specfc methods of treatng tems of net abnorma ncome of the s casses
specfed In secton 721(a) are set forth n sectons 30.721-6 to 30.721-11. These
methods are to be apped sub|ect to the provsons of ths secton.
ta payer camng the benefts of secton 721 sha fe wth ts e cess profts
ta return a detaed statement In dupcate contanng the foowng nformaton :
(1) the amount and a descrpton of each cass of ncome camed to be
abnorma, and the amount and a descrpton of each tem In each such
cass;
(2) for each cass of Income camed to be abnorma, the amount and a
descrpton of each tem of ncome of the same cass derved durng the four
ta abe years mmedatey precedng the ta abe year, and the aggregate
amount of such Items for each ta abe year;
(3) for each cass of Income camed to be abnorma, the amount of net
abnorma Income, the amount of each tem of net abnorma Income, and the
computatons by whch these amounts were determned ;
( ) the transactons n whch each such tem had ts orgn, the method
used In aocatng such Item, the amount aocated to each year, and the
reasons therefor; and
(5) a other facts upon whch the ta payer rees.
If any tem of Income Is reasonaby cassfabe n more than one cass, the ncu-
son of such tem n any one of such casses n the statement referred to above
ha consttute an Irrevocabe eecton by the ta payer for the purpose of secton
721(a) (2).
Seo. 30.721- . Computaton of ta for evn-ent ta abe year. The e cess profts
ta for the ta abe year sha be the smaer of the foowng amounts:
(a) The e cess profts ta computed wthout e cudng from gross Income
any amounts attrbutabe to other years under secton 721 ; or
(6) The sum of (1) the e cess profts ta for the ta abe year computed
wthout ncudng n gross ncome the amount of tems of net abnorma
ncome attrbutabe to other ta abe years, and (2) the aggregate of the
amounts of addtona e cess profts ta whch woud have resuted for
prevous e cess profts ta ta abe years f the gross ncome for each such
ta abe year had been Increased by the ncuson theren of the amount of
Items of net abnorma ncome attrbutabe thereto.
For an ustraton of the computatons requred by ths secton, see the e ampe
n secton 30.721-6.
Sec. 30.721-5. Computatons of ta for future ta abe years. mounts of tems
of net abnorma Income attrbutabe to a future ta abe year sha be ncuded In
the gross ncome of such ta abe year for the purposes of the e cess profts ta .
The e cess profts ta for a future ta abe year to whch any porton of the
net abnorma ncome for a prevous ta abe year s attrbuted Is the smaer
of the amounts determned under (a) and (6) beow:
(a) The e cess profts ta for such year computed wth the ncuson n
gross ncome of such porton of the net abnorma Income;
(6) The sum of
(1) the e cess profts ta for such year computed wthout the Incuson
n gross ncome of such porton of the net abnorma ncome, and
(2) the e cess of
() the decrease In e cess profts ta for the year of reazaton
whch resuted from the e cuson of the net abnorma Income from
the gross Income for such year, over
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() the aggregate of the Increases n e cess profts ta for
Intervenng years resutng from the ncuson n gross ncome of
other portons of such net abnorma ncome.
Ths secton may be ustrated by the foowng e ampe:
ampe. In the ta abe year 19 0, the Corporaton reazed 18,000 net
abnorma ncome, 2,000 of whch s attrbuted to the ta abe year 19 0 and
,000 to each of the ta abe years 19 1 through 19 . For the years 19 0
through 19 2, the ad|usted e cess profts net ncome, computed wth these
attrbuted amounts ncuded n gross Income, and the resutng e cess profts ta
are as foows:
d|usted
cess
profts ta
profts
ncome.
19 0
,000
5 .000
10 .000
1,000
15, 00
33,100
19 1
19 2
The ad|usted e cess profts net ncome for 19 3, after the Incuson n gross
Income of the amount attrbuted to such year, s 12 ,000. The e cess profts ta
for such year s 0,500, computed as foows:
(a) Ta on 12 ,000, computed wthout regard to the mtatons of sec-
ton 721(d) 1,100
(6) (1) Ta on 120,000 (ncome for 19 3 e cudng amount attrbuted
to such year) 39,500
(2) ( ) Ta for 19 0 f secton 721 were not apped to the
net abnorma ncome for such year (ta on
,000 pus the 1(5,000 attrbuted to other years,
or a tota of 20.000) 5,000
( ) Less ta for 19 0 after appcaton of secton 721_ 1,000
(C) Decrease n ta for 19 0 due to appcaton of sec-
ton 721 ,000
(3) ( ) Ta for 19 1 after appcaton of secton
721 15, 00
( ) Less ta for 19 1 f attrbuted ncome of
,000 were e cuded from gross ncome
(ta on 50,000) 1 ,000
(C) Increase n ta for 19 1 due to ncuson
of attrbuted ncome 1, 00
( ) ( ) Ta for 19 2 after appcaton of secton
721 33,100
( ) Less ta for 19 2 f attrbuted ncome of
,000 were e cuded from gross Income
(ta on 100,000) 31,500
(C) Increase n 19 2 ta due to ncuson of
attrbuted ncome 1,000
(5) ggregate of ncreases n ta for ntervenng years 19 1
and 19 2 (tem (3) (C) pus tem ( )(C) 3,000
(6) cess of decrease n ta for 19 0 over aggregate of ncreases
n ta for ntervenng years 19 1 and 19 2 (tem (2) (C)
mnus tem (5)) 1,000
(7) Sum of ta on Income for 19 3, e cudng amount attrbuted to
such year, pus e cess of decrease n ta for 19 0 over aggre-
gate of ncreases n ta for 19 1 and 19 2 (tem (1) pus
tem (6)) 0,500
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Snce the amount computed In ( )(7), 0,500, Is ess than the amount com-
puted In (a), 1,100, the e cess profts ta of the Corporaton for 19 3 s
0,500, the smaer amount.
In the above e ampe, the decrease n ta for 19 0 ( ,000) has heen equaed
by the aggregate of the ncreases n ta for the ntervenng years 19 1 through
1W3 ( , OO ,600 - ,000). Therefore, the ,000 attrbuted to 19 has no
effect on the ta for that year.
Pak. 19. Secton 30.721-2 s renumbered secton 30.721-6 and s
further amended as foows:
( ) The frst two sentences are amended to read as foows:
The frst cass of potentay abnorma Income specfcay sot forth In secton
721(a)(2) Is ncome arsng out of a cam, award, |udgment, or decree, or
nterest thereon. tems of such ncome are of the same cass.
( ) The frst paragraph of the e ampe s amended by changng
the headng of the ast coumn of the tabuaton from Gross ncome
to Income attrbuted, and by substtutng for the second sentence
thereof the foowng two sentences:
The Corporaton has not n any pror year derved ncome from any ke
source: nor are there any drect e penses nvoved n obtanng the |udgment
whch are deductbe for 19 1. Ths amount, therefore, represents the net ab-
norma ncome, and s the ony Item ncuded theren.
Par. 20. Secton 30.721-3 s renumbered secton 30.721-7, and s
further amended as foows:
( ) The frst sentence s amended to read as foows:
The second cass of potentay ahnorna ncome specfcay set forth In secton
721(a)(2) s ncome consttutng amounts payabe under contracts the per-
formance of whch requred more than 12 months.
( ) The e ampe n such secton s amended to read as foows:
ampe. In 19 1 the Corporaton whch makes ts ncome ta returns on
the caendar year bass competes two contracts for the constructon of budngs,
one of whch was begun In 1938 and the other n 1939. Its gross ncome for 19 1
from the two ong-term contracts amounts to 1,000,000. of whch 800,000 s
derved from the 1938 contract and 200,000 from the 1939 contract. It reports
ncome of ths cass upon the competed contract bass n accordance wth secton
19. 2- (b), Reguatons 103, and correspondng provsons of pror reguatons.
Its gross ncome from ong-term contracts for the years 193 , 1938, 1939, and 19 0
amounted to 250,000, 350,0 ), 200,000, and 00,000, respectvey. Therefore,
n 19 1 the gross ncome ( 1,000,000) arsng from ong-term contracts s n e cess
of 125 per cent ( 375,000) of the average gross ncome ( 300,000) of that cass
for the years 1937, 1938, 1939, and 19 0. Such gross ncome for 19 1 s therefore
sub|ect to the treatment provded n secton 721. If there were no drect e penses
other than those aready taken Into account n determnng gross ncome, the
net abnorma Income of ths cass s 1,000,000 mnus 375,000, or 625,000. The
tem of net abnorma ncome for the 1938 contract s 500,000 (800,000/1,000,000
of 625,000). See secton 30.721-3. Smary the tem of net abnorma ncome
tor the 1939 contract s 125,000 (200,000/1,000,000 of f525,000). ssumng that
the tota e pendtures propery appcabe to the 1938 contract amount to 5,000,000,
of whch the respectve sums of 500,000, 1,250,000, 1,500,000, and 1,750,000 are
Uocabe to the years 1938, 1939, 19 0, and 19 1, then the tem of 500,000 derved
from the 1938 contract s attrbutabe to those years In the respectve amounts of
50,000, 125,000, 150,000, and 175,000. In ke manner the amount of 125,000
representng the gross ncome derved from the 1939 contract sha be attrbuted
to the years 1939, 19 0, and 19 1 In proporton to the e pendtures appcabe to
that contract. For method of computaton of the e cess profts ta for the year
19 1, see secton 30.721- and the e ampe n secton 30.721-6.
Par. 21. Secton 30.721- s renumbered secton 30.721-8, and s
amended to read as foows:
Sec. 30.721-8. poraton, dscovery, prospectng, research, or deveopment.
The thrd cass of potentay abnorma Income specfcay set forth n secton
0 3 1 1
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721(a) (2) Is Income resutng from e poraton, dscovery, prospectng, research,
or deveopment of tangbe property (such as mnes, o producng property, and
tmber tracts), patents, formuae, or processes, or any combnaton thereof,
e tendng over a perod of more than 12 months. The e poraton, ds-
covery, prospectng, research, or deveopment must be that of the ta payer.
Income resutng from actvtes of such a character carred on by a predecessor
s not entted to the treatment provded In secton 721.
n tem of ncome resutng from e poraton, dscovery, prospectng, research,
or deveopment s a such ncome for the ta abe year arsng out of a unt of
property such as an o ease or other mnera property defned n secton
19.23 (m)-(t), a patent, or a formua. If the ta payer engages In manufac-
turng, marketng, mnng, o producton, or smar actvtes, ony such porton
of the resutng ncome as s attrbutabe to e poraton, dscovery, prospectng,
research, or deveopment Is wthn the cass of ncome descrbed n ths secton.
For e ampe, the Corporaton deveops a patented devce and Itsef manufac-
tures and ses such devce. It aso permts other corporatons to manufacture
such devce upon payment of a royaty of 10 for each devce produced. Income
resutng from the deveopment of the devce s the sum of the royates n-
cuded n ncome and so much of the Income arsng out of the sae of the unts
manufactured by the ta payer Itsef as does not e ceed 10 for each devce so
manufactured and sod.
In genera, an tem of net abnorma ncome of the cass descrbed n ths
secton s to be attrbuted to the ta abe years durng whch e pendtures were
made for the partcuar e poraton, dscovery, prospectng, research, or deveop-
ment whch resuted n such tem beng reazed and n the proporton whch the
amount of such e pendtures made durng each such year bears to the tota of
such e pendtures. ocaton of tems of net abnorma ncome of the cass
descrbed n ths secton must be made accordng to the prncpes set forth n
secton 30.721-3.
Ths secton may be further Iustrated by the foowng e ampes:
ampe (1). In anuary, 1938, the Corporaton began the deveopment of
a certan devce on whch t e pended consderabe sums. The corporaton secures
a patent on such devce n December, 19 0, and In the same month ses such
patent at a proft. It dd not n any of the four mmedatey precedng years
derve ncome of the cass specfed In secton 721(a) (2) (C). The net abnorma
ncome represented by ths tem s 250,000. In 1938, the corporaton e pended
50,000 on the deveopment of ths devce, 100,000 n 1939, and 150,000 n 19 0,
a tota of 300,000. For e cess profts ta purposes, one-s th (50,000/300,000)
of the tem of 250,000 s, therefore, attrbutabe to 1938; one-thrd (100,-
000/300,000) s attrbutabe to 1939; and one-haf (150,000/300,000) s attrbutabe
to 19 0. For method of computaton of the e cess profts ta for the year 19 0,
see secton 30.721 1 and the e ampe In secton 30.721-5.
ampe (2). In 1939, the Corporaton purchased from , an nventor, the
rghts to a devce he was deveopng, payng hm ,500 for such rghts. In per-
fectng the devce, the corporaton spent 3,000 n 1939 and 6,000 n 19 0, or a
tota of 9,000. patent was obtaned on the devce n 19 0, and It was censed
for use n the ndustry. The corporaton had a 15,000 tem of net abnorma
ncome n 19 0 as a resut of the royates receved for the use of ths devce.
Of ths tem, 5,000 (U of 15,000) s attrbutabe to 1939, and may be e -
cuded from gross ncome for the year 19 0 In the computaton of e cess profts
ta for that year. For method of computaton of the e cess profts ta for
the year 19 0, see secton 30.721- and the e ampe n secton 30.721-6.
Par. 22. Secton 30.721-5 s renumbered secton 30.721-9, and s
further amended as foows:
( ) The frst paragraph s amended to read as foows:
The fourth cass of potentay abnorma Income specfcay set forth In sec-
ton 721(a) (2) s ncome whch s Incudbe n gross ncome for the ta abe year
rather than for a dfferent ta abe year by reason of a change In the ta payer s
accountng perod or method of accountng. Ths cass may ncude such Items
of ncome as are ncudbe n gross ncome for the ta abe year by reason of a
change from the nstament method to the straght accrua method of accountng,
a change n nventory method, or a change from the reserve method to the specfc
charge-off method for the treatment of bad debts. Items of net abnorma ncome
ncudbe n gross ncome for the ta abe year rather than for a dfferent ta abe
year by reason of a change from the nstament method to the straght accrua
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method of accountng sha be attrbuted to the year or years such tems accrued.
The method of aocatng tems of net abnorma ncome ncudbe n gross ncome
for the ta abe year rather than for a dfferent year by reason of other changes
n accountng method or changes n accountng perod s to be determned n each
partcuar case upon consderaton of a the facts n the case. (See secton
30.721-3 as to the statement requred to be fed where the benefts of secton 721
are camed.)
( ) The ast paragraph s amended to read as foows:
Under the provsons of secton 30.721-3, the tems of net abnorma ncome
Incuded n the abnorma Income of 380,000 resutng from saes contracts
made pror to 19 0 are to be attrbuted to the years n whch such contracts
were made. For method of computaton of the e cess profts ta for the
year 19 0, see secton 30.721- and the e ampe n secton 30.721-6.
Par. 23. Secton 30.721-6 s renumbered secton 30.721-10, and s
amended to read as foows:
Sec. 30.721-10. Income derved by essor from termnaton of ease. The ffth
cass of potentay abnorma ncome specfcay set forth n secton 721(a) (2)
Is amounts ncuded n the gross ncome of a essor for the ta abe year by
reason of the termnaton of the ease. mounts may be requred to be so
Incuded by reason of the fact that mprovements made by the essee upon
the eased property come nto the possesson or contro of the essor upon
termnaton or forfeture of the ease. In such cases, f the ncome ncudbe
s abnorma ether n knd or n amount, the resutng tem of net abnorma
Income sha be aocated n accordance wth the foowng rues:
(a) If the ease has not been canceed or forfeted, but has merey
e pred, the amount of such tem sha be spread over the fe of the ease;
(6) If the ease has been canceed or forfeted, but the remanng usefu
fe of the mprovement s not n e cess of what woud have been the reman-
ng fe of the ease had the canceaton or forfeture not occurred, the amount
of such tem sha be spread over what woud have been the remanng fe
of the ease;
(c) If the ease has been canceed or forfeted and the remanng usefu
fe of the mprovement s n e cess of what woud have been the remanng
fe of the ease had the canceaton or forfeture not occurred, then
(1) n amount whch boars the same rato to the tem of net abnorma
ncome as the perod whch woud have consttuted the remanng fe
of the ease bears to the remanng usefu fe of the mprovement sha
be spread over what woud have been the remanng fe of the ease,
and
(2) The remanng porton of the tem sha be spread over the fe
of the ease, ncudng what woud have been ts remanng fe had the
canceaton or forfeture not occurred.
mounts attrbuted to each future ta abe year are to be Incuded In gross
ncome for such year for the purpose of computng the e cess profts ta .
See secton 30.721-5. Ths paragraph may be ustrated by the foowng
e ampe:
ampe. On anuary 1, 1929, the Corporaton, whch makes ts ncome ta
returns on the caendar year bass, eased to the Corporaton an unmproved
ste. The atter corporaton competed a budng on ths ste on une 30, 1931.
Such ease was for a perod of 20 years and by ts terms e pred on December 31,
19 8. On uy 1, 19 0, the ease s forfeted and the budng comes nto the
possesson and contro of the Corporaton. The vaue of the budng as of
such date s 100,000, and ts remanng usefu fe s 16 years. The Corporaton
dd not, pror to 19 0, derve gross ncome of ths nature, nor dd t report as
gross ncome any amount wth respect to the erecton of the budng. In 19 0
there were no drect costs or e penses attrbutabe to the reazaton of such
ncome. The net abnorma ncome for ths tem s, therefore, 100,000. Snce
the remanng usefu fe of the mprovement s 16 years, but what woud have
been the remanng fe of the ease s ony 8 , years, of 100,000, or 53,125,
s to be spread over what woud have been the remanng fe of the ease, . e.,
the ast haf of 19 0, and the caendar years 1 ) 1 to 19 8, both ncusve. Snce
there are 17 haf-years n such perod, - of 53,125, or 3,125, s to be aocated
to the ast haf of 19 0, and 7 of 53,125, or 6,250, to each of the caendar years
19 1 to 19 8, both ncusve. The remander of the 100,000 tem, or 6,875
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( 100,000 mnus 53,125), s to be spread over the years 1929 to 19 8, both Incu-
sve, . e., 20 of 6,875, or 2,3 3.75, s to be aocated to each such year. The
tota amount aocabe to each year s as foows:
Tears: mount per year.
1929-1939 2, 3 3. 75
19 0
Porton of 53,125 aocated to ast haf of year 3,125. 00
Pus: Porton of 6,825 aocated to such year 2,3 3. 75
Tota 5, 68. 75
19 1-19 8
Porton of 53,125 aocated to each year 6,250. 00
Pus: Porton of 6,825 aocated to each year 2,3 3. 75
Tota 8,593. 75
The amounts aocated to the years 1929 to 1939, both Incusve, w have no
effect upon the computaton of the e cess profts ta . The e cess profts ta for
the ta abe year 19 0 s to be determned by takng nto gross ncome for such year
ony 5, 68.75 of the 100,000 tem otherwse ncudbe. The amounts attrbuted
to future years must be ncuded n gross ncome for such years for the purpose of
computng the e cess profts ta , as provded n secton 30.721-5.
Other tems of net abnorma ncome resutng from the termnaton of the ease
are to be attrbuted to the ta abe year n whch such tems are reazed and
pror or subsequent ta abe years n the ght of the agreement underyng the
reazaton of such tems. If, for nstance, the essee pays the essor a ump sum
as consderaton for the canceaton of a ease, the resutng tem of net abnorma
ncome, f any, sha be attrbuted rataby to the ta abe years ncuded n what
woud have been the remanng fe of the ease had such ease not been canceed.
Par. 2 . Secton 30.721-7 s renumbered secton 30.721-11, and s
amended to read as foows:
Sec. 30.721-11. Dvdends on stock of foregn corporatons other then foregn
persona hodng companes. The s th cass of potentay abnorma ncome
specfcay set forth n secton 721(a)(2) s dvdends on stock of foregn cor-
poratons, e cept foregn persona hodng companes. Ths secton s appcabe
ony to the e tent that such dvdends are not e cuded from e cess profts net
ncome under secton 711(a)(2)( ), and therefore does not appy n the com-
putaton of the e cess profts ta when the e cess profts credt based on n-
vested capta s used uness the stock on whch the dvdends were receved s
not a capta asset. In determnng whether the cass of ncome descrbed n
ths secton s abnorma or n e cess of 125 per cent of the average ncome of
the same cass for the four precedng ta abe years, ony dvdends receved
from foregn corporatons are to be taken nto account. The e cepton reatve
to dvdends from foregn persona hodng companes appes both to dstrbu-
tons actuay receved from foregn persona hodng companes and to con-
structve dvdends deemed to have been receved pursuant to secton 337.
Items of net abnorma Income of the cass heren descrbed are to be attrb-
uted to the years n whch were accumuated the earnngs and profts out of
whch the dstrbutons were made, f accumuated after the acquston by the
dstrbutee of the stock of the dstrbutng corporaton. If the earnngs and
profts out of whch the dstrbuton s made were accumuated pror to such
acquston, the ncome arsng out of the dstrbuton s to be attrbuted to the
ta abe year n whch the stock was acqured. The earnngs and profts out of
whch any dstrbuton s made are, as provded n secton 116, the most recenty
accumuated earnngs and profts.
Ths secton may be Iustrated by the foowng e ampe:
ampe. The Corporaton, a domestc corporaton, computng ts e cess
profts credt on the ncome bass, acqured n 1938 a of the stock of the T Com-
pany, Ltd., a foregn corporaton, whch s not a foregn persona hodng company.
The Y Company, Ltd., pad n uy, 19 0, a dvdend to the Corporaton n the
amount of 100,000. The Corporaton dd not prevousy receve dvdends
from ths or any other foregn corporaton. In 19 0 there were no drect costs or
e penses attrbutabe to the recept of ths dvdend. The 100,000 s therefore a
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snge Item of net abnorma ncome. The Y Company, Ltd., had earnngs and
profts of 75,000 n 19 0 and 125,000 In 1939. Foowng prncpes of e stng
aw wth respect to the source from whch dvdends are deemed to have been pad,
the 100,000 tem of net abnorma ncome sha be aocated between the years 19 0
and 1939 n the respectve sums of 75,000 and 25,0(10. See secton 115(b) and
correspondng provsons of pror revenue aws. For method of computaton of
the e cess profts ta for the year 19 0, see secton 30.721- and the e ampe n
secton 30.721-6.
Par. 25. Secton 30.722-1 s strcken out and there s nserted n eu
thereof the foowng:
Sec. 6. bnorma ase Perod arnngs. ( cess Profts Ta mend-
ments of 19 1.)
Secton 722 of the Interna Revenue Code s amended to read as
foows:
Sec. 722. d|ustment of rnorma ase Perod Net Income.
(a) Genera Rue. In the case of a ta payer whose frst ta abe
year under ths subchapter begns n 19 0, f the ta payer estabshes
(1) that the character of the busness engaged n by the ta -
payer as of anuary 1. 19 0, s dfferent from the character of the
busness engaged n durng one or more of the ta abe years n
ts base perod (as defned n secton 713(b) (1)) ; or
(2) that n one or more of the ta abe years n such base perod
norma producton, output, or operaton was nterrupted or dmn-
shed because of the occurrence of events abnorma n the case of
such ta payer; and
(8) the amount that woud have been ts average base perod
net ncome
( ) f the character of the busness as of anuary 1, 19 0,
bad been the same durng each of the ta abe years of such base
perod; and
( ) f none of the abnorma events referred to n paragraph
(2) had occurred; and
(C) f n each of such ta abe years none of the tems of
gross ncome had been abnormay arge, and none of the tems
of deductons had been abnormay sma; and
( ) that the amount estabshed under paragraph (3) s greater
than the average base perod net ncome computed under secton
713(d) or secton 7 2, as the case may be,
then the amount estabshed under paragraph (3) sha be consdered
as the average base perod net ncome of the ta payer for the purposes
of ths subchapter.
(b Rues for ppcaton of Suhsecton (a). For the purposes
of subsecton (a)
(1) gh prces of materas, abor, capta, or any other agent
of producton, ow seng prce of the product of the ta payer,
or ow physca voume of saes owng to ow demand for such
product or for the output of the ta payer, sha not be consdered
as abnorma.
(2) The character of the busness engaged n by the ta payer
as of anuary 1, 19 0, sha be consdered dfferent from the
character of the busness engaged n durng one or more of the
ta abe years n ts base perod ony f
( ) there s a dfference n the products or servces
furnshed; or
( ) there s a dfference n the capacty for producton
or operaton; or
(C) there s a dfference n the rato of nonborrowed
capta to tota capta; or
(D) the ta payer was n e stence durng ony part of
ts base perod ; or
( ) the ta payer acqured, before anuary 1, 19 0, a
or part of the assets of a compettor, wth the resut that
the competton of such compettor was emnated or d-
mnshed.
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(3) The average base perod net ncome determned under
subsecton (a) (3) sha be computed n the same manner as pro-
Tded n secton 713(d), e cept paragraphs (2) and ( ), but for
such purposes computng e cess profts net ncome and defct n
e cess profts net ncome on the bass of the assumptons made
In subsecton (a) (3).
( ) If subsecton (a) (1), or both subsectons (a) (1) and
(a)(2) are appcabe to any ta payer, ts average base perod
net ncome under subsecton (a) (3) sha not e ceed the e cess
profts net Income (as computed for the purposes of subsecton
(a)(3)) for the ast ta abe year n such base perod. For the
purposes of ths paragraph, f such ast ta abe year s of ess
than tweve months, the e cess profts net ncome for such ta -
abe year sha be paced on an annua bass by mutpyng by
tweve and dvdng by the number of months ncuded n such
ta abe year.
(c) Lmtaton on ppcaton of Genera Rue. Ths secton
sha not be appcabe uness
(1) the ta under ths subchapter for the ta abe year com-
puted wthout reference to ths secton, e ceeds 6 per centum of
the ta payer s norma-ta net ncome for such year; and
(2) the appcaton of ths secton woud resut n a dmnuton
of the ta otherwse payabe under ths subchapter for the ta abe
year by more than 10 per centum thereof.
(d) tent of Reducton n Ta Undeb Ths Secton. The app-
caton of ths secton sha not reduce the ta payabe under ths sub-
chapter for the ta abe year beow 6 per centum of the ta payer s
norma-ta net ncome for such year. The ta under ths subchapter
computed wth the appcaton of subsecton (a) sha be ncreased
by an amount equa to 10 per centum of the ta computed wthout
reference to ths secton.
(e) ppcaton fob Reef Undeb Ths Secton. The ta payer
sha compute ts ta and fe ts return under ths subchapter wthout
the appcaton of ths secton. The benefts of ths secton sha not
be aowed uness the ta payer, wthn s months from the date pre-
scrbed by aw for the fng of Its return, makes appcaton therefor
n accordance wth reguatons to be prescrbed by the Commssoner
wth the approva of the Secretary, e cept that f the Commssoner
n the case of any ta payer wth respect to the ta abty of any
ta abe year
(1) ssues a premnary notce statng a defcency n the ta
Imposed by ths subchapter such ta payer may, wthn nnety days
after the date of such notce, make such appcaton, or
(2) mas a notce of defcency ( ) wthout havng prevousy
ssued a premnary notce thereof or ( ) wthn nnety days after
the date of such premnary notce, such ta payer may cam
the benefts of ths secton In Its petton to the oard or n an
amended petton n accordance wth the rues of the oard.
If the appcaton s not fed wthn s months after the date prescrbed
by aw for the fng of the return, the appcaton of ths secton sha
not reduce the ta otherwse determned under ths subchapter by an
amount n e cess of the amount of the defcency fnay determned
under ths subchapter wthout the appcaton of ths secton. If the
average base perod net ncome has been determned under subsecton
(a) for any ta abe year, the Commssoner may, by reguatons ap-
proved by the Secretary, prescrbe the e tent to whch the mtatons
prescrbed by ths subsecton may be waved for the purpose of deter-
mnng the ta under ths subchapter for a subsequent ta abe year.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
the enactment of the cess Profts Ta ct of 19 0.
Sec. 30.722-1. Genera rue for ad|ustment of abnorma base perod, net ncome.
In computng the e cess profts credt based on ncome, ta payers whose frst
e cess profts ta ta abe year begns n 19 0 may, under the condtons stated n
secton 722 and sub|ect to the mtatons thereof, obtan reef wth respect to
abnormates n ther base perod net ncome.
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Secton 722 sets forth the foowng specfc tests whch the ta payer must meet
to obtan the beneft thereof:
(0) The ta payer must frst estabsh
(1) that the character of ts busness engaged n as of anuary 1,19 0, was
dfferent from the character of ts busness engaged n durng one or more of
the ta abe years n ts base perod (as defned n secton 713(b) (1)), or
(2) that the norma producton, output, or operaton n one or more of the
ta abe years n the base perod was nterrupted or dmnshed because of
events abnorma n the case of the ta payer.
(6) The ta payer must ne t estabsh the amount that woud have been ts
average base perod net ncome
(1) f the character of Its busness as of anuary 1, 19 0, had been the
same durng each of the ta abe years of ts base perod, and
(2) f none of the abnorma events referred to n (a) (2) above had
occurred, and
(3) f n each of such ta abe years the gross ncome of any cass had not
been abnormay arge and the deductons of any cass had not been abnormay
sma.
(c) The ta payer must then show that the amount estabshed under (6) above
Is greater than the average base perod net ncome computed under secton 713(d)
or secton 7 2, as the case may be.
If the foregong tests are met, then the amount estabshed under (6) above
sha be consdered as the average base perod net ncome of the ta payer for the
purpose of computng the ta payer s e cess profts credt based on ncome. See,
however, sectons 30.722- and 30.722-5.
Sec. 30.722-2. Rues for estabshng a change n character of busness or nter-
rupton of producton. (a) Change n character of busness. The character of
the busness engaged n by the ta payer as of anuary 1, 19 0, s consdered df-
ferent from the character of the busness engaged n durng one or more of the
ta abe years n ts base perod ony f:
(1) There s a dfference n the products or servces furnshed. product or
servce s dfferent from another product or servce f the trade custom or practce
treats t as a product or servce of a dfferent cass. mere mprovement n a
product or servce does not consttute a dfference n the product or servce. For
e ampe, a corporaton In one year of ts base perod was engaged n both the
rado broadcastng busness and the department store busness and on anuary 1,
19 0, was engaged ony n the rado broadcastng busness, the department store
busness havng been dscontnued. The corporaton s deemed to have changed
the character of ts busness. The same s true whore a corporaton was engaged
n one of the base perod years n both the whoesae and reta dry goods busness
and on anuary 1, 19 0, was engaged ony n the reta dry goods busness.
(2) There s a dfference n the capacty for producton or operaton. Thus,
for e ampe, a corporaton may have enarged the sze or capacty of ts pant
substantay as compared wth the prevous sze or capacty of ts pant or may
have ncreased ts capta substantay as compared wth ts prevous capta.
(3) There Is a dfference n the rato of nonborrowed capta to tota capta.
corporaton whch durng the base perod was operatng argey on borrowed
capta but as of anuary 1,19 0, was operatng argey on equty capta s deemed
to have such dfference.
( ) The ta payer was n e stence durng ony part of ts base perod. n
e ampe s where a corporaton n 1938 organzed nto two or more new corpora-
tons. The new corporatons were n e stence for ony a part of the base perod.
Smary, any other corporaton organzed ess than 8 months pror to ts frst
e cess profts ta ta abe year was n e stence for ony a part of ts base
perod.
(5) The ta payer acqured before anuary 1, 19 0, a or part of the assets of
a compettor wth the resut that the competton of such compettor was em-
nated or dmnshed. For e ampe, two competng newspapers were operatng at
a oss durng a or part of the base perod. Pror to anuary 1, 19 0, the frst
newspaper purchased the franchses and other assets of the second newspaper
and as a resut of ths transacton the condton of the survvng paper was
much more promsng. dfference n the character of the busness of the ta -
payer has occurred.
(6) Interrupton or dmnuton of norma producton, output, or operaton n
the base perod. ta payer may secure reef under secton 722 If It estabshes
that ts norma producton, output, or operaton n one or more ta abe years n
ts base perod was nterrupted or dmnshed because of events abnorma In the
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case of the ta payer. Not every nterrupton or dmnuton of norma producton,
output, or operaton s a reason for estabshng a dfferent average base perod
net ncome. The nterrupton or dmnuton must be the drect resut of an event
abnorma for the ta payer. In genera, an event s abnorma for the ta payer
f n the ght of the ta payer s busness e perence t s not a usua event. gh
prces of materas, abor, capta, or any other agent of producton, ow seng
prce of the product of the ta payer, or ow physca voume of saes owng to
ow demand for such product or for the output of the ta payer, are not abnorma.
bnorma events mght ncude a food, a fre, a strke, or any other unusua
event hnderng producton, output, or operaton. s to what consttutes norma
producton, output, or operaton, see secton 30.722-3(c).
Skc. 30.722-3. Determnaton of substtute average base perod net ncome.
(a) verage bane perod net ncome under norma condtons: n genera. avng
estabshed a change n the character of ts busness or an nterrupton or dmnu-
ton of norma producton, output, or operaton n accordance wth secton 30.722-2,
the ta payer must estabsh the amount that woud have been ts average base
perod net Income from the begnnng of ts base perod (1) f t had been engaged
durng ts entre base perod n a busness of the same character as that engaged
n as of anuary 1, 19 0, and (2) f ts norma producton, output, or operaton
had not been nterrupted or dmnshed at any tme durng the base perod by
events abnorma for the ta payer, and (3) If, n each of such ta abe years, ts
gross ncome of any cass had not been abnormay arge and ts deductons of
any cass had not been abnormay sma. What woud have been the average
base perod net Income of the corporaton under such crcumstances s a queston
to be determned upon consderaton of a the facts n the partcuar case. No
defnte and concusve tests can be prescrbed by whch t can be determned
fnay n advance of an e amnaton of the facts of each case what substtute
average base perod net ncome may be estabshed.
mong the factors n the base perod whch may be matera n determnng a
substtute average base perod net ncome are genera busness condtons, com-
petton, and demand for the products or servces of the cass produced or ren-
dered by the ta payer. gh prces of materas, abor, capta or any other
agent of producton, ow seng prce of the product, and ow physca voume
of saes owng to ow demand for such products or output durng the base
perod are a factors to be taken nto consderaton and are not to be treated
as abnorma. Thus, for e ampe, n the case of a corporaton whch n 19. 9
changed the character of ts busness from the manufacture of typewrter parts
to the manufacture of rfes, a reconstructon of the e cess profts net ncome
of such a corporaton for the ta abe years n ts base perod as a manufacturer
of res woud have to take nto consderaton, among other factors, the actua
demand for such rfes n 1936, 1937, and 1938.
For ta abe years n whch the e cess profts net Income of the ta payer s
to be reconstructed, the ta payer must estabsh what ts e cess profts net
ncome woud have been under the condtons set forth n secton 722(a)(3)
for each of such years computed wth the ad|ustments provded n secton
711(b). The ta payer s substtute average base perod net ncome s then to be
computed n accordance wth secton 713(d) (1) and (3), that s, wthout
regard to any hypothetca e cess profts net ncome computed under secton
713(d)(2) and wthout regard to the provsons of secton 7 2.
(b) Where there was a change n the character of the busness. In deter-
mnng the substtute average base perod net ncome of a ta payer whch as
of anuary 1, 19 0, was engaged In a busness of a dfferent character from
that engaged n durng one or more of the ta abe years In the base perod,
one of the factors to be consdered s the prevous busness e perence of the
same corporaton or pree stng busness enterprse durng the base perod.
Thus, f a corporaton s reorganzed n the base perod nto two new corpora-
tons, the e cess profts net ncome of each of the new corporatons for the
ta abe years n the base perod n whch each was not n e stence may be
determned from that part of the busness of the orgna corporaton operated
by each of the new corporatons and that part of the e cess profts net ncome of
the orgna corporaton attrbutabe to such part of the busness.
In no case may the amount of the average base perod net ncome estabshed
by reason of a change n the character of the ta payer s busness e ceed the e cess
profts net ncome as estabshed for the ast ta abe year n the base perod.
If such ta abe year conssts of ess than 12 months the e cess profts net Income
for such ta abe year sha be paced on an annua bass by mutpyng by 12
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and dvdng by the number of months Incuded In such ta abe year. The
method of determnng the average base perod net ncome may be ustrated
by the foowng e ampe:
ampe. The Newspaper Corporaton, whose fsca year ended March 31,
19 , acqured the franchses and other assets of a rva newspaper n December,
1939. Pror to that date, both newspapers had operated at a oss. fter such
acquston, the Newspaper Corporaton showed a arge proft. The corpora-
ton estabshes that f t had possessed the assets of the rva newspaper durng
ts entre base perod ts e cess profts net Income for ts ta abe years n the base
perod woud have been as foows:
rects profts
Fsca vear endng net ncome.
Ma rch 31, 1937 310,000
March 31, 1938 320, 000
Murch 31, 1939 290,000
March 31, 19 0 300,000
The nverage base perod net ncome of the Newspaper Corporaton com-
puted under secton 713(e) s 305,000. Snce, however, under secton
722(b)( ) the hghest amount whch may be substtuted f r the average base
perod net ncome s the amount of e cess profts net ncome estabshed for
the ast ta abe year of the base perod, the substtute average base perod
net ncome s 300,000.
If the dfference the character of the busness engaged n by a corpora-
ton as of anuary 1, 19 0, s that t was n e stence durng ony part of ts
base perod, the e cess profts net ncome for a of ts ta abe years n the
base perod may have to be estabshed. The ta abe years n the base perod
durng whch such a corporaton was not n e stence are successve perods
of 12 months each, begnnng wth the forty-eghth month precedng the be-
gnnng of ts frst ta abe year under the e cess profts ta . ny remanng
perod of ess than 12 months durng whch, t was not n e stence s con-
sdered a ta abe year. The determnaton of such a corporaton s average
base perod net ncome may be ustrated by the foowng e ampe:
ampe. The Y Corporaton, whch makes Its ncome ta returns on the
caendar year bass, was organzed on uy 1, 1937, as a resut of the reorgan-
zaton of the Corporaton nto two new corporatons. The e cess profts net
ncome of the Y Corporaton computed wth the ad|ustments provded n secton
711(b) for the years 1938, 1939, and that porton of the year 1937 durng whch
t was n e stence s as foows:
cess proft
Year net ncome.
1937 0, ooo
1938 20,000
1939 150,000
ased on ths e perence and n accordance wth the prncpes set forth In
(a) of ths secton, the Y Corporaton estabshes that ts e cess profts net
Income for 1936, 1937, 1938, and 1939 woud have been as foows:
cess profts
Year net ncome.
1936 62, 000
1937 70, 000
1938 300,000
1939 200,000
The average base perod net ncome of the Y Corporaton, whether computed
under secton 713(e) or secton 713(f), can not under secton 722(b) ( ) e ceed
200,000.
(c) Where there wag an nterrupton or dmnuton of norma producton,
output, or operaton. If the ta payer estabshes that ts norma producton,
output, or operaton n one or more years n the base perod was nterrupted
or dmnshed because of events abnorma n the case of the ta payer, t must
then estabsh what ts average base perod net ncome woud have been f ts
base perod norma producton, output, or operaton had not boon so nterrupted
or dmnshed. The ta payer s norma producton, output, or o raton may be
determned from ts average producton, output, or operaton wth respect to
products or servces of the same cass. Such average producton, output, or
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98
operaton may be estabshed by the arerage amount of producton, output, or
operaton n the four prevous ta abe years, or, f the ta payer was not n
e stence for four prevous ta abe years, then for the prevous ta abe years
durng whch t was n e stence and so many of the succeedng ta abe years
endng before une 1, 19 0, as do not make the tota ta abe years n the test
perod more than four. The average producton, output, or operaton determned
shoud, however, be ad|usted n accordance wth the prncpes set forth n
(a) of ths secton for changes n prces, demand, the condton of the busness
engaged n by the ta payer, and other reevant busness factors occurrng n
the perod n whch the abnorma event affected the producton, output, or
operaton of the ta payer and not occurrng n the test perod. The average
producton, output, or operaton, as ad|usted. Is the ta payer s norma produc-
ton, output, or operaton. For the ta abe years n the base perod n whch,
as a drect resut of an abnorma event estabshed n accordance wth secton
30.722-2(6), such norma producton, output, or operaton was not attaned
the ta payer s e cess profts net ncome shoud be reconstructed as f for such
perod the ta payer had attaned such norma producton, output, or operaton.
In estabshng what woud have been Its average base perod net ncome under
secton 722(a)(3)( ), the ta payer s mted, n the ad|ustments whch t
may make, to ad|ustments for such nterruptons and dmnutons of norma
producton, output, or operaton as t estabshes under secton 30.722-2(6). The
abnorma event, however, need not have occurred In the base perod as ong
as ts consequences are drecty refected n producton, output, or operaton n
the base perod. For e ampe, f a fre n 1935 had destroyed a ta payer s
pant so that the ta payer s norma producton n 1936 was dmnshed, the
ta payer woud be permtted to estabsh what ts e cess profts net ncome
woud have been f ts norma producton had e sted n 1936.
(d) Where there are both a change of busness and an nterrupton of norma
producton. If a ta payer estabshes both a change h the character of ts bus-
ness and the occurrence of an abnorma event nterruptng or dmnshng ts nor-
ma producton, output, or operaton n the base perod, the ta payer must then
estabsh what ts average base perod net ncome woud have been as set forth n
(6) and (c) of ths secton. owever, such a ta payer s sub|ect to the mtaton
that ts average base perod net ncome thus determned can not e ceed the
amount estabshed under ths secton as the amount that woud have been the
e cess profts net ncome for the ast ta abe year In the base perod. If such
ta abe year conssts of ess than 12 months the e cess profts net ncome for
such ta abe year sha be paced on an annua bass by mutpyng by 12 and
dvdng by the number of months ncuded n such year.
(e) bnormates n gross ncome and deductons. In estabshng the subst-
tute average base perod net ncome, the ta payer must estabsh what ts average
base perod net ncome woud have been f n each of the ta abe years n ts base
perod no cass of gross ncome had been abnormay arge n amount and no cass
of deductons had been abnormay sma n amount. The ad|ustments to be made
under secton 722(a) (3) (C) are to be made ony n casses of gross ncome and
casses of deductons whch are abnorma n amount but not as the resut of a
dfference n the character of the busness or an nterrupton or dmnuton In the
norma producton, output, or operaton caused by an abnorma event, estabshed
under secton 30.722-2.
In genera, a cass of gross Income s abnormay arge to the e tent such
cass of gross ncome s arger n amount than 125 per cent of the average
amount (determned as provded beow) of the ta payer s gross Income of the
same cass, and a cass of deductons s abnormay sma to the e tent the
amount of deductons of such cass s smaer than 75 per cent of the average
amount (determned as provded beow) of the ta payer s deductons of the
same cass. In such a case, the average amount of gross ncome of the same
cass or of deductons of the same cass sha be determned by averagng the
amounts of such cass n the four prevous ta abe years, or, f the ta payer
was not n e stence for four prevous ta abe years, then for the prevous ta abe
years durng whch t was n e stence and so many of the succeedng ta abe
years endng before une 1, 19 0, as do not make the tota ta abe years In the
test perod more than four. In determnng the average amount of any cass
of gross ncome or deductons by whch an abnormaty s to be measured for
any year, the amount of gross ncome or of deductons for a year n the base
perod for whch there was a dfference n the character of the busness or an
nterrupton or dmnuton of norma producton, output, or operaton caused
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99
by an abnorma event s the amount of gross ncome or deductons estabshed
for sucb year; the amount of gross ncome or deductons of any cass ad|usted
as provded heren sha be used n computng the average amount of gross
Income or deductons of such cass for the appcaton of secton 722(a)(3)(C)
to a subsequent ta abe year. owever, f the ta payer estabshes that the
dsproporton n the amount of gross ncome or deductons of any cass for any
year s a consequence of hg prces of materas, abor, capta, or any other
agent of producton, ow seng prce of the product of the ta payer, or ow
physca voume of saes owng to ow demand for such product or for the output
of the ta payer, or of a change at any tme n the type, manner of operaton,
sze, or the condton of the busness engaged n by the ta payer, the gross
Income or deductons of such cass are not requred to be ad|usted under secton
722(a)(3)(C). That part of any cass of gross Income whch s determned to
be abnormay arge, as heren provded, sha be emnated from gross ncome.
That part of any cass of deductons determned to be abnormay sma, as
heren provded, sha be ncreased to the e tent t s abnormay sma. The
roes for determnng casses of deductons are set forth n secton 711(b)(1)
( ), (I), and ( ), and the reguatons prescrbed thereunder. The rues for
determnng casses of gross ncome are set forth n secton 721 and the regua-
tons prescrbed thereunder. The rue stated n the frst sentence of ths para-
graph may be ustrated by the foowng e ampes:
ampe ( ). The Corporaton, whch came nto e stence on anuary 1,
1936, and whch makes ts ncome ta returns on the caendar year bass, estab-
shes that t s entted to the benefts of secton 722 because of an abnorma
event nterruptng norma producton n 1937. For 1938, the corporaton s deduc-
ton for nterest on oans was 5,000. The average amount of the ta payer s
nterest deducton s to be determned for 1936, 1937, and 1939. The ta payer s
deductons of the same cass for those years were 1 ,000 for 1936, 0,000 for
1937, and 10,000 for 1S39. The average nterest deducton s therefore 11,000,
and the nterest deducton for 193S for purposes of the substtute e cess profts
net ncome for 1938 shoud be 8.2T)0 (75 er cent of 11,000).
ampe (2). The gross ncome of the Y ote Corporaton n 1939 from room
rent was 1,000,000 because of a Word s Far. The gross ncome from room
rent n 1938 was 700,000. The corporaton estabshes that the hote s gross
Income from room rent In 1937 woud have been 600,000 f a strke, by reason
of whch the corporaton was entted to the benefts of secton 722, had not
occurred. The gross ncome of the same cass n 1936 was 600,000, and n 1935
was 500,000. The average of the gross ncome of ths cass therefore was 600,000.
The gross ncome from room rent n 1938 therefore shoud be reduced to 750,000
(125 per cent of 600,000).
In estabshng the average base perod net ncome as f none of the casses
of gross ncome had been abnormay arge n amount and none of the casses of
deductons had been abnormay sma n amount, the ta payer s gross ncome
and deductons shoud be ad|usted to remove competey the effect of the abnor-
maty. Compementary ad|ustments must be made n other casses of deductons
and of gross ncome for any amount of gross ncome emnated or of deductons
ncreased. Thus, n e ampe (2) above n connecton wth the emnaton of
250,000 from gross ncome from room rent n 1039 there shoud be a correspond-
ng decrease n the deductons for e penses drecty ncurred n obtanng that
part of the gross ncome whch was emnated, such as the deducton for wages
of any addtona empoyees needed to earn the abnormay arge gross ncome.
S c. 30.722- . Lmtaton on appcaton of genera rue. The ad|ustments
provded n secton 722 sha not be operatve n the case of any ta payer uness
such ta payer estabshes that ts e cess profts ta
(a) when computed wthout reference to secton 722, e ceeds 6 per cent
of ts norma-ta net ncome for the ta abe year, and
(6) when computed wth the appcaton of secton 722(a), s an amount
whch s ess than 90 per cent of the e cess profts ta computed wthout
reference to secton 722.
s a necessary compement to these mtatons, further provsons are made
as to the amount of the e cess profts ta n the case of a ta payer entted
to the beneft of the ad|ustments provded n secton 722(a). If the ta payer
meets the tests set forth n (a) and (6) above, then there sha be added to the
ta computed after the appcaton of secton 722(a) an amount equa to 10
per cent of the amount of e cess profts ta computed wthout reference to
secton 722. The resutng ta s the ta payer s e cess profts ta f t s not
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100
ess than 6 per cent of the ta payer s norma-ta net Income for the ta abe
year; f t s ess than 6 per cent of the ta payer s norma-ta net Income, then
the ta sha be an amount equa to 6 per cent of the norma-ta net Income for
the ta abe year. The ta for the purpose of measurng the 8 per cent and
10 per cent mtatons s the ta after the appcaton of the foregn ta credt
provded n secton 729.
The appcaton of ths secton may be Iustrated by the foowng e ampes:
ampe (/). The Corporaton whch makes Its Income ta return on the
caendar year bass has a norma-ta net Income for 19 0 of 500,000 and an
ad|usted e cess profts net Income computed wthout reference to secton 722
of 200,000. The e cess profts ta on such amount Is 71,500, whch Is In e cess
of 6 per cent of the ta payer s norma-ta net ncome for 19 0. The corporaton
estabshes that by reason of a food n 1938 Its norma producton was nter-
rupted and ts e cess profts net ncome for 1038 was 100,000, athough t woud
have been 500,000 If such nterrupton had not occurred. The ta payer s average
base perod net ncome computed under secton 713(e) woud have been 100,000
arger If ts e cess profts net ncome for 1938 were consdered to be 500,000.
other facts remanng the same, the ad|usted e cess profts net ncome of
200,000 set forth above s to be reduced by the resutng 95,000 Increase n the
e cess profts credt (95 per cent of 100,000, the ncrease n average base perod
net ncome). The ad|usted e cess profts net ncome for 19 0 woud be 105,000
and the e cess profts ta on such amount woud be 33,500. To such 33,500
there must be added the amount of 7,150 (10 per cent of the ta , 71,500, com-
puted wthout reference to secton 722) and, thus, the ta payer s e cess profts
ta for 19 0, computed wth the appcaton of secton 722, Is 0,650 ( 33,500
pus 7,150).
ampe (2). The norma-ta net ncome of the Y Corporaton for the caendar
year 19 0 (ts ta abe year) s 200,000 and ts ad|usted e cess profts net
ncome computed wthout the beneft of secton 722 s 50,000. The e cess
profts ta on ths amount s 1 ,000, whch s n e cess of 6 per cent of the
corporaton s norma-ta net ncome for 19 0. The Y Corporaton meets the tests
of secton 722(a) and estabshes that ts ad|usted e cess profts net ncome for
19- 0 computed wth the ad|ustments provded n secton 722(a) woud be
3,000. The e cess profts ta on ths amount woud be 11,900. The Y Cor-
poraton s entted to the reef provded under secton 722 because the appca-
ton of secton 722(a) has reduced ts ta by more than 10 per cent, and, when
10 per cent of the ta computed wthout reference to secton 722 (10 per cent
of 1 ,000, or 1, 00) s added to the ta computed wth the ad|ustments provded
n secton 722(a) ( 11,900), the resutng e cess profts ta , 13,300, s more than
6 per cent of the ta payer s norma-ta net ncome for 19 0.
Skc. 30.722-5. ppcaton for reef under secton 722. (a) In genera. The
ta payer Is not permtted to cam the beneft of secton 722 n computng Its
e cess profts ta upon ts return, e cept as provded n (c) of ths secton.
In order to obtan the benefts of secton 722 for any ta abe year a ta payer
wthn s months after the tme prescrbed by aw for fng ts e cess profts
tn return for such year must fe under oath an appcaton on Form 991 for
the beneft of secton 722, uness the provsons of (6) or (o) of ths secton are
appcabe to such ta payer. For the purposes of ths secton, the tme pre-
scrbed by aw for fng the return ncudes the perod of any e tenson of tme
granted by the Commssoner.
The appcaton on Form 991 must be fed n dupcate wth the Commssoner
of Interna Revenue, Washngton, D. C, attenton of the Income Ta Unt,
Cearng Dvson, Cams Contro Secton. Such appcaton sha, n accordance
wth the provsons of ths secton and the nstructons on the form, set forth
the foowng Informaton:
(1) The name and address of the corporaton;
(2) The date and pace of ncorporaton;
(3) The e cess profts ta ta abe year for whch the benefts of secton 722
are camed;
( ) The coecton dstrct n whch the e cess profts ta return for such
year was fed;
(5) The ta payer s norma-ta net Income and the amount of e cess profn|
ta (after the appcaton of the foregn ta credt) shown upon ts return
for such year;
(6) The date of the begnnng of the ta payer s frst e cess profts ta ta -
abe year;
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(T) The e cess profts net ncome or defct n e cess profts net ncome for
each ta abe year n the base perod, computed wthout regard to secton 722;
(8) If a dfference n the character of busness s the bass of the appca-
ton
() the ta abe years n the base perod n whch It s camed that the
character of the busness was dfferent from that as of anuary 1, 19 0,
() the subparagraph of secton 722(b)(2) n whch such dfference
fas,
() the character of the busness as of anuary 1, 19 0,
(v) the character of the busness n each of the ta abe years n the
base perod,
(v) the amount whch woud have been the ta payer s e cess profts
net ncome for each ta abe year n the buse perod n whch ts busness
was of a dfferent character f the busness had been the same n each
of such years as that on anuary 1,19 0, and
(v) a detaed statement showng how such amount was determned;
(9) If an nterrupton or dmnuton of norma producton, output, or oper-
aton s the bass of the appcaton
() the abnorma events and the tme of ther occurrence,
() the ta abe yenrs n whch such abnorma events nterrupted or
dmnshed norma producton, output, or operaton, and
() the producton, output, or operaton of the ta payer for the ta -
abe years n the base perod and for the four ta abe years mmedatey
precedng the ta abe year n whch norma producton, output, or oper-
aton was nterrupted or dmnshed, or, f the ta payer was not n e -
stence for four prevous ta abe years, then for such prevous ta abe
years as t was n e stence and for so many of the succeedng ta abe
years endng before une 1, 19 0, as do not make the tota more than
four;
(10) schedue of the casses of gross ncome and deductons and the
amounts thereof
() for each of the ta abe years n the base perod (ncudng the
ta abe years for whch ad|ustments were made under secton 722(a) (3)
( ) and ( ) and the amounts of any casses of gross ncome or deduc-
tons estabshed thereunder),
() for each subsequent ta abe year begnnng after December 31,
1939, and endng before une 1, 19 0, and
() for each of the four ta abe years precedng the frst ta abe year
n the base perod;
(11) The e cess profts net Income or defct n e cess profts net ncome
estabshed for each ta abe year n the base perod after a ad|ustments
under secton 722;
(12) statement showng the e tent to whch any cass of Income or
deductons appearng n the schedue requred n (10) above and abnorma n
amount as determned under secton 30.722-3(c) s a resut of hgh prces
of materas, abor, capta, or any other agent of producton, ow seng prce
of the product of the ta payer, or ow physca voume of saes owng to ow-
demand for such product or for the output of the ta payer, or of a change
at any tme In the type, manner of operaton, sze, or the condton of the
busness engaged n by the ta payer;
(13) The average base perod net ncome determned under secton 722
(a)(3);
(1 ) The average base perod net Income determned wthout regard to
secton 722; and
(15) Such other nformaton as may be requred by the Instructons ap-
pearng on Form 991 or ssued therewth.
The appcaton on Form 901 sha be consdered a cam for refund or credt
wth respect to the e cess profts ta for the ta abe year pad at or pror to the
tme such appcaton s fed. In case the ta payer eects to pay n nstaments
the ta shown upon ts return and at the tme the appcaton s fed such ta
has not been pad n fu, the ta payer shoud fe a cam for refund or credt on
Form 8 3 as prompty as possbe after such ta has been pad n fu. The
Informaton aready submtted n the appcaton need not agan be .submtted on
Form 8 3 f reference s made theren to such appcaton. For mtatons upon
refunds and credts generay, see secton 322. s to procedure upon dsaow-
ance of a cam for refund reatng to abnormates, see secton 732.
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(6) fter asserton of defcency. If a ta payer does not fe an appcaton
under (a) of ths secton wthn the 6-month perod provded n secton 722(e),
t may nevertheess obtan reef under secton 722 f there s a defcency n
e cess profts ta asserted aganst t. In such case, the appcaton of secton
722 sha not reduce the e cess profts ta determned wthout reference to such
secton by an amount n e cess of the amount of the defcency fnay determned
wthout reference to such secton.
If a premnary notce of defcency s ssued, the ta payer may obtan the
mted benefts of secton 722 descrbed n the precedng paragraph by fng an
appcaton on Form 991 wthn 90 days after the date of such notce, regard-
ess of when or whether a forma notce of defcency Is ssued. (See secton
272(a).) If a forma notce of defcency s ssued wthout the Issuance of a
premnary notce or wthn 90 days after the ssuance of a premnary notce,
the ta payer may cam such benefts n ts petton, or amended petton, to the
oard of Ta ppeas fed In accordance wth the rues of the oard and wth
respect to the defcency asserted n such forma notce. If, however, a pre-
mnary notce s ssued and the ta payer does not fe a tmey appcaton on
Form 991, and a forma notce of defcency Is Issued after the e praton of 90
days from the date of the premnary notce, the ta payer can not cam the
benefts of secton 722 n a petton, or amended petton, fed wth the oard of
Ta ppeas.
ta payer fng an appcaton on Form 991 after a premnary notce of
defcency sha attach to such appcaton a copy of such notce.
(c) Waver of mtatons for subsequent ta abe years. If a ta payer fes an
appcaton on Form 991 for a ta abe year as provded In (o) or (6) of ths
secton, then n fng au appcaton for a subsequent ta abe year under (a) or
(6) of ths secton the nformaton requred n (a) (8), (9), (10), and (12) of
ths secton need be supped ony to the e tent that such nformaton woud dffer
from that set forth n the pror appcaton, provded reference s made to such
pror appcaton. If the average base perod net ncome of the ta payer s
fnay determned under secton 722(a)(3), or f permsson s granted by the
Commssoner after a determnaton whch has not become fna, such ta payer, n
computng ts e cess profts ta n any return requred to be fed thereafter, may,
wthout the fng of any appcaton on Form 991 but sub|ect to the mtatons
of secton 722 (c) and (d), use as ts average base perod net ncome the average
base perod net ncome thus determned, e cept as further ad|ustments may be
requred by secton 711(b).
Pah. 26. Secton 30.725-3 s amended by strkng out the second para-
graph thereof.
Par. 27. The foowng s nserted mmedatey precedng secton
30.729-1:
Seo. 16. Computaton of Credts on Retubnb. ( cess Profts Ta
mendments of 19 1.)
Secton 729(b) of the Interna Revenue Code s amended by strkng
out (b) Returns. and nsertng n eu thereof the foowng:
(b) Returns.
(1) Computaton of e cess profts credts. In the case of a
ta payer whch under secton 712 or secton 7 1 Is entted to have
the e cess profts credt computed under secton 713 or secton 71 ,
whchever resuts n the esser ta under ths subchapter, the return
under ths subchapter for any ta abe year sha contan computa-
tons of two tentatve ta es, one wth the credt computed under sec-
ton 713 and one wth the credt computed under secton 71 ; and
the return sha contan a Informaton whch the Commssoner, by
reguatons prescrbed by hm wth the approva of the Secretary,
may prescrbe as necessary for such computatons. If the ta payer
states n such return that t dscams the use of one of such credts
n the computaton of the ta under ths subchapter for the ta abe
year, the computaton and nformaton based on such credt may be
omtted from the return.
(2) No TURN R UIR D. .
Seo. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
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103
Par. 28. Secton 30.729-1 s amended as foows:
( ) y changng the headng to read: Tme and pace for fng
return and nformaton to be ncuded
( ) y nsertng at the end thereof the foowng new paragraph:
ny ta payer whch s entted to have ts e cess profts credt computed
under secton 713 or secton 71 , whchever credt resuts n the esser e cess
profts ta , s requred to fe a return on Form 1121 (revsed), and such
return sha (uness the ta payer states theen thut t dscams the use of
one of the credts) contan computatons of the credts computed under sec-
ton 713 and secton 71 and the e cess profts net ncome computed wth the
credt under secton 713 and the e cess profts net ncome computed wth the
credt under secton 71 , and sha contan a the nformaton requred by
such form and by these reguatons wth respect to such romputatons.
ta payer statng n ts return that t dscams the use of one of the credts
n the computaton of the e cess profts ta for the ta abe year may omt
from the return the computaton and nformaton upon whch such dscamed
credt woud be based.
Par. 29. The foowng s nserted mmedatey precedng secton
30.730- 1 :
Sec. 7. Consodated Retttnh of Insurance Companes Other Than
Lfe or Mutua. ( cess Profts Ta mendments of 10 1.)
Secton 730(e)(6) of the Interna Revenue Code s emended to read
as foows:
(6) Insurance companes sub|ect to ta aton under secton 201
or 207.
Sec. 17. ffectve Datk. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Par. 30. Secton 30.730-3 s amended as foows:
( ) y strkng out the fourth sentence of the frst paragraph and
nsertng n eu thereof the foowng:
For nstance, there w not be recognzed as an affated group two non-
nsurance corporatons the common parent corporaton of whch s a persona
hodng company or an nsurance company ta abe under secton 201 or sec-
ton 207.
( ) y strkng out the second paragraph and nsertng n eu
thereof the foowng:
n nsurance company ta abe under secton 201 may be ncuded n an
affated group wth other nsurance companes ta abe under secton 201
but may not he ncuded n an affated group wth other corporatons. Sm-
ary, an nsurance company ta abe under secton 207 may be ncuded n
an affated group wth other nsurance companes ta abe under secton 207
but may not be ncuded n an affated group wth other corporatons. On
the other hand, an nsurance company ta abe under secton 20 may be
ncuded n an affated group wth corporatons other than nsurance com-
panes ta abe under secton 201 or secton 207.
Par. 31. The foowng s nserted mmedatey foowng secton
30.731- 1:
Sec. 9. Procedura Provsons. ( cess Profts Ta mendments of
19 1.)
Part 1 of subchapter of chapter 2 of the Interna Revenue Code
s amended by nsertng at the end thereof the foowng new secton:
Sec. 732. Revew of bnormates by oard of Ta ppeas.
(a) Petton to the oard. If a cam for refund of ta under
ths subchapter for any ta abe year s dsaowed n whoe or n part
by the Commssoner, and the dsaowance reates to the appcaton
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10
of secton 711(b)(1) ( ), (I), ( ), or ( ), secton 721, or secton
722, reatng to abnormates, the Commssoner sha send notce of
such dsaowance to the ta payer by regstered ma. Wthn nnety
days after such notce s maed (not countng Sunday or a ega ho-
day n the Dstrct of Coumba as the nneteth day) the ta payer
may fe a petton wth the oard of Ta ppeas for a redetermna-
ton of the tn under ths subchapter. If such petton s so fed, such
notce of dsaowance sha be deemed to be a notce of defcency
for a purposes reatng to the assessment and coecton of ta es or
the refund or credt of overpayments.
(b) Defcency Found by oard n Case of Cam. If the oard
fnds that there s no overpayment of ta n respect of any ta abe
year n respect of whch the Commssoner has dsaowed, n whoe or
n part, a cam for refund descrbed n subsecton (a) and the oard
further fnds that there s a defcency for such year, the oard sha
have |ursdcton to determne the amount of such defcency and such
amount sha, when the decson of the oard becomes fna, be as-
sessed and sha be pad upon notce and demand from the coector.
(c) Fnaty of Determnaton. If n the determnaton of the
ta abty under ths subchapter the determnaton of any queston
s necessary soey by reason of secton 711(b)(1) ( ), (I), ( ), or
( ), secton 721, or secton 722, the determnaton of such queston
sha not be revewed or redetermned by any court or agency e cept
the oard.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Sec. 30.732-1. Revew of abnormates by oard of Ta ppeas. Secton
732 provdes that, n addton to ts |ursdcton to redetermne a defcency,
the oard of Ta ppeas sha have |ursdcton to revew the Commsson-
er s dsaowance of a cam for refund of e cess profts ta es, f such dsaow-
ance nvoves the determnaton of any queston reatng soey to the appca-
ton of secton 711(b)(1) ( ), (I), ( ), or ( ), secton 721 or secton 722,
whch sectons have reference to abnormates. The ta payer s petton must
be fed wth the oard wthn 00 days (not countng Sunday or a ega hoday
n the Dstrct of Coumba as the nneteth day) after the sendng by regstered
ma of the notce of dsaowance of the cam for refund.
Where the ta payer has fed such a petton the notce of dsaowance of
Its cam for refund s consdered to be a notce of defcency for a purposes
reatng to the assessment and coecton of ta es or the refund or credt of
overpayments. If the oard fnds that there has been no overpayment of ta
wth respect to the ta abe year nvoved, and further fnds that there s a
defcency for such year, the oard w determne the amount of such def-
cency and such amount sha, when the decson of the oard becomes fna,
be assessed and f ad upon notce and demand from the coector.
The e tent and the fnaty of the oard s |ursdcton wth respect to ques-
tons nvovng the appcaton of the sectons deang wth abnormates are
set forth n secton 732(c) and may be ustrated by the foowng e ampe:
ampe. ta payer engaged n the producton and refnng of o cams,
wth reference to a ta abe year begnnng n 19 0, that 80 per cent of an tem
of gross ncome resuts from e poraton carred on n pror years and s
therefore wthn secton 721(a)(2)(C). The Commssoner determnes that
ony 0 per cent of such tem s gross Income resutng from e poraton and
therefore reaches a dfferent resut as to the amount of abnorma ncome of the
cass descrbed n secton 721(a)(2)(C). There Is no dspute as to the tota
amount of the tem of gross ncome. The controversy reates soey to the
percentage thereof resutng from e poraton. The Commssoner s determna-
ton Is therefore upon an ssue arsng soey under secton 721 and s revew-
abe ony by the oard of Ta ppeas. If, however, the Commssoner aso
determnes that the tota amount of the Item of gross Income s greater than
the amount reported by the ta payer, the queston as to such amount Is not
one arsng soey by reason of secton 721 but ndependenty of t, and hence
revew of ths queston s not confned to the oard.
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G. 10. C PIT LIZ TION OF D RTISING, TC., P NDITUR S. ( CeSS
Profts Ta mendments of 19 1.)
(a) Part 1 of subchapter of chapter 2 of the Interna Revenue Code
s amended by nsertng at the end thereof the foowng nevr secton:
Sec. 733. Captazaton of dvertsng, tc., pkndtkbeb.
(a) ecton to Charge to Capta ccount. For the purpose of
computng the e cess profts credt, a ta payer may eect, wthn s
months after the date prescrbed by aw for fng ts return for ts frst
ta abe year under ths subchapter, to charge to capta account so much
of the deductons for ta abe years n ts appcabe base perod on account
of e pendtures for advertsng or the promoton of good w, as, under
rues and reguatons prescrbed by the Commssoner wth the approva
of the Secretary, may be regarded as capta nvestments. Such eecton
must be the same for a such ta abe years, and must be for the tota
amount of such e pendtures whch may be so regarded as capta nvest-
ments. In computng the e cess profts credt, no amount on account of
such e pendtures sha be charged to capta account:
(1) For ta abe years n the base perod uness the eecton au-
thorzed n subsecton (a) s e ercsed, or
(2) For any ta abe year pror to the begnnng of the base
perod.
(b) ffect of ecton. If the ta payer e ercses the eecton au-
thorzed under subsecton (a)
(1) The net ncome for each ta abe year n the bnse perod sha
be consdered to be the net ncome computed wth such deductons
dsaowed, and such deductons sha not be consdered as havng
dmnshed earnngs and profts. Ths paragraph sha be retro-
actvey apped as f t were a part of the aw appcabe to each ta -
abe year n the base perod ; and
(2) The treatment of such e pendtures as deductons for a ta -
abe year n the base perod sha, for the purposes of secton 73
(b) (2), be consdered treatment whch was not correct under the
aw appcabe to such year.

Sec. 17. ffectve Datf.. ( cess Profts Ta mendments of 1911.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Sec. 30.733-1. .Scope of eecton to charge to capta account e pendtures for
advertsng or the promoton of good w. ny ta payer may, for the purpose
of computng ts e cess profts credt under ether the ncome or the nvested
capta method, eect to charge to capta account any deductons based upon
e pendtures for ta abe years n ts base perod on account of advertsng or
the promoton of good w, to the e tent that such e pendtures may be regarded
as capta nvestments under the reguatons prescrbed under secton 733.
Secton 733 provdes for an eecton wth reference ony to deductons for such
e pendtures for ta abe years n the base perod. In order to secure the
benefts of that secton, a ta payer sha make ts eecton wthn s months
after the date prescrbed by aw for fng ts return for ts frst e cess profts
ta ta abe year.
The eecton under secton 733 Is an eecton to captaze a the e pendtures
In each ta abe year In the ta payer s base perod whch were for advertsng
or the promoton of good w and whch may be regarded as capta nvestments
under the reguatons prescrbed under secton 733. ta payer may not
captaze such e pendtures for one base perod ta abe year and treat as a
deducton such e pendtures wth respect to another base perod ta abe year.
No such e pendtures for any ta abe year begnnng pror to the ta payer s
base perod may be charged to capta account. ta payer whch has faed to
make an eecton under secton 733 Is not permtted, In computng ts e cess
profts credt, to charge to capta account base perod e pendtures for adver-
tsng or the promoton of good w whch have been deducted for ta abe
years n such perod.
Sec. 30.733-2. pendtures whch may oe regarded as capta nvestments.
n e pendture for advertsng or the promoton of good w may be regarded
as a capta Investment f, upon consderaton of a the facts and crcumstances
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106
of the partcuar case, t may be regarded as made for the purpose of ncreasng
the ta payer s earnng capacty over a substanta perod subsequent to the
ta abe year n whch such e pendture was made. The fact that a corporaton
faed, because of operatng osses, to receve any benefts wth respect to ts
ncome ta abty from deductons on account of e pendtures s not evdence
that such e pendtures may be regarded as capta nvestments. In addton to
those e pendtures for capta tems ncudng good w whch, under the pro-
vsons of secton 2 , may not be aowed as deductons, the foowng e pend-
tures may n any case be regarded as capta nvestments wthn the contem-
paton of secton 733:
(a) advertsng e pendtures to promote a ta payer s busness n a
terrtory new to such ta payer, or to promote a new product, department,
trade mark, trade brand, or trade name of such ta payer, for the frst 12
months after the ta payer has begun to deveop such new terrtory, or to
promote such new product, department, trade mark, trade brand, or trade
name. new product wthn the meanng of ths secton does not ncude
any product whch s merey an mprovement of an earer product.
(6) advertsng e pendtures for the ta abe year to the e tent that
such e pendtures e ceed the ta payer s average annua e pendtures on
account of advertsng for the 8 months precedng the ta abe year, or, f
the ta payer was not n e stence durng the whoe of such 8-month perod,
then for the perod durng whch the ta payer was n e stence.
very tem cassfabe under ths secton as a capta nvestment consttutes
a permanent asset of the ta payer s busness, and no deducton for deprecaton
w be aowed n respect of such an tem.
ta payer eectng under secton 733 sha submt a statement contanng
compete nformaton wth respect to a e pendtures made durng ts base
perod for advertsng or the promoton of good w, cassfed as to those whch
are deductbe and those whch may be regarded as capta nvestments under
that secton. Ths statement sha set forth whether such e pendtures were
e traordnary n nature or amount and the purposes for whch they were
made. Such a ta payer sha bear the burden of provng that those e pend-
tures whch t seeks to captaze may be regarded as capta nvestments.
It may not deduct smar e pendtures made n any ta abe year begnnng
after December 31, 1939, and sha submt the same compete nformaton wth
respect to such e pendtures.
Sec. 30.733-3. ffect of eecton. Secton 733 retroactvey amends, for the
purpose of determnng the ncome ta abty and the e cess profts credt
of any ta payer e ercsng an eecton under that secton, the revenue aws
appcabe to each of such ta payer s base perod ta abe years. ence, the
prevous treatment as deductons of e pendtures made durng the base perod
for advertsng or the promoton of good w whch may be regarded as
capta nvestments under the reguatons prescrbed under secton 733 s an
erroneous and nconsstent treatment. The norma-ta or speca-cass net
ncome for each appcabe base perod ta abe year must be recomputed wth
such e pendtures dsaowed as deductons, and both the e cess profts net
Income for each such year and the earnngs and profts account w be n-
creased n the amount of such dsaowed deductons.
The dsaowance of deductons n the base perod mnde necessary by ths
secton requres a redetermnaton of the ncome ta abty for such years
and any defcences n ta resutng from the dsaowance of such deductons
sha be assessed and coected under the nterna revenue aws appcabe
wth respect to the assessment and coecton of defcences for such years.
If, however, correcton of the effect of the pror nconsstent treatment of such
tems n the base perod years s prevented, wthn the meanng of secton
73 (b)(1)(C), correcton sha be made by means of an ad|ustment under
secton 73 . Snce the amount of such an ad|ustment under secton 73 s a
part of the e cess profts ta , whch appes ony to ta abe years begnnng
after December 31, 1939, t does not decrease earnngs and profts or e cess
profts net ncome for any perod before the begnnng of the ta payer s frst
e cess profts ta ta abe year.
In the case of a ta payer eectng under secton 733, the provsons of sec-
ton 711(b) (1) ( ), reatng to abnorma deductons n the base perod, do not
nffect deductons for e pendtures for advertsng or the promoton of good
w whch may be regarded as capta nvestments, snce, n such a case,
secton 733 effects a dsaowance of such deductons for ncome ta purposes
before any of the ad|ustments under secton 711(b)(1) are operatve.
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107
Sec. 11. d|ustment n Case or Inconsstent Poston. ( cess Profts
Ta mendments of 19 1.)
Part 1 of subchapter of chapter 2 of the Interna Revenue Code
Is amended by Insertng at the end thereof the foowng new secton:
Sec. 73 . d|ustment n Case or Poston Inconsstent Wth Pror
Income Ta Labty.
(a) Defntons. For the purposes of ths secton
(1) Ta payer. The term ta payer means any person sub|ect
to a ta under the appcabe revenue ct
(2) Income ta . The term ncome ta means an ncome ta
mposed by chapter 1 or chapter 2 of ths tte; Tte I and
Tte I of the Revenue cts of 1938, 1936, and 193 ; Tte I of
the Revenue cts of 1932 and 1928; Tte II of the Revenue cts
of 1926 and 192 ; Tte II of the Revenue cts of 1921 and 1918;
Tte I of the Revenue ct of 1917; Tte I of the Revenue ct of
1916; or secton II of the ct of October 3, 1913; a war profts
or e cess profts ta mposed by Tte III of the Revenue cts of
1921 and 1918; or Tte II of the Revenue ct of 1917; or an
ncome, war profts, or e cess profts ta mposed by any of the
foregong provsons, as amended or suppemented.
(3) Pror ta abe year. ta abe year begnnng after Decem-
ber 31,1939, sha not be consdered a pror ta abe year.
(b) Crcumstances of d|ustment.
(1) If
( ) n determnng at any tme the ta of a ta payer
under ths subchapter an tem affectng the determna-
ton of the e cess profts credt s treated n a manner ncon-
sstent wth the treatment accorded such tem n the determna-
ton of the ncome-ta abty of such ta payer or a prede-
cessor for a pror ta abe year or years, and
( ) the treatment of such tem n the pror ta abe year
or years consstenty wth the determnaton under ths sub-
chapter woud effect an ncrease or decrease n the amount of
the ncome ta es prevousy determned for such ta abe year
or years, and
(C) on the date of such determnaton of the ta under ths
subchapter correcton of the effect of the nconsstent treatment
n any one or more of the pror ta abe years s prevented (e cept
for the provsons of secton 3801) by the operaton of any aw
or rue of aw (other than secton 3761, reatng to compromses),
then the correcton sha be made by an ad|ustment under ths sec-
ton. If n a subsequent determnaton of the ta under ths sub-
chapter for such ta abe year such nconsstent treatment s not
adopted, then the correcton sha not be made n connecton wth
such subsequent determnaton.
(2) Such ad|ustment sha be made ony If there Is adopted n the
determnaton a poston mantaned by the Commssoner (n case
the net effect of the ad|ustment woud be a decrease n the ncome
ta es prevousy determned for such year or years) or by the ta -
payer wth respect to whom the determnaton s made (n case the
net effect of the ad|ustment woud be an ncrease n the ncome ta es
prevousy determned for such year or years) whch poston Is
Inconsstent wth the treatment accorded such Item n the pror ta -
abe year or years whch was not correct under the aw appcabe to
such year.
(c) Method and ffect of d|ustment. (1) The ad|ustment author-
zed by subsecton (b), n the amount ascertaned as provded n subsec-
ton (d), f a net Increase sha be added to, and f a net decrease sha
be subtracted from, the ta otherwse computed under ths subchapter
for the ta abe year wth respect to whch such nconsstent poston s
adopted.
(2) If more than one ad|ustment under ths secton s made because
more than one nconsstent poston Is adopted wth respect to one ta abe
year under ths subchapter, the separate ad|ustments, each an amount
ascertaned as provded n subsecton (d), sha be aggregated, and the
aggregate net Increase or decrease sha be added to or subtracted from
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103
the ta otherwse computed under ths subchapter for the ta abe year
wth respect to whch such nconsstent postons are adopted.
(3) If a the ad|ustments under ths secton, made on account of the
adopton of an nconsstent poston or postons wth respect to one ta -
abe year under ths subchapter, resut n an aggregate net ncrease, the
ta mposed by ths subchapter sha n no case be ess than the amount
of such aggregate net ncrease.
(d) kcebtanment of mount of d|ustment. In computng the
amount of an ad|ustment under ths secton there sha frst be ascer-
taned the amount of the ncome ta es prevousy determned for each of
the pror ta abe years for whch correcton s prevented. The amount
of each such ta prevousy determned for each such ta abe year sha
be (1) the ta shown by the ta payer, or by the predecessor, upon the
return for such pror ta abe year, ncreased by the amounts prevousy
assessed (or coected wthout assessment) as defcences, and decreased
by the amounts prevousy abated, credted, refunded, or otherwse
repad In respect of such ta ; or (2) f no amount was shown as the ta
by such ta payer or such predecessor upon the return, or f no return was
made by such ta payer or such predecessor, then the amounts prevousy
assessed (or coected wthout assessment) as defcences, but such
amounts prevousy assessed, or coected wthout assessment, sha be
decreased by the amounts prevousy abated, credted, refunded, or other-
wse repad n respect of such ta . There sha then be ascertaned the
ncrease or decrease n each such ta prevousy determned for each such
year whch resuts soey from the treatment of the tem consstenty wth
the treatment accorded such tem n the determnaton of the ta a-
bty under ths subchapter. To the ncrease or decrease so ascertaned
for each such ta for each such year there sha be added nterest thereon
computed as f the Increase or decrease consttuted a defcency or an
overpayment, as the case may be, for such pror ta abe year. There sha
be ascertaned the dfference between the aggregate of such ncreases,
pus the nterest attrbutabe to each, and the aggregate of such decreases,
pus the nterest attrbutabe to each, and the net Increase or decrease
so ascertaned sha be the amount of the ad|ustment under ths secton
wth respect to the nconsstent treatment of such tem.
Sec. 17. ffectve Date, ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Sec. 30.73 -1. Purpose and scope of secton 73. . (a) Genera. Secton 73
provdes for an ad|ustment f a determnaton of a ta payer s e cess profts ta
abty treats an tem or transacton affectng the e cess profts credt Incon-
sstenty wth the treatment of such tem or transacton n the determnaton of
the ncome ta abty of the ta payer, or a predecessor, for a pror ta abe year
or years. The ad|ustment s not authorzed uness (1) the treatment of the tem
or transacton for pror ta abe years was ncorrect under the aw appcabe to
such years, (2) a correcton of the effect of such erroneous treatment for one or
more of the pror ta abe years Is prevented by the operaton of a provson or
rue of aw, and (3) the nconsstent poston adopted n the determnaton s
asserted and mantaned by the party (ether the Commssoner or the ta payer)
who woud be adversey affected by the ad|ustment.
(6) Defntons. When used n sectons 30.73 -1 to 30.73 - , ncusve
(1) The terms ta payer, ncome ta , and pror ta abe year sha
have the meanng assgned to such terms by secton 73 (a). s to what
consttutes a ta abe year, see secton 8(a).
(2) The term predecessor ncudes any ta payer (other than the ta -
payer whose e cess profts ta abty s the sub|ect of the determnaton)
whose ncome ta abty for such pror ta abe year woud have been
dfferent f there had been no nconsstency between the treatment accorded
an tem or transacton n the determnaton of the e cess profts ta abty
of the ta payer and the treatment accorded such tem or transacton n the
determnaton of ts (. e., the predecessor s) own ncome ta abty for
such pror ta abe year.
Skc. 30.73 -2. Crcumstances of ad|ustment. (a) Determnaton. fna de-
termnaton of the e cess profts ta abty s not a prerequste to an ad|ustment
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109
under secton 73 . Whenever there s a determnaton of the e cess profts ta
abty and the condtons prescrbed In secton 73 (b) are satsfed, the ad|ust-
ment Is authorzed as an essenta part of the determnaton of such ta abty.
For e ampe, the makng of the e cess profts ta return requred by secton 729
or secton 730 s a determnaton by the ta payer; the asserton of a defcency or
the aowance or dsaowance of a cam for refund s a determnaton by the
Commssoner; and a decson by the oard of Ta ppeas or a court s a
determnaton by such oard or court. If any such determnaton becomes fna,
the ad|ustment aso becomes fna. If, foowng a determnaton, there are
further proceedngs n the case and a subsequent determnaton whch does not
adopt the nconsstent treatment of the tem or transacton, then no ad|ustment
Is authorzed as a part of such subsequent determnaton.
(6) Correcton under ordnary procedure prevented. n ad|ustment s au-
thorzed ony f, on the date of the determnaton of the e cess profts ta abty,
correcton of the effect of the nconsstent treatment for one or more of the pror
ta abe years s prevented (e cept for the provsons of secton 3801, reatng
to mtgaton of effect of mtatons and other provsons n ncome ta cases)
by the operaton, whether before, on, or after the date of enactment of secton
73 , of any provson of aw (other than secton 3761, reatng to compromses) or
rue of aw. Such provsons or rues of aw ncude, for e ampe, statutes of
mtatons and res |udcata.
The ascertanment of whether correcton of the effect of the Inconsstent treat-
ment s prevented wthn the meanng of secton 73 (b) (1) (C) and ths secton
must be made wth respect to each ncome ta for each pror ta abe year affected
by the erroneous treatment of the tem or transacton. Secton 73 s not app-
cabe n respect of any Income ta for any pror ta abe year If, on the date of
the determnaton of the e cess profts ta abty, correcton of the effect of
the erroneous treatment of the tem Is possbe under the ordnary procedure
appcabe to the assessment and coecton of defcences or the refund or credt
of overpayments, as the case may be, n respect of such ta for such ta abe
year. See the e ampe under secton 30.73 - .
If correcton of the effect of the erroneous treatment of the tem or transac-
ton wth respect to an ncome ta for a pror ta abe year s otherwse pre-
vented, the appcaton of secton 73 s not precuded by the fact that the ta
for such year may, under approprate crcumstances, be open to an ad|ustment
under secton 3801.
If any ncome ta abty for a pror ta abe year has been compromsed
under secton 3761, no ad|ustment may be made under secton 73 wth respect
to the ta abty compromsed.
(c) Operaton dependent upon mantenance of nconsstent poston. n ad-
|ustment, wth respect to an tem or transacton, whch woud resut n a net.
ncrease n the amount of the Income ta es prevousy determned for pror
ta abe years s authorzed ony If (1) the ta payer wth respect to whch the
determnaton s made has, n connecton wth an tem or transacton affectng
the determnaton of ts e cess profts credt, mantaned a poston whch s
nconsstent wth the erroneous treatment of such tem or transacton for pror
ta abe years, and (2) such nconsstent poston Is adopted n the determnaton.
n ad|ustment, wth respect to an tem or transacton, whch woud resut
n a net decrease n the amount of the ncome ta es prevousy determned for
pror ta abe years s authorzed ony f (1) the Commssoner, In connecton
wth an tem or transacton affectng the determnaton of the ta payer s
e cess profts credt, has mantaned a poston whch s nconsstent wth the
erroneous treatment of such tem or transacton for pror ta abe years, and
(2) such nconsstent poston s adopted n the determnaton.
Inconsstent treatment wthn the meanng of secton 73 may reate to the
prncpe or rue of aw apped n determnng the ta abe status of an tem
or transacton, or t may reate ony to the amount of the Item or transacton
whch s to be taken nto account for ta purposes. The nconsstency Is to be
ascertaned by reference to the actua treatment of the Item or transacton for
pror ta abe years rather than to what the ta payer or the Commssoner may
have urged.
If a determnaton of the e cess profts ta abty for one ta abe year
adopts wth respect to an Item or transacton an nconsstent poston whch
resuts In an ad|ustment under secton 73 , smar treatment of the same Item
or transacton for subsequent e cess profts ta ta abe years does not author-
ze a further ad|ustment under such secton.
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110
(d) Law appcabe n determnaton of error. Whether there was an errone-
ous treatment of the Item or transacton for pror ta abe years s to be deter-
mned under the provsons of the nterna revenue aws appcabe wth respect
to such years. If the Inconsstent treatment adopted n the determnaton of
the e cess profts ta abty s based upon an authortatve |udca Interpre-
taton of the appcabe revenue aw whch dffers from the nterpretaton of
such aw accepted n the determnaton of the ta abty for such pror years,
then the treatment accorded the tem or transacton for such pror years s
erroneous wthn the meanng of secton 73 .
Secton 73 does not authorze an ad|ustment If the dfference between the
treatment accorded an tem or transacton n computng the e cess profts
credt and the treatment accorded such tem or transacton n computng the
ta abty for pror ta abe years Is occasoned soey by reason of an ad|ust-
ment requred by a specfc provson of the ct, such as the ad|ustments
requred by secton 711(b) to norma-ta net ncome and speca-cass net ncome
In computng e cess profts net Income. Snce the dsaowances under secton
733 of deductons on account of e pendtures for advertsng or the promoton
of good w are not requred by the ct but are merey permssve at the
eecton of the ta payer, and snce secton 733 specfcay provdes that, f an
eecton s made, the treatment of such e pendtures as deductons for pror
ta abe years sha be consdered ncorrect, an ad|ustment under secton 73
may be authorzed n the case of such a dsaowance.
Sec. 30.73 -3. Method and effect of ad|ustment. The ad|ustment authorzed
by secton 73 , athough measured by reference to the ncome ta es prevousy
determned for pror ta abe years, does not operate as an ad|ustment to the
Income ta abty for such years, but te amount of sueh ad|ustment s added
to or subtracted from, as the case may be, the e cess profts ta otherwse
computed for the ta abe year wth respect to whch the nconsstent poston
s adopted.
No ad|ustment wth respect to an tem or transacton s authorzed uness
the nconsstent poston adopted n the determnaton s mantaned by the
party who woud be adversey affected by such ad|ustment. See secton
30.73 -2(c). ccordngy, f a determnaton for one ta abe year adopts
nconsstent postons wth respect to severa Items or transactons, t s
necessary to make separate and dstnct computatons wth respect to each such
tem or transacton n order to ascertan the amount of the potenta ad|ust-
ment wth respect to each such tem or transacton and whether an ad|ust-
ment wth respect to such Item or transacton s authorzed. If severa ad|ust-
ments are authorzed wth respect to one e cess profts ta ta abe year, the
separate ad|ustments are aggregated and the aggregate net ncrease or net
decrease s added to, or subtracted from, as the case may be, the e cess profts
ta otherwse computed for such ta abe year. In ascertanng the amount
of the ad|ustment wth respect to a partcuar tem or transacton, no effect sha
be gven to the computatons made for the purpose of determnng the amount
of the ad|ustment wth respect to any other tem or transacton. If the severa
authorzed ad|ustments resut n an aggregate net Increase, the e cess profts
ta abty for such ta abe year sha not n any case be ess than the
amount of such aggregate net Increase.
The amount of the credt for foregn ta es aowabe under the provsons of
secton 729 sha be determned before gvng effect to any ad|ustment under
ths secton.
Sf.c. 30.73 - . scertanment of amount of ad|ustment. To ascertan the
amount of the ad|ustment, t s necessary to determne the amount of the ncrease
or decrease n each ncome ta prevousy determned for each of the pror ta abe
years whch wou d have resuted f the tem or transacton erroneousy treated
had receved the correct treatment under the aw appcabe wth respect to such
ta for such year. To each such ncrease or decrease there sha be added nterest
thereon computed as f the ncrease or decrease consttuted a defcency or an
overpayment, as the case may be. wth respect to such ta for such year. In a
such cases nterest sha be computed to the 15th day of the thrd month foowng
the cose of the e cess profts ta ta abe year wth respect to whch the determ-
naton of the e cess profts ta abty s made.
If ony one Income ta for one pror ta abe year Is nvoved, the ncrease or
decrease n such ta for such year pus the Interest thereon s the amount of the
ad|ustment wth respect to the partcuar tem or transacton.
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If two or more Income ta es for one pror ta abe year, or two or more pror
ta abe years are Invoved, t s necessary to determne the ncrease or decrease n
each ncome ta prevousy determned for each such year, pus the nterest on
each such ncrease or decrease. The dfference between the sum of the ncreases,
ncudng the nterest thereon, and the sum of the decreases, ncudng the Interest
thereon, sha be ascertaned and the net ncrease or net decrease so determned s
the amount of the ad|ustment wth respect to the partcuar Item or transacton.
The computaton to determne the ncrease or decrease n each Income ta for
each year sha be made as foows:
(a) The amount of the ta prevousy determned must frst be ascertaned.
Ths may be the amount of ta shown on the ta payer s return, but f any
changes n that amount have been made they must be taken nto account, ncud-
ng any ad|ustment prevousy made under the provsons of secton 820 of the
Revenue ct of 1938 or secton 3801 of the Interna Revenue Code. In such cases,
the ta prevousy determned w be the ta shown on the return, ncreased by
the amounts prevousy assessed (or coected wthout assessment) as defcences,
and decreased by amounts prevousy abated, credted, refunded, or otherwse
repad n respect of such ta . If no amount was shown as the ta on the return,
or f no return was made, the ta prevousy determned w be the sum of the
amounts prevousy assessed (or coected wthout assessment) as defcences,
decreased by the amounts prevousy abated, credted, refunded, or otherwse
repad n respect of such ta .
(b) fter the ta prevousy determned has been ascertaned, a recomputa-
ton must be made to ascertan the ncrease or decrease n ta represented by
the dfference, f any, between the ta prevousy determned and the ta as
recomputed upon the bass of the correct treatment of the tem or transacton.
Wth the e cepton of the tems upon whch the ta prevousy determned was
based and the Item or transacton wth respect to whch the erroneous treatment
occurred, no tem sha be consdered n computng the amount of the ncrease
or decrease n the ta prevousy determned. If the treatment of any tem
noon whch the ta prevousy determned was based, or f the appcaton of any
provsons of the nterna revenue aws wth respect to such ta depends upon
the amount of ncome (e. g., chartabe contrbutons, foregn ta credt, earned
ncome credt), read|ustment of such Items n conformty wth the change In the
amount of the ncome whch resuts from the correct treatment of the tem or
transacton n respect of whch the nconsstent poston was adopted s necessary
as part of the recomputaton.
ampe. In December, 193 , the Corporaton transferred deprecabe prop-
erty to the T Corporaton n e change for stock of the Y Corporaton havng a
far market vaue of 100,000. oth corporatons made ther returns on the ca-
endar year bass. t the tme of the transfer, the property had an ad|usted
bass n the hands of the Corporaton of 80,000 and an estmated remanng
fe of 20 years. The e change was treated as nonta abe and the gan of 20,000
reazed by the Corporaton was not recognzed. For each of the years 1035 to
1939, ncusve, the Y Corporaton was aowed a deducton for deprecaton n
the amount of ,000, computed on a bass of 80,000, the same bass the property
had n the hands of the Corporaton. In ts e cess profts ta return for the
ta abe year 19 0, the Y Corporaton camed that the property shoud have a
bass of 100,000 for nvested capta purposes, and aso camed a deducton of
5,000 for deprecaton for such year. Ths poston was based upon the con-
tenton that the 193 e change was ta abe and the gan of 20,000 shoud have
been recognzed and added to the bass of the property In the hands of the
Y Corporaton. Tmey cams for refund based upon the aowance of addtona
deductons for deprecaton for the ta abe years 1938 and 1939 were fed. The
statute of mtatons prevents any refund of overpayments or assessment of
defcences for the ta abe years 193 to 1937, ncusve. The Commssoner s
determnaton of the e cess profts ta abty for the ta abe year 19 0 adopts
the Inconsstent poston asserted by the Y Corporaton and, accordngy, If the
computaton under secton 73 (d) dscoses a net Increase n the ta es prevousy
determned for the ta abe years for whch correcton s prevented, an ad|ust-
ment s authorzed under the provsons of secton 73 .
The Corporaton was not sub|ect to the ncome ta mposed by Tte I of
the Revenue ct of 193 . Its ta prevousy determned for the ta abe year 193
Is ,125, computed upon an ncome of 30,000. The corporaton omtted from
ts gross ncome an tem of renta ncome amountng to 3,000 and negected to
take a deducton for Interest amountng to 1,500. Durng the ta abe year It
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112
sustaned a capta oss of 10,000, of whch amount ony 2,000 was aowed
as a deducton n computng ts net ncome.
The ncrease n the ta of the Corporaton prevousy determned for 193 ,
pus the nterest thereon, s computed as foows:
Ta prevousy determned for 193 ,125
Net ncome for 193 upon whch ta prevousy determned was based 30, 000
Pus: Gan reazed upon e change 20,000
Less: Increased deducton for capta oss ( 10,000 mnus
2,000) 8,000
12,000
Net ncome as recomputed 2, 000
Ta as recomputed 5, 775
Ta prevousy determned ,125
Increase n ta prevousy determned for 103 1, 050
Interest on ncrease n ta 59
Tota ncrease for 193 2, 2
In accordance wth the provsons of secton 73 (d), the recomputaton does
not take nto consderaton the tem of 3,000, representng renta ncome whch
was omtted from gross ncome, or the tem of 1,500, representng nterest pad,
for whch no deducton was aowed.
The Y Corporaton was not sub|ect to the ncome ta mposed by Tte I of
the Revenue cts of 193 or 1936. The decrease n the ta of the Y Corporaton
prevousy determned for each of the ta abe years 1935, 1936, and 1937, whch
resuts soey from the aowance of an addtona deducton of 1,000 for depreca-
ton In each of such years, pus the nterest on each such decrease, s assumed to
be as foows:
1
Year.
Ta.
Interest.
Tota.
1037
137.50
220.00
220.00
1.25
62.80
39.60
178. 76
272.80
269.60
The amount of the ad|ustment to be added to the e cess profts ta of the Y
Corporaton otherwse determned for the ta abe year 19 0 s as foows:
Increase for 193 2,2 .00
Less: Decrease for 1935 178. 75
Decrease for 1936 272. 80
Decrease for 1937 259. 60
711.15
Net ncrease (amount of ad|ustment authorzed) 1,532.85
Par. 32. The foowng s nserted mmedatey precedng secton
30.7 0-1:
Sec. 8. Incorporaton of Partnershp ob Soe r OP TO snrp. ( -
cess Profts Ta mendments of 1911.)
(a) Secton 7 0(a)(1)(C) of the Interna Revenue Code s amended
by strkng out owned by such other corporaton. and nsertng n
eu thereof:
owned by such other corporaton, or
(D) Substantay a the propertes of a partnershp n an
e change to whch secton 112(b)(5), or so much of secton 112(c)
or (e) as refers to secton 112(b) (5), or to whch a correspondng
provson of a pror revenue aw, s or was appcabe.
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113
(b) Secton 7 0(b) ( ) of the Interna Revenue Code Is amended
by strkng out the perod at the end thereof and nsertng n eu
thereof a semcoon and the foowng:
or
(5) In the case of a transacton specfed In subsecton
(a)(1)(D), the partnershp whose propertes were acqured.
(c) Secton 7 0 of the Interna Revenue Code Is amended by nsert-
ng at the end thereof the foowng new subsecton:
(h) Soe Pboprktobshp. For the purposes of sectons 7 0
(a)(1)(D), 7 0(b)(5), and 7 2(g), a busness owned by a soe pro-
pretorshp sha be consdered a partnershp.

Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date
of enactment of the cess Profts Ta ct of 19 0.
Par. 33. Secton 30.7 0-1 s amended as foows:
( ) The word eect occurrng n the second sentence s changed
to use.
( ) The thrd and fourth sentences of subsecton (a) are amended
to read as foows:
n acqurng corporaton s a domestc corporaton whch has absorbed one or
more other domestc corporatons, partnershps, or busnesses owned by soe
propretorshps n a transacton meetng the requrements set forth In secton
7 0(a). ach such absorbed con raton, partnershp, or busness owned by a
soe propretorshp s desgnated a component corporaton of the acqurng
corporaton.
(C) The ast sentence of subsecton (a) s amended to read as
foows:
foregn corporaton can not be an acqurng corporaton and nether a fore gn
corporaton, a foregn partnershp, nor a busness owned by a foregn soe
propretorshp can be u component corporaton (see secton 7 ).
(D) Subsecton (b) s amended to read as foows:
(6) The purpose of Suppement Is n genera to attrbute to an acqurng
corporaton the e stence of corporatons, partnershps, or busnesses owned by
soe propretorshps absorbed by t, together wth the base perod e cess pros
net ncome or defct n e cess profts net ncome and the net capta changes of
such predecessors, n order (1) that a corporaton the corporate fe of whch
In substance, though not n form, Incudes the base perod may use the e cess
profts credt based on ncome and (2) that a corporaton composed n whoe
or n part of quafed component corporatons may compute Its e cess profts
credt n the ght of the base perod e perence of the entre enterprse. ccord-
ngy, an acqurng corporaton whch was not actuay n e stence pror to
anuary 1, 19 0, s, notwthstandng secton 712(a), nevertheess gven the
rght to use the e cess profts credt based on ncome, provded that t has a
quafed component corporaton. Furthermore, every acqurng corporaton whch
Is entted to the e cess profts credt based on ncome Is requred. If t was not
actuay n e stence pror to anuary 1, 19 0, and n every other case may
eect, to take the base perod e perence of a quafed component corporatons
nto account n computng ts average base perod net Income. Fnay, an
acqurng corporaton s requred to add to ts day capta addton or reduc-
ton the net capta addton or reducton of each component corporaton.
Par. 3 . Secton 30.7 0-2 s amended as foows:
( ) y nsertng mmedatey precedng the ast paragraph thereof
the foowng new paragraph :
( ) The acquston of substantay a the propertes of a partnershp n an
e change to whch secton 112(b)(5), or so much of secton 112 (c) or (e as
refers to secton 112(b)(5), or to whch the correspondng provsons of a
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11
pror revenue aw, Is or was appcabe. For the purposes of ths paragraph
a busness owned by a soe propretorshp sha be consdered a partnershp.
(13) The ast paragraph s amended to read as foows:
Te types of transactons set forth n secton 7 0(a), other than those set
forth n secton 7 0(a)(1)(C), ether are embraced wthn the defnton of a
reorganzaton contaned In secton 112(g)(1), are transfers to a controed
corporaton wthn the meanng of secton 112(b)(5) and reated sectons, or
are compete qudatons wthn the meanng of secton 112(b)(6). Snce
Suppement appes ony to cases where there Is a suffcent contnuty of
nterest to |ustfy treatng a corporaton by whch the assets of another
corporaton, a partnershp, or a busness owned by a soe propretorshp have
been acqured, as standng In the pace of ts predecessor, such transactons
must satsfy a the requrements of the reguatons prescrbed under secton
112 wth respect to such transactons n order that the transferee corporaton
may be treated as an acqurng corporaton.
Par. 35. The foowng s nserted mmedatey foowng secton
30.7 0- 3:
Sec. 30.7 0- . Partnershp w quafed component corporaton. partnershp
(or a busness owned by a soe propretorshp) can not be an acqurng corpora-
ton and, therefore, secton 7 0(g) can not operate to make any of ts predecessors
component corporatons of ts acqurng corporaton. In order that a partnershp
(or a busness owned by a soe propretorshp) may be a quafed component
corporaton t must have been actuay n e stence at the begnnng of the ta -
payer s base perod. It s not suffcent that such partnershp (or busness owned
by a soe propretorshp) has a predecessor whch was n e stence at 6uch tme.
Par. 36. The foowng s nserted mmedatey precedng secton
30.7 1- 1:
Sec. 1 . cess Profts Credt of cqurng Corporatons. ( cess
Profts Ta mendments of 19 1.)
Secton 7 1 of the Interna Revenue Code s amended to read as
foows:
Sec. 7 1. owance of cess Profts Credt.
(a) owance. In the case of a ta payer whch Is an acqurng
corporaton whch was n e stence on the date of the begnnng of ts
base perod, the e cess profts credt for any ta abe year sha be an
amount computed under secton 713 or secton 71 , whchever amount
resuts n the esser ta under ths subchapter for the ta abe year for
whch the ta under ths subchapter s beng computed.
(b) ffect of Dscamer of Cheut. If the ta payer states n ts
return for the ta abe year under ths subchapter that t dscams the
use of the credt computed under secton 713 or the use of the credt
computed under secton 71 , the credt so dscamed sha not, for the
purposes of the nterna revenue aws, be appcabe to the computaton
of the ta under ths subchapter for such ta abe year.
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Par. 37. Secton 30.7 1-1 s amended to read as foows:
Sec. 30.7 1-1. cess profts credt of acqurng corporatons. Lke any other
domestc corporaton, an acqurng corporaton whch was actuay n e stence
pror to anuary 1, 19 0, s entted under secton 712(a) to the e cess profts
credt based on ncome, computed under secton 713, or the e cess profts credt
based on nvested capta, computed under secton 71 , whchever credt resuts
n the esser ta for the ta abe year for whch the ta s beng computed.
Whether or not an acqurng corporaton was actuny In e stence pror to
anuary 1, 19 0, however, any such corporaton whch was constructvey n
e stence at the begnnng of Its 8-month base perod by vrtue of havng
acqured a quafed component corporaton s entted under secton 7 1 to the
e cess profts credt based on Income or the e cess profts credt based on
nvested capta, whchever credt resuts n the esser ta for the ta abe year.
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115
very other acqurng corporaton Is entted to use ony the e cess profts credt
based on nvested capta.
If an acqurng corporaton whch Is entted to whchever credt resuts In
the esser ta dscams n Its return for a partcuar ta abe year the use of
ether credt, the credt so dscamed sha not, for the purposes of the nterna
revenue aws, be appcabe to the computaton of the ta for the ta abe year
wth respect to whch the dscamer s made. See secton 729(b)(1).
Par. 38. The foowng s nserted mmedatey precedng secton
30.7 2-1:
Sec. 8. Incorporaton op Partnershp or Soe Propretorshp. ( cess
Profts Ta mendments of 19 1.)

(d) Secton 7 2 of the Interna Revenue Code s amended by Insertng
at the end thereof the foowng new subsecton:
(g) In the case of a partnershp whch s a component corporaton
by vrtue of secton 7 0(b)(5), the computatons requred by ths Sup-
pement sha be made, under rues and reguatons prescrbed by the
Commssoner wth the approva of the Secretary, as If suc partnershp
had been a corporaton. For the purpose of such computatons, n mak-
ng the ad|ustment for Income ta es requred by secton 711(b) (1) ( ),
the partnershp so regarded as a corporaton sha be consdered as hav-
ng dstrbuted a ts net Income as a dvdend.
Seo. 15. verage ase Perod Net Income of cqurng Corporatons.
( cess Profts Ta mendments of 19 1.)
So much of secton 7 2 of the Interna Revenue Code as foows the
secton bendng and precedes the begnnng of subsecton (a) s
amended to read as foows:
In the case of a ta payer whch s an acqurng corporaton the
e cess profts credt of whch s aowed under secton 7 1, ts average
base perod net ncome (for the purpose of the credt computed under
secton 713) f the ta payer was actuay In e stence before anuary
1, 19-10, sha, at the eecton of the ta payer made n ts return for the
ta abe year, be computed as foows, and f the ta payer was not actu-
ay In e stence before such date, sha be computed as foows, n eu
of the method provded n secton 713: .
Sec. 17. ffectve Date. ( cess Profts Ta mendments of 19 1.)
The amendments made by ths ct sha be effectve as of the date of
enactment of the cess Profts Ta ct of 19 0.
Pab. 39. Secton 30.7 2-1 s amended as foows:
( ) Wherever occurrng theren, the term net oss s changed to
defct n e cess profts net ncome, and the term net osses s
changed to defcts n e cess profts net ncome.
( ) The foowng s substtuted for the frst two sentences n sub-
secton (a) :
In computng the e cess profts credt based on Income, an acqurng corpora-
ton whch was actuay In e stence pror to anuary 1, 19 0, may, at Its eec-
ton, use as ts average base perod net ncome the average base perod net n-
come computed under secton 7 2 wth reference to the base perod e perence of
the ta payer and each quafed component corporaton. If It fas so to eect,
Its average base perod net Income sha be the average base perod net ncome
computed under secton 713 soey wth reference to the ta payer s own base
perod e perence and wthout reference to the base perod e perence of any of
the ta payer s component corporatons. The eecton sha be made n the e cess
profts ta return for the partcuar ta abe year. n eecton once made s
Irrevocabe for a partcuar ta abe year, but a new eecton Is granted for each
succeedng ta abe year.
n acqurng corporaton whch was not actuay In e stence pror to anu-
ary 1, 19 0, but whch s entted under secton 7 1 to use the e cess profts
credt based on ncome, because of havng been constructvey In e stence at the
begnnng of ts base perod, s requred In every case to compute ts average
base perod net ncome under secton 7 2.
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116
The foowng three steps are necessary In computng the average base perod
net Income under secton 7 2:
(C) Subsecton (b) s amended by addng at the end thereof a new
paragraph readng as foows:
In the case of a quafed component corporaton whch s a partnershp or a
busness owned by a soe propretorshp, Its e cess profts net ncome or defct
n e cess profts net ncome for each ta abe year In the base perod sha be
determned as though such partnershp or busness owned by a soe propretorshp
hnd been a corporaton for each such year. mong the ad|ustments whch w
be necessary n computng the e cess profts net ncome or defct n e cess profts
net ncome are the foowng:
(1) reasonabe deducton for saary or compensaton to each partner or the
soe propretor for persona servces actuay rendered sha be aowed;
(2) The credt for dvdends receved provded by secton 26(b) and secton
711(h)(1)(G) sha be aowed;
(3) The treatment of capta gans and osses s-ha be that appcabe to cor-
poratons ;
( ) The deducton for chartabe contrbutons sha be that aowed by secton
23(q) :
(5) The ncome ta es aowed as a deducton ether under secton 711(b) (1)
( ) or under secton 23(c) sha be computed as though the partnershp or bus-
ness owned by a soe propretor were a corporaton and n computng such ta es
the partnershp or busness owned by a soe propretorshp sha be deemed to
have dstrbuted a ts net Income as a dvdend.
(D) The reference to secton 711(a) (1) (F) occurrng n subsec-
ton (c) (2) (v) s changed to secton 711 (b)(1) (G).
Par. 0. The foowng s nserted mmedatey precedng secton
30.7 3-1:
Sec. . Computaton or verage ase Perod Net Income. ( cess
Profts Ta mendments of 19 1.)

(d) Secton 7 3(a) of the Interna Revenue Code s amended by
strkng out secton 713(c) and Insertng n eu thereof secton
713(g)
Par. 1. Secton 30.7 3-1 s amended by nsertng after the second
paragraph thereof the foowng new paragraph:
The net capta addton or reducton of a partnershp (or busness owned by
a soe propretorshp) whch s a component corporaton sha be determned as
neary as may be In the same manner as though such partnershp (or busness
owned by a soe propretorshp) were a corporaton. See secton 7 2(g).
Par. 2. Secton 30.752-8 s amended by changng 83 appearng
n tem (8) of the e ampe n subsecton (b) to 183.
Par. 3. Treasury Dec son 50 3, approved March 15,19 1 page 79,
ths uetn sectons 30.1 to 30. . Tte 26, Code of Federa Regua-
tons, 19 1 Sup. s hereby superseded.
(Ths Treasury decson s ssued under the authorty contaned n
secton 62 of the Interna Revenue Code (53 Stat., 32; 26 U. S. C, Sup.
, 62) and the cess Profts Ta mendments of 19 1 (Pubc aw
10, Seventy-seventh Congress).)
Gut T. everno,
Commssoner of Interna Revenue.
pproved May 3, 19 1.
ohn L. Suvan,
ctng Secretary of the Treasury.
(Fed wth the Dvson of the Federa Regster May 5, 19 1, 35 p. m.)
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117
C SS PROFITS T R GUL TIONS 109 .
19 1-6-10595
T. D. 5037
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 30.
Reguatons prescrbed under the cess Profts Ta ct of 19 0
(Subchapter of Chapter 2 of the Interna Revenue Code as added
by the Second Revenue ct of 10 0).
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Tabe of Contents.
Secton.
30.0. Scope of reguatons.
3 ) 710-1. Scope of ta .
30.710-2. Measure and rate of ta .
30.711 (a)-. cess profts net ncome for the ta abe year.
30.711 (a)-2. cess profts net ncome f ncome credt s used.
30.711 (a)-3. cess profts net ncome f nvested capta credt s used.
30.711(a) . Ta for perod of ess than 12 mouths.
30.711 (b)-. Computaton of e cess profts net ncome for ta abe years n
base perod.
30.712- 1. cess profts credt owance.
30.713- 1. cess profts credt based on ncome Determnaton of average
base perod net ncome.
30.713- 2. cess profts credt based on ncome d|ustments n e cess
profts credt on account of capta changes.
30.71 - 1. cess profts credt based on nvested capta.
30.715- 1. Determnaton of nvested capta.
30.718-1. Determnaton of day equty nvested capta Money and prop-
erty pad n.
30.718-2. Determnaton of day equty nvested capta ccumuated earn-
ngs and profts.
30.718-3. Determnaton of day equty nvested capta Dstrbutons n
stock.
30.718-- . Determnaton of day equty nvested capta Reductons by ds-
trbutons.
30.718- 5. Determnaton of day equty nvested capta d|ustments on ac-
count of recept of property on certan ta -free qudatons.
30.719- 1. orrowed nvested capta.
30.720- 1. Reducton of average nvested capta for nadmssbe assets.
30.721- 1. bnormates n Income n ta abe year.
30.721-2. Income arsng out of a cam, award, udgment, or decree, or
nterest thereon.
30.721-3. Long-term contracts.
30.721 . poraton, dscovery, prospectng, research, or deveopment
30.721-5. Change n accountng perod or method of accountng.
30.721-6. Income derved by essor from termnaton of ease.
Sectons 30.0 to 30.752-8 ssued under the authorty contaned n secton 62 of the
Interna Revenue Code (53 Stat., 32), as made appcabe by secton 72 ) of the Interna
Revenue Code, added by the Second Revenue ct of 19 0 (Pubc, No. 801, Seventy-s th
Congress, thrd sesson), and the statutory provsons whch they foow.
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118
Secton.
80.721- 7. Dvdends on stock of foregn corporatons other than foregn per-
sona hodng companes.
30.722- 1. d|ustment of abnormates n ncome or capta.
30.723- 1. Rues where equty nvested capta can not be determned under
secton 718.
80.72 - 1. Invested capta of certan foregn corporatons and corporatons en-
tted to benefts of secton 251.
30.725- 1. Ta aton of persona servce corporatons.
80.725-2. Defnton of persona servce corporaton.
30.725- 3. ecton as to ta abty.
30.726- 1. Corporatons competng contracts under Merchant Marne ct of 1930.
30.727- 1. empt corporatons.
30.729-1. Tme and pace for fng returns.
30.729-2. Tme for payment of ta .
30.729- 3. Foregn ta credt.
30.730- 1. Consodated e cess-profts ta returns of affated corporatons.
30.730-2. Formaton of and changes n affated group.
30.730-3. Corporatons to be ncuded n consodated e cess-profts ta returns.
30.730- . Foregn corporatons whch may be treated as domestc corporatons.
30.731- 1. Corporatons whch mne strategc metas.
80.7 0-1. Purpose and seo e of Suppement .
30.7 0-2. Transactons whereby a corporaton becomes an acqurng corporaton.
80.7 0- 3. ase perod and base perod years of acqurng corporaton. -
30.7 1- 1. ecton of ncome credt.
30.7 2- 1. verage base perod net ncome.
80.7 3- 1. Net capta changes.
80.750-1. Purpose and scope of Suppement .
30.750-2. change.
30.750-3. Contro.
80.750- 1. ghest bracket amount.
80.751- 1. Property pad n for stock.
30.751- 2. Lmtaton on borrowed capta.
80.752- 1. Nature and functon of hghest bracket amount.
80.752-2. Day nvested capta of transferor upon e change for purpose of
computng hghest bracket amount ppcaton of secton 752(a).
30.752 3. ghest bracket amount of transferor and transferee for year fo-
owng e change where transferor n contro ppcaton of secton
752(b) (2) and (c) (2).
80.752 . ghest bracket amount of transferor and transferee for year fo-
owng e change where transferor not n contro ppcaton of
secton 752(b)(3) and (c)(3).
80.752-5. ghest bracket amount of transferor and transferee for year fo-
owng certan e changes under secton 112(b)(5) ppcaton of
secton 752(b) ( ) and (c)( ).
80.752-0. ghest bracket amount of transferee for year foowng certan
112(b)(6) qudatons ppcaton of secton 752(c)(5).
80.752-7. ghest bracket amount for year after e change or qudaton where
more than one transacton n same ta abe year ppcaton of
secton 752(d)(3).
80.752-S. ghest bracket amount of transferor and transferee for ta abe
year of e change.
TITL II C SS PROFITS T (S COND R NU CT OF 19 0).
Sec. 201. cess Profts Ta of 19 0.
The Interna Revenue Code s amended by nsertng after secton 706
the foowng new subchapter whch may be cted as the cess
Profts Ta ct of 19 0 :
Subchapter cess Profts Ta .
Part I.

Sec. 72S. Meanng of Terms Used.
The terms used n ths subchapter sha have the same meanng
08 when used n Chapter 1.
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119
Sec. 729. Laws ppcabe.
(a) Genera Rue. provsons of aw (Incudng penates)
appcabe n respect of the ta es mposed by Chapter 1, sha, nsofar
as not nconsstent wth ths subchapter, be appcabe n respect of
the ta mposed by ths subchapter.
r
Secton 80.0. cope of reguaton . These reguatons dea wth the e cess
profts ta Imposed by the cess Profts Ta ct of 19 0 (Subchapter of
Chapter 2 of the Interna Revenue Code), whch ct s referred to In these
reguatons as the ct, and whch ta s referred to In these reguatons us
the e cess profts ta . Such ta Is to be dstngushed from the e cess-
profts ta based on decared vaue capta stock Imposed by Subchapter of
Chapter 2 of the Interna Revenue Code, referred to n these reguatons ps
the decared vaue e cess-profts ta , and so desgnated by secton 506 of
the Second Revenue ct of 19 0, whch ta contnues n effect and compements
the capta stock ta .
ach secton, subsecton, or paragraph of the Interna Revenue Code set forth
n these reguatons sha be consdered as a part of the respectve reguatons
secton to whch t corresponds.
ach secton of the reguatons has been gven a key number correspondng
to the number of the secton, subsecton, or paragraph of the Interuu Revenue
Code whch the reguatons secton nterprets. Inasmuch as the reguatons
consttute Part 30 of Tte 26 of the 19 1 Suppement to the Code of Federa
Reguatons, each key number Is preceded by the number 30 and a decma
pont. The key number Is foowed by a dash (-) and the dentfyng number
of the reguatons secton.
The reguatons heretofore ssued under secton 725 reatng to persona
servce corporatons as paragraph 1 of Treasury Decson 5036, approved Febru-
ary 5, 19 1 page 276, ths uetn , and the reguatons heretofore ssued under
secton 729 reatng to the tme and pace for fng returns and the tme for pay-
ment of the ta as Treasury Decson 5025, approved December 21, 19 0 C. .
19 0-2, 172 , are hereby superseded.
Sec. 710. Imposton of Ta .
(a) Imposton. There sha be eved, coected, and pad, for
each ta abe year begnnng after December 31, 1939, on the ad|usted
e cess profts net ncome, as defned n subsecton (b), of every corpora-
ton (e cept a corporaton e empt under secton 727) a ta as foows:
(1) Upon ad|usted e cess profts net Incomes of ess tuau
20,000, 25 per centum of the ad|usted e cess profts net Income.
5,000 upon ad|usted e cess profts net ncomes of 20,000; and
upon ad|usted e cess profts net Incomes n e cess of 20,000, and
not n e cess of 50,000, 30 per centum n addton of such e cess.
1 ,000 upon ad|usted e cess profts net ncomes of 50,000;
and upon ad|usted e cess profts net ncomes n e cess of 50,000,
and not n e cess of 100,000, 35 per centum n addton of such
e cess.
31,500 upon ad|usted e cess profts net ncomes of 100,000;
and upon ad|usted e cess profts net ncomes n e cess of 100,000,
and not n e cess of 250,000, 0 per centum n addton of such
e cess.
91,500 upon ad|usted e cess profts net Income of 250,000;
and upon ad|usted e cess profts net Incomes n e cess of 250,000,
and not n e cess of 500,000, 5 per centum n addton of such
e cess.
20 ,000 upon ad|usted e cess profts net Incomes of 500,000;
and upon ad|usted e cess profts net ncomes n e cess of 500,000,
60 per centum In addton of such e cess.
(2) ppcaton of bates n case of certan e changes.
If the ta payer s hghest bracket amount for the ta abe year
computed under secton 752 (reatng to certan e changes) s
ess than 500,000, then n the appcaton of paragraph (1) of
ths subsecton to such ta payer, n eu of each amount, other
than the percentages, specfed n such paragraph, there sha be
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substtuted an amount whch bears the same rato to the amount
so specfed as the hghest bracket amount so computed bears to
500,000.
(b) Defnton of d|usted cess Profts Net Income. s used
n ths secton, the term ad|usted e cess profts net ncome n the
case of any ta abe year means the e cess profts net ncome (as de-
fned n secton 711) mnus the sum of:
(1) Specfc e empton. specfc e empton of 5,000;
(2) cess profts credt. The amount of the e cess profts
credt aowed under secton 712; and
(3) Unused e cess profts credt. In the case of a ta payer
the norma-ta net ncome of whch for the ta abe year s not
more than 25,000, the amount by whch the e cess profts credt
for the precedng ta abe year (f begnnng after December 31,
1039) e ceeds the e cess profts net ncome for such precedng
ta abe year.
Sec. 30.710-1. Scope of ta . The e cess profts ta s mposed upon the
ad|usted e cess profts net ncome of every corporaton, both domestc and
foregn, for each ncome-ta ta abe year begnnng after December 31. 1 39,
e cept certan corporatons whch are e empt. (See secton 727.) corpora-
ton the e cess profts net Income of whch, computed as provded n secton
711 (a) (2) and (3), s not greater than 5,000 need not fe an e cess profts
ta return. (See secton 729 (b).) persona servce corporaton, as defned
n secton 725, may eect not to be sub|ect to the e cess profts ta , thereby
makng ts ncome ta abe to ts sharehoders as provded n Suppement S
of Chapter 1 of the Interna Revenue Code. (See secton 725.)
Sec. 30.710-2. Measure and rate of ta . The ta s based on the ad|usted
e cess profts net ncome for the ta abe year. The ad|usted e cess profts net
ncome s determned by deductng from the e cess profts net ncome (deter-
mned as provded n secton 711) the sum of:
specfc e empton of 5,000,
The e cess profts credt aowed by secton 712, or secton 7 1 n the
case of certan reorganzatons, and
carry-over, n certan cases, of the unused e cess profts credt of
the precedng ta abe year.
The unused e cess profts credt carry-over conssts of the amount by whch
the e cess profts credt for the precedng ta abe year e ceeds the e cess
profts net ncome for such precedng ta abe year, and s avaabe ony f the
precedng ta abe year began after December 31, 1939, and If the norma-ta
net ncome of the corporaton for the current ta abe year does not e ceed
25,000.
s to the e empton of Income derved from certan mnng operatons, see
secton 731, and as to the e cess profts ta of corporatons competng con-
tracts under the Merchant Marne ct of 1936, see secton 726.
The foowng tabe shows the e cess profts ta due for ta abe years be-
gnnng after December 31, 1939, upon certan specfed amounts of ad|usted
e cess profts net ncome. In each nstance the frst fgure of the ad|usted
e cess profts net ncome n the ad|usted e cess profts net ncome coumn s to
be e cuded and the second fgure ncuded. The percentage gven opposte ap-
pes to the e cess of ncome over the frst fgure n the ad|usted e cess profts
net ncome coumn. The ast coumn gves the tota e cess profts ta on an
ad|usted e cess profts net ncome equa to the second fgure In the e cess profts
net ncome coumn.
cess Profts Ta Tabe.
Tota e -
cess profts
ta .
d|usted e cess profts net ncome.
Percent.
0 to 20,000
26
30
36
0
6
60
5,000
1 ,000
31,600
91,600
20 .000
20,000 to 50,000
60,000 to 100,000.
260,000 to 600,000
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The e cess profts ta for any amount of ad|usted e cess profts net Income
not stated n round fgures n the tabe s computed by addng to the e cess
profts ta for the argest amount stated whch s ess than the ad|usted e cess
profts net ncome, the e cess profts ta upon the e cess over that amount at
the rate ndcated n the tabe.
The computaton of the ta s Iustrated by the foowng e ampe:
ampe: The Corporaton has for the caendar year 19 0 an e cess profts
net ncome of 800,000. The amount of ts e cess profts credt as aowed under
secton 712 s 195,000. The e cess profts ta of the corporaton for the ca-
endar year 19 0 s 25 ,000, computed as foows:
cess profts net ncome 800,000
Less:
Specfc e empton 5,000
cess profts credt 195,000
. 200,000
d|usted e cess profts net ncome 000,000
Computaton of e cess profts ta :
Ta on 500,000 (see tabe) 20 ,000
Ta on 100,000 at 50 per cent 50,000
Tota 25 ,000
d|ustments are requred n the above e cess profts ta tabe n the case of
corporatons whch have been through certan ta -free e changes or qudatons
(after December 31, 1939) descrbed In sectons 750 and 752 and whch, as a
consequence, have a hghest bracket amount of ess than 500,000. For defn-
ton and computaton of hghest bracket amount see sectons 750(e) and 752.
Such ad|ustment s accompshed by appyng to such tabe the rato of the
corporaton s hghest bracket amount, ad|usted as provded n secton 752, to
what ts hghest bracket amount woud have been f the ad|ustments requred
by secton 752 had not been made, that Is, 500,000. Thus, f the hghest
bracket amount of a corporaton as computed under secton 752 Is ony 300,000,
the doar amounts n the tabe appcabe to such corporaton w be ony
300 000
. for 60 per cent, of the amounts theren set forth. The eft-hand coumn
dOO.OOU
(headed d|usted cess Profts Net Income ) of the tabe appcabe to
such a corporaton woud therefore read 0 to 12,000, 12,000 to 30,000,
30,000 to 00,000, 60,000 to 150,000, 150,000 to 300,000, and 300,000 up.
The rght-hand coumn (headed Tota cess Profts Ta ) woud read
3,000, 8, 00, 18,900, 5 ,900, and 122, 00. The mdde, or percentage, coumn
woud reman unchanged.
The tabe as so revsed woud be appcabe whether the corporaton s e cess
profts credt s based on ncome or nvested capta. If, after the ad|ustments
provded by secton 752, the hghest bracket amount of a corporaton s st
500,000, no ad|ustment n the tabe s necessary, snce the rato of the hghest
bracket amount to 500,000 w produce a percentage of 100. The hghest
bracket amount of a corporaton can never e ceed 500,000, and therefore any
ad|ustment n the tabe requred by secton 710(a)(2) w operate to reduce
the doar amounts appearng theren and thus to Increase the tota ta .
If the facts reatve to the Corporaton were the same as assumed n the
precedng e ampe n ths secton e cept that the Corporaton has a hghest
bracket amount of ony 300,000 Instead of 500,000, the e cess profts ta of
such corporaton for the caendar year 19 0 woud be 272, 00, computed as
foows:
Computaton of e cess profts ta :
Ta on 300,000 from tabe as revsed
Ta on 300,000 at 50 per cent
Tota 272, 00
If the hghest bracket amount of a corporaton were an amount other than
300,000, and ess than 500,000, the revson of the e cess profts ta tabe
woud be correspondngy dfferent. For e ampe, f the hghest bracket amount
were 200,000, the ad|usted fgures woud be 0 per cent, n eu of 60 per cent,
of the doar amounts set forth n the tabe.
0 3 1 1 5
122, 00
150, 000
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122
For computaton of ta for perods of ess than 12 months, see secton
711(a)(3).
Sec. 711. cess Profts Net Income.
(a) Ta abe Teabs egnnng fter December 81, 1939. The
e cess profts net Income for any ta abe year begnnng after December
SI, 1939, sha be the norma-ta net ncome, as defned In secton
13(a) (2), for such year e cept that the foowng ad|ustments sha be
made:
(1) cess profts credt computed under ncome credt. If
the e cess profts credt Is computed under secton 713, the ad|ust-
ments sha be as foows:
( ) Income Ta es. The deducton for ta es sha be n-
creased by an amount equa to the ta (not ncudng the ta
under secton 102) under Chapter 1 for such ta abe year|
( ) Long-Term Gans and Losses. There sha be e -
cuded ong-term capta gans and osses. There sha be
e cuded the e cess of gans from the sae or e change of
property hed for more than eghteen months whch s of a
character whch s sub|ect to the aowance for deprecaton
provded n secton 23(1) over the osses from the sae or
e change of such property;
(C) Income From Retrement or Dscharge of onds, and
So Forth. There sha be e cuded, In the case of any ta -
payer, Income derved from the retrement or dscharge by the
ta payer of any bond, debenture, note, or certfcate or other
evdence of ndebtedness, f the obgaton of the ta payer
has been outstandng for more than eghteen months, n-
cudng, In case the ssuance was at a premum, the amount
ncudbe n Income for such year soey because of such
retrement or dscharge;
(D) Refunds and Interest on grcutura d|ustment ct
Ta es. There sha be e cuded ncome attrbutabe to refund
of ta pad under the grcutura d|ustment ct of 1933,
as amended, and nterest upon any such refund;
( ) Recoveres of ad Debts. There sha be e cuded
ncome attrbutabe to the recovery of a bad debt f a de-
ducton wth reference to such debt was aowabe from gross
Income for any ta abe year begnnng pror to anuary 1, 19 0;
(F) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to dvdends on stock of
domestc corporatons.
(2) cess profts credt computed under nvested capta
credt. If the e cess profts credt s computed under secton
71 , the ad|ustments sha be as foows:
( ) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to a dvdends on stock of
a corporatons, e cept dvdends (actua or constructve) on
stock of foregn persona-hodng companes;
( ) Interest. The deducton for Interest sha be reduced
by an amount equa to 50 per centum of so much of such
nterest as represents Interest on the Indebtedness ncuded n
the day amounts of borrowed capta (determned under
secton 719(a)) ;
(O) Income Ta es. The deducton for ta es sha be In-
creased by an amount equa to the ta (not ncudng the ta
under secton 102) under Chapter 1 for such ta abe year;
(D) Long-Term Gans and Losses. There sha be e -
cuded ong-term capta gans and osses. There sha be
e cuded the e cess of gans from the sae or e change of prop-
erty hed for more than eghteen months whch s of a character
whch Is sub|ect to the aowance for deprecaton provded
In secton 23(1) over the osses from the sae or e change of
such property;
( ) Income From Retrement or Dscharge of onds, and
So Forth. There sha be e cuded, In the case of any ta payer,
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123
Income derved from the retrement or dscharge by the ta -
payer of any bond, debenture, note, or certfcate or other
evdence of ndebtedness, f the obgaton of the ta payer
has been outstandng for more than eghteen months, Incudng,
n case the ssuance was at a premum, the amount ncudbe n
ncome for such year soey because of such retrement or
dscharge;
(F) Refunds and Interest on grcutura d|ustment ct
Ta es. There sha be e cuded ncome attrbutabe to refund
of ta pad under the grcutura d|ustment ct of 1933, as
amended, and nterest upon any such refund;
(G) Interest on Certan Government Obgatons. The
norma-ta net ncome sha be ncreased by an amount equa
to the amount of the nterest on obgatons hed durng the
ta abe year whch are descrbed n secton 22(b) ( ) any part
of the nterest from whch s e eudbe from gross Income or
aowabe as a credt aganst net ncome, If the ta payer has
so eected under secton 720(d) ; and
( ) Recoveres of ad Debts. There sha be e cuded
ncome attrbutabe to the recovery of a bad debt f a deducton
wth reference to such debt was aowabe from gross Income
for any ta abe year begnnng pror to anuary 1, 19 0.
(3) Ta abe year .kss than tweve months. If the ta abe
year s a perod of ess than tweve months the e cess profts net
ncome sha be paced on an annua bass by mutpyng the
amount thereof by the number of days n the tweve months
endng wth the cose of the ta abe year and dvdng by the
number of days n the ta abe year. The ta sha be such part of
the ta computed on such annua bass as the number of days In
the ta abe year s of the number of days In the tweve months
endng wth the cose of the ta abe year.

Sec. 30.711 (a)-. cess profts net ncome for the ta abe year. Two
methods are provded for determnng the e cess profts net ncome for the
ta abe year. One method, that provded by secton 711(a) (1), Is to be used If
the e cess profts credt Is computed under secton 713, whch credt s referred to
n these reguatons as the ncome credt. The other method, that provded by
secton 711(a)(2), s to be used f the e cess profts credt Is computed under
secton 71 , whch credt s referred to n these reguatons as the Invested capta
credt. s to corporatons havng the opton to eect as between the Income
credt and the Invested capta credt, and corporatons requred to use the
Invested capta credt, see sectons 712 and 7 1. The norma-ta net Income
for the ta abe year as defned In secton 13(a)(2) must frst be ascertaned
under ether method. The norma-ta net ncome may be a mnus quantty
for the purpose of secton 711 If and to the e tent not attrbutabe to a
net operatng oss deducton. The norma-ta net Income havng been deter-
mned, certan ad|ustments must be made as provded In secton 711(a) (1) or
(2), whchever s appcabe.
Sec. 30.711(a)-2. cess profts net ncome f ncome credt s used. If the
e cess profts credt for the ta abe year Is computed under secton 713, the
norma-ta net ncome for such year sha be ad|usted as provded In secton
711(a)(1).
In makng the ad|ustment provded In secton 711(a)(1)( ), the amount
by whch the deducton for ta es Is to be Increased Is an amount equa to the
ta for the ta abe year under Chapter 1 (not ncudng the ta mposed
under secton 102) after the aowance of the credt for foregn ta es as
provded n sectons 31 and 131.
In makng the ad|ustment provded n secton 711(a)(1)(C), the term
ndebtedness as used theren Incudes Indebtedness assumed by the ta -
payer even though such ndebtedness Is evdenced, so far as the ta payer s
concerned, ony by a contract (whch has been outstandng for more than 18
months) wth the person whose abtes have been assumed. so, a re-
newa obgaton s to be consdered to be outstandng for more than 18
months f the orgna obgatons and the renewa obgatons taken together
have been outstandng for a tota of more than 18 months. The term other
evdence of ndebtedness does not ncude open account book entres.
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12
The refunds of grcutura d|ustment ct ta es referred to In secton
711(a)(1)(D) ncude ony those made under Tte II of the Revenue ct of
1936 and refunds made to processors under secton 15(a) of the grcutura
d|ustment ct as reenacted by secton 601 of the Revenue ct of 1936.
The provsons of secton 711(a)(1)( ), reatng to recoveres of bad debts,
are not appcabe n the case of a ta payer usng the reserve method of
treatng bad debts as provded n sectons 19.23(k)- and 19.23(k)-5 of Regu-
atons 103.
The computaton of the e cess profts net Income In the cases where the Income
credt Is used may be ustrated by the foowng e ampe:
ampe: The facts wth respect to the Corporaton for the caendar year
19 0 are as foows:
(1) The norma-ta net ncome of the corporaton Is 00,000.
(2) The ta of the corporaton under Chapter 1 (e cudng any ta
abty under secton 102 and after credt for foregn ta ) s 83,000.
(3) The corporaton has ong-term capta gans of 100,000 and ong-
terms capta osses of 75,000. It has gans of 50,000 and osses of
100,000 from saes of property hed for more than 18 months and of a
character sub|ect to the aowance for deprecaton provded n secton
23(1).
( ) On anuary 1, 1930, the corporaton ssued at a premum of 0,000
bonds wth a tota face vaue of 800,000, maturng December 31, 19 9.
On anuary 1, 19 0, the corporaton purchases one-haf of the amount of
the bonds for 390,000. For the years 1930 to 1939, ncusve, t had
returned 10,000 as Income wth respect to the premum on the bonds
t so purchased. The corporaton has never been n an unsound fnanca
condton.
(5) The corporaton derves ncome n the amount of 00 attrbutabe
to refund of ta pad under the grcutura d|ustment ct of 1933, as
amended, and Interest upon such refund.
(6) For the caendar year 1935, the corporaton deducted 10,000 as a
bad debt, whch deducton was aowabe. Durng the caendar year 19 0,
t recovers 5,000 wth respect to such debt.
(7) The corporaton receves as dvdends: 100,000 of the cass wth
respect to whch a credt s aowed by secton 26(b), 20,000 from a
Chna Trade ct corporaton, and 20,000 from a foregn corporaton whch
Is not a foregn persona-hodng company.
If the ncome credt s used, the e cess profts net Income of the corpora-
ton for the caendar year 19 0 s 231,600, computed as foows:
Norma-ta net ncome 00,000
Pus:
Long-term capta osses 75, 000
Less:
Income ta under Chapter 1 83,000
Long-term capta gans 100, 000
Income from retrement of bonds 20, 000
Income from refunds of grcutura d|ustment ct
ta es and Interest thereon 00
Income from recovery of bad debts 5,000
ddtona dvdends receved credt (100 per cent of tota
dvdends of 120,000 receved from domestc corpora-
tons ncudng the Chna Trade ct corporaton, ess
credt of 85,000 aready aowed by secton 26(b) for
dvdends receved, or 120,000 mnus 85,000) 35,000
75,000
2 3, 00
cess profts net ncome 231,600
It s to be observed that no ad|ustment under secton 711(a) (1) ( ) Is requred
to be made for the gans and osses from the sae of property hed for more
than 18 months whch s of a character sub|ect to aowances for deprecaton,
snce such osses e ceed such gans. It s aso to be observed that no ad|ust-
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125
ment under secton 711(a) (1) (F) s requred to be made for the 20,000 dv-
dends receved from the foregn corporaton.
Sec. 30.711 (a)-3. cess profts net ncome f nvested capta credt s used.
If the e cess profts credt for the ta abe year s computed under secton 71 ,
the norma-ta net ncome for such year sha be ad|usted os provded n sec-
ton 711(a) (2). Such ad|ustments are the same as the ad|ustments provded n
secton 711(a) (1) e cept that the foowng addtona ad|ustments are requred
to be made:
(a) There sha be added to the norma-ta net Income:
(1) n amount equa to 60 per cent of the deducton for Interest on the
ndebtedness ncuded In the day amounts of borrowed capta (determned
under secton 719(a)); and
(2) n amount equa to the amount of nterest on obgatons hed durng
the ta abe year whch are descrbed In secton 22(b)( ), any part of the
nterest from whch s e cudbe from gross ncome or aowabe as a credt
aganst net ncome, f the corporaton has eected under secton 720(d) to
treat such nterest as ta abe for e cess profts ta purposes. s used In
paragraph (2), the term nterest ncudes, In the case of obgatons
ssued at a dscount, so much of such dscount as (for purposes of determn-
ng gan or oss upon sae or other dsposton) Is treated ns Interest n the
hands of the ta payer for the ta abe year.
(6) There sha be subtracted from the norma-ta net ncome the amount of
dvdends receved from foregn corporatons, e cept dvdends (actua or con-
structve) on stock of foregn persona hodng companes.
The computaton of the e cess profts net Income In cases where the Invested
capta credt s used may be ustrated by the foowng e ampe:
ampe: The facts present n the e ampe In secton 30.711(a)-2 wth respect
to the Corporaton are aso present wth respect to the T Corporaton, and
n addton the foowng facts are present wth respect to the atter corporaton:
(a) Durng the caendar year 19 0 the corporaton pays nterest amount-
ng to 8,000 on the bonds referred to n ( ) of that e ampe.
(6) Throughout the entre caendar year 19 0 the corporaton owns
100,000 of Treasury bonds 19 -5 and 100,000 of bonds Issued by a State.
It derves ncome for the year 19 0 from Interest on such bonds amountng
to 6,000. The corporaton eects under secton 720(d) to ncrease ts
norma-ta net ncome for e cess profts ta purposes for the year 19 0 by
an amount equa to the amount of nterest on a obgatons hed durng
that year whch are descrbed n secton 22(b) ( ).
If the nvested capta credt s used, the e cess profts net ncome of the
corporaton for the caendar year 19 0 s 2 1,600, computed as foows:
Norma-ta net ncome 00,000
Pus:
Long-term capta osses 75, 000
50 per cent of Interest on ndebtedness Incuded In
borrowed capta 2 ,000
Interest on Government and State obgatons 6,000
105,000
505,000
Less:
Income ta under Chapter 1 83, 000
Long-term capta gans 100,000
Income from retrement of bonds 1 20,000
Income from refunds of grcutura d|ustment ct
ta es and nterest thereon 00
Income from recovery of bad debts 5,000
ddtona dvdends receved credt ( 1 0,000 dvdends
receved from both domestc and foregn corporatons
ess credt of 85,000 aready aowed by secton 26(b)
for dvdends receved) 55,000
263, 00
cess profts net ncome under secton 711(a)(2)
2 1,600
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Sec. 30.711(a)- . Ta for perod of ess than 12 months Sectons 711(a) (S)
provdes that f the ta abe year s a perod of ess than 12 months true
e cess profts net ncome sha be paced on an annua bass by mutpyng
the amount thereof by the number of days In the 12 months endng wth the
cose of the ta abe year and by dvdng such product by the number of days
n the ta abe year. tentatve ta sha then be computed as though the
e cess profts net ncome were the amount so ascertaned. The actua ta
for the ta abe year sha be an amount whch bears the same rato to such
tentatve ta as the number of days n the ta abe year bears to the tota
number of days In the 12 months endng wth the cose of the ta abe year.
The frst ta abe year of a corporaton whch fes a return of ncome re-
ceved or accrued from the date of ts ncorporaton to the end of ts frst
accountng perod s a perod of ess than 12 months, where the perod between
the date of Incorporaton and the end of such frst accountng perod s ess than
12 months.
Sec. 711. cess Profts Net Income.

(b) Ta abe Years n ase Perod..
(1) Genera rue and ad|ustments. The e cess profts net
ncome for any ta abe year sub|ect to the Revenue ct of 1930
sha be the norma-ta net Income, as defned n secton 13(a)
of such ct; and for any other ta abe year begnnng after De-
cember 31, 1937, and before anuary 1, 19 0, sha be the speca-
cass net ncome, as defned n secton 1 (a) of the appcabe
revenue aw. In ether case the foowng ad|ustments sha be
made (for addtona ad|ustments n case of certan reorganza-
tons, see secton 7 2(e)) :
( ) Income Ta es. The deducton for ta es sha be n-
creased by an amount equa to the ta (not ncudng the
ta under secton 102) for such ta abe year under Tte I
or Chapter 1, as the case may be, of the revenue aw appcabe
to such year;
( ) Long-Term Gans and Losses. There sha be e cuded
ong-term capta gans and osses. There sha be e cuded
the e cess of gans from the sae or e change of property
hed for more than eghteen months whch s of a character
whch s sub|ect to the aowance for deprecaton provded
n secton 23(1) over the osses from the sae or e change of
Such property;
(C) Income from Retrement or Dscharge of onds, and
So Forth. There sha be e cuded, n the case of any ta -
payer, ncome derved from the retrement or dscharge by the
ta payer of any bond, debenture, note, or certfcate or other
evdence of ndebtedness, f the obgaton of the ta payer has
been outstandng for more than eghteen months, ncudng, n
case the ssuance was at a premum, the amount ncudbe
In Income for such year soey because of such retrement or
dscharge;
(D) Deductons on ccount of Retrement or Dscharge of
onds, and So Forth. If durng the ta abe year the ta payer
retres or dscharges any bond, debenture, note, or certfcate
or other evdence of ndebtedness, f the obgaton of the ta -
payer has been outstandng for more than eghteen months,
the foowng deductons for such ta abe year sha not be
aowed:
() The deducton aowabe under secton 23(a) for
e penses pad or Incurred n connecton wth such retre-
ment or dscharge;
() The deducton for osses aowabe by reason of
such retrement or dscharge; and
() In case the ssuance was at a dscount, the
amount deductbe for such year soey because of such
retrement or dscharge;
( ) Casuaty, Demoton, and Smar Losses. Deductons
under secton 23(f) for osses arsng from fres, storms, shp-
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wreck, or other casuaty, or from theft, or arsng from the
demoton, abandonment, or oss of usefu vaue of property,
not compensated for by nsurance or otherwse, sha not be
aowed;
(F) Repayment of Processng Ta to endees. The de-
ducton under secton 23(a), for any ta abe year, for e penses
sha be decreased by an amount whch bears the same rato to
the amount deductbe on account of any repayment or credt
by the corporaton to ts vendee of any amount attrbutabe to
any ta under the grcutura d|ustment ct of 1933, as
amended, as the e cess of the aggregate of the amounts so
deductbe n the base perod over the aggregate of the amounts
attrbutabe tc ta es under such ct coected from Its vendees
whch were ncudbe n the corporaton s gross ncome n the
base perod and whch were not pad, bears to the aggregate of
the amounts so deductbe n the base perod;
(G) Payment of udgments, and So Forth. Deductons at-
trbutabe to any cam, award, |udgment, or decree aganst the
ta payer, or nterest on any of the foregong, sha not be
aowed f n the ght of the ta payer s busness t was ab-
norma for the ta payer to ncur a abty of such character
or, If the ta payer normay ncurred such abty, the amount
of such abty n the ta abe year was grossy dsproporton-
ate to the amount of such abty n the four prevous
ta abe years;
( ) e pendtures for ntangbe drng and deveop-
ment costs pad or Incurred In or for the drng of wes or the
preparaton of wes for the producton of o or gas, or e pend-
tures for deveopment costs n the case of mnes, whch the
ta payer has deducted from gross Income as an e pense, sha
not be aowed to the e tent that In the ght of the ta payer s
busness t was abnorma for the ta payer to Incur a abty
of such character or, f the ta payer normay Incurred such
abty, to the e tent that the amount of such abty n the
ta abe year was grossy dsproportonate to the amount of such
abty n the four prevous ta abe years; and
(I) Dvdends Receved. The credt for dvdends receved
sha appy, wthout mtaton, to dvdends on stock of domes- .
tc corporaton.
(2) Capta gans and osses. For the purposes of ths sub-
secton the norma-ta net ncome and the speca-cass net n-
come referred to n paragraph (1) sha be computed as f sec-
ton 23(g) (2), secton 23(k) (2), and secton 117 were part of the
revenue aw appcabe to the ta abe year the e cess profts net
ncome of whch s beng computed, wth the e cepton that the
net short-term capta oss carry-over provded In subsecton (e)
of secton 117 sha be appcabe to net short-term capta osses
for ta abe years begnnng after December 31, 193 . Such e -
cepton sha not appy for the purposes of computng the ta under
ths subchapter for any ta abe year begnnng before anuary
1, 19 1.
Sec. 30.711 (b)-. Computaton of e cess profts net ncome for ta abe year
n base perod. If the e cess profts credt for the ta abe year s computed
under secton 713, t s necessary to compute the e cess profts net ncome
for each ta abe year of the base perod. The ta abe years n the base
perod are those begnnng after December 31, 1935, and before anuary 1,
19 0. For a ta abe year begnnng after December 31, 1935, and before
anuary 1, 1938, the startng pont In the determnaton of the e cess profts
net Income s the norma-ta net ncome, as defned In secton 13(a) of the
Revenue ct of 1936. For a ta abe year begnnng after December 31, 1937,
the startng pont s the speca-cass net ncome, as defned n secton 1 (a)
of the Revenue ct of 1938 and the Interna Revenue Code. The amount
to be used s the correct norma-ta net ncome or speca-cass net Income,
as t e case may be, regardess of the amount shown n the return for such
year and regardess of the fact that the assessment of a defcency or the aow-
ance of a refund may be barred by the statute of mtatons.
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128
The norma-tar net Income or the speca-cass net Income, as the case
may be, a to be ad|usted frst as requred by secton 711(b) (2) and then aa
requred by secton 711(b)(1).
The ad|ustments requred by sectons 711(b)(2) and 711(b)(1)( ) may be
ustrated by the foowng e ampe:
ampe: The norma-ta net ncome of the Corporaton for the caendar
year 1936 Is 50,000 and ts speca-cass net ncome for the caendar year
1939 s 200,000. In December, 1935, the corporaton purchased shares of stock
and bonds of other corporatons for a tota purchase prce of 25,000. The
corporatons were never ncuded n a consodated return. Such shares of
stock and bonds were capta assets. They became worthess n 1936 and the
bonds were charged off durng that year. In addton, the corporaton had
gans and osses as foows:
1938 1 39
Short-term capta gans 12,000 None
Short-term capta osses (dsregardng any carry-over) 26,000 None
Long-term capta gans 10,000 25,000
Long-term capta osses 30,000 1,000
Net gan or net oss from the saes of property hed for
more than 18 months of the character sub|ect to the
aowance for deprecaton provded In secton 23(1) 5,000 3, 000
The ad|ustments requred n computng the e cess profts net ncome of the
corporaton for 1936 and 1939 are as foows:
1936
Norma-ta net ncome 50,000
d|ustment under secton 711(b) (2) :
dd deductons for oss on worthess stock and bonds ( 25,000)
and for capta net oss ( 2,000) ( 25,000 pus 2,000 or 27,000).. 27, 000
77,000
Subtract deducton for net ong-term capta oss of 20,000 and for
net oss of 5,000 from saes of property hed for more than 18
months of the character sub|ect to the aowance for depreca-
ton provded n secton 23(1) 25,000
I orma-ta net Income ad|usted as requred by secton 711(b) (2) 52,000
d|ustments under secton 711(b)(1)( ):
dd net ong-term capta oss of 20,000 20,000
Norma-ta net ncome ad|usted as requred by secton 711(b)(2) and
secton 711(b)(1)( ) 72,000
1939
Speca-cass net ncome 200,000
(No ad|ustment requred under secton 711(b)(2).)
d|ustments under secton 711(b) (1) ( ):
Deduct net ong-term capta gan of 2 ,000 ( 25,000 1,000) and
net gan of 3,000 from saes of property hed for more than
18 months of the character sub|ect to the aowance for depre-
caton as provded n secton 23(1) 27,000
Speca-cass net ncome ad|usted as requred by sectons 711(b)(2)
and 711(b)(1)( ) 173,000
In makng the ad|ustments requred to be made by secton 711(b) (1) ( ) the
amount of the ncome ta requred to be deducted Is the correct amount
for the ta abe year, regardess of the fact that the assessment or coecton
of any defcency or the aowance of any refund may be barred by the statute
of mtatons.
1 Snce under secton 117 of the Code, short-term capta osses are deductbe ony to the
e tent of short-term capta gans, the e cess of short-term capta osses over short-term
capta gans ( 51,000 ( 25,000 on account of worthess stock and bonds, pus 26,000
other short-term capta ooses) mnus 12,000, or 89,000) does not enter Into the ad-
|ustment.
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129
In makng the ad|ustments provded In secton 711(b)(1)(D), the deduc-
ton aowabe for any premum pad on bonds when caed for redempton sha
be dsaowed, but the deducton aowabe for any dscount amortzed up to
the date of retrement or dscharge sha not be dsaowed. penses ncurred
n ssung bonds whch are amortzed sha be treated n the same manner as
dscounts. The ad|ustments requred by secton 711(b)(1)(D) may be Ius-
trated by the foowng e ampe:
ampe: The norma-ta net Income of the M Corporaton for the caendar
year 1936 Is 75,000. On anuary 1, 1936, the corporaton Issued 1,200 non-
sera bonds wth a tota face vaue of 120,000 at a dscount of 1 , 00, matur-
ng on December 31, 195 . On ugust 1, 1936, the corporaton purchased
one-s th of the amount of the bonds for 19,000. The deducton aowabe under
secton 23(a) of the Revenue ct of 1936 for e penses pad In connecton wth
such purchase amounted to 1,200. The ad|ustments requred by secton 711(b)
(1) (D) n computug the e cess profts net Income of the corporaton for 1936
are as foows:
Norma-ta net Income 75,000
d|ustment under secton 711(b)(1)(D) :
dd:
(I) Deducton aowabe for e penses n connecton
wth retrement 1, 200
(II) Deducton for osses aowabe by reason of re-
trement None
( ) mount deductbe because of retrement or ds-
charge of bonds ( 1,210 computed as In Schedue
beow) 1,210
2, 10
Norma-ta net Income ad|usted as requred by secton 711(b) (1) (D)__
Schedue
(a) nnua amortzaton on 1 , 00 dscount ( 1 , 00-5-20)
(b) nnua amortzaton of dscount on bock of bonds retred
( 720 3)
(c) Monthy amortzaton of dscount on bock of bonds retred
( 120-12)
(d) mortzed dscount deductbe on bock of bonds retred on
ugust 1, 1936 ( 10 19)
(e) Purchase prce of bonds retred on ugust 1, 1936
) -
(g) Tota amount of dscount deductbe on account of retrement
of bonds on ugust 1, 1936 ( 19,000 17,600)
(ft) mount deductbe because of retrement or dscharge of
bonds (tem (g) ess Item (d), or 1, 00 190)
The ad|ustments requred by secton 711(b)(1)(F) may be Iustrated by
the foowng e ampe:
ampe: The norma-ta net Income of the O Corporaton for the caendar
year 1936 s 75,000. Durng that year the corporaton coected from ts ven-
dees 2,000 attrbutabe to ta es under the grcutura d|ustment ct of 1933,
as amended. The 2,000 was Incuded n the gross Income of the corporaton
for 1936 and the ta es to whch such amount was attrbutabe were not pad.
Durng the years 1936 and 1937 the corporaton repad to ts vendees 0,000
and 2,000, respectvey, of amounts It had coected from them for 1936 and
pror years attrbutabe to such ta es. It made no such repayments durng the
years 1938 and 1939. The amount repad to the vendees In 1936 s deductbe
from the corporaton s gross Income for that year. The ad|ustments requred by
secton 711(b)(1)(F) In computng the e cess profts net Income of the cor-
poraton for 1936 are as foows:
Norma-ta net ncome 75,000
d|ustment under secton 711(b)(1)(F):
dd: The amount of ,500, computed as shown In the schedue
beow ,500
77, 10
720
120
10
190
19,000
17,600
1, 00
1,210
Norma-ta net ncome ad|usted as requred by secton 711(b) (1) (F)_.
79,500
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130
Schedue
( ) mount deductbe under secton 23(a) for 1936 on account of
repayment to vendees of amounts coected from vendees at-
trbutabe to ta es under grcutura d|ustment ct of 1933,
as amended, whch were not pad 6,000
(6) ggregate amounts descrbed In (a) deductbe n the base
perod ( 6,000 pus 2,000) 8,000
(c) ggregate of amounts descrbed In (a) coected from ven-
dees and ncudbe n gross Income of corporaton n base
perod 2, 000
(d) cess of (6) over (o) ( 8,000 mnus 2,000) 0,000
(e) Rato of (d) to (6) 6/8
(O mount of ad|ustment ( W (a), or 6 of 6,000
(6) 8 /
In connecton wth the ad|ustments requred to be made by secton 711(b) (1)
(G) and ( ), see the reguatons under secton 721 reatng to cams, awards.
udgments, or decrees, and to the determnaton of abnormaty ether n knd
or In amount.
Sec. 732. cess Pbofts Credt owance.
(a) Domestc Corporatons. In the case of a domestc corpora-
ton whch was In e stence before anuary 1, 19 0, the e cess profts
credt for any ta abe year sha, at the eecton of the ta payer made
n ts return for such ta abe year, be an amount computed under sec-
ton 713 or secton 71 . (For eecton n case of certan reorganzatons
of corporatons not quafed under the precedng sentence, see secton
7 1.) In the case of a other domestc corporatons the e cess profts
credt for any ta abe year sha be an amount computed under secton
71 . In the case of a domestc corporaton whch for any ta abe year
does not fe a return before the e praton of the tme prescrbed by
aw for fng such return, the e cess profts credt for such ta abe
year sha be an amount computed under secton 71 .
(b) Foregn Corporatons. In the case of a foregn corporaton
engaged n trude or busness wthn the Unted States or havng an
offce or pace of busness theren, the frst ta abe year of whch under
ths subchapter begns on any date n 19 0, whch was n e stence
on the day forty-eght months pror to such date and whch at any tme
durng each of the ta abe years n such forty-eght months was engaged
n trade or busness wthn the Unted States or had an offce or pace
of busness theren, the e cess profts credt for any ta abe year sha,
at the eecton of the ta payer n ts return for such ta abe year be
an amount computed under secton 713 or secton 71 . In the case of
a other such foregn corporatons the e cess profts credt for any ta -
abe year sha be an amount computed under secton 71 . In the case
of a foregn corporaton whch for any ta abe year does not fe a
return before the e praton of the tme prescrbed by aw for fng
such return, the e cess profts credt for such ta abe year sha be an
amount computed under secton 71 .
Sec. 30.712-1. cess profts credt owance. (a) Two methods are pro-
vded for computng the e cess profts credt: (1) The ncome method under
Whch the credt s computed as provded n secton 713, and (2) the nvested
capta method under whch the credt s computed as provded n secton 71 .
(6) The foowng corporatons are gven the opton to adopt ether method:
(1) domestc corporaton whch was n e stence before anuary 1,
19 0.
(2) domestc corporaton not In e stence before anuary 1, 19 0, but
gven the rght to an eecton under secton 7 1. . (For computaton of e -
cess profts credt based on ncome n such cases, see sectons 7 0 to 7 .)
(3) foregn corporaton () whch s engaged n trade or busness
wthn the Unted States or havng an offce or pace of busness theren
at any tme durng the ta abe year; (II) the frst ta abe year of whch
for the purposes of the e cess profts ta begns on any date In 19 0;
() whch was In e stence on the day 8 months pror to such date;
and (v) whch, at any tme durng each of the ta abe years n such 8
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131
months, was engaged In trade or busness wthn the Unted States or had
an offce or pace of busness theren. s to what consttutes beng en-
gaged n trade or busness wthn the Unted States, see secton 19.231-1
of Reguatons 103.
The eecton, whch wthn the meanng of the ct must be unquafed, sha
be made In the e cess profts ta return for the partcuar ta abe year, fed
wthn the tme prescrbed by aw. The eecton for that year once made s
rrevocabe after the e praton of such tme, but a new eecton s granted
for each succeedng ta abe year. The tme prescrbed by aw for fng
the return ncudes the perod of any e tenson of tme granted by the
Commssoner.
(c) The foowng corporatons sub|ect to the e cess profts ta have no
opton and sha use the Invested capta method provded n secton 71 :
(1) ny corporaton, domestc or foregn, whch fas to fe a return
for the ta abe year wthn the statutory perod for fng the return,
or wthn such perod as e tended.
(2) other domestc and foregn corporatons not descrbed n para-
graph (6) of ths secton.
Seo. 713. cess Profts Ceedt ased on Income.
(a) mount of cess Profts Credt. The e cess profts credt
for any ta abe year, computed under ths secton, sha be
(1) Domestc corporatons. In the case of a domestc cor-
poraton
( ) 05 per centum of the average base perod net ncome,
as defned n subsecton (b),
( ) Pus 8 per centum of the net capta addton as de-
fned n subsecton (c), or
(C) Mnus ( per centum of the net capta reducton as
defned n subsecton (c).
(2) Foregn corporatons. In the case of a foregn corpora-
ton, 95 per centum of the average base perod net Income.
(b) verage ase Perod Net Income. For the purposes of ths
secton the average base perod net Income of the ta payer sha be
determned as foows:
(1) y computng the aggregate of the e cess profts net n-
come for each of the ta abe years of the ta payer begnnng
after December 31, 1935, and before anuary 1, 19 0, reduced, In
the case of each such ta abe year n whch the deductons pus
the credt for dvdends receved e ceeded the gross Income, by
the amount attrbutabe to such e cess under paragraph ( ) ;
(2) y dvdng the amount ascertaned under paragraph (1)
by the tota number of months n a such ta abe years; and
(3) y mutpyng the amount ascertaned under paragraph
(2) by tweve.
( ) For the purposes of paragraph (1)
( ) In determnng whether, for any ta abe year, the
. deductons pus the credt for dvdends receved e ceeded the
gross ncome, and n determnng the amount of such e cess,
the ad|ustments provded In secton 711(b)(1) sha be made;
and
( ) The amount attrbutabe to any ta abe year In whch
there s such an e cess sha be the amount of such e cess,
e cept that such amount sha be zero f there s ony one
such year, or, f more than one, sha be zero for the year
In whch such e cess s the greatest.
(5) For the purposes of paragraph (1), f the ta paytr was
In e stence durng ony part of the 8 months precedng the begn-
nng of ts frst ta abe year under ths subchapter (herenafter
n ths paragraph caed base perod ), ts e cess profts net
Income
( ) For each ta abe year of tweve months (begnnng
wth the begnnng of such base perod) durng whch It was
not n e stence, sha be an amount equa to 8 per centum
of the e cess of
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(1) the day nvested capta for the frst day of the
ta payer s frst ta abe year begnnng after December 31,
1939, over
() an amount equa to the same percentage of such
day nvested capta as Is appcabe under secton 720
n reducton of the average Invested capta of the pre-
cedng ta abe year;
( ) for the ta abe year of ess than tweve months con-
sstng of that part of the remander of the base perod durng
whch t was not In e stence, sha be the amount ascertaned
for a fu year under subparagraph ( ), mutped by the
number of days n such ta abe year of ess than tweve months
and dvded by the number of days n the tweve months end-
ng wth the cose of such ta abe year.
(6) In no case sha the average base perod net ncome be
ess than zero.
(7) For computaton of average base perod net Income In
case of certan reorganzatons, see secton 7 2.
(c) d|ustments n cess Profts Credt on ccount of Capta
Changes. For the purposes of ths secton
(1) The net capta addton for the ta abe year sha be the
e cess, dvded by the number of days n the ta abe year, of the
aggregate of the day capta addton for each day of the ta abe
year over the aggregate of the day capta reducton for each
day of the ta abe year.
(2) The net capta reducton for the ta abe year sha be the
e cess, dvded by the number of days n the ta abe year, of
the aggregate of the day capta reducton for each day of the
ta abe year over the aggregate of the day capta addton for
each day of the ta abe year.
(3) The day capta addton for any day of the ta abe year
sha be the aggregate of the amounts of money and property pad
In for stock, or as pad-n surpus, or as a contrbuton to capta,
after the begnnng of the ta payer s frst ta abe year under ths
subchapter and pror to such day. In determnng the amount of
any property pad n, such property sha be ncuded n an
amount determned n the manner provded n secton 718(a)(2).
dstrbuton by the ta payer to ts sharehoders n ts stock
or rghts to acqure ts stock sha not be regarded as money
or property pad In for stock, or as pad-n surpus, or as a con-
trbuton to capta. The amount ascertaned under ths para-
graph sha be reduced by the e cess, f any, of the e cuded capta
for such day over the e cuded capta for the frst day of the
ta payer s frst ta abe year under ths subchapter. For the pur-
poses of ths paragraph the e cuded capta for any day sha be
an amount equa to the sum of the foowng:
( ) The aggregate of the ad|usted bass (for determnng
oss upon sae or e change) as of the begnnng of such day,
of obgatons hed by the ta payer at the begnnng of such
day, whch are descrbed n secton 22(b)( ) ( ), ( ), or
(C) any part of the nterest from whch Is e cudbe from
gross Income or aowabe as a credt aganst net Income; and
( ) The aggregate of the ad|usted bass (for determnng
oss upon sae or e change) as of the begnnng of such day,
of stock of domestc corporatons hed by the ta payer at
the begnnng of such day.
The day capta addton sha In no case be ess than zero.
(For day capta addtons and reductons In case of certan re-
organzatons, see secton 7 3.)
( ) The day capta reducton for any day of the ta abe year
sha be the aggregate of the amounts of dstrbutons to share-
hoders, not out of earnngs and profts, after the begnnng of the
ta payer s frst ta abe year under ths subchapter and pror to
such day.
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Sec. 30.713-1. cess profts credt based on ncome Determnaton of average
base perod net ncome. (a) Corporaton n e stence durng the entre base
perod. In order for a corporaton to determne the amount of Its e cess profts
credt based on ncome for any partcuar ta abe year, t Is necessary frst to
compute the amount of the average base perod net Income, 90 per cent of
whch s the startng pont for computng the e cess profts credt based on
ncome. If the corporaton was n e stence durng the entre 8 months pre-
cedng the begnnng of ts frst e cess profts ta ta abe year, the foowng
steps are requred for such computaton:
(1) The e cess profts net ncome for each of the ta abe years n the
base perod (years begnnng after December 81, 1985, and before anuary
1, 19 0) s to be determned as provded n secton 711(b).
(2) The aggregate of the e cess profts net Income for the ta abe years
n the base perod, dsregardng any ta abe year for whch the e cess profts
net ncome s ess than zero, Is to be computed.
(3) From such aggregate amount there s to be deducted the sum of
the amounts by whch the deductons pus the credt for dvdends receved
e ceed the gross ncome for those ta abe years for whch there s such
an e cess, e cept the year for whch such e cess s the greatest If there
Is such an e cess for ony one ta abe year, there sha be no such deduc-
ton. In computng such e cess the amounts of gross ncome, deductons,
and credt for dvdends receved must be ad|usted to the e tent requred
In determnng e cess profts net ncome for the ta abe years n the base
perod under secton 711(b). The credt for nterest receved aowed
by secton 26(a), though taken Into account In computng e cess profts
net ncome, s not taken nto account n computng the e cess referred
to n ths paragraph.
( ) Such aggregate amount as so reduced s to be dvded by the num-
ber of months n the ta abe years n the base perod and the quotent
so obtaned s to be mutped by 12. In no case sha the average base
perod net ncome be ess than zero.
The computaton of the average base perod net Income may be ustrated
by the foowng e ampe:
ampe: The e cess profts net ncome, credt for Interest receved, credt
for dvdends receved, deductons, and gross ncome (a computed by makng
the ad|ustments provded n secton 711(b)) of the Corporaton (a domestc
corporaton), for the years 1936 to 1939, are as foows:
1936
1937
1938
1939
100,000
10.000
20,000
60,000
190,000
100, 000
10.000
0,000
150.000
100,000
60,000
10,000
28,000
150,000
125,000
30,000
10,000
80. OO
9ft 000
S f I
Credt for dvdends receved .
Deductons
Gross ncome
160,000
The average base perod net ncome of the corporaton s 20,000, computed as
foows:
(a) ggregate of e cess profts net Income for ta abe years n base
perod (other than those years for whch there s a defct n such
ncome), before reducton requred by secton 713(b)(1) ( 100,000
pus 30,000) 130,000
(6) mount tem (o) above s to be reduced as requred by secton
713(b) (1) and ( ), I. e., e cess for 1938 of deductons pus credt for
dvdends receved over gross Income, or 150,000 pus 25,000
mnus 125,000 50,000
(c) ggregate of e cess profts net Income for ta abe years In base
perod as reduced (Item (o) mnus Item (6)) 80,000
(d) verage base perod net ncome, 80,000 (tem (o)), dvded by 8
(tota number of months n ta abe years n base perod), mutped
80,000
by 12, or 8 12 20,000
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(6) Corporaton n e stence durng ony part of the base perod. The base
perod of a corporaton whch was n e stence durng ony part of the 8-
month perod precedng the begnnng of ts frst e cess profts ta ta abe
year s such perod of 8 months. Secton 718(b) (5) provdes a method for
determnng the e cess profts net Income for such a corporaton for that
porton of such base perod durng whch t was not n e stence. For each
ta abe year of 12 months (begnnng wth the begnnng of the base perod)
durng whch t was not n e stence the e cess profts net ncome s 8 per
cent of the corporaton s day nvested capta (see secton 717) for the frst
day of ts frst e cess profts ta ta abe year reduced on account of nad-
mssbe assets by the same rato as woud be appcabe under secton 720
n reducton of ts average nvested capta for the precedng ta abe year.
The e cess profts net ncome for a ta abe year of ess than 12 months
consstng of that part of the remander of the base perod durng whch
t was not n e stence s a proportonate part of such amount. The provsons
of ths paragraph may be ustrated by the foowng e ampe:
ampe: The Y Corporaton, whch makes ts ncome ta returns on the
caendar year bass, was organzed on uy 1, 1937, under the aws of a State
of the Unted States. The corporaton s not entted under secton 26(a)
to any credt on account of Government obgatons. The e cess profts net
ncome, credt for dvdends receved, deductons, and gross ncome (a com-
puted by makng the ad|ustments provded n secton 711(b)) for the years
1938 and 1939 and that porton of the year 1937 durng whch t was n e st-
ence, are as foows:
1837
1938
1939
0,000
10,000
60,000
30,000
20,000
30,000
100,000
110,000
150,000
35,000
100,000
285,000
The day nvested capta of the corporaton for anuary 1, 19 0, s 200,000.
The percentage of such nvested capta whch woud be appcabe under secton
720 n reducton of the average nvested capta of the corporaton on account
of nadmssbe assets for the caendar year 1939 s 5.
The average base perod net ncome of the Y Corporaton s 38,18 .38,
computed as foows:
(a) Day Invested capta for anuary 1,19 0 200,000.00
(6) mount equa to the same percentage (5 per cent) of Item (a)
as Is appcabe under secton 720 n reducton of the average
nvested capta for precedng ta abe year, 1939 ( 200,000
.05) 10,000.00
(e) cessof tem (a) over Item (6) 190,000.00
(d) cess profts net ncome for 1836 ( 190,000 .08) 15,200.00
(e) cess profts net ncome for perod from anuary 1, 1937, to
/ 15,200 181
une 30, 1937 ( 365 7, 537. 53
(/) ggregate of e cess profts net ncome for ta abe years n
base perod (other than those years for whch there s a
defct n such ncome), before reducton requred by secton
713(b) (1) ( 15,200 pus 7,537.53 pus 150,000) 172,737.53
(g) mount tem (/) above s to be reduced as requred by secton
713(b)(1) 20,000.00
(ft) ggregate of e cess profts net Income for ta abe years n
base perod as reduced by tem (g) above 152,737.53
( ) verage base perod net ncome, 152,737.53 (tem (ft)), dvded
by 8 (tota number of months n ta abe year In base
152,737.53
perod) mutped by 12, or - . 12 38,18 . 38
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Sec. 30.713-2. cess profts credt based on ncome. d|ustments n access
profts credt on account of capta changes. Under the ncome method of
determnng the e cess profts credt t s necessary to make ad|ustments for
capta changes snce the begnnng of the frst e cess profts ta ta abe year.
The amount representng 95 per cent of the average base perod net ncome
whch s the startng pont n the computaton of the e cess profts credt sha
be ncreased by 8 per cent of the net capta addton or reduced by 6 per cent
of the net capta reducton. No capta ad|ustments are permtted or requred
n the case of a foregn corporaton. Capta addtons are money and property
pad In for stock, or as pad-n surpus, or as a contrbuton to capta after the
begnnng of the frst e cess profts ta ta abe year, ad|usted for ncreases n
e cuded capta over the same perod. Capta reductons are dstrbutons
snce the begnnng of the frst e cess profts ta ta abe year whch are not
out of earnngs and profts. The term earnngs and profts ncudes earnngs
and profts of the ta abe year and the accumuated earnngs and profts of the
corporaton, whether accumuated before, on, or after March 1, 1913. For
capta addtons and reductons In case of certan reorganzatons, see secton
7 3. d|ustments on account of capta changes are Iustrated by the foow-
ng e ampes:
ampe ( ) : Computaton of net capta addton. -On anuary 1, 19 0, the
Corporaton, whch makes Its Income ta returns on the caendar year bass,
owns stock n anoher domestc corporaton, acqured n 1938, the ad|usted bass
of whch Is 10,000 and 30,000 of State bonds whch t had purchased n 1938
for 32,000.
The foowng were the ony changes whch occurred durng 19 0 that woud
affect the determnaton of the net capta addton or the net capta reducton
of the corporaton:
(a) On pr 1, 19 0, there was pad nto the corporaton for shares of ts
stock rea estate havng a bass to the corporaton of 30,000.
(6) On uy 1, 19 0, there was pad Into the corporaton for shares of ts stock
Treasury bonds havng a bass to the corporaton of 22, 00 and cash n the
amount of 36,600.
The net capta addton of the corporaton for 19 0 s 0,759.02, computed as
foows:
Perod pr 2, 19 0, to uy 1,19 0, ncusve.
(1) Rea estate pad In for stock pr 1, 19 0 30,000.00
(2) Less: cess of e cuded capta for each day of perod over
e cuded capta on anuary 1, 19 01 None
(3) Day capta addton for each day of perod (Item (1)
mnus tem (2)) 30,000.00
( ) ggregate of day capta addtons for perod ( 30,000
mutped by 91, number of days n perod) 2,730,000.00
Perod uy 2, 19 0, to December SI, 19 0, ncusve.
(5) Rea estate, as above 30,000.00
(6) Treasury bonds pad n for stock uy 1, 19 0 22, 00.00
(7) Cash pad n for stock uy 1, 19 0 36, 600. 00
(8) Tota
(a) cuded capta for each day of perod :
( ) Stock of domestc corporutons--
( ) State bonds
Tota
(t) cuded capta for anuary 1, 19 0:
) Stock of domestc corporatons
) State bonds
Tota
89, 000. 00
10, 000
82,000
2,000
10,000
-- 82, 000
2, 000

(
(c) cess of e cuded capta for each day of perod over e cuded capta on
anuary 1, 19 0 None
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(9) Less: cess of e cuded capta for each day of perod over
e cuded capta on anuary 1, 19 01 22, 00.00
(10) Day capta addton for each day of perod (Item (8)
mnus tem (9)) 66,600.00
(11) ggregate of day capta addtons for perod ( 66,600
mutped by 183, number of days n perod) 12,187,800.00
(12) ggregate of day capta addtons for 19 0 (tem ( )
pus tem (11)) 1 ,917,800.00
(13) Net capta addton ( 1 ,917,800 dvded by 366, number of
days n ta abe year) 0,759.02
ampe (2) : Computaton of net capta reducton. The T Corporaton,
a domestc corporaton whch makes ts ncome ta returns on the caendar
year bass, was organzed on anuary 1, 1910, wth an authorzed and out-
standng capta stock of 2,000 shares of common stock of a par vaue of 100
each and 1,000 shares of partcpatng preferred stock of a par vaue of 100
each. ach share of preferred stock s entted to receve annua dvdends
of 7, and 100 on compete qudaton, n prorty to any payments on common
stock, and s entted to partcpate equay wth each share of the common
stock n ether nstance after the common stock has receved a smar amount.
The preferred stock s redeemabe n whoe or n part at the opton of the
board of drectors at any tme at 106 per share pus ts proporton of the
earnngs of the company at the tme of such redempton. The preferred stock
was ssued at 106 per share for a tota of 106,000, and the common stock was
ssued at 100 per share for a tota of 200,000. On uy 1, 19 0, the com-
pany had a pad-n surpus of 6,000, consstng of the premum receved on
the preferred stock, earnngs and profts of 30,000 accumuated pror to
March 1, 1913, and earnngs and profts accumuated snce February 2S, 1913,
of 75,000. On uy 1, 19 0, the opton wth respect to the preferred stock
Is e ercsed and the entre amount of such stock s redeemed at 1 1 per share
for a tota of 1 1,000, such transacton beng a parta qudaton under sec-
ton 115(c). The corporaton has no other transactons durng the year 19 0
whch affect the capta of the corporaton.
The net capta reducton of the corporaton for 19 0 s . 3,000, computed
as foows:
(a) Tota amount dstrbuted to preferred sharehoders 1 1,000
(6) ocaton of the amount dstrbuted:
( ) ttrbutabe to par vaue 100,000
( ) ttrbutabe to pad-n surpus 6,000
(C) ttrbutabe to earnngs and profts accumuated
as of uy 1, 19 0 (one-thrd of ( 30,000 pus
75,000)) 35,000
Tota 1 1,000
(c) mount of dstrbuton not out of earnngs and profts ( 100,000
pus 6,000) 106,000
(d) ggregate of the day capta reducton from uy 2, 19 0, to
December 31, 19 0, both dates ncusve ( 106,000 mutped
by 183, number of days n ta abe year after dstrbuton) 19,398,000
(e) Net capta reducton ( 19,398,000 dvded by 366, number of
days n ta abe year) 53,000

(a) cudedcapta for each day of perod :


22, 00
6 , 00
2, 000
, 00
( ) Stock of domestc corporatons _ n noo
( ) State bonds 3 ooo
(C) Treasury bonds ZZZZZZ 22 (n
Tota 6. t
(6) cuded capta for anuary 1, 10 0 ZZIZZZZZZ 2 (
(0) ces of e cuded capta for each day of perod over e cuded capta on
anuary 1. 19 0 ( 6 , 00 mnus 2,000) 22 -
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137
Sec. 71 . cess Profts Credt ared on Invested Capta.
The e cess profts credt, for any ta abe year, computed under
Los secton, sha be an amount equa to 8 per centum of the ta -
paver s nvested capta for the ta abe year, determned under secton
715.
Sec. 30.71 -1. cess profts cre t based on nvested capta. Secton 71
appes ony to a corporaton whch under secton 712 eects or s requred to
compute ts e cess profts credt under the nvested capta method. Such
credt s an amount equa to 8 per cent of Its nvested capta for the ta abe
year, regardess of the rato of earnngs to nvested capta for prevous
ta abe years. For computaton of e cess profts net ncome f e cess profts
credt based on Invested capta s used, see secton 711(a) (2).
Sec. 715. Defnton of Invested Capta.
For the purposes of ths su -hapter the nvested capta for any
ta abe year sha be the average nvested capta for such year, de-
termned under secton 71(1, reduced by an amount computed under
secton 720 (reatng to nadmssbe assets). If the Commssoner fnds
that n any case the determnaton of nvested capta, on a bass other
than a day bass, w produce an nvested capta dfferng by not
more than 1,000 from an nvested capta) determned on a dny bass,
he may, under reguatons prescrbed by hm wth the upprovn of the
Secretary, provde for such determnaton on such other bass. (For
computaton of nvested capta n case of foregn corporatons and cor-
poratons entted to the benefts of secton 201, see secton 72 .)
Sec. 716. vehaoe Invested Capta.
The average Invested capta for any ta abe year sha be the
aggregate of the day nvested capta for each day of such ta abe
year, dvded by the number of days In such ta abe year.
S t. 717. Day Invested Capta.
The day nvested capta for any day of the ta abe year sha
be the sum of the equty nvested capta for such day pus the borrowed
nvested capta for such day determned under secton 719.
Sec. 30.715-1. Determnaton of nvested capta. It s necessary for a ta -
payer usng the nvested capta method n computng the e cess profts credt
to determne the nvested capta for the ta abe year. Ths s not the In-
vested capta at the begnnng of the ta abe year but the average nvested
capta for the ta abe year, reduced by an amount computed under secton 720,
f the ta payer owned any nadmssbe assets durng the ta abe year. The
average nvested capta for the ta abe year s the aggregate of the day
nvested capta for each day of the ta abe year, dvded by the number of days
n such ta abe year. The day Invested capta s the sum of the equty
nvested capta, as defned n secton 718, and the borrowed nvested capta,
as defned n secton 719. The nvested capta sha be computed n a cases
on a day bass.
If, durng the ta abe year, a corporaton Is not nvoved In a ta -free quda-
ton and nether receves new capta, whether pad n or borrowed, nor makes
any dstrbuton other than out of earnngs and profts of the ta abe year,
nor retres ndebtedness of the character ncudbe In borrowed capta, Its
average nvested capta for the ta abe year s an amount equa to ts day
nvested capta for the frst day of the ta abe year.
In cases where the changes n nvested capta are not numerous durng the
ta abe year, the determnaton of the average nvested capta may generay
be smpfed by .takng the Invested capta as of the frst day of the ta abe
year and addng thereto such porton of each addton made durng the year
as the number of days remanng n the ta abe year after such addton bears
to the tota number of days n the ta abe year, and subtractng such porton of
each reducton of capta as the number of days after such reducton bears
to the tota number of days n the ta abe year. Ths paragraph may be
Iustrated by the foowng e ampe:
ampe: The nvested capta of the Corporaton on anuary 1, 19 0, s
500,000. The ony changes In nvested capta durng the ta abe year 19 0
are as foows:
(a) On pr 1, 19 0, money amountng to 100,000 s pad n for stock.
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138
(o) On October 1, 10 0, n capta dstrbuton Is made amountng to 200,000.
ggregate nvested capta from anuary 1 to pr 1, ncusve
(92 days), 500.000 92 6,000,000.00
ggregate nvested capta from pr 2 to October 1, ncusve
(183 days) ( 500,000 pus 100,000) 183 109,800,000.00
ggregate nvested capta from October 2 to December 31, ncu-
sve (91 cays) ( 600,000 mnus 200,000) 91 36, 00,000.00
ggregate Invested capta for 19 0 192,200,000.00
verage nvested capta for 19 0 ( 192,200,000 dvded by 366,
number of days n ta abe year) 525,136. 61
Sec. 718. quty Invested Capta.
(a) Defnton. The equty nvested capta for any day of any
ta abe year sha be determned as of the begnnng of such day and
sha be the sum of the foowng amounts, reduced as provded n
subsecton (b)
(1) Money pad n. oney prevousy pad n for stock, or aa
pad-n surpus, or as a contrbuton to capta;
(2) Property pad n. Property (other than money) prevousy
pad n (regardess of the tme pad In) for stock, or as pad-n
surpus, or as a contrbuton to capta. Such property sha be
ncuded n an amount equa to ts bass (unad|usted) for deter-
mnng oss upon sae or e change. If the property was dsposed of
before such ta abe year, such bass sha be determned n the
same manner as f the property were st hed at the begnnng of
such ta abe year. If such unad|usted bass s a substtuted bass
t sha be ad|usted, wth respect to the perod before the property
was pad In, n the manner provded In secton 113(b) (2) ;
(3) Dstrbutons n stock. Dstrbutons n stock
( ) Made pror to such ta abe year to the e tent to whch
they are consdered dstrbutons of earnngs and profts; and
( ) Prevousy made durng such ta abe year to the e tent
to whch they are consdered dstrbutons of earnngs and
profts other than earnngs and profts of such ta abe year;
( ) arnngs and profts at begnnng of year. The accumu-
ated earnngs and profts as of the begnnng of such ta abe year;
and
(5) Increase on account of gan on ta -free qudaton.
In the case of the prevous recept of property (other than prop-
erty descrbed n the ast sentence of secton 113(a) (15)) by the
ta payer n compete qudaton of another corporaton under sec-
ton 112(b)(6), or the correspondng provson of a pror revenue
aw, an amount, wth respect to each such qudaton, equa to the
amount by whch the aggregate of the amount of the money so
receved and of the ad|usted bass, at the tme of recept, of a
property (other than money) so receved, e ceeds the sum of:
( ) The aggregate of the ad|usted bass of each share of
stock wth respect to whch such property was receved: such
ad|usted bass of each share to be determned mmedatey
pror to the recept of any property n such qudaton wth
respect to such share, and
( ) The aggregate of the abtes of such other corpora-
ton assumed by the ta payer In conecton wth the recept of
such property, of the abtes (not assumed by the ta payer)
to whch such property so receved was sub|ect, and of any
other consderaton (other than the stock wth respect to whch
such property was receved) gven by the ta payer for such
property so receved.
(b) Reducton n quty Invested Capta. The amount by whch
the equty nvested capta for any day sha be reduced as provded In
subsecton (a) sha be the sum of the foowng amounts
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(1) Dstrbutons n prevous years. Dstrbutons made pror
to such ta abe year whch were not ont of accumuated earnngs
and profts;
(2) Dstrbutons durng the year. Dstrbutons prevousy
made durng such ta abe year whch are not out of the earnngs
and profts of such ta abe year;
(3) arnngs and profts of another corporaton. The earn-
ngs and profts of another corporaton whch prevousy at any tme
were ncuded n accumuated earnngs and profts by reason of- a
transacton descrbed n secton 112 (b) to (e), both ncusve, or In
the correspondng provson of a pror revenue aw, or by reason of
the transfer by such other corporaton to the ta payer of property
the bass of whch n the hands of the ta payer a or was deter-
mned wth reference to ts bass In the hands of such other
corporaton, or woud have been so determned If the property
had been other than money; and
( ) Reducton on account of oss on ta -free qudaton.
In the case of the prevous recept of property (other than property
descrbed In the ast sentence of secton 113(a) (15)) by the ta -
payer In compete qudaton of another corporaton under secton
112(b)(6), or the correspondng provson of a pror revenue aw,
an amount, wth respect to each such qudaton, equa to the
amount by whch the sum of
( ) The aggregate of he ad|usted b. ss of each share of
stock wth respect to whch such property was receved; such
ad|usted bass of each share to be determned mmedatey
pror to the recept of any property n such qudaton wth
respect to such share, and
( ) The aggregate of the abtes of such other corpora-
ton assumed by the ta payer In connecton wth the recept of
such property, of the abtes (not assumed by the ta payer)
to whch such property so receved was sub|ect, and of any
other consderaton (other than the stock wth respect to
whch such property was receved) gven by the ta payer for
such property so receved,
e ceeds the agg egate of the amount of the money so receved and
of the ad|usted bass, at the tme of recept, of a property (other
than money) so receved. The amount of the reducton under ths
paragraph sha not e ceed the accumuated earnngs and profts
as of the begnnng of such ta abe year.
(c) Rues for ppcaton of Subsectons (a) and (b). For the
purposes of subsectons (a) and (b)
(1) Dstrbutons to sharehoders. The term dstrbuton
means a dstrbuton by a corporaton to ts sharehoders, and the
term dstrbuton n stock means a dstrbuton by a corporaton
In ts stock or rghts to acqure ts stock. To the e tent that a
dstrbuton n stock Is not consdered a dstrbuton of earnngs nnd
profts t sha not be consdered a dstrbuton. dstrbuton n
stock sha not be regarded as money or property pad n for stock,
or as pad-n surpus, or as a contrbuton to capta.
(2) Dstrbutons n frst s ty days of ta abe year. In the
appcaton of such subsectons to any ta abe year begnnng after
December 31, 10 0, so much of the dstrbutons (taken In the order
of tme) made durng the frst s ty days thereof as does not
e ceed the accumuated earnngs and profts as of the begnnng
thereof (computed wthout regard to ths paragraph) sha be
consdered to have been made on the ast (ay of the precedng
ta abe year.
(3) Computaton of earnngs and profts of ta abe year.
For the purposes of subsectons (a) (3) ( ) and (b) (2) n determn-
ng whether a dstrbuton s out of the earnngs and profts of any
ta abe year, such earnngs and profts sha be computed as of the
cose of such ta abe year wthout dmnuton by reason of any
dstrbuton made durng such ta abe year or by reason of the ta
under ths subchapter for such year and the determnaton sha
be made wthout regard to the amount of earnngs and profts at
the tme the dstrbuton was made.
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( ) Stock n case or merger on consodaton. If a corpora-
ton owns stock n another corporaton, and
( ) such corporatons are merged or consodated In a stat-
utory merger or consodaton, or
( ) such corporatons are partes to a transacton whch
resuts In the emnaton of such stock In a manner smar to
that resutng from a statutory merger or consodaton, then
such stock sha not be consdered as property pad n for stock
of, or as pad-n surpus of, or as a contrbuton to capta of,
the corporaton resutng from the transacton referred to In
subparagraph ( ) or ( ).
(d) For speca rues affectng computaton of property pad In
for stock In connecton wth certan e changes and qudatons, see
secton 751(a).
(e) For determnaton of equty Invested capta In speca cases,
see secton 723.
Sew. 30.718-1. Determnaton of day equty nvested capta Money and
property pad n. The equty nvested capta for any day Is determned as
of the begnnng of such day. The bass or startng pont Is found In the
amount of money and property prevousy pad In for stock, or as pad-n
surpus, or as a contrbuton to capta. For the purpose of determnng equty
Invested capta, the amount of any property pad In Is the unad|usted bass
to the ta payer for determnng oss upon a sae or e change under the aw
appcabe to the ta abe year for whch the Invested capta s beng computed.
If the property was dsposed of before such ta abe year, such unad|usted
bass sha be determned as If the property were st hed at the begnnng
of such ta abe year.
If the bass to the ta payer Is cost and stock was Issued for the prop-
erty, the cost Is the far market vaue of such stock at the rme of Its Issuance.
If the stock had no estabshed market vaue at the tme of the e change, the
far market vaue of the assets of the company at that tme shoud be de-
termned and the abtes deducted. The resutng net worth w be deemed
to represent the tota vaue of the outstandng stock. In determnng net
worth for the purpose of f ng the far market vaue of the stock at the tme
of the e change, the property pad n for such stock sha be ncuded n
the assets at ts far market vaue at that tme.
If stock havng no estabshed market vaue Is Issued for Intangbe property,
and t Is necessary to determne the far market vaue of such property, the
foowng factors, among others, may be taken nto consderaton In determn-
ng such vaue: (a) The earnngs attrbutabe to such ntangbe assets whe
In the hands of the predecessor owner; and (6) any cash offers for the pur-
chase of the busness, ncudng the Intangbe property, at or about the tme
of Its acquston. corporaton camng a vaue for Intangbe property pad
In for stock shoud fe wth Its return a fu statement of the facts reatng
to such vauaton.
If the property was acqured after December 31, 1920, by a corporaton from
a sharehoder as pad-n surpus or from any person as a contrbuton to capta,
then the bass sha be the same as It woud be n the hands of the transferor
If the transfer had not been made. (See secton 113(a)(8).) If so acqured
pror to anuary 1, 1921, the bass Is the far market vaue of the property
at the tme It was pad In. If the bass Is the transferor s bass, then such
ad|ustments sha be made as are provded In secton 113(b) (2) wth respect to
the perod before the property was pad n. Thus, f pad Into a corpora-
ton n 1930 as pad-n surpus certan Improved rea estate purchased by hm
In 1920 for 20,000, wth respect to whch deprecaton was aowed for the
perod hed by hm n amounts aggregatng 6,000 (the fu amount aowabe),
s bass of 20,000 sha be reduced by 6,000 for the purpose of computng the
nvested capta of the corporaton.
The fact that the money or property pad In has been ost, destroyed, or
otherwse dsposed of sha not reduce the nvested capta, e cept as such
facts are refected In the earnngs and profts as of the begnnng of the ta abe
year. s to cases wth respect to whch the equty Invested capta at the
begnnng of the year can not be determned, see secton 723. s to determna-
ton of amount of property pad n for stock n connecton wth certan
e changes, see secton 751(a).
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Secton 718(c)( ), whch provdes that In certan cases stock acqured by
a corporaton sha not be treated as property pad n for stock, or as pad-n
surpus, or as a contrbuton to capta, s for the purpose of avodng dupca-
ton to nvested capta. Thus, for e ampe, f the Corporaton owns stock
of the Y Corporaton and both corporatons are merged nto the Z Corporaton,
the Y Corporaton stock receved by the Z Corporaton from the Corporaton
may not be treated as property pad n for stock, or as pad-n surpus, or as a
contrbuton to capta of the Z Corporaton. Ths avods dupcaton, snce
the assets of the Y Corporaton, aganst whch such stock was ssued, are
treated as property pad n for stock, or as pad-n surpus, or as a contrbu-
ton to capta of the Z Corporaton. Secton 718(c)( ) does not appy to a
secton 112(b)(6) qudaton where no possbty of dupcaton e sts.
Sec. 30.718-2. Determnaton of day equty nvested capta ccumuated
earnngs and profts (a) In genera. The term accumuated earnngs and
profts Is not defned n the Interna Revenue Code. See, however, secton 118
and the reguatons prescrbed thereunder as to the effect of certan transactons
on earnngs and profts, and secton 30.718- as to the effect of the decaraton
and dstrbuton of dvdends. In genera, the concept of accumuated earn-
ngs and profts for the purpose of the e cess profts ta Is the same as for the
purpose of the ncome ta . In computng accumuated earnngs and profts as
of the begnnng of the ta abe year, a ta payer keepng ts books and makng ts
ncome ta returns on the accrua bass sha subtract the Income and e cess
profts ta es for the precedng ta abe year. If there s a defct n the accumu-
ated earnngs and profts as of the begnnng of the ta abe year, such defct
sha not be taken nto account n determnng nvested capta, and In such cases
the earnngs and profts as of the begnnng of the ta abe year sha be consd-
ered as zero, but subsequent earnngs and profts sha be apped aganst such
defct. Unreazed apprecaton n vaue of property s not a factor n determn-
ng earnngs and profts.
(6) Current earnngs and proft . arnngs and profts of any ta abe year
can not be ncuded n the computaton of Invested capta for that year. If a
dvdend s decared and pad durng any year out of the earnngs and profts of
that year and the stockhoders pay back Into the corporaton a or a substanta
part of the amount of such dvdends, the amount so pad back can not be
ncuded n the computaton of nvested capta for that year uness the corpora-
ton shows by evdence satsfactory to the Commssoner that the dvdends
were pad n good fath and wthout any understandng, e press or mped, that
they were to be pad back.
Se ). 30.718-3. Determnaton of day equty nvested capta. Dstrbuton n
stock. dstrbuton made pror to the ta abe year by a corporaton n ts
stock, or n rghts to acqure ts stock, to the e tent to whch t consttutes a
dstrbuton of earnngs and profts of the corporaton, consttutes an tem of
nvested capta. Such a dstrbuton made durng the ta abe year out of
earnngs and profts other than out of the earnngs and profts of that year s
aso an tem of nvested capta. If a stock dvdend s pad out of capta and
not out of earnngs and profts, or s of such a character as not to be sub|ect to
ta n the hands of a dstrbutee because e empt as a stock dvdend ether by
statute or otherwse, t s not deemed to consttute a dstrbuton and does not
reduce the earnngs and profts account. See secton 115(h).
Sec. 30.718- . Determnaton of day equty nvested capta Reducton by
dstrbuton. The amount of te day equty nvested capta ns partay
determned by takng the aggregate of the sums descrbed In secton 718(a) sha
be reduced by the amount of the dstrbutons made n pror ta abe years whch
were not out of accumuated earnngs and profts pus the amount of the dstr-
butons prevousy made durng the ta abe year whch were not out of the
earnngs or profts of such year. In determnng whether a dstrbuton s out of
the earnngs and profts of any ta abe year, such earnngs and profts sha be
computed as of the cose of such ta abe year wthout dmnuton by reason of
any dstrbuton made durng such ta abe year or by reason of the e cess profts
ta mposed by the cess Profts Ta ct of 19 0, and wthout regard to the
amount of earnngs and profts at the tme the dstrbuton was made.
For e ampe, f a corporaton makng a return on the caendar yenr bass had
accumuated earnngs and profts as of the begnnng of the ta abe year of
50,000, and earnngs and profts durng the ta abe year (wthout dmnuton
by any dstrbutons or the e cess profts ta for the ta abe year) of 150,000,
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a earned durng the ast s months of the ta abe year, and dstrbuted 175,000
as dvdends durng the ta abe year, 56,000 on pr 1, 70,000 on uy 1, and
9,000 on October 1, s -sevenths of each dstrbuton w be deemed to have
been pad out of earnngs of the ta abe year and one-seventh from accumuated
earnngs and profts, so that accumuated earnngs and profts w be reduced
by 8,000 begnnng pr 2, by an addtona 10,000 begnnng uy 2, and by
an addtona 7,000 begnnng October 2.
In computng accumuated earnngs and profts as of the begnnng of the
ta abe year and n determnng what dstrbutons durng the ta abe year
are made out of the earnngs and profts of such year, for the purposes of secton
718 (a) and (b) dstrbutons made durng the frst 60 days of any ta abe,
year begnnng after December 31, 19 0, are deemed, to the e tent they do not
e ceed the accumuated earnngs and profts as of the begnnng of the ta abe
year, to have been made on the ast day of the precedng ta abe year. In
appyng such rue, such dstrbutons sha be consdered n the order of tme.
For e ampe, If a corporaton on the caendar year bass has accumuated
earnngs or profts of 100,000 on anuary 1, 19 1, and makes dstrbutons of
75,000 on anuary 15, 19 1, and 50,000 on February 15, 19 1, the dstrbuton
of anuary 15, 19 1, and 25,000 of the dstrbuton of February 15, 19 1, are
consdered as havng been made on December 31, 19 0.
dstrbuton s consdered to be made on the date t Is payabe, e cept that
where no date Is set for Its payment, the dstrbuton s consdered to be made
on the date when It Is decared, and e cept that dstrbutons payabe durng
the frst 60 days of a ta abe year begnnng after December 31, 19 0, are con-
sdered to be dstrbutons made on the ast day of the precedng ta abe year
to the e tent such dstrbutons do not e ceed the accumuated earnngs and
profts as of the begnnng of the ta abe year.
The purchase by a corporaton of ts own stock for Investment does not of
tsef resut n a reducton of nvested capta. ut see secton 30.720-1 reatve
to nadmssbe assets. If, however, the corporaton subsequenty cances such
stock, nvested capta s reduced, begnnng wth the day foowng such cance-
aton, by so much of the ad|usted bass of such stock n the hands of the cor-
poraton as s not propery chargeabe to earnngs and profts of the ta abe
year. If stock s purchased for retrement, there Is a dstrbuton on the date
of purchase of the amount pad therefor and the nvested capta s reduced by
the amount thereof not propery chargeabe to earnngs and profts of the ta abe
year.
Sec. 30.718-5. Determnaton of day equty nvested capta d|ustments on
account of recept of property on certan ta -free qudatons. If the ta payer
has prevousy receved property (other than property descrbed n the ast sen-
tence of secton 113(a) (15)) n compete qudaton of another corporaton n
whch no gan or oss was recognzed under secton 112(b)(6) or the same
secton of the Revenue ct of 1936 or 1938, the Invested capta sha be n-
creased by an amount equa to the e cess of the aggregate of the money and
the ad|usted bass, at the tme of recept, of the property other than money so
receved over the sum of the ad|usted bass of the stock wth respect to whch
such property was receved and the aggregate of the abtes assumed by the
ta payer, or to whch the property receved was sub|ect, and any other consder-
aton gven by the ta payer for such property. If the aggregate of the ad|usted
bass of such stock pus such abtes and other consderaton gven for the
property so receved e ceeds such money and the ad|usted bass of such property,
then such e cess sha be deducted from the Invested capta to the e tent
that such e cess does not e ceed the accumuated earnngs and profts as of the
begnnng of the ta abe year. The term ad|usted bass as used n secton
718(a)(5) and (b)( ) means ad|usted bass for determnng oss. The prov-
sons of ths paragraph may be ustrated by the foowng e ampes:
ampe (1): The Corporaton owns a the outstandng stock of the Y
Corporaton for whch It pad 25,000, whch Is Its ad|usted bass for determ-
nng oss. The T Corporaton s competey qudated durng the 19 0 ta abe
year of the Corporaton n accordance wth secton 112(b)(6). The
Corporaton receved upon such qudaton assets havng an ad|usted bass
of 35,000 for determnng oss. Under secton 718(a)(5) there Is an Increase
In equty nvested capta of 10,000, computed as foows:
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d|usted bass to the Y Corporaton of property receved by the
Corporaton n qudaton 35,000
Less:
d|usted bass to the Corporaton of stock In the Y corporaton. 25,000
Increase n equty Invested capta 10,000
ampe (2) : If n the above e ampe the Corporaton had pad 0,000,
nstead of 25,000, for the stock of the Y corporaton and hud accumuated
earnngs and profts as of the begnnng of the ta abe year of 10,000, then
under the appcaton of secton 718(b) ( ) there s a decrease n equty n-
vested capta of 5,000 as shown by the foowng computaton:
d|usted bass to the Corporaton of stock n the Y Corporaton 0,000
Less:
d|usted bass to the Y Corporaton of property receved by the
Corporaton n qudaton 85,000
Reducton In equty nvested capta 5, 000
If at the begnnng of a subsequent ta abe year the accumuated earnngs and
profts are ess than 5,000, the amount of the reducton requred by secton
718(b) ( ) for such ta abe year w be mted to the amount of such accu-
muated earnngs and profts.
If the earnngs and profts of another corporaton prevousy at any tme
were ncuded n the accumuated earnngs and profts of the ta payer by
reason of a transacton referred to n secton 718(b)(3), the amount of such
earnngs and profts sha be deducted n determnng the equty nvested
capta. The provsons of ths paragraph may be ustrated by the foowng
e ampe:
ampe: The Y Corporaton pror to uy 1, 1939, had capta stock out-
standng of 20,000 and accumuated earnngs and profts of . 5,000. The
Corporaton was organzed on uy 1 to take over a the assets of the Y
Corporaton n e change for a of ts stock. Stock n the amount of 25,000
was ssued by the Corporaton n e change for a the assets of the Y
Corporaton whch had an ad|usted bass to the Y Corporaton of 25,000.
Snce the property of the Y Corporaton n the amount of 25,000 s a part
of the nvested capta of the Corporaton as property pad n for stock
and n addton the accumuated earnngs and profts of the Y Corporaton
amountng to 5,000 are consdered part of the accumuated earnngs and profts
of the Corporaton,1 the nvested capta of the corporaton for the ta abe
year must be reduced by 5,000, the amount of the earnngs and profts of
the Y Corporaton, as provded by secton 718(b) (3).
Sec. 719. orrowed Invested Capta.
(a) orrowed Capta. The borrowed capta for any day of any
ta abe year sha be determned as of the begnnng of such day and
sha be the sum of the foowng:
(1) The amount of the outstandng ndebtedness (not ncud-
ng nterest, and not ncudng ndebtedness descrbed n secton
751(b) reatng to certan e changes) of the ta payer whch s
evdenced by a bond, note, b of e change, debenture, certfcate
of Indebtedness, mortgage, or deed of trust, pus,
(2) In the case of a ta payer havng a contract (made before
the e praton of 30 days after the date of the enactment of the
Second Revenue ct of 19 0) wth a foregn government to fur-
nsh artces, materas, or suppes to such foregn government, f
such contract provdes for advance payment and for repayment by
the vendor of any part of such advance payment upon canceaton
of the contract by such foregn government, the amount whch
woud be requred to be so repad f canceaton occurred at the
begnnng of such day, but no amount sha be consdered as bor-
rowed capta under ths paragraph whch has been ncudbe n
gross ncome.
(b) orrowed Invested Capta. The borrowed nvested capta
for any day of any ta abe year sha be determned as of the bega-
1 Commssoner v. Sansome (60 Fed. (2d), 931).
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nng of such day and sha be an amount equa to 50 per centum of the
borrowed capta for such day.
Sec. 30.719-1. orrowed nvested capta. The borrowed Invested capta for
any day of the ta abe year s 50 per cent of the borrowed capta for such day
determned as of the begnnng of such day. orrowed capta s defned to mean :
(a) Outstandng ndebtedness (other than nterest and Indebtedness descrbed
In secton 751(b) reatng to certan e changes, but ncudng ndebtedness as-
sumed or to whch the ta payer s property s sub|ect) of the ta payer whch s
evdenced by a bond, a promssory note, b of e change, debenture, certfcate
of ndebtedness, mortgage, or deed of trust, pus
(6) In the case of a corporaton havng a contract, made before November 8,
10 0, wth a foregn government to furnsh artces, materas, or suppes to such
foregn government, amounts receved as advance payment n connecton wth
and as provded by such contract, to the e tent such amounts woud be repayabe
pursuant to the terms of the contract, If canceaton by such foregn government
occurred at the begnnng of the day for whch the borrowed capta s beng
ascertaned, but no amount sha be Incuded as borrowed capta whch has been
ncudbe n gross ncome.
In order for any Indebtedness to be ncuded n borrowed capta t must be
bona fde. It must be one ncurred for busness reasons and not merey to ncrease
the e cess profts credt. If ndebtedness of the ta payer s assumed by another
person It ceases to be borrowed capta of the ta payer. For such purpose an
assumpton of ndebtedness ncudes the recept of property sub|ect to n-
debtedness.
Whether outstandng certfcates desgnated by such names as debenture
preferred stock or guaranteed preferred stock consttute borrowed capta
depends upon whether the hoder has a propretary Interest n the corporaton or
has the rghts of a credtor, determned n the ght of a the facts. The name
borne by the certfcate s of tte mportance. More Important attrbutes to be
consdered are whether or not there s a maturty date, the source of payment of
any nterest or dvdend specfed n the certfcate (whether ony out of
earnngs or out of capta and earnngs), rghts to enforce payment, and other
rghts as compared wth those of genera credtors.
The term certfcate of ndebtedness ncudes ony nstruments havng the
genera character of Investment securtes Issued by a corporaton as dstn-
gushabe from Instruments evdencng debts arsng n ordnary transactons
between ndvduas. orrowed capta does not ncude Indebtedness Incurred
by a bank arsng out of the recept of a depost and evdenced, for e ampe, by
n certfcate of depost, a passbook, a casher s check, or a certfed check.
The provsons of secton 719(a) (2) reatng to contracts wth a foregn
government may be ustrated by the foowng e ampe:
ampe: The Corporaton, whch makes ts ncome ta returns on the
caendar year bass and reports ts Income on the accrua bass, entered nto
a contract wth a foregn government on November 1, 19 0, for the manufacture
and devery of certan parts for arcraft, and receved thereunder an ad-
vance payment as of that date of 500,000. The contract provded for ts
canceaton by the vendee, and further provded that the advance payment
shoud be returned upon such canceaton ess the sum of 100,000 and 5,000
for each unt devered before canceaton. Ten unts were devered December
1, 19 0, another 10 unts December 30, 19 0, and the contract was canceed
December 31, 19 0, before any other deveres had been made. orrowed
Invested capta woud be Increased 200,000 (50 per cent of 00,000) for each
day begnnng November 2, 19 0, and endng December 1, 19 0; 175,000 ( 50
per cent of 350,000) for each day begnnng December 2, 19 0, and endng
December 30, 19 0; and 150,000 ( 50 per cent of 300,000) for one day, Decem-
ber 81, 19 0.
Sec. 720. dmssbe and Inadmssbe ssets.
(a) Defntons. For the purposes of ths subchapter
(1) The term Inadmssbe assets means
( ) Stock n corporatons e cept stock In a foregn per-
sona-hodng company; and
( ) cept as provded In subsecton (d), obgatons do-
scrbed In secton 22(b) ( ) any part of the Interest from
whch s e cudbe from gross ncome or aowabe as a credt
aganst net Income.
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(2) The term admssbe assets means a assets other than In-
admssbe assets.
(b) Rato or Inadmssb.es to Tota ssets. The amount by
whch the average Invested capta for any ta abe year sha be reduced
as provded n secton 715 sha be an amount whch Is the same per-
centage of such average nvested capta as the percentage whch the
tota of the nadmssbe assets s of the tota of admssbe and nad-
mssbe assets. For such purposes, the amount attrbutabe to each
asset hed at any tme durng such ta abe year sha be determned
by ascertanng the ad|usted bass thereof (or, n the case of money,
the amount thereof) for each day of such ta abe year so hed and
addng such day amounts. The determnaton of such day amounts
sha be made under reguatons prescrbed by the Commssoner wth
the approva of the Secretary. The ad|usted bass sha be the ad-
usted bass for determnng oss upon sae or e change as determned
tnder secton 113.
(c) Computaton rr Short-Term Capta Gan. If durng the ta -
abe year there has been a short-term capta gan wth respect to an
nadmssbe asset, then so much of the amount attrbutabe to such
nadmssbe asset under subsecton (b) as bears the same rato thereto
as such gan bears to the sum of such gan pus the dvdends and n-
terest on such asset for such year, sha, for the purpose of determn-
ng the rato of nadmssbe assets to the tota of admssbe and
Inadmssbe assets, be added to the totu of admssbe assets am
subtracted from the tota of nadmssbe assets.
(d) TR TM NT OP GO RNM NT O LIG TIONS S DMISSI L
ssets. If the e cess profts credt for any ta abe year s computed
under secton 71 , the ta payer may n ts return for such year eect
to ncrease ts norma-ta net ncome for such ta abe year by an
amount equa to the amount of the nterest on a obgatons hed dur-
ng the ta abe year whch are descrbed n secton 22(b)( ) any
part of the nterest from whch s e cudbe from gross ncome or
aowabe as a credt aganst net ncome. In such case, for the purposes
of ths secton, the term admssbe assets ncudes suc obgatons,
and the term nadmssbe assets does not Incude such obgatons.
Sec. 0.720-1. Reducton of average nvested capta for nadmssbe assets.
If a ta payer owns any nadmssbe assets on any day durng the ta abe
year, then secton 715 reatng to the computaton of nvested capta requres
the average nvested capta to be reduced n the same rato as the nadmssbe
assets bear to the tota assets. The term nadmssbe assets means stock
n a corporatons, domestc or foregn, e cept stock n a foregn persona-
hodng company, and a obgatons descrbed n secton 22(b)( ), any part
of the nterest from whch s e cudbe from gross ncome or aowabe as a
credt aganst net Income. Stock hed n the treasury of the ssung corpora-
ton Is an nadmssbe asset. The term admssbe assets means a assets
other than nadmssbe assets. owever, f a ta payer n ts return for a
ta abe year eects to ncrease ts norma-ta net ncome for that year for the
purpose of the e cess profts ta by ncudng a the nterest derved from
tbe obgatons descrbed n secton 22(b)( ), a such obgatons sha be
consdered admssbe assets for such ta abe year. For the purposes of the
precedng sentence, ( ) the term nterest ncudes, In the case of obgatons
Issued at a dscount, so much of-such dscount as (for purposes of determnng
gan or oss upon sae or other dsposton) Is treated as nterest n the hands
of tbe ta payer for the ta abe year, and ( ) the term obgatons descrbed n
secton 22(b)( ) ncudes obgatons, whether or not Issued at a dscount,
tbe dscount on whch, If Issued at a dscount, woud be so treated. The foowng
steps are necessary In the appcaton of secton 720:
(a) There must frst be determned the ad|usted bass for determnng
oss upon the sae or e change, as provded n secton 113, for each asset, or,
In the case of money, the amount thereof, owned at the begnnng of each day
darng the ta abe year.
(6) There must then be determned the aggregate of the admssbe assets
and the aggregate of the Inadmssbe assets for the ta abe year.
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(c) The average nvested capta for the ta abe year must then be reduced
by the percentage whch the tota of the nadmssbe assets s of the tota
of the admssbe and nadmssbe assets.
If the ta payer had a short-term capta gan durng the ta abe year wth
respect to any nadmssbe asset, then the amount of the admssbe assets
sha be ncreased and the amount of the nadmssbe assets sha be decreased
by so much of the amount attrbutabe to such Inadmssbe asset as such
gan bears to the sum of such gan pus the dvdends or nterest on such asset
for such year.
The amount of admssbe assets and the amount of Inadmssbe assets
sha be determned as of the begnnng of each day. If, however, t Is mprac-
tcabe to determne such amounts as of the begnnng of each day but the
amounts hed on a gven day of each month throughout the year or at other
reguar ntervas not e ceedng one year can be determned, the amounts hed
as of the begnnng of each day of such month or other perod may be deter-
mned by dvdng by two the sum of the amounts of such assets hed at the
begnnng of the perod and the amounts hed at the end of the perod. If
at nny tme a substanta change has taken pace ether n the amount of
Inadmssbe assets or n the tota amount of admssbe and Inadmssbe assets,
the effect of such change sha be averaged e acty from the date on whch
t occurred. Ordnary the ta payer w be abe to determne the amount of
Inadmssbe assets actuay hed on each day of the ta abe year. The fact
that It may be mpractcabe to determne the amount of admssbe assets
actuay hed on each day of the ta abe year w not reeve the ta payer
from the necessty of determnng the actua amount of Inadmssbe assets
hed uness such determnaton s kewse mpractcabe.
The ad|ustment for nadmssbe assets may be ustrated by the foowng
e ampe:
ampe: The average nvested capta of the Corporaton for ts ta -
abe year 19 0, determned under secton 716, s 1,000,000. On anuary 1, 19 0,
the corporaton hed bonds of a State whch It had prevousy purchased for
60,000, and stock n another corporaton (not a foregn persona hodng
company) whch t had prevousy purchased for 25,000. On uy 1, 19 0, t
purchased stock n another corporaton (not a foregn persona hodng com-
pany) for 20,000, and on uy , 19 0, addtona State bonds for 8,700.
On September 1, 19 0, t sod for 29,000 the stock purchased on uy 1, 19 0,
after havng receved a dvdend of 1,000 thereon. The aggregate of the day
amounts of the admssbe and nadmssbe assets for the ta abe year 19 0
s 00,000,000. The corporaton does rot eect to Increase ts norma-ta net
ncome for e cess profts ta purposes by the amount of the nterest derved
from the State bonds.
The nvested capta of the Corporaton as defned n secton 715 s 900,000,
computed as foows:
verage Invested capta for 19 0 1, 000, 000
Less:
mount computed under secton 720 for nadmssbe assets
(10 per cent of 1,000,000, see Schedue I beow) 100,000
Invested capta for 1 W0 as defned n secton 715 900, 000
Schedue I.
(a) ggregate of the day amounts of nadmssbe assets for the
vear 19 0 before ad|ustment for short-term capta gan:
(1) State bonds hed anuary 1, 19 0 ( 60,000
mutped by 366 (days)) 21,060.000
(2) State bonds purchased uy , 19 0 ( 8,700
mutped by 180 (days)) 8, 766, 000
(3) Stock n domestc corporaton hed anuary 1,
19 0 ( 25,000 mutped by 360 (days)) 9,150.0:0
( ) Stock In domestc corporaton purchased uy
1, 19 0. for 20,000 and sod September 1,
1910, for 29,000 ( 20,000 mutped by 62
(days)) 1,2 0,000
1,116,000
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(6) Less:
d|ustment on account of short-term capta gan (see Sched-
ue II beow) 1,116,000
(c) ggregate of the day amounts of the Inadmssbe assets
after ad|ustment for short-term capta gan (Item (a)
mnus Item ( )) 0,000,000
(d) ggregate of the day amounts of admssbe and Inadms-
sbe assets for the year 10 0 (ths Item beng unaffected
by the ad|ustment on account of the short-term capta
gan) 00,000,000
(e) Rato of aggregate of day amounts of nadmssbe assets
(tem (c) above) to aggregate of day amounts of adms-
sbe and nadmssbe assets (tem (d) above), 0,000,000
dvded by 00,000,000 per cent 10
Schedue II.
Computaton of ad|ustment on account of short-term capta gan:
(a) mount attrbutabe to Inadmssbe asset before ad|ust-
ment under secton 720(c) for short-term capta gan
(stock n domestc corporaton purchased uy 1, 19 0,
for 20,000 and sod September 1, 19 0, for 29,000),
20,000 mutped by 62 (days)) 1,2 0,000
(6) mount of gan reazed ( 29,000 mnus 20,000) 9,000
(c) Sum of gan pus dvdends receved ( 9,000 pus 1,000). 10,000
d) Rato of gan (tem (6)) to sum of gan pus dvdends re-
ceved (tem (c)), 9,000 dvded by 10,000__per cent-. 90
(e) d|ustment on account of short-term capta gan, 90 per
cent of 1,2 0,000 (tem (a) ) 1,116,000

Sec. 721. bnormautrs n Income n Ta abe Perod.
If there s Incudbe n the gross ncome of the ta payer for any
ta abe year an tem of ncome of any one or more of the foowng
casses:
(a) rsng out of a cam, award, |udgment, or decree, or Inter-
est on any of the foregong; or
(b) Consttutng an amount payabe under a contract the per-
formance of whch requred more than 12 months; or
(c) Resutng from e poraton, dscovery, prospectng, research,
or deveopment of tangbe property, patents, formuae, or processes,
or any combnaton of the foregong, e tendng over a perod of
more than 12 months; or
(d) Incudbe n gross Income for the ta abe year rather than
for a dfferent ta abe year by reason of a change n the ta payer s
accountng perod or method of accountng; or
(e) In the case of a essor of rea property, amounts ncuded
n gross ncome for the ta abe year by reason of the termnaton
of the ease; or
(f) Dvdends on stock of foregn corporatons, e cept foregn
persona hodng companes;
and, n the ght of the ta payer s busness, t Is abnorma for the ta -
payer to derve Income of such cass, or. If the ta payer normay
derves ncome of such cass, the tem ncudbe In the gross Income of the
ta abe year Is grossy dsproportonate to the gross Income of the
same cass In the four prevous ta abe years, then: (1) the amount of
such tem attrbutabe to any prevous ta abe year or years sha be
determned under rues and reguatons prescrbed by the Commssoner
wth the approva of the Secretary; (2) the amount of such Item at-
trbutabe to any future ta abe year or years sha be determned under
rues and reguatons prescrbed by the Commssoner wth the approva
of the Secretary and sha, for the purposes of ths subchapter, be In-
cuded In the gross ncome for the future year or years to whch attrb-
utabe; and (3) the ta under ths subchapter for the ta abe year (n
whch the whoe of such tem woud, wthout regard to ths secton, be
ncudbe) sha not e ceed the sum of:
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( ) The ta under ths subchapter for such ta abe year com-
puted wthout the ncuson n gross ncome of the porton of such
tem whch s attrbutabe to any other ta abe year, and
( ) The aggregate of the Increase n the ta under ths sub-
chapter whch woud have resuted for each prevous ta abe year
to whch any porton of such tem Is attrbutabe, computed as If
an amount equa to such porton had been ncuded In gross ncome
for such prevous ta abe year.
Sk 30.721-1. bnormates n ncome n ta abe year. (a) If there s n-
cudbe n gross ncome an Item of any one of s casses of Income enumerated
In secton 721 propery attrbutabe n whoe or In part to a year other than
the ta abe year and f ether
n the ght of the ta payer s busness It s abnorma for It to receve
ncome of such cass, or
though ts recept Is norma, the amount thereof s grossy dspropor-
tonate to the gross ncome of the same cass reazed by the ta payer In
the four prevous ta abe years,
then the amount of such Income attrbutabe to prevous and to future ta abe
years sha for e cess profts ta purposes be determned n accordance wth
these reguatons. The e cess profts ta for the ta abe year sha be the esser
of the foowng:
Such ta computed wthout regard to secton 721; or
The sum of the e cess profts ta for the ta abe year computed wth-
out the ncuson n gross Income of the porton of the abnorma ncome
whch s attrbutabe to any other ta abe year pus the addtona e cess
profts ta whch woud have resuted for each prevous ta abe year f
the gross ncome for such ta abe year had been ncreased by the ncuson
theren of the porton of the abnorma ncome attrbutabe thereto.
(6) If the ta payer normay derves Income of the same cass but the tem
or tems ncudbe n gross Income for the ta abe year are grossy dspropor-
tonate to the average ncome of such cass n the precedng four ta abe years,
such tem or tems sha be sub|ect to the treatment provded by secton 721.
(c) Secton 721 has no effect upon the computaton of base perod net ncome
or of earnngs and profts and therefore does not affect the computaton of the
e cess profts credt. Smary, t has no appcaton n the determnaton of
ta es other than the e cess profts ta Imposed by Subchapter of Chapter 2.
mounts aocated to future years are to be ncuded n gross ncome for such
years for e cess profts ta purposes. If, however, the ta payer competey
qudates or otherwse dsposes of a ts assets pror to the cose of the ast
year to whch such amounts are aocated, a amounts not theretofore Incuded
n gross ncome sha be Incuded n gross ncome for the ta abe year n whch
the qudaton s competed or the assets transferred.
(d) ta payer camng the benefts of secton 721 sha fe wth ts e cess
profts ta return a statement showng (1) the amount and nature of the tem
of ncome camed to be abnorma; (2) the method used In aocatng such
abnorma ncome and the amount aocated to each year; (3) a schedue show-
ng by years the amount, f any, of ncome of the same cass derved durng the
four ta abe years Immedatey precedng the ta abe year; and ( ) a other
facts upon whch the ta payer rees.
Sec. 30.721-2. Income arsng out of a cam, aoard, |udgment, or decree, or
nterest thereon. The frst cass of potentay abnorma Income Is .Income ars-
ng out of a cam, award, |udgment, or decree, or nterest thereon. Items
of Income covered by ths secton are of the same type or cass. Therefore, n
determnng whether Income arsng out of a |udgment, for e ampe, Is abnor-
ma ether n knd or n amount, account must be taken not ony of other udg-
ment Income, f any, receved n precedng ta abe years, but aso of any Income
arsng out of cams, awards, and decrees, and Interest thereon, so receved.
In determnng the portons of ncome of the cass descrbed whch are attrb-
utabe to other ta abe years, due regard sha be gven to the nature of the
cam upon whch the recovery s founded. ocaton w generay be made
to the year or years durng whch occurred the e potaton, remova, or use, as
the case may be, of the property rght formng the sub|ect matter of the cam,
award, |udgment, or decree. Thus, n the case of a |udgment for Infrngement
of a patent, the number of unts produced through the use by the nfrnger of
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such patent In the respectve years Invoved sha consttute a proper bass of
aocaton. Smary, f the remova of mneras forms the bnss of the recovery,
the unts removed In the respectve years sha consttute a proper bass of ao-
caton. The Income arsng from awards of the M ed Cams Commsson,
Unted States and Germany, to the e tent they consttute compensaton for past
osses, sha be attrbuted to the years durng whch such osses occurred.
Interest sha be attrbuted to the years for whch t was aowed.
Ths secton may be ustrated by the foowng e ampe:
ampe: ased upon encroachment by the Y Corporaton upon mnera
property, the Corporaton n 19 1 obtans |udgment for and payment of
630,000. The Corporaton has not n any pror year derved ncome from
any ke source. s the |udgment s based upon 1 per ton for ore removed n
each year, the amount receved s aocated as foows:
Year.
Tonnage.
ross In-
come.
1888
80,000
200,000
ISO. 000
200,000
80,000
200,000
150.000
200,000
1939
19 0 ...
19 1
Tota
630,000
For the purposes of the computaton of the e cess profts ta there sha be
ncuded n gross ncome for the year 19 1 the amount of 200,000. The
amount of 150,000 aocated to 19 0 affects the tota 19 1 e cess profts ta as
e paned beow. The amount aocated to the years 1938 and 1939 s not sub|ect
to e cess profts ta for the reason that the e cess profts ta s appcabe ony
to years begnnng after December 31, 1939.
The e cess profts ta for the year 19 1 sha be determned as foows:
(1) n e cess profts ta for 19 1 sha be computed wthout regard to
secton 721, that s, by ncudng In gross Income the tem of 630,000, and
(2) parta e cess profts ta for 19 1 sha be computed on the net
ncome arrved at by ncudng In gross ncome ony 200,000 of the tem
of 630,000, and to the parta ta so computed there sha be added the
ncrease n the e cess profts ta whch woud resut from the ncuson
n gross ncome for the year 19 0 of 150,000 of the Item of 630,000.
The e cess profts ta for 19 1 Is ether (1) or (2), whchever s the esser.
To arrve at the ncrease n the e cess profts ta for 19 0 whch woud
resut from the ncuson n the gross ncome for such year of 150,000 of the tem
of 630,000, the e cess profts ta sha (but ony for the purpose of determnng
the 19 1 e cess profts ta abty) be computed frst by Incudng the tem of
150,000 n the gross ncome, and second by e cudng such amount from the gross
ncome. The e cess of the amount obtaned as the resut of the frst computaton
over the amount obtaned as the resut of the second computaton represents such
ncrease.
If n the above e ampe, n addton to the prncpa amount, nterest had been
added to the |udgment, such nterest woud be aso propery aocabe as between
the year 19 1 and pror ta abe years n accordance wth the method sanctoned
by the court n settng the amount of such nterest. If the porton of the tota
nterest attrbutabe to the respectve years can not be ascertaned from the |udg-
ment, such nterest may be aocated among such years, upon the bass of the
respectve portons of the prncpa amount attrbutabe to such years, gvng
effect to the perod of tme each porton remaned unpad.
Sec. 80.721-3. Long-term contracts. The second cass of potentay abnorma
Income Is ncome consttutng an amount payabe under a contract the performance
of -whch requred more than 12 months. Such contracts are herenafter referred
to n ths secton as ong-term contracts. In determnng whether perform-
ance requred a perod of more than 12 months, ony the perod begnnng
wth the commencement of the work and endng wth ts competon sha be
taken Into account If ess than 12 months eapse between begnnng of the
work and ts competon the contract s not a ong-term contract, even though
more than 12 months may have eapsed between the e ecuton of such con-
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trnct and the competon of Its performance. In genera, amounts payabe under
a ong-term contract are entted to the treatment provded by secton 721 ony
If the ta payer reports Its ncome on the competed contract bass.
mounts payabe under a ong-term contract fang wthn the provsons
of ths secton sha be attrbuted to the ta abe years durng whch e pend-
tures were mnde on account of such contract In the proporton whch the
amount of such e pendtures made durng each such year bears to the tota
of such e pendtures, account beng taken of the matera and suppes on hand
at the begnnng and end of each such year for use In connecton wth the work
under the contract but not yet so apped.
Ths secton may be Iustrated by the foowng e ampe:
ampe: In 19 1 the Corporaton whch makes ts Income ta returns on the
caendar year bass competes two contracts for the constructon of budngs,
one of whch was begun n 1938 and the other n 1939. Its gross Income for
19 1 from the two ong-term contracts amounts to 1,000,000, of whch 800,000
Is derved from the 1938 contract and 200,000 from the 1939 contract. It
reports ncome of ths cass upon the competed contract bass In accordance
wth secton 19. 2- (6), Reguatons 103, and correspondng provsons of pror
reguatons. Its gross ncome from ong-term contracts for the years 1937, 1938,
1939, and 19 0 amounted to 250,000, 350,000, 200,000, and 00,000, respec-
tvey. The gross ncome ( 1,000,000) arsng from ong-term contracts n 19 1
s therefore grossy dsproportonate to the average gross Income ( 300,000) of
that cass for the years 1937, 1938, 1939, and 19 0. Such gross ncome for 19 1
s therefore sub|ect to the provsons of secton 721. ssumng that the tota
e pendtures propery appcabe to the 1938 contract amount to 5,000,000, of
whch the respectve sums of 500,000, 1,250,000, 1,500,000, and 1,750,000 are
aocabe to the years 1938, 1939, 19 0, and 19 1, then the tem of 800,000
attrbutabe to the 1938 contract s aocabe to those years In the respectve
amounts of 80,000, 200,000, 2 0,000, and 280,000. In ke manner the amount
of 200,000 representng the gross ncome derved from the 1939 contract sha
be aocated to the years 1939, 19 0, and 19 1 In proporton to the e pendtures
appcabe to that contract. For method of computaton of the e cess profts
ta for the year 19 1, see the e ampe n secton 30.721-2.
Sec. 30.721- . poraton, dscovery, prospectng, research, or deveopment.
The thrd cass of potentay abnorma ncome s ncome resutng from e -
poraton, dscovery, prospectng, research, or deveopment of tangbe property
(such as mnes, o-producng property, and tmber tracts), patents, formuae,
or processes, or any combnaton thereof, e tendng over a perod of more than
12 months. The e poraton, dscovery, prospectng, research, or deveopment
must be that of the ta payer. Income resutng from actvtes of such a char-
acter carred on by a predecessor s not entted to the treatment provded by
secton 721.
Ordnary, the tme when e poraton, dscovery, prospectng, research, or de-
veopment begns w be deemed to be when the frst e pendtures on account
thereof are Incurred. Such actvtes must be reated to the partcuar property
out of whch the ncome arses. Moreover, the Income sub|ect to the treatment
provded n secton 721 does not ncude proft resutng from manufacturng or
other actvtes not specfed n secton 721.
Income of the cass descrbed n ths secton, f found to be abnorma ether
n knd or n amount, s to be attrbuted to the ta abe years In the perod
commencng wth the begnnng of the e poraton, dscovery, prospectng, re-
search, or deveopment and endng wth the cose of the ta abe year. In mak-
ng such aocaton, due regard shoud be gven to e pendtures, progress of the
partcuar actvty, and a other factors tendng to estabsh the e tent to whch
the ncome subsequenty reazed Is attrbutabe to the actvtes for any porton
of the tota perod. owever, In any case the Income may be attrbuted rataby
to the months In the perod commencng wth the begnnng of the e poraton,
dscovery, prospectng, research, or deveopment and endng wth the cose of
the ta abe year. Ths method may be ustrated by the foowng e ampes:
ampe (1) : In anuary, 1938, the Corporaton began the deveopment
of a certan devce on whch t e pended consderabe sums. The corporaton
secures a patent on such devce In December, 19 0, and In the same month ses
such patent at a proft of 250,000. It dd not In any of the four mmedatey
precedng years derve Income of the cass specfed In (c) of secton 721. One-
thrd of the tem of 250,000 Is, therefore, attrbutabe to each of the years 1938,
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1939, and 19 0 for e cess profts ta purposes. For method of computaton of
the e cess profts ta for the year 19 0, see the e ampe n secton 30.721-2.
ampe (2): The Corporaton throughout the years 1937, 1938, and 1939
had been engaged n the deveopment of a chemca formua whch was per-
fected and censed for use n the Industry n 19 0, n whch year the Corpora-
ton derved royates for the use of the formua n the sum of 150,000. The
corporaton dd not n any of the four Immedatey precedng years derve any
ncome In the nature of royates. In such case the amount of 150,000 s,
for e cess profts ta purposes, attrbutabe rataby to the years 1937, 1938,
1939, and 19 0. ence, of the amount of 150,000 three-fourths thereof, or
112,500, s e cuded from gross Income for the year 19 0 n the computaton
of e cess profts ta for that year. For method of computaton of the e cess
profts ta for the year 19 0, see the e ampe In secton 30.721-2.
Sec. 30.721-5. Change n accountng perod or method of accountng. The
fourth cass of potentay abnorma Income s ncome whch s ncudbe n gross
Income for the ta abe year rather than for a dfferent ta abe year by reason of
a change n the ta payer s accountng perod or method of accountng. Ths cass
may Incude such tems of ncome as are ncudbe n gross ncome for the ta abe
year by reason of a change from the nstament method to the straght accrua
method of accountng, a change In nventory method, or a change from the reserve
method to the specfc charge-off method for the treatment of bad debts. Items
of abnorma ncome ncudbe n gross ncome for the ta abe year rather than
for a dfferent ta abe ye#r by reason of a change from the nstament method
to the straght accrua method of accountng sha be attrbuted to the year
or years such tems accrued. The method of aocatng tems of abnorma ncome
Incudbe n gross Income for the ta abe year rather than for a dfferent year
by reason of other changes n accountng method or changes n accountng perod
Is to be determned n each partcuar case upon consderaton of a the facts
n the case. (See secton 30.721-1 as to the statement requred to be fed where
the benefts of secton 721 are camed.)
Ths secton may be ustrated by the foowng e ampe:
ampe: The Y Corporaton, pror to the caendar year 19 0, reported ts
ncome on the nstament bass. For the year 19 0 t secures the consent of
the Commssoner to a change n the method of reportng Income to the straght
accrua bass.
The gross ncome for the year 19 0 computed under the straght accrua
method of accountng and wthout regard to secton 721 s as foows:
From nstament saes contracts made In 19 0 320, 000
From nstament coectons n 19 0 on saes contracts made pror
to 19 0 250,000
From nstament saes contracts made pror to 19 0 but not yet co-
ected 130,000
Tota 700,000
Under the provsons of secton 721, the 250,000 and 130,000 tems are at-
trbutabe for e cess profts ta purposes to years pror to 10 0, the amount
attrbutabe to each such year beng equa to the amount Incudbe n 19 0 wth-
out regard to secton 721 on account of contracts made n each such year. For
method of computaton of the e cess profts ta for the year 19 0, see the
e ampe In secton 30.721-2.
Sec. 30.721-6. Income derved by essor from termnaton of ease. The ffth
cass of potentay abnorma ncome Is amounts ncuded n gross ncome of a
essor for the ta abe year by reason of the termnaton of the ease. mounts
may be requred to be so ncuded by reason of the fact that Improvements
made by the essee upon the eased property come nto the possesson or contro
of the essor upon termnaton or forfeture of the ease. In such cases. If the
Income Incudbe s abnorma ether n knd or In amount, t sha be aocated
In accordance wth the foowng rues:
(a) If the ease has not been canceed or forfeted, but has merey e pred,
the ncome sha be spread over the fe of the ease.
(6) If the ease has been canceed or forfeted, but the remanng usefu
fe of the mprovement s not n e cess of what woud have been the remanng
fe of the ease had the canceaton or forfeture not occurred, the ncome
ba be spread over what woud have been the remanng fe of the ease.
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152
(c) If the ease has been canceed or forfeted and the remanng usefu
fe of the mprovement Is n e cess of what woud have been the remanng
fe of the ease had the canceaton or forfeture not occurred, then
(1) n amount whch bears the same rato to the tota Income Incudbe
as the perod whch woud have consttuted the remanng fe of the ease
bears to the remanng usefu fe of the Improvement sha be spread over
what woud have been the remanng fe of the ease; and
(2) The remanng porton of the ncome ncudbe sha be spread over
the fe of the ease, ncudng what woud have been ts remanng fe had
the canceaton or forfeture not occurred.
mounts attrbuted to each future ta abe year are to be Incuded n gross
ncome for such year for the purpose of computng the e cess profts ta . Ths
paragraph may be ustrated by the foowng e ampe:
ampe: On anuary 1, 1929, the Corporaton, whch makes ts Income
ta returns on the caendar year bass, eased to the Corporaton an unm-
proved ste, on whch the atter corporaton competed a budng on une 30,
1931. Such ease was for a perod of 20 years and by ts terms e pred on
December 31, 19 8. On uy 1, 19 0, the ease Is forfeted and the budng
comes nto the possesson and contro of the Corporaton. The vaue as
of such date of the budng s 100,000, and ts remanng usefu fe Is 16
years. The Corporaton dd not, pror to 19 0, derve gross ncome of ths
nature nor dd t report as gross ncome any amount wth respect to the
erecton of the budng. Snce the remanng usefu.fe of the mprovement
s 16 years but what woud have been the remanng fe of the ease s ony
o
8 years, - of 100,000, or 53,125, s to be spread over what woud have
o
been the remanng fe of the ease, . e., the ast haf of 19 0, and the caendar
years 19 1 to 19 8, both ncusve. Snce there are 17 haf years n such
perod, n of 53,125, or 3,125, s to be aocated to the ast haf of 19 0,
and 7 of 53,125, or 6,250, to each of the caendar years 19 1 to 19 8, both
ncusve. The remander of the 100,000 Income, or 6,875 ( 100,000 mnus
53,125), s to be spread over the years 1929 to 19 8, both ncusve, . c, o of
6,875, or 2,3 3.75, s to be aocated to each such year. The tota amount
aocabe to each year s as foows:
Years. mount per year.
1929-1939 2,3 3.75
19 0
Porton of 53,125 aocated to ast haf of year 3,125.00
Pus: Porton of 6,825 aocated to such year 2,3 3. 75
Tota 5, G 75
19 1-19 8
Porton of 53,125 aocated to each year 6, 250.00
Pus: Porton of 6,825 aocated to each year 2,3 3. 75
Tota 8,598.75
The amounts aocated to the years 1929 to 1939, both ncusve, w have
no effect upon the computaton of the e cess profts ta . The e cess profts
ta for the ta abe year 19 0 s to be determned by takng nto gross ncome
for such year ony 5, 68.75 of the 100,000 Item otherwse ncudbe. The
amounts attrbuted to future years must be ncuded n gross ncome for such
years for the purpose of computng the e cess profts ta .
Other Income sub|ect to the provsons of secton 721 attrbutabe to the
termnaton of the ease s to be aocated as between the ta abe year n whch
such ncome s reazed and pror or subsequent ta abe years In the ght
of the agreement underyng the reazaton of such ncome. If, for nstance,
the essee pays the essor a ump sum as consderaton for canceaton of a
ease, such ump sum, f found to be abnorma ether n knd or n amount,
sha be aocated rataby to the ta abe years ncuded In what woud have
been the remanng fe of the ease had such ease not been canceed.
Sbc. 30.721-7. Drdcnds on stock of foregn corporatons other than foregn
persona hodng companes. The s th and fna cass of potentay ab-
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153
norma) Income under secton 721 s dvdends on stock of foregn corpora-
ton s-e cept foregn persona hodng commues. Ths secton s appcabe
ony to corporatons eectng the e cess profts credt based on ncome, snce
secton 711(a) (2) ( ) gves corporatons eectng the e cess profts credt based
on nvested capta a dvdends receved credt of 100 per cent of dvdends of
ths cass. In determnng whether the recept of such dvdends Is abnorma
or whether the amount thereof s grossy dsproportonate to the ncome of such
cass receved n the four precedng ta abe years, ony dvdends receved from
foregn corporatons are to be taken nto account. The e cepton reatve to
dvdends from foregn persona hodng companes appes bot to dstrbutons
actuay receved from foregn persona hodng companes and to constructve
dvdends deemed to have been receved pursuant to secton 837.
Income of ths cass whch Is abnorma ether n knd or n amount s to be
attrbuted to the years n whch were accumuated the earnngs and profts
out of whch such dstrbutons were made, f accumuhted nfer the acqu-
ston by the dstrbutee of the stock of the dstrbutng corporaton. If the
earnngs and profts out of whch the dstrbuton Is made were accumuated
pror to such acquston, the ncome arsng out of the dstrbuton s to bo
attrbuted to the ta abe year n whch the stock was acqured. The earnngs
and profts out of whch any dstrbuton s made are, as provded n secton
115, the most recenty accumuated earnngs and profts.
Ths secton may be ustrated by the foowng e ampe:
ampe: The Corporaton, a domestc corporaton, computng ts e cess
profts credt on the ncome bass, acqured n 1938 a of the stock of the
Y Company, Ltd., a foregn corporaton, whch s not a f( rc n rersoua hodng
company. The Y Company, Ltd., pad n uy, 19 0, a dvdend to the Cor-
poraton n the amount of 100,000. The Corporaton dd not prevousy receve
dvdends from any foregn corporaton. The Y Company, Ltd., had earnngs
and profts of 75,000 n 19 0 and 125.00 ) n 19: , . Foowng prncpes of
e stng aw wth respect to the source from whch dvdends are deemed to have
been psd, the dvdends receved by the Corporaton n 19 0 sha be aocated
as between the years 19 0 and 1939 n the respectve sums of 75,( ) and 25,000.
8ee secton 115(b) and correspondng provsons of pror revenue aws. For
method of computaton of the e cess profts ta for the year 19 0, see the
e ampe n secton 20.721-2.
Sec 722. d|ustment of bnormates n Income and Capta by
tm Commssoner.
For the purposes of ths subchapter, the Commssoner sha aso
have authorty to make such ad|ustments as may bo necessary to ad|ust
abnormates affectng ncome or capta, and hs decson sha be
snfe|eet-to revew by the Unted States oard of Ta ppeas.
Sbbs 30.722-1. d|ustment of abnormates n ncome or capta. Undem the
provsons of secton 722 the Commssoner Is authorzed to make such ad|ust-
ment ; as may be found necessary by reason of abnormates affectng ncome
or capta. d|ustments for more than one abnormaty may be necessary n
a partcuar case. bnormates may requre ad|ustments for the ta abe year,
or fo one or more of the ta abe years n the base perod, or both. What
ad|ustments are proper can be determned ony upon consderaton of a the
facts n the partcuar case.
No genera rue can be stated as to what consttutes an abnormaty In ether
ncome or capta. The mere fact that the ta payer derved an unusuay hgh
rate of proft on ts nvested capta s not suffcent to |ustfy an ad|ustment.
ta payer camng the benefts of secton 722 sha, n makng ts e cess
profts ta return, compute and pay ts e cess profts ta wthout regard to
secton 722. In such case, the ta payer shoud as prompty as possbe fe an
appcaton wth the Commssoner of Interna Revenue, Washngton, D. C,
attenton of the Income Ta Unt, Records Dvson, for reef under ths secton,
showng the nature and e tent of the aeged abnormates n ncome or capta,
the ad|ustments sought, and a the facts upon whch t rees.
Sec. 723. quty Invested Capta n Speca Cases.
Where the Commssoner determnes that the equty nvested capta
as of the begnnng of the ta payer s frst ta abe year under tb|s sub-
chapter cannot be determned In accordance wth secton 718, the equty
Invested capta as of the begnnng of such year sha be an amount
0 3 1 1 6
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equa to the sum of (a) the money pus (b) the aggregate of the ad-
|usted bass of the assets of the ta payer hed by the ta payer at such;
tme, such sum beng reduced by the ndebtedness outstandng at such
tme. The amount of the money, assets, and ndebtedness at such tme
sha be determned n accordance wth rues and reguatons prescrbed
by the Commssoner wth the approva of the Secretary. In such case,
the equty nvested capta for each day after the begnnng of the ta -
payer s frst ta abe year under ths subchapter sha be determned,
n accordance wth rues and reguatons prescrbed by the Commssoner
wth the approva of the Secretary, usng as the basc fgure th.e equty
Invested capta as so determned.
Sec. 30.723-1. Rues where equty Invested capta can not he determned under
secton 7 S. In cases n whch the Commssoner determnes that the equty
nvested capta of a corporaton as of the begnnng of ts frst e cess profts
ta ta abe year can not be determned n accordance wth secton 718, such
equty nvested capta sha be an amount equa to the sum of (a) the money,
pus (6) the aggregate of the ad|usted bass of the assets other than money,
hod by the corporaton as of the begnnng of such ta abe year, such sum
beng reduced by the ndebtedness of the corporaton outstandng at such tme.
The ad|usted bass of the assets sha be the ad|usted bass for determnng
oss upon a sae or e change for Federa ncome ta purposes. See, n genera,
secton 113 and the reguatons prescrbed thereunder. For the purposes of
secton 723 the term ndebtedness means any abty of the corporaton,
absoute and not contngent, and ncudes abtes assumed by the corporaton,
whether or not n connecton wth property hed by the ta payer, and any
abtes to whch property hed by the corporaton s sub|ect, but does not
ncude the obgaton of the corporaton on ts capta stock.
The equty nvested capta under secton 723 for each day after the frst day
of the frst e cess profts ta ta abe year of the corporaton sha be the basc
fgure determned under the frst paragraph of ths secton ncreased or decreased
as provded n secton 718 and the reguatons prescrbed thereunder wth respect
to changes n the equty nvested capta occurrng after the begnnng of such
frst ta abe year. For such purpose the term accumuated earnngs and
profts means the earnngs and profts accumuated snce the begnnng of the
frst e cess profts ta ta abe year of the corporaton, computed wthout regard
to any defct n accumuated earnngs and profts e stng at the begnnng of
such year. Smary, the term earnngs and profts refers ony to such
accumuated earnngs and profts and earnngs and profts of an e cess profts
ta ta abe year. In a cases comng under secton 723 the ta payer sha be
treated as a corporaton newy organzed mmedatey pror to the begnnng of
Its frst e cess profts ta ta abe year wth an equty nvested capta, consstng
of money pad n for stock, equa to the basc fgure determned under secton 723.
In any case In whch a ta payer fnds t mpossbe to determne ts equty
nvested capta as of the begnnng of ts frst e cess profts ta ta abe year n
accordance wth secton 718, t may compute ts equty nvested capta n accord-
ance wth secton 723, provded t submts wth ts return a schedue showng such
computaton, and a statement of the facts upon whch t bases ts concuson that
t can not compute ts equty nvested capta under secton 718, so that the Com-
mssoner may determne whether ts equty nvested capta can be computed
n accordance wth that secton.
Sec. 72 . Foregn Corporatons and Corporatons ntted to ene-
fts of Secton 251 Invested Capta
Notwthstandng secton 715, n the case of a foregn corporaton
engaged n trade or busness wthn the Unted States or havng an
offce or pace of busness theren, and n the case of a corporaton
entted to the benefts of secton 251, the Invested capta for any ta -
abe year sha be determned n accordance wth rues and reguatons
prescrbed by the Commssoner wth the approva of the Secretary,
under whch
(a) Genera Rue. The day nvested capta for any day of the
ta abe year sha be the aggregate of the ad|usted bass of each Unted
States asset hed by the ta payer on the begnnng of such day. In the
appcaton of secton 720 n reducton of the average nvested capta
(determned on the bass of such day nvested capta), the terms
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admssbe assets and Inadmssbe assets sha Incude ony Unted
States assets; or
(b) cepton. If the Commssoner determnes that the Unted
States assets of the ta payer cannot satsfactory be segregated from
Its other assets, the nvested capta for the ta abe year sha be an
amount whch s the same percentage of the aggregate of the ad|usted
bass of a assets hed by the ta payer as of the end of the ast day
of the ta abe year whch the net Income for the ta abe year from
sources wthn the Unted States Is of the tota net ncome of the
ta payer for such year.
(c) Defnton of Unted States sset. s used In ths subsec-
ton, the term Unted States asset means an asset hed by the ta -
payer n the Unted States, determned u accordance wth rues and
reguatons prescrbed by the Commssoner wth the approva of the
Secretary.
Sec. 30.72 -1. Invested capta of certan foregn corporatons and corpora,
tons entted to benefts of secton 251. In the case of a foregn corporaton
engaged n trade or busness wthn the Unted States or havng an off -e or
pace of busness theren, and In the case of a corporaton entted to the bene-
fts of secton 251 (on account of dervng a arge porton of ts gross ncome
from possessons of the Unted States), the nvested capta for any ta abe
year sha be nvested capta as provded n sectons 715, 716, 717, and 720, wth
the foowng e ceptons:
(a) The day Invested capta for each day n the ta abe year sha he the
aggregate of the ad|usted bass of each Unted States asset as defned n d)
beow hed by the ta payer on the begnnng of such day. The ad|usted bass
of each such asset sha be the ad|usted bass for determnng oss upon a
sae or e change for Federa ncome ta purposes. The amount of Unted
States assets hed at the begnnng of each day of the ta abe year sha be
determned n the same manner as the amount of admssbe and nadmssbe
assets s determned under secton 30.720-1. The day nvested capta com-
puted under ths secton s not affected by the ndebtedness of the corporaton,
and does not ncude borrowed capta as defned n secton 719.
(b) In the appcaton of secton 720 n reducton of the nveragp nvested
capta (determned on the bass of the day nvested capta as provded In
(a) above), the terms admssbe assets and nadmssbe assets sha
ncude ony Unted States assets. The amount of such admssbe assets and
nadmssbe assets sha be determned n the same manner as provded n
secton 30.720-1.
(c) In cases n whch the Commssoner determnes that the Unted States
asset of a corporaton can not satsfactory be segregated from Its other assets,
the Invested capta of the corporaton for the ta abe year sh be an amount
whch Is the same percentage of the aggregate ad|usted bass (for determnng
oss) of a assets hed by the ta payer as of the end of the ast day of the
ta abe year whch the net ncome for the ta abe year from sources wthn
the Unted States s of the tota net ncome of the ta payer for such year.
For the purposes of ths paragraph the net Income of the corporaton from
sources wthn the Unted States sha he determned as provded n secton
119 and the reguatons prescrbed thereunder. The provsons of sectons
715 and 720 reatng to ad|ustment for nadmssbe assets have no appca-
ton In determnng nvested capta under secton 72 (b).
(d) For the purposes of secton 72 the term Unted States asset means
an asset ether (1) empoyed by the ta payer n the Unted States n carryng
on ts trade or busness theren, or (2) of a knd the ncome from whch s
ncome from sources wthn the Unted States under secton 119 and the regu-
atons prescrbed thereunder rrespectve of where the evdence of the prop-
erty rght n such asset s hed.
Sec, 725. Persona Servce Corporatons.
(a) Defnton. s used n ths subchapter, the term persona
servce corporaton means a corporaton whose ncome s to be ascrbed
prmary to the actvtes of sharehoders who are reguary engaged
n the actve conduct of the affars of the corporaton and are the owners
at a tmes durng the ta abe year of at east 70 per centum n vaue
of each cass of stock of the corporaton, nnd n whch capta Is not a
matera Income-producng factor; but does not ncude any foregn
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156
corporaton, nor any corporaton 50 per centum or more of whose gross
Income conssts of gans, profts, or ncome derved from tradng as a
prncpa. For the purposes of ths subsecton, an ndvdua sha be
consdered as ownng, at any tme, the stock owned at such tme by hs
spouse or mnor chd or by any guardan or trustee representng them.
(b) .ecton as to Ta abty. If a persona servce corporaton
sgnfes, n ts return under Chapter 1 for any ta abe year, ts desre
not to be sub|ect to the ta mposed under ths subchapter for such
ta abe year, t sha be e empt from such ta for such year, and the
provsons of Suppement S of Chapter 1 sha appy to the sharehoders
n such corporaton who were such sharehoders on the ast day of such
ta abe year of the corporaton.
Sec. 30.725-1. Ta aton of pergona servce corporatons. persona servce
corporaton s sub|ect to the e cess profts ta mposed under Subchapter of
Chapter 2 the same as any other domestc corporaton uness t eects as to any
ta abe year not to be sub|ect to such ta . If the corporaton eects not to be
sub|ect to the e cess profts ta , the provsons of Suppement S (sectons 391
to 396, ncusve, as added by secton 502 of the Second Revenue ct of 19 0)
sha appy to the sharehoders n such corporaton who were such sharehoders
on the ast day of the ta abe year of the corporaton. See secton 19.39 -1 of
Reguatons 103. In such case, the amount of the undstrbuted Suppement S
net ncome sha be consdered as pad n to the corporaton as of the cose of the
ta abe year as pad-n surpus or as a contrbuton to capta, and the amount of
accumuated earnngs and profts as of the cose of such year sha be corre-
spondngy reduced. See secton 39 (d).
Sec. 30.725-2. Defnton of persona servce corporaton. (a) In genera.
The term persona servce corporaton means a domestc corporaton n whch
capta s not a matera Income-producng factor and the ncome of whch s to
be ascrbed prmary to the actvtes of sharehoders who (1) are reguary
engaged n the actve conduct of the affars of the corporaton, and (2) are the
owners, throughout the entre ta abe year, of at east 70 per cent n vaue of
each cass of stock of the corporaton.
If 50 per cent or more of the gross Income of a corporaton conssts of gans,
profts, or ncome derved from tradng as a prncpa, such corporaton can not
be consdered to be a persona servce corporaton. s to corporatons n whch
ess than 50 per cent of the gross ncome s derved from tradng as a prncpa,
see (e) beow.
(6) Stock nterest of sharehoders. Sharehoders reguary engaged n the
actve conduct of the affars of the corporaton and to whom the Income of the
corporaton s prmary to be ascrbed must own at a tmes durng the ta abe
year at east 70 per cent n vaue of each cass of stock of the corporaton. II
stock s owned by the spouse or mnor chd of an ndvdua, or owned by the
guardan or trustee of such spouse or chd, such stock s treated as beng owned
by such ndvdua.
corporaton can not be consdered to be a persona servce corporaton for
any ta abe year f another corporaton owns more than 30 per cent In vaue
of any cass of ts stock at any tme durng such year. corporaton s an
artfca entty and can not tsef be reguary engaged n the actve conduct of
the affars of another corporaton wthn the meanng of secton 725.
The fact that the ownershp of shares n the corporaton may change durng
the course of the ta abe year does not take the corporaton whch s otherwse
a persona servce corporaton out of that cass uness at some tme durng the
ta abe year the ownershp of more than 30 per cent n vaue of the shares of
any cass of stock passes nto the hands of persons not reguary engaged In the
actve conduct of the affars of the corporaton.
(c) Income to be ascrbed prmary to the actvtes of sharehoders. If em-
poyees oher than sharehoders contrbute substantay to the servces rendered
by a corporaton, such corporaton s not a persona servce corporaton uness,
n every case n whch servces are so rendered, the vaue of and the compen-
saton charged for such servces are to be attrbuted prmary to the e perence
or sk of the sharehoders and such fact Is evdenced n some defnte manner
n the norma course of the busness or professon. The fact that the share-
hoders gve persona attenton or render vauabe servces to the corporaton as
a resut of whch ts earnngs are greater than those of a corporaton engaged
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157
In a ke or smar busness or professon, the sharehoders of whch are not
reguary engaged n the actvtes of the corporaton, does not of tsef consttute
the corporaton a persona servce corporaton.
Income of a corporaton from merchandsng or tradng as a prncpa, drecty
or ndrecty, n commodtes or n the servces of others Is not to be ascrbed
prmary to the actvtes of ts sharehoders. Income of a corporaton from
the conduct of an aucton, agency, brokerage, or commsson busness strcty
on the bass of a fee or commsson may be so ascrbed. If. however, ether
as a matter of busness pocy or by contract, the corporaton assumes any
such rsks as those of market fuctuatons, bad debts, or faure to accept shp-
ments, or f t guarantees the accounts of the purchaser or s In any way
accountabe to the seer for the payment of the purchase prce, the transacton
s one of merchandsng or tradng, and ths s true even though the goods are
shpped drecty from the producer to the consumer and are never actuay
n the possesson of the corporaton. The fact that earnngs of the corpora-
ton are termed commssons or fees s not controng. The fact that a com-
msson or fee n a transacton s based on a dfference n the prces at whch
the seer ses and the buyer buys rases a presumpton that the transacton
s one of merchandsng or tradng, and t w be so consdered n the absence
of satsfactory evdence to the contrary.
It may happen that a corporaton s engaged n two or more busnesses or
professons whch are more or ess reated. Tms, an engneerng concern may
aso engage n contractng, whch amounts to tradng n materas and abor,
or a brokerage concern may guarantee some of Its accounts, or a photographc
concern may se pctures, frames, art goods, and suppes. In such cases, the
corporaton Is not a persona servce corporaton uness the actvtes of the
corporaton consstng of tradng or guaranteeng of accounts or seng are
neggbe or merey ncdenta, and uness no apprecabe part of the earnngs
s to be ascrbed to such actvtes. See aso (c) beow reatng to the empoy-
ment of capta.
(d) Sharehoders reguary engaged n the actve conduct of the affars of
the corporaton. corporaton s not a persona servce corporaton uness
sharehoders who own at a tmes durng the ta abe year at east 70 per
cent n vaue of each cass of stock are reguary engaged n the actve
conduct of the affars of the corporaton. That such sharehoders devote some
of ther tme to the affars of the corporaton s not suffcent; they must wth
reguarty devote substanta tme and energy to the conduct of ts affars.
(e) Capta as a matera ncome-prodmng factor. In a persona servce
corporaton capta must not be a matera ncome-producng factor. Whether
capta s a matera Income-producng factor Is to be determned by reference
to (1) the e tent to whch capta Is requred to carry on the busness or pro-
fesson, and (2) the e tent to whch capta Is actuay used n the producton
of ncome though not requred by the prmary actvtes of the corporaton.
If the use of capta s necessary to the producton of the ncome of the cor-
poraton and s more than ncdenta, capta Is a matera Income-producng
factor and the corporaton s not a persona servce corporaton. If a sub-
stanta porton of the ncome s attrbutabe to a use of capta, whether or
not connected wth the prmary actvtes of the corporaton, capta s a matera
Income-producng factor even though such use of capta s not necessary to
such prmary actvtes. The term capta as used n secton 725 and n
ths secton means not ony capta actuay Invested by the sharehoders but
aso capta obtaned n other ways. Thus, capta may be borrowed ether
drecty as shown by bonds, debentures, certfcates of ndebtedness, notes, bs
payabe, or other paper, or ndrecty as shown by accounts payabe or other
forms of credt, or the busness of the corporaton may be fnanced n some
other manner by ts sharehoders. If a substanta amount of capta s used
to fnance or carry the accounts of cents or customers. It w be nferred that
because of competton or for other reasons such use of capta s necessary
and more than ncdenta n order to secure or hod busness whch woud
otherwse be ost If a corporaton engaged In an agency, brokerage, or com-
msson busness reguary empoys n substanta amount of capta to end to
Its prncpas, to buy and carry goods on ts own account, or to buy and carry
odd ots n order that t may render more satsfactory servce to ts prncpas or
customers, such corporaton s not a persona servce corporaton. In genera,
the arger the amount of capta actuay used the stronger s the evdence
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158
that capta s necessary and more than ncdenta and s a matera ncome-
producng factor.
The term ncome as used n secton 725 and n ths secton means gross
ncome. Capta s a matera Income-producng factor f ts use resuts In a
substanta amount of gross ncome, rrespectve of the amount of net ncome,
f any, such use produces.
(f) ppcaton of reguatons; returns. No defnte and concusve tests
can be prescrbed by whch t can be fnay determned n advance of an
e amnaton of the corporaton s ncome ta return whether t s or s not a
persona servce corporaton. In the precedng subsectons are set forth the
genera prncpes under whch such determnaton w be made.
If a corporaton camng to be a persona servce corporaton sgnfes n
ts return under Chapter 1 for any ta abe year ts desre not to be sub|ect
to the e cess profts ta under Subchapter of Chapter 2 for such ta abe
year, t sha attach Form 1121PS, n dupcate, to ts ncome ta return on
Form 1120. In Form 1121PS there sha be stated (1) such facts as tend
to show whether or not the corporaton s a persona servce corporaton, n-
cudng () the nature of ts busness, () the character, preferences, dvdend
rates, and other essenta features of the varous casses of Its stock outstandng
for any tme durng the ta abe year, ( I) the names and addresses of ts sev-
era sharehoders and ther reatonshp to each other, (v) the number and
casses of shares owned at any tme durng the ta abe year by each share-
hoder and the porton of the year durng whch such shares were so owned,
(v) the nature of the actvtes of the severa sharehoders on behaf of the
corporaton, and (v) the e tent to whch capta n any form s used In the
busness, and (2) the computaton of the undstrbuted Suppement S net ncome
for the ta abe year, the names and addresses of a sharehoders of the cor-
poraton at the cose of the ta abe year, the number and casses of shares
hed by each, and such other nformaton as may be requred by the form and
the nstructons prnted on the form or ssued therewth.
Sec. 30.725-3. ecton as to ta abty. The eecton as to ta abty pro-
vded for n secton 725(b) and the resutng e empton from ta have ap-
pcaton ony to the e cess profts ta on domestc corporatons mposed under
Subchapter of Chapter 2 as added by secton 201 of the Second Revenue
ct of 19 0. The corporaton may make such an eecton by sgnfyng n ts
return under Chapter 1 ts desre not to be sub|ect to the e cess profts ta .
new eecton s requred for each ta abe year. n amended return fed
after the statutory perod for fng the return (or after the ast day of any
e tenson perod) s not a return wthn the meanng of secton 725(b).
domestc corporaton whch eects n ts ncome ta return for a ta abe
year to be e empt from the e cess profts ta for such year as a persona
servce corporaton may, notwthstandng such eecton, fe an e cess profts
ta return for such ta abe year on Form 1121. Such return sha be com-
pete n a respects e cept for the computaton of the ta , and there sha
be attached to t a statement that the corporaton desres to be cassfed as
a persona servce corporaton and not to be sub|ect to the e cess profts ta
for the ta abe year and that t has attached Form 1121FS n dupcate to ts
ncome ta return on Form 1120. n e cess profts ta return made n ths
manner wthn the tme prescrbed by aw w consttute a return wthn the
meanng of secton 712(a). In the case of a domestc corporaton whch fes
such a return eectng theren as provded In secton 712(a) or secton 7 1
to compute ts e cess profts credt for such ta abe year under secton 713
or secton 71 and whch s subsequenty determned not to be a persona serv-
ce corporaton, the amount of e cess profts ta for such year sha be deter-
mned by the Commssoner n accordance wth the eecton so made by the
corporaton wth respect to the computaton of ts e cess profts credt, and
the e cess profts ta so determned w consttute a defcency whch sha
be assessed and coected n the same manner as n the case of a defcency
n Income ta under Chapter 1. corporaton not fng an e cess profts ta
return for a ta abe year wthn the tme prescrbed by aw may not n any
case eect to have the e cess profts credt for such ta abe year computed
under secton 713. The aowance of a credt or refund of any ncome ta
overpad by the sharehoders of a corporaton dened persona servce cassfca-
ton s sub|ect to the mtatons provded n secton 322.
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Sec. 726. Corporatons Competng Contracts Undkr Merchant
Marne ct, 1936.
(a) If the Unted States Martme Commsson certfes to the
Commssoner that the ta payer has competed wthn the ta abe year
any contracts or subcontracts whch are sub|ect to the provsons of
secton 505(b) of the Merchant Marne ct of 1936, as amended, then
the ta Imposed by ths subchapter for such ta abe year sha be, n
eu of a ta computed under secton 710, a ta computed under sub-
secton (b) of ths secton, f, and ony f, the ta computed under
subsecton (b) s ess than the ta computed under secton 710.
(b) The ta computed under ths subsecton sha be the e cess
of
(1) tentatve ta computed under secton 710 wth the
norma-ta net Income Increased by the amount of any payments
made, or to be made, to the Unted States Martme Commsson
wth respect to such contracts or subcontracts; over
(2) The amount of such payments.
Sec 30.726-1. Corporatons competng contracts under Merchant Marne
ct of 1936. (o) Secton 726 provdes for an aternatve ta n the case of a
corporaton whch has been certfed by the Unted States Martme Com-
msson (herenafter referred to as the Commsson) to the Commssoner as
havng competed wthn the ta abe year any contracts or subcontracts
sub|ect to the provsons of secton 505(b) of the Merchant Marne ct of 1936,
as amended (herenafter referred to as secton 505(b)). Under secton 505(b)
a contractor or subcontractor Is requred to pay to the Commsson the amount
of proft, f any, n e cess of 10 per cent of the tota contract prces of such
contracts or subcontracts.
(6) The aternatve ta s n eu of the e cess profts ta computed under
secton 710 but ony If such aternatve ta s ess than the ta under such
secton. Such aternatve ta Is the e cess of (1) a tentatve ta computed
under secton 710 wth the norma-ta net Income ncreased by the amount of
any payments made, or to be made, to the Commsson wth respect to con-
tracts or subcontracts the competon of whc durng the ta abe year has
been certfed to the Commssoner by the Commsson, over (2) the amount
of such payments.
(c) For the purposes of secton 726, a certfcate by the Commsson that the
vesse or porton thereof covered by the contract or subcontract has been
devered durng the ta abe year sha be deemed to be the certfcate requred
by such secton.
(d) corporaton camng the beneft of secton 726 sha attach to Its e cess
profts ta return (1) a certfcate of the Commsson showng each contract
or subcontract sub|ect to the provsons of secton 505(b) whch the corpora-
ton has competed wthn the ta abe year and (2) a statement showng the
amount of payments made, or to be made, to the Commsson wth respect to
such contracts and subcontracts. If the amount of the payments made, or
to be made, to the Commsson wth respect to such contracts or subcontracts
has not been ascertaned at the tme of fng the e cess profts ta return
the coroporaton may estmate the amount of such payments for the purposes of
secton 726. In such cases, the Commssoner may requre a bond from the
corporaton as a condton precedent to the computaton of the ta under that
secton. If such a bond s requred t sha be on the form prescrbed by the
Commssoner and n such sum as the Commssoner may prescrbe, and t
sha be condtoned upon the payment by the corporaton of any amount of
ta found due upon redetermnaton of the ta made necessary by the
estmated amount under secton 726(b)(2) provng ncorrect, and upon such
further condtons as the Commssoner may requre. The bond sha be e e-
cuted by the corporaton as prncpa and by suretes satsfactory to the Com-
mssoner. (See aso secton 112(1 of the Revenue ct of 1926, as amended,
paragraph 63 of the ppend to Reguatons 103.)
(c) If the amount actuay pad, or to be pad, to the Commsson under sec-
ton 505(b) dffers from the amount used n determnng the ta under secton
726, the corporaton sha mmedatey notfy the Commssoner of the amount
actuay pad, or to be pad, wth respect to the partcuar contract. The Com-
mssoner w thereupon redetermne the amount of the e cess profts ta
under secton 726 nnd the amount of ta , If any, found to be due upon snch
redetermnaton sha be pad by the corporaton upon notce and demand from
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the coector. The amount of ta , f any, shown upon redetermnaton to have
been overpad sha be credted or refunded to the ta payer n accordance wth
the provsons of secton 322.
Sec. 727. empt Corpob.vtons.
The foowng corporatons sha be e empt from the ta mposed
by ths subchapter:
(a) Corporatons e empt under secton 101 from the ta mposed
by Chapter 1.
(b) Foregn persona-hodng companes, as defned n secton 331.
(c) Mutua nvestment companes, as defned n secton 301.
(d) Investment companes whch under the Investment Company
ct of 10 0 are regstered as dversfed companes at a tmes durng
the ta abe year. For the purposes of ths subsecton, f a company s
so regstered before uy 1, 19 1, t sha be consdered as so regstered
at a tmes pror to the date of such regstraton.
(e) Persona-hodng companes, as defned In secton 501.
(f) Foregn corporatons not engaged n trade or busness wthn
the Unted States and not havng an offce or pace of busness theren.
(g) Domestc corporatons satsfyng the foowng condtons:
(1) If 95 per centum or more of the gross ncome of such domes-
tc corporaton for the three-year perod mmedatey precedng the
cose of the ta abe year (or for such part of such perod durng
whch the corporaton was n e stence) was derved from sources
other than sources wthn the Unted States; and
(2) If 50 per centum or more of Its gross ncome for such pe-
rod or such part thereof was derved from the actve conduct of a
trnde or busness.
(h) ny corporaton sub|ect to the provsons of Tte I of the Cv
eronautcs ct of 1938, In the gross Income of whch for any ta abe
year begnnng after December 31, 1939, there s ncudbe compensa-
ton receved from the Unted States for the transportaton of ma
by arcraft f, after e cudng from ts gross ncome such compensa-
ton, ts ad|usted e cess profts net ncome for such year s zero or
ess.
Sec. 30.727-1. empt corporaton . (a) corporaton whch has estabshed
ts rght under secton 101 to e empton from Income ta need not agan
estabsh ts rght Tnder secton 727(a) to e empton from e cess profts ta .
corporaton whch has not estabshed ts rght to e empton under secton
101 and whch cams e empron under secton 727(a) s requred to estabsh
Its rght to e empton under secton 101 n the manner prescrbed In the
reguatons thereunder n order to be hed e empt under secton 727(a).
( ) corporaton whch cams e empton under the provsons of secton 727,
other than the provsons of secton 727 (a), (g), and (h), sha fe wth ts
ncome ta return a statement showng under what paragraph of secton 727
It cam e empton.
(e) corporaton whch cams e empton under secton 727(g) sha attach
to Its Income ta return a statement showng for the 3-year perod Immedatey
precedng the cose of the ta abe year (or for such part thereof durng whch
the corporaton was n e stence) (1) ts tota gross Income from a sources,
(2) the amount thereof derved from the actve conduct of a trade or busness,
(3) a descrpton of such trade or busness and the facts upon whch the
corporaton rees to estabsh that such trade or busness was actvey con-
ducted by t, and ( ) the amount of ts gross ncome from sources wthn
the Unted States. The gross ncome from sources wthn the Unted States
sha be determned as provded n secton 119 and the reguatons prescrbed
thereunder.
( f) corporaton whch cams e empton under secton 727(h) sha attach
to ts ncome ta return a statement showng (1) that t s sub|ect to the pro-
vsons of Tte I of the Cv eronautcs cts of 1938, (2) the amount of the
compensaton ncuded n the gross ncome of the corporaton as compensaton
receved from the Unted States for the transportaton of ma by arcraft, and
f3) the amount of ts gross Income, net ncome, e cess profts net Income, and
ad|usted e cess profts net ncome, after e cudng from ts gross ncome the
amount of such compensaton.
s to the statute of mtatons where no return s fed, see sectons 275(a)
and 276(a).
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Set. 728. Meanng of Terms Used.
The terms used n ths subchapter sha have the same meanng as
when used n Chapter 1.
Sec. 72f . Laws ppcabe.
(a) Gof L Rue. provsons of aw (ncudng penates)
appcabe n respect of the tu es mposed by Chapter 1, sha. Insofar
as not nconsstent wth ths subchapter, be appcabe n respect of the
ta mposed by ths subchapter.
(b) Returns. Notwthstandng subsecton (a), no return under
secton 52(a) sha be requred to be fed by any ta payer under ths
subchapter for any ta abe year for whch ts e cess profts net ncome,
computed wth the ad|ustments provded In secton 711(a)(2) and
paced on an annua bass as provded n secton 711(a)(3), s not
greater than 5,000.
(c) Foregn Ta es Pad. In the appcaton of secton 131 for the
pnrposes of ths subchapter the ta pad or accrued to any country sha
be deemed to be the amount of such ta reduced by the amount of the
credt aowed wth respect to such tu aganst the tu mposed by
Chapter 1.
(d) Lmtatons on mount of Foskon Ta Credt. The amount
of the credt taken under ths secton sha be sub|ect to each of the
foowng mtatons:
(1) The amount of the credt n respect of the ta pad or
accrued to any country sha not e ceed the same proporton of the
ta aganst whch such credt Is taken, whch the ta payer s e cess
profts net ncome from sources wthn such country bears to Its
entre e cess profts net ncome for the same ta abe year; and
(2) The tota amount, of the credt sha not e ceed the same
proporton of the ta aganst whch such credt s taken, whch the
ta payer s e cess profts net ncome from sources wthout the Unted
States bears to ts entre e cess profts net ncome for the same
ta abe year.
Sec. 30.729-1. Tme and pace for fng returns. cess profts ta returns
sha be fed at the same tme and pace as the tme nnd pace prescrbed n sec-
tons 53 and 35 and the ncome ta reguatons under such sectons for the fng
of ncome ta returns, e cept that such e cess profts ta returns for ta abe
years endng before December 31, 19 0, whch, f fed wthn the tme prescr ed
n such reguatons, woud be fed before March 15, 11) 1, sha be fed on or
before March 15, 10 1. The e cess profts ta return of a corporaton of Income
receved or accrued from the date of ts ncorporaton to the end of ts frst
accountng perod, where the perod between the date of Incorporaton nnd the
end of such perod s ess th n 12 months, sha be consdered as n return for a
fractona part of a year, and sha be fed wthn the tme prescrbed for fh.g
returns for ta abe years of ess than 12 months.
Sec. 30.729-2. Tme for payment of ta . The e cess profts ta sha be pad
at the same tme as the tme prescrbed n sectons 56 and 23(5 and the ncome
ta reguatons under such sectons for the payment of ncome ta , e cept
that such e cess profts ta for ta abe years endng before December 31, 19 0,
whch, If pad wthn the tme so prescrbed, woud be pad before March
15, 10 1, sha be pad on or before March 15, 10 1. In case an eecton s
made to pay In nstaments such e cess profs ta for a ta abe year endng
before December 31, 19 0, and the frst nstament, f pad wthn the tme
prescrbed n such reguatons, woud be pad before March 15, 19 1, then the
frst Instament of such ta sha be pad on March 15, 10 1, and the second,
thrd, and fourth nstaments thereof sha be pad on or before the 15th
day of the thrd, s th, and nnth month, respectvey, after March 15, 19 1.
Sec. 30.729-3. Foregn ta credt. The provsons of aw made appcabe to
the e cess profts ta by secton 729(a) ncude secton 131 reatng to the
credt for Income, war-profts and e cess-profts ta vs pad or accrued durng
the ta abe year to any foregn country or any possesson of the Unted States.
The ta payer Is aowed such a credt aganst the e cess profts ta f t
cams such credt In ts Federa ncome ta return and kewse cams such
credt In Its e cess profts ta return. The amount of such credt aowabe
aganst the e cess profts ta s (a) the amount of such Income, war-profts,
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162
and e cess-profts ta es reduced by (6) the amount of such ta es aowed as a
credt under secton 131 aganst the Income ta . Thus, for nstance, f a ta -
payer pays to a foregn country wth respect to the caendar year 19 0 ncome
ta n the amount of 25,000 upon ncome from sources theren an, due to
the operaton of the mtaton provsons contaned n secton 131(b), ony the
amount of #20,000 s aowed as a credt aganst the ncome ta for that year,
the remander, or 5,01)0, s avaabe as a credt aganst the e cess profts
ta for the year 19 0. The amount thus made avaabe as a credt aganst
the e cess prnfts ta s, however, sub|ect to the further mtatons provded
n secton 729(d). For the appcaton of the mtatons provded In secton
729(d) to the amount of ncome, war-profts or e cess-profts ta es thus made
avaabe as a credt aganst the e cess profts ta , see secton 131(b) and the
reguatons prescrbed thereunder.
Sec. 730. Consodated Returns.
(a) Prvege to Fe Consodated Returns. n affated group
of corporatons sha, sub|ect to the provsons of ths secton, have the
prvege of makng a consodated return for the ta abe year n eu of
separate returns. The makng of a consodated return sha be upon
the condton that a the corporatons whch have been members of
the affated group at any tme durng the ta abe year for whch
the return s made consent to a the reguatons under subsecton
(b) prescrbed pror to the ast day prescrbed by aw for the fng of
such return; and the makng of a consodated return sha be con-
sdered as such consent. In the case of a corporaton whch s a
member of the affated group for a fractona part of the year the
consodated return sha ncude the ncome of such corporaton for
such part of the year as t s a member of the affated group.
(b) Reguatons. The Commssoner, wth the approva of the
Secretary, sha prescrbe such reguatons as he may deem necessary
n order that the ta abty of any affated group of corporatons
makng a consodated return and of each corporaton n the group, both
durng and after the perod of affaton, may be returned determned,
computed, assessed, coected, and ad|usted, n such manner as
ceary to refect the e cess profts ta abty and the varous factors
necessary for the determnaton of such abty, and n order to pre-
vent avodance of such ta abty.
(c) Computaton and Payment of Ta . In any case n whch a
consodated return s made the ta sha be determned, computed,
assessed, coected, and ad|usted n accordance wth the reguatons under
subsecton (b) prescrbed pror to the ast day prescrbed by aw for
the fng of such return. Ony one specfc e empton of 5,000 pro-
vded n secton 710(b)(1) sha be aowed for the entre affated
group of corporatons.
(d) Defnton of ffated Gkoup . s used n ths secton,
an affated group means one or more chans of ncudbe corpora-
tons connected through stock ownershp wth a common parent cor-
poraton whch s an ncudbe corporaton If
(1) t east 95 per centum of each cass of the stock of each of
the ncudbe corporatons (e cept the common parent cor-
poraton) s owned drecty by one or more of the other ncudbe
corporatons; and
(2) The common parent corporaton owns drecty at east 95
per centum of each cass of the stock of at east one of the other
ncudbe corporatons.
s used n ths subsecton, the term stock does not ncude non-
votng stock whch Is mted and preferred to as to dvdends.
(e) Defnton of Incudbe Corporaton . s used n ths sec-
ton, the term ncudbe corporaton means any corporaton e cept
(1) Corporatons e empt from the ta mposed by ths sub-
chapter.
(2) Foregn corporatons.
(3) Corporatons organzed under the Chna Trade ct, 1922.
( ) Corporatons entted to the benefts of secton 251, by
reason of recevng a arge percentage of ther ncome from pos-
sessons of the Unted States.
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(5) Persona servce corporatons.
(6) Insurance companes sub|ect to ta aton under secton 201,
20 , or 207.
(f) Incudbe Insurance Companes. Despte the provsons of
paragraph (6) of subsecton (e), two or more domestc nsurance com-
Snes each of whch s sub|ect to ta aton under the same secton of
apter 1 sha be consdered as ncudbe corporatons for the pur-
pose of the appcaton of subsecton (d) to such nsurance companes
aone.
(g) Subsdary Formed to Compy Wth Foregn Law. In the
case of a domestc corporaton ownng or controng, drecty or nd-
recty, 100 per centum of the capta stock (e cusve of drectors
quafyng shares) of a corporaton organzed under the aws of a con-
tguous foregn country and mantaned soey for the purpose of com-
pyng wth the aws of such country as to tte and operaton of prop-
erty, such foregn corporaton may, at the opton of the domestc cor-
poraton, be treated for the purpose of ths subchapter as a domestc
corporaton.
(h) Suspenson of Runnno of Statute of Lmtatons. If a notce
under secton 272(a) n respect of a defcency for any ta abe year s
maed to a corporaton, the suspenson of the runnng of the statute of
mtatons, provded n secton 277, sha appy n the case of corporatons
wth whch such corporaton mude a consodated return for such ta abe
year.
Sec. 30.730-1. Consodated e cess profts ta returns of affated corpora-
tons. Reguatons prescrbed under secton 730(b) as a separate.Treasury de-
cson are appcabe to the makng of consodated e cess profts ta returns
by affated corporatons for ta abe years begnnng after December 31, 1939,
and to the determnaton, computaton, assessment, coecton, and ad|ustment
of ta abtes under consodated returns for such years. For defnton of
ta abe year, see secton 8.
Seo. 30.732-2. Formaton of and changes n affated group. n affated group
of corporatons, wthn the meanng of secton 730, s formed at the tme that
the common parent corporaton whch s an ncudbe corporaton becomes the
owner drecty of at east 95 per cent of each cass of the stock of another n-
cudbe corporaton. corporaton becomes a member of such an affated group
at the tme that one or more members of such group become the owners drecty
of at east 95 per cent of each cass of ts stock. corporaton ceases to be a
member of such an affated group at the tme that the aggregate of each cass
of ts stock owned drecty by the members of such group becomes ess than 05
per cent. The term stock as heren used does not Incude nonvotng stock
whch s mted and preferred as to dvdends.
Sec. 30.730-3. Corporatons to be ncuded n consodated e cess profts tar
returns. The prvege of fng consodated e cess profts ta returns Is mted
to corporatons consttutng an affated group as defned n secton 730(d).
consodated return must Incude every domestc corporaton whch s a member
of the affated group but sha not ncude n corporaton whch s not an
ncudbe corporaton as defned n secton 730(e). In no case may a con-
sodated return he fed by subsdary corporatons as an affated group uness
the common parent corporaton through whch the subsdares are connected
Is a member of the group. For nstance, there w not be recognzed as an
affated group two ndustra corporatons the common parent corporaton of
whch s an nsurance company or a persona hodng company. In addton,
no corporaton whch s connected by stock ownershp wth an affated group
of ncudbe corporatons through a uouncudbe corporaton may be Incuded
n a consodated return.
Whe nsurance companes are not ncudbe n an affated group of cor-
poratons whch are not nsurance companes, an Insurance company may be
affated wth other nsurance companes sub|ect to the ncome ta mposed by
the same secton. For e ampe, an nsurance company ta abe under secton
201 may be affated wth another nsurance company ta abe under secton
201 but not wth an nsurance company ta abe under secton 20 or secton 207.
Seo. 30.730- . Foregn corporatons whch may be treated as domestc corpo-
ratons. In the case of a domestc corporaton ownng or controng, drecty
or ndrecty, the entre capta stock (e cusve of drectors quafyng shares)
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of a corporaton organzed under the aws of Canada or of Me co and man-
taned soey for the purpose of compyng wth the aws of such country as to
tte and operaton of property, such foregn corporaton may, at the opton of the
domestc corporaton, be treated as a domestc corporaton. The opton to treat
such foregn corporaton as a domestc corporaton must be e ercsed at the tme
of makng the frst consodated e cess profts ta return, and can not be e er-
csed at any tme thereafter. If the eecton s e ercsed to treat such foregn
corporaton as a domestc corporaton t must be Incuded In the consodated
return of the affated group of whch t Is a member for each year for whch
such group makes or s requred to make a consodated return.
S ;. 731. Corporatons ngaged n Mnno of Strategc Metas.
In the case of any domestc corporaton engaged In the mnng of
tungsten, qucksver, manganese, patnum, antmony, chromte, or tn,
the porton of the ad|usted e cess profts net Income attrbutabe to such
mnng n the Unted States sha be e empt from the ta mposed by
ths subchapter. The ta on the remanng porton of such ad|usted
e cess profts net Income sha be an amount whch bears the same rato
to the ta computed wthout regard to ths secton as such remanng
porton bears to the entre ad|usted e cess profts net Income.
Sec. 30.731-1. Corporatons whch mne strategc metas. (a) If a domestc
corporaton Is engaged n mnng tungsten, qucksver, manganese, patnum,
antmony, chromte, or tn (herenafter referred to as strategc metas), wthn
the Unted States, the porton of ts ad|usted e cess profts net ncome attrbuta-
be to such mnng s e empt from the e cess profts ta . The e cess profts
ta on the remanng porton of such ad|usted e cess profts net ncome s an
amount whch bears the game rato to the e cess profts ta computed wthout
regard to secton 731 as such remanng porton bears to the entre ad|usted
e cess profts net ncome.
(6) The porton of the ad|usted e cess profts net Income attrbutabe to mn-
ng of strategc metas s an amount whch bears the same rato to the tota
ad|usted e cess profts net Income as the porton of the e cess profts net
ncome attrbutabe to such mnng bears to the tota e cess profts net ncome.
The porton of the e cess profts net ncome attrbutabe to such mnng s
the gross ncome derved from strategc metas and arsng out of operatons
whch gve rse to gross ncome from the property, as defned n secton
19.23 (m)-() (f) of Reguatons 103, ess the sum of (1) aowabe deductons
whch are drecty attrbutabe to such mnng, (2) any ad|ustments made under
secton 711 Invovng tems drecty attrbutabe to such mnng, and (3) an
aocabe porton of any deductons party attrbutabe to such mnng and of
any ad|ustments under secton 711 nvovng tems party attrbutabe to
such mnng.
(c) There sha be attached to and made a part of the return of any ta -
payer camng the benefts under secton 731 a schedue contanng the foowng
nformaton:
(1) The amount of gross Income from the mnng of strategc metas and from
each other actvty of the corporaton;
(2) The aowabe deductons and the ad|ustments under secton 711 drecty
attrbutabe to such mnng; and
(3) The porton of the aowabe deductons and of the ad|ustments under
secton 711 aocated to such mnng and the bass for such aocaton.
The foowng e ampe Iustrates the computaton of the ta n the case of a
corporaton entted to the benefts of secton 731:
ampe: The M Corporaton, a domestc corporaton, mnes both god and
patnum (a by-product of god) and reduces the ores contanng such metas.
The corporaton has an e cess profts credt of 0,000. The e cess profts net
ncome attrbutabe to patnum mnng s 20,000; that attrbutabe to other
actvtes s 05,000. The ta s 17,3 7.83, computed as foows:
(1) Tota e cess profts net ncome.
(2) Less:
Specfc e empton
cess profLs credt
5,000
0,000
115,000. 00
5, 000.00
t3) Tota ad|usted e cess profts net ncome.
70,000. 00
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( ) Less:
Porton attrbutabe to patnum mnng ( of 70,00o). 12,173.91
(5) Remanng porton of ad|usted e cess profts net ncome 57,820.09
(C) Ta on ad|usted e cess profts net ncome of 70,000 computed
wthout regard to secton 731 (see secton 710) 21,000.00
(7) Ta under secton 731 on Item (5), . e., porton of tem (6)
whch bears the same rato to 21,000 as porton of ad|usted
e cess profts net ncome not attrbutabe to patnum
mnng bears to tota ad|usted e cess profts net ncome
/ 57,S .00 f 21 0( 17 3 7 33
70,000
Part II Rues n Connecton Wth Certan changes.
Suppement cess Trofts Credt ased on Income.
Sec. 7 0. Defntons.
For the purposes of ths Suppement
(a) cqrnNa Corpcbatton. The term acqurng corporaton
means
(1) corporaton whch has acqured
( ) substantay a the propertes of another corporaton
and the whoe or a part of the consderaton for the transfer
cf suc propertes s the transfer to such other corporaton
of a the stock of a casses (e cept quafyng shares) of the
corporaton whch has acqured such propertes, or
( ) substantay a the propertes of another corporaton
and the soe consderaton for the transfer of such propertes
s the transfer to such other corporaton of votng stock of the
corporaton whch has acqured such propertes, or
(C) before October 1, 19 0, propertes of another corpora-
ton soey as pad-n surpus or a contrbuton to capta n
respect of votng stock owned by such other corporaton.
For the purposes of subparagraphs (15) and (C) In determnng
whether such votng stock or such pad-n surpus or contrbuton to
capta s the soe consderaton, the assumpton by the acqurng
corporaton of a abty of the other, or the fact that property
acqured s sub|ect to a abty, sha be dsregarded. Subpara-
graph ( ) or (C) sha appy ony f the corporaton transferrng
such propertes s forthwth competey qudated In pursuance of
the pan under whch the acquston s made, and the transacton of
whch the acquston s a part has the effect of a statutory merger
or consodaton.
(2) corporaton whch has acqured property from another
corporaton n a transacton wth respect to whch gan or oss was
not recognzed under secton 112(b) (0) of Chapter 1 or a corre-
spondng provson of a pror revenue aw;
(3) corporaton the resut of a statutory merger of two or
more corpora tons; or
( ) corporaton the resut of a statutory consodaton of two
or more corporatons.
(b) Component Corporaton. The term component corporaton
means
(1) In the case of a transacton descrbed n subsecton (a)(1),
the corporaton whch transferred the assets;
(2) In the case of a transacton descrbed n subsecton (a) (2),
(3) In the case of a statutory merger, a corporatons merged,
the corporaton the property of whch was acqured ;
e cept the corporaton resutng from the merger; or
( ) In the case of a statutory consodaton, a corporatons
consodated, e cept the corporaton resutng from the consodaton.
(c) uafed Component Corporaton. The term quafed com-
ponent corporaton means a component corporaton whch was In e -
stence on the date of the begnnng of the ta payer s base perod.
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166
(d) ase Perod. In the case of a ta payer whch s an acqurng
corporaton the base perod sha be:
(1) If the ta s beng computed for any ta abe year begnnng
n 1910, the forty-eght months precedng the begnnng of such
ta abe year; or
(2) If the ta s beng computed for any ta abe year begnnng
after December 31, 10 0, the forty-eght months precedng what
woud have been ts frst ta abe year begnnng n 19 0 f t had
had a ta abe year begnnng n 19 0 on the date on whch the ta -
abe year for whch the ta s beng computed began.
(e) ase Perod Years. In the case of a ta payer whch s an ac-
qurng corporaton ts base perod years sha be the four successve
tweve-month perods begnnng on the same date as the begnnng of
ts base perod.
(f) stence of cqurng Corporaton. For the purposes of sub-
secton (c) and secton 7 1, f any component corporaton was n e -
stence on the date of the begnnng of the ta payer s base perod (ether
actuay or by reason of ths subsecton), ts acqurng corporaton sha
be consdered to have been n e stence on such date.
(g) Component Corporatons of Component Corporatons. If a
corporaton s a component corporaton of an acqurng corporaton,
under subsecton (b) or under ths subsecton, t sha (e cept for the
purposes of secton 7 2(d) (1) and (2) and secton 7 3(a)) aso be a
component corporaton of the corporaton of whch such acqurng cor-
poraton s a component corporaton.
Sec. 30.7 0-1. Purpose and scope of Suppement . (a) The term Sup-
pement , when used n these reguatons, means sectons 7 0 to 7 . Suppe-
ment provdes rues governng the rght to eect the e cess profts credt based
on ncome and the method of computng such credt, n the case of certan ac-
qurng corporatons. n acqurng corporaton s a domestc corporaton whch
has absorbed one or more other domestc corporatons n a transacton meetng
the requrements set forth n secton 7 0(a). ach such absorbed corporaton
s desgnated a component corporaton of the acqurng corporaton. Further-
more, e cept for the purposes of secton 7 2(d) (1) and (2) and secton 7 3(a),
f an acqurng corporaton s ater absorbed by another acqurng corporaton,
a of the component corporatons of the frst acqurng corporaton become
component corporatons of the second acqurng corporaton. component cor-
poraton s desgnated a quafed component corporaton f t or one of ts com-
ponent corporatons was actuay n e stence at the begnnng of the acqur-
ng corporaton s base perod, . c, on the date n 1936 correspondng to the date
on whch begns the ta abe year for whch the e cess profts ta s beng com-
puted. foregn corporaton can be nether an acqurng corporaton nor a
component corporaton (see secton 7 ).
(6) The purpose of Suppement Is n genera to attrbute to an acqurng
corporaton the e stence of corporatons absorbed by t, together wth the base
perod e cess profts net ncome or net oss and the net capta changes of such
absorbed corporatons, n order (1) that a corporaton the corporate fe of whch
n substance, though not n form, ncudes the base perod may eect the e cess
profts credt based on ncome and (2) that a corporaton composed n whoe or
n part of quafed component corporatons may compute ts e cess profts credt
n the ght of the base perod e perence of the entre enterprse. ccordngy,
an acqurng corporaton whch was not actuay n e stence pror to anuary
1, 19 0, s, notwthstandng secton 712(a), nevertheess gven the rght to eect
the e cess profts credt based on ncome, provded that t has a quafed com-
ponent corporaton. Furthermore, every acqurng corporaton whch s entted
to and does eect the e cess profts credt based on ncome Is requred to take
the base perod e perence of a quafed component corporatons nto account
n computng ts average base perod net ncome. Fnay, an acqurng cor-
poraton s requred to add to ts day capta addton or reducton the net
capta addton or reducton of each component corporaton.
Sec. 30.7 0-2. Transactons whereby a corporaton becomes an acqurng cor-
poraton. (a) The types of transactons whereby a corporaton can become an
acqurng corporaton are specfcay descrbed n secton 7 0(a). In addton
to statutory mergers and consodatons and the acquston of property n
a compete qudaton n whch gan or oss s not recognzed because of the
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167
provsons of secton 112(b)(0) or the same secton as contaned n the Revenue
ct of 1936 or 1938, ony the foowng types of transactons are ncuded:
(1) The acquston by one corporaton, n e change n whoe or n part for
a of ts stock of a casses (e cept quafyng shares), of substantay a the
propertes of another corporaton. See secton 112(g)(1)(D).
(2) The acquston by one corporaton, n e change soey for a or a part
of ts votng stock, of substantay a the propertes of another corporaton,
bnt n determnng whether the e change s soey for votng stock the assump-
ton by the acqurng corporaton of a abty of the other, or the fact that
property acqured Is sub|ect to a abty, sha be dsregarded. See secton
112(g)(1)(C). In ths type of transacton It s aso requred that the trans-
feror corporaton be forthwth competey qudated pursuant to the pan under
whch the transfer of Its propertes was made and that the transacton of whch
the transfer s a part have the effect of a statutory merger or consodaton.
(3) The acquston before October 1, 19 0, by one corporaton of propertes
of another corporaton soey as pad-n surpus or a contrbuton to capta n
respect of votng stock of the acqurng corporaton owned by the transferor
corporaton, but n determnng whether the acquston s soey as pad-n sur-
pus or a contrbuton to capta the assumpton by the acqurng corporaton
of a abty of the other, or the fact that property acqured s sub|ect to a
abry, sha be dsregarded. s n the case of (2) above, t Is aso requred
that the transferor corporaton be forthwth competey qudated pmSuant to
the pan under whch the transfer of propertes was made and that the transac-
ton of whch the transfer s a part have the effect of a statutory merger or
consodaton.
(6) The types of transactons set forth n secton 7 0(a), other than those set
forth n secton 7 0(a)(1)(C), ether are embraced wthn the defnton of
a reorganzaton contaned n secton 112(g)(1) or are compete qudatons
wthn the meanng of secton 112(b)(6). Snce Suppement appes ony
to cases where there s a suffcent contnuty of nterest to ustfy treatng a
corporaton whch has acqured the assets of another as standng n the pace
of such other corporaton, such transactons must satsfy a the requrements
of the reguatons prescrbed under secton 112 wth respect to such transactons,
n order that the transferee corporaton may be treated as an acqurng corpo-
raton.
Sec. 30.7 0-3. wse perod and bate perod yeart of acqurng corporaton. The
base perod of an acqurng corporaton s the perod of 8 months begnnng on
the d;te n 1036 correspondng to the date on whch begns the acqurng corpora-
ton s ta abe year for whch the e cess profts ta s beng computed. For e am-
pe, f the ta abe year for whch the e cess profts ta of an acqurng corporaton
s beng computed begns on anuary 1, the base perod of such corporaton s the
perod anuary 1, 1936, to December 81, 1939, both dates ncusve. Such rue
appes even though the corporaton may have had a dfferent base perod n
connecton wth the computaton of the e cess profts ta for some prevous
ta abe year and even though the acqurng corporaton s not organzed unt
after 19 0.
The base perod years of an acqurng corporaton are four In number, beng
composed of the four successve 12-month perods begnnng on the same date
as the begnnng of ts base perod. Thus, f the base perod begns anuary 1,
1936, the four base perod years are the four caendar years 1936, 1937, 1938, and
1939.
Sec. 7 1. ecton of Income Credt.
In addton to the corporatons whch under secton 712(a) may
eect the e cess profts credt computed under secton 713 or the e cess
profts credt computed under secton 71 , a ta payer whch s an acqur-
ng corporaton whch was n e stence on the date of the begnnng of
ts base perod sha have such eecton.
Sec. 30.7 1-1. ecton of ncome credt. Lke any other domestc corpora-
ton, an acqurng corporaton s entted under secton 712(a) to eect the
e cess profts credt based on ncome f t was tsef actuay n e stence
pror to anuary 1, 19 0. Whether or not It was so In e stence, however,
t s entted under secton 7 1 to eect the e cess profts credt based on n-
come f t was constructvey n e stence at the begnnng of ts 8-month
base perod by vrtue of havng acqured a quafed component corporaton.
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168
very such eecton must be made wthn the tme and In the manner pro-
vded In secton 712(a) and the reguatons prescrbed thereunder.
Sec. 7 2. verage ase Perod Net Income.
In the case of a ta payer whch s an acqurng corporaton whch
was actuay n e stence on the date of the begnnng of ts base
perod, or whch s entted under secton 7 1 to eect the e cess profts
credt computed under secton 713, ts average base perod net ncome
(for the purpose of the credt computed under secton 713) sha be
computed as foows, n eu of the method provded In secton 713:
(a) y ascertanng wth respect to each of ts base perod years
(1) The amount of Its e cess profts net ncome for each of
Its ta abe years begnnng after December 81, 1935, and endng
wth or wthn such base perod year; or, n the case of each such
ta abe year n whch the deductons pus the credt for dv-
dends receved e ceeded the gross ncome, the amount of such
e cess;
(2) Wth respect to each of ts quafed component corpora-
tons, the amount of ts e cess profts net ncome for each of
ts ta abe years begnnng after December 31, 1935, and endng
wth or wthn such base perod year of the ta payer; or, n the case
of each such ta abe year n whch the deductons pus the credt
for dvdends receved e ceeded the gross ncome, the amount of
such e cess;
(3) ( ) The aggregate of the amounts of e cess profts net
ncome ascertaned under paragraphs (1) and (2) ; ( ) the aggre-
gate of the e cesses ascertaned under paragraphs (1) and (2) ;
and (C) the dfference between the aggregates found under cause
( ) and cause ( ). If the aggregate ascertaned under cause
( ) s greater than the aggregate found under cause ( ), the
dfference sha for the purposes of subsecton (b) be desgnated
a pus amount , and f the aggregate ascertaned under cause ( )
s greater than the aggregate found under cause ( ), the df-
ference sha for the purposes of subsecton (b) be desgnated a
mnus amount .
(b) y addng the pus amounts ascertaned under subsecton (a) (3)
for each year of the base perod; and by subtractng from such sum,
If for two or more years of the base perod there was a mnus amount,
the sum of such mnus amounts, e cudng the greatest.
(c) y dvdng the amount ascertaned under subsecton (b) by
four.
(d) In no case sha the average base perod net ncome be ess
than zero. In the case of a ta payer whch becomes an ncqurng
corporaton n any ta abe year begnnng after December 31, 1939,
f, on September 11, 19 0, and at a tmes unt the ta payer became
an acqurng corporaton
(1) the ta payer owned not ess than 75 per centum of each
cass of stock of each of the quafed component corporatons n-
voved n the transacton n whch the ta payer became an ac-
qurng corporaton; or
(2) one of the quafed component corporatons Invoved n
the transacton owned not ess than 75 per centum of each cass
of stock of the ta payer, and of each of the other quafed com-
ponent corporatons nvoved n the transacton,
the average base perod net ncome of the ta payer sha not be ess
than ( ) the average base perod net Income of that one of ts quafed
component corporatons nvoved In the transacton the average base
perod net ncome of whch s greatest, or ( ) the average base perod
net ncome of the ta payer computed wthout regard to the base
perod net ncome of any of ts quafed component corporatons n-
voved n the transacton.
(e) For the purposes of subsecton (a) (1) and (2) of ths secton
(1) There sha be e cuded, n the varous computatons, any
dvdends pad by the ta payer or any of ts quafed component
corporatons durng any of the ta abe years of the payor whch
are ncuded n the computaton of the ta payer s average base
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169
perod net Income. If the payor corporaton s a corporaton de-
scrbed n subsecton (f)(1) or (2) of ths secton, the dvdends
to be e cuded under ths paragraph sha be ony such as are
pad after such payor corporaton frst became an acqurng cor-
poraton ; and
(2) In determnng whether, for any ta abe year, the deduc-
tons pus the credt for dvdends receved e ceeded the gross
ncome, and n determnng the amount of such e cess, the ad|ust-
ments provded n secton 711(b) (1) sha be made.
(f) (1) In the case of a ta payer whch s an acqurng corporaton
and whch was not actuay In e stence on the date of the begnnng
of ts base perod, there sha be e cuded from the varous computa-
tons under subsectons (a)(1) of ths secton the porton of ts e cess
profts net ncome, or of the e cess over gross ncome theren referred
to, whch s attrbutabe to any perod before t frst became an acqurng
corporaton.
(2) In the case of a component corporaton whch became a quafed
component corporaton ony by reason of secton 7 0(f), there sha be
e cuded from the varous computatons under subsecton (a) (2) of ths
secton the porton of ts e cess profts net ncome, or of the e cess over
gross Income theren referred to, whch s attrbutabe to any perod
before t frst became an acqurng corporaton.
(3) In the case of a quafed component corporaton whch was
actuay n e stence on the date of the begnnng of the ta payer s base
perod, there sha be e cuded from the varous computatons under sub-
secton (a)(2) of ths secton the porton of ts e cess profts net ncome,
or of the e cess over gross ncome theren referred to, whch s attrb-
utabe to the perod before such date.
( ) If durng the ta abe year for whch ta s computed under ths
subchapter the ta payer acqures assets n a transacton whch const-
tutes t an acqurng corporaton, the amount ncudbe under subsecton
(a)(2), attrbutabe to such transacton, sha be mted to an amount
whch bears the same rato to the amount computed wthout regard to
ths paragraph as the number of days n the ta abe year after such
transacton bears to the tota number of days n such ta abe year.
Sec. 30.7 2-1. verage base perod net ncome. (a) Genera. very acqur-
ng corporaton eectng the e cess profts credt based on ncome whch was
tsef actuay n e stence at the begnnng of ts base perod or whch has a
quafed component corporaton s requred to compute ts average base perod
net ncome n accordance wth secton 7 2, n eu of the method provded by sec-
ton 713(b). Three steps are necessary n makng such computaton, as foows:
(1) The e cess profts net ncome or e cess of deductons pus the credt for
dvdends receved over gross ncome (herenafter referred to as net oss ) of
the acqurng corporaton and each quafed component corporaton for each
ta abe year begnnng after December 31, 1935, and endng wth or wthn a
base perod year of the acqurng corporaton must be determned.
(2) The group e cess profts net ncome or group net oss for each base perod
year of the acqurng corporaton, . e., the aggregate of the amounts determned
wth respect to each corporaton separatey for ta abe years endng wth or
wthn such base perod year, must be determned as provded In paragraph (c)
of ths secton.
(3) The ta payer s average base perod net Income s then ascertaned by
determnng the aggregate of the group e cess profts net Incomes and net osses
(e cept the greatest, whch s treated as zero) and dvdng by , as provded
n paragraph (d) of ths secton.
(6) Determnaton of e cess profts net ncome or net oss of acqurng cor-
poraton and each quafed component corporaton. The frst stop n computng
the average base perod net ncome of an acqurng corporaton s the determna-
ton of the e cess profts net ncome or net oss of the acqurng corporaton and
each quafed component corporaton for each ta abe year begnnng after
December 31, 1935, and endng wth or wthn a base perod year of the acqurng
corporaton. Such e cess profts net ncome or net oss sha be computed wth
the ad|ustments provded n secton 711(b).
(c) Determnaton of group e cess profts net ncome or net oss. (1) Gen-
era. The group e cess profts net ncome or net oss of an acqurng corporaton
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170
for each base perod year Is determned by addng together the e cess profts
net ncomes of the severa corporatons determned under paragraph ( ) of ths
secton for each ta abe year endng wth or wthn such base perod year and
subtractng from such sum the sum of the net osses so determned for each such
ta abe year, wth the e ceptons and mtatons set forth n (2) beow. If the
sum of the e cess profts net Incomes for such base perod year e ceeds the sum
of the net osses for such base perod year, the dfference s the group e cess
profts net ncome for such base perod year. If the sum of the net osses e ceeds
the sura of the e cess profts net ncomes, the dfference s the group net oss for
such base perod year. Ths paragraph may be ustrated by the foowng
e ampes:
ampe (1) : The Corporaton, whch was organzed pror to 1936, Is com-
putng ts e cess profts ta for the caendar year 19 0. In 1939 t became an
acqurng corporaton of the Y Corporaton and the Z Corporaton, both of whch
were n e stence on anuary 1, 1936. Durng the Corporaton s base perod
the Y Corporaton made ts Income ta returns on the bass of the fsca year
begnnng uy 1. Durng the same perod the Z Corporaton made ts ncome
ta returns on the caendar year bass. For the caendar year 1936 the
Corporaton had an e cess profts net Income of 50,000, and the Z Corporaton
had an e cess profts net Income of 20,000. For ts frst base perod year, . e.,
the caendar year 1936, the group e cess profts net Income of , the acqurng
corporaton, Is 70,000, computed as foows:
cess profts net ncome of the Corporaton for 1036 50, 000
Pus: cess profts net Income of the Z Corporaton for 1936 20,000
Group e cess profts net Income for 1936 70,000
The Y Corporaton s fsca year endng une 30, 1936, can not be taken Into
account snce t s a ta abe year begnnng pror to anuary 1, 1936.
ampe (2): If for the caendar year 1937 the Corporaton had an
e cess profts net ncome of 75,000 and the Z Corporaton had an e cess profts
net Income of 30,000 and f the Y Corporaton for the fsca year endng une 30,
1937, had a net oss of 5,000, the Corporaton woud have a group e cess profts
net ncome for ts second base perod year, I. e., the caendar year 1937, of 100,000,
computed as foows:
cess profts net ncome of the Corporaton for 1937 75,000
Pus: cess profts net ncome of the Z Corporaton for 1937 30,000
Tota 105,000
Less: Net oss of the Y Corporaton fsca year endng une 30, 1937 -5, 000
Group e cess profts net Income for 1937 100, 000
ampe (3) : If for the caendar year 1938 the Corporaton had an e cess
profts net Income of 0,000 and the Z Corporaton had a net oss of 50,000
and If the Y Corporaton for the fsca year endng une 30, 1938, had an e cess
profts net Income of 5,000, the Corporaton woud have a group net oss for ts
thrd base perod year, . e., the caendar year 1938, of 5,000, computed as foows:
Net oss of the Z Corporaton for 1938 50,000
Less:
cess profts net Income of the Corporaton for 1938 0,000
cess profts net ncome of the Y Corporaton for fsca vear
endng une 30, 1938 5,000
5,000
Group net oss for 1938 5, 000
(2) ceptons and mtatons. The amount of e cess profts net Income
or net oss of an acqurng corporaton or a quafed component corporaton for a
ta abe year begnnng after December 31, 1935, and endng wth or wthn a
base perod year whch may be ncuded n computng the group e cess profts
net ncome or net oss for such base perod year s to be determned n accordance
wth the foowng e ceptons and mtatons:
() n acqurng corporaton whch was not Itsef actuay n e stence at
the begnnng of ts base perod s not permtted to take nto account any of
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171
ts own e cess profts net ncome or net oss attrbutabe to any perod before
t frst became an acqurng corporaton (see secton 7 2(f)(1)). The same
rue s appcabe to the e cess profts net ncome or net oss of a quafed
component corporaton whch was not actuay n e stence at the begnnng
of the ta payer s base perod (see secton 7 2(f)(2)). Ths rue may be
ustrated by the foowng e ampe:
ampe: The Corporaton was organzed pror to 1036. The I Corpora-
ton was organzed anuary 1, 1938. On uy 1, 1939, the Corporaton ac-
qured the Corporaton n a transacton descrbed n secton 7 0(a). In
computng ts average base perod net ncome, the Corporaton may not
take nto account any porton of ts own e cess profts net ncome or net oss
attrbutabe to the perod precedng uy 1, 1939. It s requred, however, to
take nto account the e cess profts net ncome or net oss of the Corporaton
for such perod. If the Corporaton s subsequenty acqured by the C
Corporaton, the C Corporaton w kewse not be permtted to take nto
account the e cess profts net ncome or net oss of the Corporaton attrbu-
tabe to the perod precedng uy 1, 1939, n computng ts own average base
perod net ncome, but w be requred to take nto account wth respect to
such perod the e cess profts net ncome or net oss of the Corporaton.
Such rue s appcabe whether or not the C Corporaton was actuay n
e stence at the begnnng of ts base perod.
The e cess profts net ncome or net oss of such an acqurng or quafed
component corporaton for the entre perod foowng the (ate when t frst
becomes an acqurng corporaton s to be taken nto account, however, even
though when t frst becomes an acqurng corporaton t does not acqure a
quafed component corporaton but merey a component corporaton.
() If the frst ta abe year of a quafed component corporaton whch
ends wth or wthn the ta payer s frst base perod year began pror to the
begnnng of such base perod year (though after December 81, 1935), so much
of such quafed component corporaton s e cess profts net ncome or net oss
for such ta abe year must be e cuded as s attrbutabe to the perod before
the begnnng of such frst base perod year (see secton 7 2(f)(3)). For e -
ampe, If the acqurng corporaton s base perod begns on uy 1, 193(5, but
the ta abe year of one of ts quafed component corporatons s the caendar
year 1936, ony so much of such quafed component corporaton s e cess
profts net ncome or net oss for the caendar year 1936 may be ncuded n
computng the group e cess profts net Income or net oss for the 12-month
perod begnnng uy 1, 1936, as s attrbutabe to the perod begnnng uy 1,
1936, and endng December 31,1936.
() In case a corporaton becomes an acqurng corporaton n an e cess
profts ta ta abe year, ony a proportonate amount of the e cess profts net n-
come or net oss of any quafed component corporaton acqured upon such trans-
acton may be Incuded n computng the ta payer s average base perod net
ncome for purposes of the e cess profts credt for such ta abe year. The
amount thereof whch may be ncuded wth respect to each base perod year
s an amount whch bears the same rato to the tota amount of the e cess
profts net ncome or net oss of such quafed component con oraton otherwse
ncudbe In such base perod year as the number of the days n the ta abe
year after the acquston takes pace bears to the tota number of days n the
ta abe year. (See secton 7 2(f)( ).) In the computaton of the e cess
profts credt based on ncome for subsequent ta abe years, the average base
perod net Income sha refect the fu amount of the base perod e cess profts
net Income or net oss of such quafed component corporaton. Ths paragraph
may be ustrated by the foowng e ampe:
ampe: On uy 1, 19 0, the Corporaton acqures the Y Corporaton
In a transacton descrbed In secton 7 0(a). oth the Corporaton and the
Y Corporaton were n e stence on anuary 1, 1936, and both corporatons
have aways fed ther Income ta returns on the caendar year bass. The
Y Corporaton had an e cess profts net ncome of 100,000 for the caendar
year 1936, a net oss of 10,000 for the caendar year 1937, an e cess profts
net ncome of 70,000 for the caendar year 1938, and an e cess profts net
Income of 50,000 for the caendar year 1939. In computng Its average base
perod net ncome for purposes of the e cess profts credt for the caendar
year 18 0, the Corporaton may ncude ony one-haf of the above amounts,
. e., 50,000 for 1936, mnus 5,000 for 1937, 35,000 for 1938, and 25,000 for
1939. In computng the e cess profts credt for 19 1 and subsequent years,
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172
however, the Corporaton may ncude the fu amount of the base perod
e cess profts net ncomes and net oss of the Y Corporaton.
(v) No ad|ustment need be made under secton 7 2(e)(1) on account of
dvdends, snce the e cess profts net ncome w not ncude dvdends receved
from a domestc corporaton (see secton 711(a) (1) (F)).
(d) Determnaton of average base perod net ncome. The average base
perod net ncome of an acqurng corporaton s the sum of the group e cess
profts net Incomes for the base perod years for whch there were group
e cess profts net ncomes, reduced by the sum of the group net osses for the
base perod years for whch there were group net osses (e cept the year for
whch the greatest or ony group net oss was sustaned, whch s treated as
eero), the remander beng dvded by . In no case, however, sha the average
base perod not Income be ess than zero. Ths paragraph may he ustrated
by the foowng e ampe:
ampe: The group net ncome or group net oss of the P Corporaton for
each of ts base perod years Is as foows (a group net oss beng preceded by
a mnus sgn) :
Frst base perod year 100,000
Second base perod year 1- 50,000
Thrd base perod year 25,000
Fourth base perod year 75, 000
The average base perod net ncome of the P Corporaton s 37,500, com-
puted as foows:
Group e cess profts net Income for frst year 100. 000
Pus:
Group e cess profts net ncome for fourth year 75, 000
Tota 175, 000
Less:
Group net osses, e cudng greatest 25,0C0
Remander 150,000
verage base perod net ncome ( 150,000 dvded by ) 37, 500
Secton 7 2(d) provdes for a mnmum average base perod net ncome In
the case of a ta payer whch becomes an acqurng corporaton n a transacton
takng pace n a ta abe year begnnng after December 31, 1939, f, on Septem-
ber 11, 19-10, and at a tmes thereafter unt the transacton takes pace, ether
the ta payer owns at east 75 per cent of eac cass of stock of each qua-
fed component corporaton nvoved n the transacton, or one of such
quafed component corporatons owns at east 75 per cent of each cass of
Stock of the ta payer and each of the other quafed component corporatons.
In suc case the average base perod net ncome of the ta payer sha not be
ess than Its average base perod net Income computed as though the transac-
ton had not taken pace, or the argest average base perod net ncome among
such quafed component corporatons. For the purposes of ths paragraph
secton 7 0(g) s not appcabe.
Sec. 7 3. Net Capta Changes.
(a) For the purposes of secton 713(e), upon the date of the trans-
acton whch consttutes a corporaton an acqurng corporaton, there
sha be added to ts day capta addton or reducton for such day,
the net capta addton or reducton, as the case may be, of each of the
component corporatons nvoved In such transacton, but no other
capta addton or reducton sha be consdered as havng been made
by reason of such transacton.
(b) For the purposes of ths secton
(1) In computng the net capta addton of each such com-
ponent corporaton there sha be dsregarded property pad n to
such corporaton by the ta payer or by any of ts component cor-
poratons.
(2) In computng the net capta reducton of each such com-
ponent corporaton there sha be dsregarded dstrbutons mad
to the ta payer or to any of such component corporatons.
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Sec. 30.7 3-1. Net capta chanfca. No capta addton or reducton sha
resut to an acqurng corporaton from the acquston of a component corpora-
ton, e cept to the e tent such component corporaton has a net capta add-
ton or reducton upon the date the transacton takes pace. ny such net
capta addton or reducton sha be added to the day capta addton or
reducton of the acqurng corporaton for the day the transacton takes pace
and for each day thereafter. The net capta addton or reducton of a com-
ponent corporaton s the dfference between the day capta addton and the
day capta reducton of such component corporaton for the day the transac-
ton takes pace, but n determnng such day capta addton or reducton
money or other property pad n on such day and dstrbutons (other than out
of earnngs and profts) made on such day or pursuant to the pan under whch
the acquston s made sha be taken nto account e cept as provded n sec-
ton 7 3(b) and e cept dstrbutons of stock of the acqurng corporaton. For
the purposes of ths paragraph secton 7 0(g) Is not appcabe and, accord-
ngy, a corporaton Is a component corporaton of ony Its mmedate acqurng
corporaton. If ts acqurng corporaton Is subsequenty acqured by another
corporaton, Its net capta addton or reducton w be added to the day
capta addton or reducton of such other corporaton ony to the e tent that
t s refected In the net capta addton or reducton of ts mmedate acqurng
corporaton.
In determnng the net capta addton or reducton of a component cor-
poraton, money or other property pad In by and dstrbutons made to the
ta payer or any other component corporatons of the ta payer sha be dsre-
garded. For ths purpose the term component corporaton Incudes a com-
ponent corporaton of a component corporaton of the ta payer as provded n
secton 7 0(g).
Ths secton may be Iustrated by the foowng e ampe:
ampe: On March 1, 19 0, the Corporaton, n e change soey for ts
votng stock, acqures a the assets of the Y Corporaton, havng an ad|usted
bass for computng oss n the hnnds of the Y Corporaton of 100,000.
Immedatey after the e change the Y Corporaton dstrbutes the stock of
the Corporaton n compete qudaton. oth corporatons make ther
Income ta returns on a caendar year bass. The ony money or other prop-
erty pad n to and dstrbuton made by the Y Corporaton from anuary 1, 1 0,
to March 1, 19 0, were as foows:
anuary 15, ,000 pad n for stock by persons other than the Cor-
poraton or any component corporaton thereof.
February 1, dstrbuton to sharehoders of 10,000, of whch ony 7,n00
was out of earnngs and profts.
t no tme from anuary 1, 19 0, to March 1, 19 0, dd the Y Corporaton
have any e cuded capta.
The Y Corporaton has a net capta addton on March 1, 19 0, of 2,000,
computed as foows:
Capta addtons (money pad In for stock anuary 15) 5,000
Less:
Capta reductons (dstrbuton February 1, to the e tent not
chargeabe to earnngs and profts ( 10,000 mnus 7,000)) 3,000
Net capta addton 2,000
Such net capta addton of 2,000 Is added to the day capta addton
of the Corporaton for March 1, 19 0, and for each day thereafter, but no
porton of the 100,000 pad In for stock on March 1, 19 0, may be taken Into
account.
Sec. 7 . Foeeon Cobpobato b.
The term corporaton as used In ths Suppement does not ncude
a foregn corporaton.
Suppement ghest racket mount and Invested Capta.
Sec. 750. Defntons.
a used In ths Suppement
(a) change. The term e change means an e change, to whch
secton 112(b)( ) or (5) or so much of secton 112(c),(d), or (e) as
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refers to secton 112(b)( ) or (5), or to whch a correspondng pro-
vson of a pror revenue aw, s or was appcabe, by one corpora-
ton of ts property whoy or n part for stock or securtes of another
corporaton, or a transfer of property by one corporaton to another
corporaton after December 31, 1017, the bass of whch n the hands of
such other corporaton s or was determned under secton 113(a)
(8)( ), or woud have been so determned had such secton been n
effect.
(b) Transferor Upon an change. The term transferor upon
an e change means a corporaton whch upon an e change transfers
property to another corporaton n e change, whoy or n part, for stock
or securtes of such other corporaton, or transfers property to another
corporaton after December 31, 1917, the bass of whch n the hands of
such other corporaton s or was determned under secton 113(a) (8) ( ),
or woud have been so determned had such secton been n effect.
(c) Transferee Upon an change. The term transferee upon
an e change means a corporaton whch upon an e change acqures
property from another corporaton n e change, whoy or n part, for
Its stock or securtes, or whch acqures property from another cor-
poraton after December 31, 1017, the bass of whch n ts hands s or
was determned under secton 113(a)(8)( ), or woud have been so
determned had such secton been n effect.
(d) Contro. The term contro means the ownershp of stock
possessng at east 00 per centum of the tota combned votng power
of a casses of stock entted to vote and at east 00 per centum of
the tota vaue of shares of a casses of stock of the corporaton.
(e) ghest racket mount. The term hghest bracket amount
means 500,000 or the hghest bracket amount computed under secton
752, whchever Is the smaer.
Sec. 30.7C0-1. Purpose and scope of Suppement . The term Suppement ,
when used n these reguatons, means sectons 750 to 752. The purpose of
Suppement s twofod.
Suppement provdes rues reatve to the e tent to whch equty nvested
capta and borrowed capta are affected by the acquston of property n
an e change meetng the requrements of secton 750(a) (see secton 751).
Such rues are appcabe In the case of e changes occurrng pror to the begn-
nng of the acqurng corporaton s frst e cess profts ta ta abe year as
we as e changes occurrng thereafter. The purpose of secton 751 s n genera
to provde a rue for the determnaton of the e tent to whch property Is
pad n for stock In cases Invovng an assumpton of abtes and the payment
of boot, and to prevent a dupcaton n nvested capta n cases where bonds
as we as stock are ssued as consderaton for the transfer of the propertes
acqured.
Suppement aso provdes rues for the determnaton of the hghest
bracket amount of certan corporatons whch, after the begnnng of the
e cess profts ta perod, have been partes to an e change meetng the requre-
ments of secton 750(a) (see secton 752). The hghest bracket amount s a
fgure whch Is to be substtuted for the 500,000 fgure contaned n the
hghest ta bracket n secton 710(a) (1) and s aso used n ad|ustng the other
brackets n the rate schedue contaned n such secton. The purpose of secton
752 s n genera to prevent a owerng of the effectve rates of ta through
dvdng up the ncome of one enterprse among severa corporate enttes by
the organzaton of subsdares. For e ampe, secton 752, together wth
secton 710(a)(2), s desgned to make certan that, f the Corporaton
dvdes tsef nto the Corporaton and the Corporaton, the effectve rate of
ta appcabe to the Corporaton and the . Corporaton together w be
the same as the effectve rate of ta whch woud be appcabe to the
Corporaton n undvded form.
Sec. 30.750-2. change. s used n Suppement the term e change
means an e change, to whch secton 112(b)( ) or (5) or so much of secton
112(c).(d), or (e) as refers to secton 112(b)( ) or (5), or to whch a cor-
respondng provson of a pror revenue aw, s or was appcabe, by one
corporaton of ts property whoy or In part for stock or securtes of another
corporaton, or a transfer of property by one corporaton to another corporaton
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175
after December 81, 1917, the bass of whch In the hands of such other corpo-
raton s or was determned under secton 113(a)(8)( ), or woud have been
so determned bad such secton been n effect. s so defned the term e change
ncudes a statutory merger or consodaton. The fact that the property trans-
ferred conssts soey of cash w not prevent a transacton from quafyng as
an e change wthn the meanng of secton 750(a). Moreover, a transacton
whch woud not be wthn secton 112(b)( ) of the Interna Revenue Code
but was wthn the correspondng provson of the Revenue ct appcabe to
the ta abe year n whch t took pace, because of dfferences n the defnton
of the term reorganzaton contaned n such Revenue ct, s an e change
wthn the meanng of secton 750(a).
Sec. 30.750-3. Contro. In determnng whether contro, as that term s
defned n secton 750(d), e sts, Treasury stock s not to be taken nto account.
Snce the term contro means, In addton to the ownershp of stock possessng
at east 90 per cent of the tota combned votng power of a casses of stock
entted to vote, ownershp of at east .CO per cent of the tota vaue of shares
of a casses of stock (ncudng votng stock) of the corporaton, t w fre-
quenty be necessary to vaue each cass of stock separatey. For the purposes
of secton 750(d) the term vaue means far market vaue. If stock not
owned s a of a snge cass t w be necessary to make a separate vauaton
ony of such cass of stock and to compare such vaue wth the combned vaue
of a the stock, snce by so dong t w be possbe to determne whether the
stock not owned e ceeds 10 per cent of the tota vaue of shares of a casses
of stock of the corporaton. The eement of contro s of consequence ony n
connecton wth the appcaton of secton 752, whch docs not appy to an
e change takng pace pror to 19 0.
Sua 30.750- . ghest bracket amount. The hghest bracket amount of a
corporaton whch has not, after the begnnng of the e cess profts ta perod,
been a transferor or transferee upon an e change as defned n secton 750(b)
and (c) s 500,000. Whenever a corporaton becomes such a transferor or
transferee, such 500,000 amount s ad|usted as provded n secton 752 both
for the ta abe year the e change takes pace and for subsequent ta abe years.
The ad|usted fgure, whch can never e ceed but may be ess than 500,000, s
the corporaton s hghest bracket amount unt a subsequent e change, or a com-
pete qudaton, sub|ect to the provsons of secton 112(b)(0), of a subsdary
to whch property was transferred on a prevous e change sub|ect to secton
752, makes a further ad|ustment necessary.
Sec. 751. Determnaton of Property Pad In for Stock and of
orhowbd Capta n Connecton Wth Certan changes.
(a) Property Pad In for Stock. In the appcaton of secton
718(a) to a transferee upon an e change In determnng the amount
pad n for stock of the transferee, or as pad-n surpus or as a con-
trbuton to capta of the transferee, n connecton wth such e change,
ony an amount sha be deemed to have been so pad n equa to the
e cess of the bass In the hands of the transferee of the property of
the transferor receved by the transferee upon the e change over the
sum of
(1) ny abty of the transferor assumed upon such e change
and any abty sub|ect to whch the property was receved upon
such e change, pus
(2) The aggregate of the amount of money and the far market
vaue of any other property transferred to the transferor not per-
mtted to be receved by such transferor wthout the recognton
of gan.
(b) orrowed Capta. In the appcaton of secton 719(a) to a
transferee upon an e change, the term borrowed capta sha not In-
cude Indebtedness orgnay evdenced by securtes ssued by the
transferee upon such e change as consderaton for the property of
the transferor receved by the transferee upon such e change If (1)
such securtes were propery permtted to be receved by the person
to whom such securtes were ssued wthout the recognton of gan
and (2) the ndebtedness orgnay evdenced by such securtes dd
not arse out of ndebtedness of the transferor (other than ndebted-
ness whch n the transferor s hands was sub|ect to the mtatons
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176
of ths subsecton) assumed by the transferee n connecton wth such
e change.
Sec. 30.751-1. Property pad n for stork. The amount to be treated as prop-
erty pad n for stock, or ns pad-n surpus, or as a contrbuton to capta of
a transferee n connecton wth an e change s the unad|usted bass for deter-
mnng oss n the hands of the transferee of the property transferred (ad|usted
n the case of a substtuted bass, as provded n secton 113(b) (2)) reduced by
the sum of the foowng:
(a) ny abty of the transferor assumed upon such e change and
any abty sub|ect to whch the property was transferred, pus
(6) The aggregate of the amount of money and the far market vaue
of any other property receved by the transferor from the transferee upon
such e change, not permtted to be receved by such transferor wthout the
recognton of gan.
Ths secton may be ustrated by the foowng e ampe:
ampe: The Corporaton n 19 0 transfers a ts property to the T Cor-
poraton n e change for stock havng a far market vaue of 200,000 and con-
sttutng 80 per cent of each cass of stock of the Y Corporaton, 10,000 In
bonds of the Y Corporaton, 5,000 n cash, and the assumpton by the Y Corpo-
raton of the abtes of the Corporaton amountng to 5,000. None of
the consderaton receved was dstrbuted by the Corporaton to ts share-
hoders. The ad|usted bass for gan or oss In the hands of the Corporaton
of the assets transferred s 100,000 at the tme of the transfer. The amount
to be treated as property pad n for stock of the Y Corporaton Is 55,000,
computed as foows:
(1) d|usted bass of property n hands of the Corporaton 100,000
(2) Pus: Gan recognzed under secton 112(d)(2) 5,000
(3) ass under secton 113(a)(7) (ad|usted as provded In secton
113(b) (2)) n hands of the Y Corporaton 105,000
( ) Less the sum of:
Labtes of the Corporaton assumed by the Y
Corporaton 5,000
Money receved by the Corporaton 5,000
50,000
( ) Property pad n for stock of the Y Corporaton ((3) mnus ( ))__ 55,000

Seo. 30.751-2. Lmtaton on borroved capta. transferee may not treat
as borrowed capta any ndebtedness orgnay evdenced by Its securtes
ssued u| m an e change and permtted to be receved by the persons to whom
Issued wthout the recognton of gan, e cept and to the e tent that such se-
curtes were ssued n assumpton of ndebtedness of the transferor not e cuded
from the borrowed capta of the transferor by vrtue of ths secton.
Ths secton may be ustrated by the foowng e ampe:
ampe: The Corporaton, whch has never prevousy been a party to an
e change, transfers to the Y Corporaton a ts property n e change for a the
stock of the Y Corporaton and 50,000 of bonds of the Y Corporaton, 20,000
of whch are ssued to the bondhoders of the Corporaton n assumpton of
the abtes of the Corporaton. s a resut of such transacton the Y
Corporaton s entted to a borrowed capta of ony 20,000 (producng a
borrowed nvested capta of 10,000), snce the remanng 30,000 of bonds are
property permtted to be receved wthout the recognton of gan and are not
ssued n connecton wth the assumpton of abtes of the Corporaton.
Sec. 7 2. Computaton op ghest racket mount n Connecton
Wth changes.
(a) Speca ppcaton of Day Invested Capta of Trahsferob
Upon change. For the purposes of ths secton, the day nvested
capta of a transferor upon an e change for the day after the e -
change sha be the day nvested capta determned under secton
717 reduced by an amount equa to the amount by whch the equty
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.Invested capta of the transferee upon snch e change was Increased
by reason of the recept of property from such transferor upon such
e change.
(b) ohekt backet mount or Tbansfehor.
(1) Ta abe year of e change. In the case of a transferor
upon an e change after the begnnng of ts frst ta abe year
under ths subchapter, ts hghest bracket amount for the ta abe
year In whch the e change takes pace sha be the sum of
( ) Its hghest bracket amount mmedatey precedng the
e change mutped by the number of days n the ta abe
year up to and ncudng the day of the e change, pus
( ) Its hghest bracket amount for the ta abe year after
the e change, mutped by the number of days n the ta abe
year remanng after the day of the e change,
dvded by the number of days n the ta abe year.
(2) Ta abe tears afteb e change nvovng contro. In the
case of a transferor upon an e change after the begnnng of Its
frst ta abe year under ths subchapter, f mmedatey after the
e change the transferor or Its sharehoders, or both, are n contro
of the transferee, the transferor s hghest bracket amount for any
ta abe year after the ta abe year n whch the e change takes
pace sha be an amount whch s a percentage of ts hghest
bracket amount mmedatey precedng the e change equa to the
percentage whch s ts day nvested capta for the day after the
e change s of ts day nvested capta for the day of the e change.
(3) Ta abe tears after e chanoe not nvovng contko. In
the case of a transferor upon an e change (other than a transferor
descrbed n paragraph ( ) of ths subsecton) after the begnnng of
ts frst ta abe year under ths subchapter, f mmedatey after
the e change no transferor or Its sharehoders, or both, upon the
e change are n contro of the transferee, and f the sharehoders of
the transferee Immedatey precedng the e change are not n con-
tro of the transferee mmedatey after the e change, the trans-
feror s hghest bracket amount for any ta abe year after. the
e change sha be the e cess, f any, of the sum of the transferor s
hghest bracket amount mmedatey precedng the e change and
the transferee s hghest bracket amount mmedatey precedng
the e change, over 500,000.
( ) Ta abe years after certan e changes under secton
112(b)(5). In the case of an e change after the begnnng of the
frst ta abe year under ths subchapter of any transferor or trans-
feree upon such e change, nvovng two or more transferors, or one
or more transferors and one or more other persons, f Immedatey
after the e change no one of such transferors, or ts sharehoders,
or both, and no one or more of such other persons are n contro
of the transferee and f such e change s an e change descrbed
In secton 112(b)(5) or so much of secton 112(c) or 112(e) as
refers to secton 112(b) (5), the hghest bracket amount of any such
transferor for any ta abe year after the e change sha be an
amount equa to ts hghest bracket amount mmedatey precedng
the e change
( ) Mnus an amount whch bears the same rato to ts
hghest bracket amount mmedatey precedng the e change as
the e cess of ts day nvested capta for the day of the e -
change over ts day nvested capta for the day after the e -
change bears to Its day nvested capta for the day of the
e change, and
( ) Pus an amount whch bears the same rato to the
e cess over 500,000 of the sum of the amounts computed under
subparagraph ( ) wth respect to each transferor, as the
amount computed under subparagraph ( ) wth respect to
such transferor bears to the sum of the amounts computed
under such subparagraph wth respect to each transferor.
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(c) ghest racket mount of Transferee.
(1) Ta abe year of e change nvovng contro. In the case
of a transferee upon an e change after the begnnng of the frst
ta abe year under ths subchapter of a transferor upon such e -
change the transferee s hghest bracket amount for the ta abe year
In whch the e change takes pace sha be the sum of
( ) Its hghest bracket amount Immedatey precedng the
e change mutped by the number of days In the ta abe year
up to and Incudng the day of the e change, pus
( ) Its hghest bracket amount for the ta abe year after
the e change mutped by the number of days n the ta abe
year remanng after the day of the e change,
dvded by the number of days In the ta abe year. For the purposes
of ths paragraph and subsecton (d) of ths secton e change n-
cudes a qudaton descrbed n paragraph (5) of ths subsecton, and
Such e change sha be deemed to have taken pace on the day such
qudaton was competed.
(2) Ta abe years after e change nvovng contro. In the
case of a transferee upon an e change after the begnnng of the
frst ta abe year under ths subchapter of a transferor upon such
e change, If mmedatey after the e change any transferor upon
such e change or Its sharehoders, or both are In contro of the
transferee, the transferee s hghest bracket amount for any ta abe
year after the e change sha be an amount whch s a percentage
of such transferor s hghest bracket amount mmedatey precedng
the e change equa to the percentage whch the e cess of the trans-
feree s day nvested capta for the day after the e change over
ts day Invested capta for the day of the e change Is of such
transferor s day nvested capta for the day of the e change.
(3) Ta abe tears after e change not nvovng contro. In
the case of a transferee upon an e change (other than a transferee
descrbed n paragraph ( ) of ths subsecton) after the begnnng
of the frst ta abe year under ths subchapter of a transferor upon
such e change, If Immedatey after the e change no transferor
or ts sharehoders, or both, are n contro of the transferee, and f
the sharehoders of the transferee Immedatey precedng the e -
change are not n contro of the transferee Immedatey after the
e change, the transferee s hghest bracket amount for any ta abe
year after the e change sha be an amount equa to ( ) the sum of
the transferor s hghest bracket amount Immedatey precedng the
e change and the transferee s hghest bracket amount mmedatey
precedng the e change, or ( ) . 00,000, whchever s the smaer.
( ) Ta abe years after certan e changes under secon
112(b)(5). In the case of an e change descrbed n subsecton
(b) ( ) of ths secton, the hghest bracket amount of the trans-
feree upon such e change for any ta abe year after the e change
sha be an amount equa ( ) to the sum of the amounts com-
puted under subparagraph ( ) of such subsecton wth respect to
each transferor or ( ) 500,000, whchever Is the smaer.
(5) Ta are years after qudaton n case cf corporaton
kdcf|vtng property under secton 112(b) (6). Upon the recept by
a corporaton durng any ta abe year under ths subchapter of prop-
erty In compete qudaton of another corporaton, gan or oss upon
whch s not recognzed by reason of secton 112(b) (6), the hghest
bracket amount of the corporaton recevng such property for any
ta abe year after the qudaton s competed sha be an amount
equa to ts hghest bracket amount mmedatey precedng the com-
peton of the qudaton ncreased, but In no case to an amount
above . nOO.OOO, by an amount equa to the hghest bracket amount
of such other corporaton mmedatey precedng the competon of
such qudaton, f prevousy and after the begnnng of the frst
ta nbe year under ths subchapter of the corporaton recevng such
property such corporaton was a transferor upon an e change wth
respect to whch such other corporaton was a transferee.
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179
(d) ghest racket mount n Case of Two ob Mobe changes
IN Same Ta abe Year.-
(1) If a transferor upon an e change s n the same ta abe
year nvoved n more than one e change (ether as transferor
or transferee), ts hghest bracket amount for such ta abe year
sha be the amount determned under subsecton (b)(1) wth
respect to the ast e change n such ta abe year. Its hghest
bracket amount mmedatey precedng any e change n such ta -
abe year subsequent to the frst e change theren sha be the
amount computed under subsecton (b)(1) wth respect to the
mmedatey precedng e change as f the ta abe year cosed on
the day of such subsequent e change.
(2) If a transferee upon an e change s n the same ta abe
year nvoved n more than one e change (ether as transferee or
transferor), ts hghest bracket amount for such ta abe year 6ha
be the amount determned under subsecton (c) (1) wth respect to
the ast e change n such ta abe year. Its hghest bracket
amount mmedatey precedng any e change n such ta abe year
subsequent to the frst e change theren sha be the amount com-
puted under subsecton (c)(1) wth respect to the mmedatey
precedng e change as f the ta abe year cosed on the day of such
subsequent e change.
(3) If a transferor or transferee upon an e change s n the
same ta abe year nvoved n more than one e change (ether
as transferor or transferee), ts hghest bracket amount for any
ta abe year after the ta abe year n whch such e changes took
pace sha be the amount computed under subsecton (b)(2),(3),
or ( ), or (c)(2), (3), ( ), or (5), as the case may be, wth
respect to the ast such e change.
Sec. 30.752-1. Nature and functon of hytest bracket amount. The genera
rate schedue contaned n secton 710(a) (1) s composed of s brackets, the
dvdng nes between whch are e pressed n terms of f ed amounts of ad-
|usted e cess profts net ncome. Such brackets and the rates of ta appcabe
thereto are as foows:
The dvdng ne between the ast two brackets s 500,000. Ths amount s
desgnated as a corporaton s hghest bracket amount.
Snce the varous brackets are defned n terms of absoute amounts of
ncome, an enterprse wth 1,000,000 of ncome, for e ampe, woud have a
substantay ower ta f the ncome coud be spt between two separate
corporate enttes, for n such case no porton of the ncome woud be sub|ect
to the 50 per cent rate. The possbty of obtanng such an advantage through
the transfer of propertes n an e change after December 31, 1939, s avoded
by ad|ustng the brackets of both corporatons nvoved n such a transacton
so as to make the tota amount of ncome sub|ect to ta n each bracket the
same as woud have been the case f the enterprse had remaned n the form of
a snge corporate entty. Ths s accompshed n genera by reducng the
hghest bracket amount of the orgna corporaton In the same proporton as
the nvested capta of such corporaton s reduced as a resut of the e change.
Thus, f the Invested capta of the corporaton s cut In haf, the hghest
bracket amount s aso cut n haf, and becomes 250,000. The same propor-
tonate reducton s then made n each of the other brackets. The transferee
corporaton, n the case of such a corporate spt-up, s gven a hghest bracket
amount equa to the amount by whch the hghest bracket amount of the
transferor corporaton Is reduced, and each of the other brackets s kewse
proportonatey reduced. In the case of a corporaton dvdng tsef n haf
by the organzaton of a whoy owned subsdary, each corporaton woud be
Per cent.
Frst 20,000
Ne t 30,000.
Ne t 50,000-
25
;;o
35
0
._ 5
. 50
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180
sub|ect to the foowng rate schedue for the ta abe year foowng the
year n whch the transacton took pace:
Per cent.
Frst 10,000 25
Ne t 15,000 80
Ne t 25,000 35
Ne t 75,000 0
Ne t 125,000 5
Over 2 0,000 60
Secton 752 Is drected ony to the determnaton of the hghest bracket
amount of each corporaton nvoved n an e change descrbed n secton 750(a)
or n certan types of compete qudatons sub|ect to the provsons of secton
112(b)(6). The appcaton of such amount n reducton of the rate schedue
appcabe to such corporaton s to be found n secton 710(a) (2).
separate computaton under secton 752 must be made for the year n whch
the e change takes pace and for years foowng such year. Snce, n deter-
mnng the hghest bracket amount for the year of the e change, the hghest
bracket amount for the year foowng the e change must frst be determned,
these reguatons w frst set forth the rues governng such atter determ-
naton.
Sec. 30.752-2. Day nvested capta of transferor upon e change for purpose
of computng hghest bracket amount ppcaton of secton 752(a). In mak-
ng the varous computatons requred by secton 752(b), (c), and (d) the
day nvested capta of a transferor upon an e change for the cay after the
e change s the day nvested capta determned under secton 717 reduced by
an amount equa to the amount by whch the equty nvested capta of the
transferee upon such e change s Increased by reason of the recept of property
from the transferor. Such rue s appcabe ony for purposes of secton 752.
The nvested capta of a transferor upon an e change for purposes of computng
the e cess prots credt based on nvested capta s to be determned under
the genera rue contaned n secton 717. For purposes of secton 752, as n
the case of the genera rue, ndebtedness consttutng borrowed capta of the
transferor whch Is assumed by the transferee s not to be treated as borrowed
capta of the transferor for any day foowng the day the e change takes
pace.
Ths secton may be ustrated by the foowng e ampe:
ampe: On December 1, 19 0, the Corporaton, whch has a day In-
vested capta for such day of 100,000 consstng entrey of equty nvested
capta, transfers property wth an ad|usted bass (for determnng oss) of
30,000 to the Y Corporaton n e change for a the stock of the Y Corporaton.
Te day nvested capta of the Y Corporaton for December 2, 19 0, s therefore
30,000. Under secton 717 the day Invested capta of the Corporaton for
Decem er 2, 19 0, s not affected (though the Invested capta for the year w
be ad|usted on account of nadmssbes). For the purpose of computng the
hghest bracket amount of the Corporaton and the Y Corporaton, however,
the day Invested capta of the Corporaton for December 2, 19 0, w be
100,000 mnus 30,000, or 70,000.
Sec. 30.752-3. ghest orackct amount of transferor and transferee for year
fomrng e change where transferor n contro ppcaton of secton 752
(6) (2) and (c)(2). (a) Transferor. In the case of an e change as defned
n secton 750(a) after the begnnng of the frst e cess profts ta ta abe
year of the transferor upon such e change, f mmedatey after the e change
the transferor, or ts sharehoders, or both, are n contro of the transferee, the
transferor s hghest bracket amount for any ta abe year after that In whch
the e change takes pace sha be the same proporton of Its hghest bracket
amount mmedatey precedng the e change as ts day nvested capta for
the day after the e change Is of ts day nvested capta for the day of the
e change. Thus, f ts day nvested capta Is reduced by 25 per cent as a
resut of the e change, the hghest bracket amount w be reduced by 25 per
cent, . e., t w be reduced to 75 wr cent of what t was before the e change.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On December 1, 19 0, the Corporaton, whch makes ts Income
ta returns on the caendar year bass and whch has a day nvested capta
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181
for December 1 of 100,000, transfers to the T Corporaton property wth an
ad|usted bass (for determnng oss) of 30,000 n e change for a the stock
of the T Corporaton. The Corporaton has not prevousy n 19 0 been a
party to an e change and therefore has a hghest bracket amount mmedatey
precedng ths e change of 500,000. The day nvested capta of the Y Corpo-
raton for December 2, 19 0, s 30,000 and the day nvested capta of the
Corporaton for purposes of secton 752 for December 2, 19 0, s therefore
70,000. The hghest bracket amount of the Corporaton for the ta abe year
descrbed n paragraph (a) of ths secton for the ta abe year foowng that
n whch the e change takes pace s the amount by whch the transferor s hgh-
est bracket amount s reduced on account of such e change. Thus, the hghest
bracket amount of the Y Corporaton n the e ampe gven In paragraph (o) of
ths secton for the year foowng the year In whch the e change takes pace s
150,000, . e., 500,000 mnus 350,000.
Sec. 30.752- . ghest bracket amount of transferor and transferee for year
foowng e change chere transferor not In contro ppcaton of secton 752
(ft) (3) and (c)(3). (a) Transferor. In the case of an e change (e cept nn
e change descrbed n secton 752(b) ( )) after the begnnng of the frst e cess
profts ta ta abe year of the transferor, f Immedatey after the e change no
transferor or ts sharehoders, or both, are In contro of the transferee and the
sharehoders of the transferee mmedatey before the e change are not n contro
of the transferee mmedatey after the e change, the transferor s hghest
bracket amount for any ta abe year after that n whch the e change takes
pace s the e cess, f any, over 500,000 of the sum of the transferor s hghest
bracket amount mmedatey precedng the e change nnd the transferee s hghest
bracket amount mmedatey precedng the e change. Tms, so much of the
hghest bracket amount of the transferor Immedatey precedng the e change as
s not needed to rase the hghest bracket amount of the transferee to 500,000
s permtted to be reraned by the transferor.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On December 1, 19 0, the Corporaton, whch makes ts Income
ta returns on the caendar year bass, transfers a Its assets to the Y Corpora-
ton n e chnnge soey for 75 per cent of the votng stock of the Y Corporaton.
The Corporaton has not prevousy In 19 0 been a party to an e change and
therefore has a hghest bracket amount Immedatey precedng ths e change of
500,000. The Y Corporaton has, however, a hghest bracket, amount of ony
00,000 because of havng prevousy n an e cess protts ta ta abe year been a
party to an e change. The hghest bracket amount of the Corporaton for
the year 19 1 w be 00,000, computed as foows:
ghest bracket amount of the Corporaton mmedatey precedng
e change 500, 000
Pus: ghest bracket amount of the Y Corporaton mmedatey
precedng e change 00,000
(6) Transferee. The hghest bracket amount of the transferee In an e -
change descrbed n paragraph (a) of ths secton for the ta abe year foowng
that n whch the e change takes pace s (1) the sum of Its hghest bracket
amount mmedatey precedng the e change and the hghest bracket amount of
the transferor mmedatey precedng the e change, or (2) 500,000, whchever
s smaer. Thus, the hghest bracket amount of the Y Corporaton n the
e ampe gven In paragraph (a) of ths secton for the year foowng the year
n whch the e change takes pace s 500,000. The hghest bracket amount
Immedatey pror to an e change, of a transferee organzed upon such e change,
s 500,000.
Tota
Less: 500,000.
900,000
500,000
ghest bracket amount of the Corporaton for 19 1
00,000
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Sec. 30.752-5. ghest bracket amount of transferor and transferee for year
foowng certan e changes under secton 112(h)(5) ppcaton of secton
752(h)( ) and (c)( ). (a) Transferor. If an e change descrbed n secton
112(b)(5) or so much of secton 112(c) or (e) as refers to secton 112(b)(5)
takes pace n an e cess profts ta ta abe year of any party thereto and f,
upon such e change,
there are severa corporate transferors, or
n addton to one or more corporate transferors, one or more other
persons transfer property to the transferee upon the e change, and
mmedatey after the e change no one of the corporate transferors,
or ts sharehoders, or both, and no one or more of such other persons are
n contro of the transferee,
the hghest bracket amount of each corporate transferor for any ta abe year
after that n whch the e change takes pace s computed as foows:
(1) Its hghest bracket amount mmedatey precedng the e change Is
frst tentatvey reduced n the same proporton as ts day nvested capta
s reduced as a resut of the e change (see secton 30.752-3(o)).
(2) There must then be ascertaned the e cess, f any, over 500,000 of
the sum of the amounts by whch the hghest bracket amounts of a the
corporate transferors are tentatvey reduced under (1). The hghest
bracket amount as tentatvey reduced under (1) of each corporate trans-
feror s then ncreased by an amount whch bears the same rato to such
e cess as the tentatve reducton under (1) of such transferor bears to the
sum of the tentatve reductons under (1) of a the corporate transferors.
Thus, the hghest bracket amount of each corporate transferor s fnay
reduced by ony so much as s necessary, together wth the amounts by
whch the hghest bracket amounts of the other corporate transferors are
reduced, to confer upon the transferee a hghest bracket amount of 500,000.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On December 1, 19- 0, the Corporaton and the Y Corporaton,
both of whch make Ther ncome ta returns on the caendar year bass, have
a day nvested capta of 100,000 and 20 ),000, respectvey. Nether cor-
poraton has prevousy n 19 0 been a party to an e change. On such date they
organze the Z Corporaton to whch the Corporaton transfers property hav-
ng an ad|usted bass (for determnng oss) of ,000 for stock of the Z
Corporaton and the Y Corporaton transfers propery havng an ad|usted bass
(for determnng oss) of 132,000 for the remanng stock of the Z Corpora-
ton. the requrements of secton 112(b)(5) are satsfed. The hghest
bracket amount of the Corporaton for 10 1 s 300.0:k), computed as foows:
(1) Day nvested capta of the Corporaton December 1,19 0 100, 000
(2) Less: Day nvested capta of the Corporaton Decom er
2, 19 0 56, COO
(3) Dfference ,000
( ) Percentage tem (3) s of tem (1)
(5) Tentatve reducton n hghest bracket amount of the Corpora-
ton ( per cent of 500,000) 220,000
(6) Day nvested capta of the Y Corporaton December 1,19 0 200,000
(7) Less: Day nvested capta of the Y Corporaton December 2,
19 0 as, 000
(8) Dfference 132,000
9) Percentage tem (8) s of tem (0) 68
10) Tentatve reducton n hghest bracket amount of the Y Cor-
poraton (66) per cent of 500,000) 330. 000
s
(11) Rum of tems (5) and (10) 550,000
(12) Less: 500,000 500,000
(13) Dfference 50,000
(1 ) Percentage whch tem (5) Is of tem (11) 0
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183
(15) 0 per cent of 50,000 (Item 13) 20,000
(16) ghest bracket amount of tbe Corporaton pror to
e change 500,000
(17) Less: Item (5) 220,000
(18) Dfference 250,000
(19) Pus: Item (15) 20,000
(20) ghest bracket amount of the Corporaton for 10 1 300,000
The hghest bracket amount of the Y Corporaton for 19 1 s 200,000, com-
puted n the same manner.
(6) Transferee. In the case of an e change descrbed n paragraph (a) of
ths secton, the hghest bracket amount of the transferee s whchever of the
foowng amounts s the smaer: (1) 500,000, or (2) the sum of the amounts
by whch the hghest bracket amounts of a the corporate transferors are
tentatvey reduced under secton 752(b)( )( ) and paragraph (o) (1) of ths
secton. Thus, n the e ampe gven n paragraph (a) of ths secton, the
hghest bracket amount of the Z Corporaton for the ta abe year after the
e change takes pace s 500,000, that amount beng ess than 550,000, the
sum of the amounts by whch the hghest bracket amounts of the Corporaton
and the Y Corporaton are tentatvey reduced under paragraph (a)(1) of
ths secton ( 220,000 pus 330,000).
Seo. 30.752-6. yhest bracket amount of transferee for year foorno certan
112(b)(6) qudatons ppcaton of secton 752(c)(5). If a corporaton
whch prevousy n an e cess profts ta ta abe year has been a transferor
upon an e change subsequenty qudates under secton 112(b)(6) one of the
transferees upon such prevous e change, ts hghest bracket amount for any
ta abe year after that n whch the qudaton s competed s ts hghest
bracket amount mmedatey precedng the competon of the qudaton, n-
creased, but not to an amount e ceedng 500,000, by the hghest bracket amount
of the corporaton whch t qudates. In the case of any other qudaton
under secton 112(b)(6), the hghest bracket amount of the transferee s not
affected.
Ths secton may be ustrated by the foowng e ampe:
ampe: On December 1, 10 0, the Corporaton s a transferor upon an
e change wth respect to whch the Y Corporaton and the Z Corporaton are
transferees. s a resut of such e change the hghest bracket amounts of the
, Y, and Z Corporatons for 19 1 are 200,000, 175,000, and 125,000, respec-
tvey. - The Corporaton subsequenty qudates the Y Corporaton under
secton 112(b) (6). Its hghest bracket amount for the year after that n whch
such qudaton s competed s 375,000, computed as foows:
ghest bracket amount of the Corporaton mmedatey precedng
qudaton 200,000
Pus: ghest bracket amount of the Y Corporaton mmedatey pre-
cedng qudaton 175,000
ghest bracket amount of the Corporaton for ne t ta abe year 375,000
If the hghest bracket amount of the Corporaton had, because of some other
transacton, been Increased from 200,000 to 00,000 between the tme of the
19 0 e change and the competon of the qudaton of the Y Corporaton, ts
hghest bracket amount for the year after that n whch the qudaton s
competed woud be 500,000, notwthstandng the sum of ts hghest bracket
amount precedng the qudaton and that of the Y Corporaton s 575,000
( 00,000 pus 175,000), snce no corporaton s entted to a hghest bracket
amount n e cess of 500,000.
Seo. 30.752-7. ghest bracket amount for year after e change or qudaton
where more than one transacton n same ta abe year ppcaton of secton
752(d) (S). The hghest bracket amount of a transferor or transferee for any
ta abe year after that n whch severa e changes or qudatons take pace
s to be determned on the bass of the ast such e change or qudaton. If
such determnaton depends upon the hghest bracket amount mmedatey
precedng such ast e change, however, prevous transactons w have to be
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18
taken Into account, . e., the hghest bracket amount mmedatey precedng the
rst transacton s the hghest bracket amount for the ne t ta abe year deter-
mned on the bass of the ast precedng transacton, the hghest bracket amount
mmedatey precedng such ast precedng transacton s the hghest bracket
for the ne t ta abe year determned on the bass of the second precedng trans-
acton, whch process s contnued unt the pont s reached where the hghest
bracket amount for the ne t ta abe year can be determned wthout reference
to the hghest bracket amount precedng such transacton.
Ths secton may be ustrated by the foowng e ampe:
ampe: On pr 1, 19 0, the Corporaton, whch makes ts ncome ta
returns on a caendar year bass, transfers property to the Y Corporaton n an
e change as a resut of whch ts hghest bracket amount for 19 1 becomes
300,000. On une 1, 19 0, when ts day nvested capta s 250,000, t trans-
fers property wth an ad|usted bass of 100,000 to the Z Corporaton n e -
change for a the stock of the Z Corporaton. No other e changes take pace
durng the ta abe year 1(1 0. The hghest bracket amount of the Corpora-
ton for 19 1 s 180,000, computed as foows:
(1) Day nvested capta of the Corporaton for une 1, 19 0 250,000
(2) Less: Increase n day nvested capta of the Z Corporaton 100,000
(3) Day nvested capta of Corporaton une 2, 19 0 150,000
( ) Percentage whch tem (3) s of tem (1) 60
(5) ghest bracket amount of the Corporaton for 19 1, determned
n respect of pr 1 e change 300, 000
(6) ghest bracket amount of the Corporaton for 19 1 (60 per
cent of 300,000) 180,000

Sbc. 80.752-8. ghest bracket amount of transferor and transferee for ta -


abe pear of e change. (a) Genera rue ppcaton of secton 752 (b)(1)
and (c) (/). The hghest bracket amount both of a transferor and a transferee
for the ta abe year h whch an e change takes pace s the average bracket
amount for such year, computed by takng Into account the hghest bracket
amount mmedatey precedng such e change and the hghest bracket amount
computed for the ne t ta abe year wth respect to such e change. Such aver-
age s
(1) The hghest bracket amount mmedatey precedng the e change,
mutped by e number of days n the ta abe year up to and ncudng
the day of the change, pus
(2) The bghent bracket amount for the ne t ta abe year computed
wth respect to such e change, mutped by the number of fays n the
ta abe year remanng after the day of the e change,
dvded by the number of days n the ta abe year. For the purposes of ths
eef on. n the case of a transferee, the term e change ncudes a secton
112(b) (t) qudaton of the character descrbed n secton 752(c)(5) and s
deemed to have taken pace on the day the qudaton Is competed. The
hghest bracket amount mmedatey pror to an e change, of a transferee or-
ganzed upon such e change, s .r 00,000, and the ta abe year of such a trans-
feree s the perod from the date of ts organzaton to the end of ts frst
accountng perod for whch t fes ts return.
Ths paragraph may be ustrated by the foowng e ampe:
ampe: On uy 1, 19 0, the Corporaton, whch makes ts ncome ta
returns on the caendar year bass and has not prevousy n 19 0 been a party
to an e change, organzes the Y Corporaton, to whch t transfers property n
e change for a the stock of the Y Corporaton. Under secton 752(b) (2) and
secton :-10.752-3( ) the hghest bracket amount of the Corporaton for 19 1
Is 200,000. The hghest bracket amount of the Corporaton for 19 0 s
therefore 3r 0,000, computed as foows:
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(1) 500,000 (hghest bracket amount mmedatey precedng
e change) mutped by 183 (number of days n 19 0 up to
and ncudng uy 1) 91, 500,000
(2) Pus: 200,000 (hghest bracket amount for 19 1, computed n
respect of uy 1 e change), mutped by 183 (number of
days uy 2 to December 31, 19 0, both ncusve) 36, 600, 000
(3) Item (1) pus tem (2) 128,100,000
( ) ghest bracket amount for 19 0 ( 128,100,000 (tem (3)) d-
vded by 306 (number of days n 19 0) 300,000
(6) Where more than one e change n ta abe year ppcaton of aecton
152(d) (1) and (2). In the case of a transferor or a transferee whch has been
a party to more than one e change n the same ta abe year, ts hghest bracket
amount for such ta abe year s the amount computed under parngraph (a)
of ths secton n respect of the ast e change, but n computng such amount
prevous e changes must be taken nto account n order to determne the varous
factors whch enter Into such computaton. The hghest bracket amount pre-
cedng such ast e change (whch s the frst factor) s the hghest bracket
amount for such ta abe year computed under paragraph (a) of ths secton n