This account represents the accumulated profits, except those that were established in the reserve accounts Item No. 23, for specific purposes, which also constitute surplus. This item is the excess of: Item 12 (Assets). Surplus. $743,525.00 Capital. and comprises the invested capital based on values for that purpose, of...... $585,025.00 The invested capital, in the example, is made up of: To the above amount should be added the monthly average of any additional capital paid in during the taxable year, but no part of the earnings of the taxable year may be added to the invested capital of such taxable year for purposes of deductions under the Excess Profits Tax. Item No. 25, These totals, respectively, agree with totals in Item 12. EXAMPLE No. 2 (PAGE 158) This example presents a short alternative method of computing invested capital. It is based primarily upon the book account balances. To the excess of assets over liabilities, as shown by the books of account, are added all items that were increased by valuations placed thereon in accordance with "invested capital values," and reduced by the amount of item that is not recognized by law as a part of invested capital. EXAMPLE NO. 3 (PAGE 159) Example No. 3 shows another alternative method of computing invested capital. This method is predicated upon the capi tal stock plus surplus, as shown by the books of account, to which are added and subtracted the differences between the book values and values for purposes of invested capital. SUGGESTIONS IN CONNECTION WITH THE VALUATION OF ASSETS FOR PURPOSES OF INVESTED CAPITAL NOT INCLUDED IN EXAMPLE No. I tion Expenses. By rulings of the Treasury Department, organization expenses are not deductible from income; they are held to be capital exOrganiza- penditures. (See page 111). Although, from a commercial viewpoint, capitalized expenses are looked upon with disfavor, where such expenses have been paid by capital stock or out of moneys received from the original sale of stock, were set up as assets, and have not been charged off, it would seem proper to state them as invested capital to the amount actually so paid. Such items should only consist of the initial expenses incurred in connection with organizing a corporation; no additions should be made thereto after the organization has been completed. An unpaid subscription to capital stock, although an account receivable, is not such an asset as will constitute invested capital. It is not capital paid in, in any sense of that term, nor is it employed in the business. Subscrip- Treasury stock, in the usual acceptation of that term, denotes stock that has been fully paid for in cash or property and reTreasury turned to the corporation. Inasmuch as invested Stock. capital is defined by the Act as actual cash paid in, the actual cash value of tangible property paid in other than cash, and intangible property bona fide paid for by cash or tangible property or by stock (with limitations) it must follow that treasury stock, fully paid for, constitutes invested capital. This conclusion is reached, not by reason of value attaching to the treasury stock as an asset of the corporation, but because it represents capital paid in. Stock repurchased by a corporation. cannot be so treated because upon its reacquirement by purchase, it ceases to be paid in. Unexecuted contracts purchased for cash, property, or stock, may in some cases constitute invested capital, Unexecuted subject, however, to the limitations of law prescribed Contracts. by section 207 as to intangible property. These items are dealt with on page 138. Patents. Trade marks. Franchise. Assets of this class constitute invested capital to the amount of cost thereof, less the amount charged off against income, provided that they are employed in the business. Patterns Unused patterns, designs, plates or dies that have and Designs. been discarded and play no part in the production Plates and of profits should not be stated as invested capital, ex- Dies. cept, perhaps, at their residual value, if they have any. Assets of the same general character as those under discussion should be judged in respect of invested capital principally upon their productivity in the business, but always limited to the cost, less that part thereof which has been charged off. TREASURY DECISIONS UNDER THE EXCESS PROFITS TAX Stock on hand of merchandise, supplies, and work in process of mercantile and manufacturing businesses, and of Inventories securities held by dealers, for purposes of income taxes of Merand excess profits taxes, may be inventoried either: (a) at cost, or chandise, etc., and Securities held by Dealers. (b) at cost or market price whichever is lower. Whichever method is adopted must be adhered to in subsequent years unless a change in the method is authorized by the Commissioner of Internal Revenue. This ruling is only applicable to commodities dealt in and not to subjects of more or less permanent investment. T. D. 2609. Washington, D. C., December 19, 1917. To Collectors of Internal Revenue, Revenue Agents, and Others Concerned: 1. For the purposes of income and excess profits tax returns, inventories of merchandise, etc., and of securities, will be subject to the following rules: A. Inventories of supplies, raw materials, work in process of production and unsold merchandise, must be taken either (a) at cost, or (b) at cost or market price whichever is lower; provided that the method adopted must be adhered to in subsequent years unless another be authorized by the Commissioner of Internal Revenue. B. A dealer in securities who in his books of account regularly inventories unsold securities on hand either (a) at cost, or (b) at cost or market price whichever is lower, may for purposes of income and excess profits taxes make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years unless another be authorized by the Commissioner of Internal Revenue. C. Gain or loss resulting from the sale or disposition of assets inventoried as above must be computed as the difference between the inventory value and the price or value at which sold or disposed of. 2. In all other cases inventories must be taken at cost or at value as of March 1, 1913, as the case may be. APPROVED: W. G. MCADOO, DANIEL C. ROPER, Commissioner of Internal Revenue. Secretary of the Treasury. Tangible and Intangible Property In many instances the construction placed by the Department upon the terms "tangible property" and "intangible property" will determine whether or not a particular asset constitutes invested capital. According to the following ruling (T. D. 2610) stocks, bonds, bills and accounts receivable and notes and other evidences of indebtedness are construed to be tangible property. Defined. Washington, D. C., December 20, 1917. To Collectors of Internal Revenue, Revenue Agents and Others Concerned: The term "other intangible property" as used in section 207 will be construed to mean property of a character similar to good-will, trade-marks, and the other specific kinds of property enumerated in the same clause. With respect to property not clearly of such a character rulings will be issued as occasion may demand to indicate whether it shall be regarded as tangible or intangible. To date, the following classes of property have been construed to be tangible property within the meaning of section 207: Stocks, Bills and accounts receivable, Notes and other evidences of indebtedness. APPROVED: W. G. MCADOO, DANIEL C. ROPER, Commissioner of Internal Revenue. Secretary of the Treasury. It is not clear, to the writer, why stocks and bonds, by law excluded as invested capital, the income from which is not subject to the tax, should have been stated in the foregoing Treasury Decision, unless it refers to cases where securities are dealt in as a commodity, or where an original issue of capital stock is paid for by securities. Partner It has been held by the Treasury Department that for the purpose of determining the amount of net income subject to the Excess Profits Tax where actual capital is em- Salary Alployed, partnerships and individuals will be al- lowance to lowed to deduct a reasonable amount in lieu of a ships and salary compensation, "not in excess of the salary Individuals or compensation customarily paid for similar service" in a like. or similar trade or business. In the case of partnerships such deduction in lieu of salary compensation will be allowed whether or not a previous agreement therefor existed, but only to March 1, 1918. On and after that date such allowance, in the case of partnerships, will only be permitted where provision for the same is made by partnership agreement and where the salaries are actually paid to the partners. In both cases (partnerships and individuals) the person credited with such salary allowance must make an individual return and pay the excess profits tax at the 8 per cent. rate. T. D. 2611. |