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corporation. If the business was continuous throughout the year, no change in management or operation other than the change in name having occurred, the return should be made covering the business transacted throughout the year, such return to be made by the corporation in the name which it bears at the end of the year, with a notation on the return to the effect that the name had been changed, giving both the old and the new names. If, however, a distinctly new corporation was organized to take over the property of the old, both corporations will be required to make separate returns covering the periods of the year during which they were respectively in charge of the business.' (Reg. No. 33, 1918, ¶ 613.)

Under this regulation it is necessary to file three or more returns for a single year in cases of mergers, one for each corporation before the merger covering the portion of the year during which the corporations existed as separate entities and one for the merged corporation after the consolidation. In some cases where the merger consisted of the absorption by one company of another, so that the effect has been merely the enlargement of an existing corporation, separate returns for the companies before and after the merger have not been required.

Corporations "not doing business" may have to make returns. In the language of Section 239, "every corporation subject to taxation under this title" must make a return. Under similar language in the 1917 law, it was ruled that "every corporation not specifically enumerated as exempt shall make return of annual net income whether or not it may have for the particular year any net income." Consequently all corporations no matter how small the income or whether or not they have any income at all, provided only that as corporations they are subject to the tax, must file a return. Such corporаtions, if in existence during any part of the year, are liable and must report from the first of the year to the date of dissolu

'T. D. 2137.

"And every personal service corporation" which happens to be exempt under "this title" (Section 239).

'Section 13 (b).

'Reg. No. 33, 1918, ¶ 606.

tion or liquidation, or from the date of incorporation to the end of the year.1

HOLDING COMPANIES WITH INCOME ONLY FROM DIVIDENDS MUST MAKE RETURNS.-Section 239, quoted in the preceding paragraph, appears to include holding companies receiving no income other than dividends from subsidiaries. Dividends received by a corporation must be reported as gross income [Section 233 (a) and Section 213] even though they are deducted in order to ascertain net income. If any doubt arises concerning the liability of holding companies to submit returns, the Commissioner will undoubtedly require such returns through an exercise of his power under Section 1305 to demand returns whenever in his judgment he considers them "necessary."

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INCOMPLETE CORPORATIONS MUST FILE RETURNS UNLESS

SPECIFICALLY RELIEVED.—

REGULATION. Corporations which have applied for but have never received charters and corporations which have received charters but never perfected their organizations and which as entities have transacted no business and had no income whatever from any source may, upon presentation of the facts to the collector, be relieved from the necessity of making returns, so long as they remain in this unorganized condition. In the absence of a showing to this effect to the collector of internal revenue, such companies will be required to make returns and will be liable to the penalties of the law for failure to do so. (Reg. No. 33, 1918, ¶ 303.)

Consolidated returns.-The new law recognizes for the first time for income tax purposes3 the essential economic unity of closely affiliated corporations and permits them to file consolidated returns. This permission eliminates many injustices and discriminations between corporations which under the old procedure existed merely because of accidents of organization. The holding company, by virtue of its new right to file con

'Reg. No. 33, 1918, ¶ 608.

"See page 70.

For the excess profits tax practice in 1917, see Chapter XXXII.

solidated returns and the removal of the 2 per cent discrimination against dividends received from subsidiaries,' is now placed in a fair position under the income tax law.2

LAW. Section 240. (a) That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III [war profits and excess profits tax], and the taxes thereunder shall be computed and determined upon the basis of such return: ...

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"AFFILIATED CORPORATIONS" DEFINED.

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LAW. Section 240. . . (b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

ONLY ONE $2,000 CREDIT PERMITTED IN A CONSOLIDATED

RETURN.

LAW. Section 240. (a) . . . . There shall be allowed in computing the income tax only one specific credit of $2,000 (as provided in section 236) ; . . . .

DISTRIBUTION OF THE TAX AMONG THE SUBSIDIARIES.

LAW. Section 240. (a) . . . . In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agree

'See Chapter XV.

[Former Procedure] Under previous income tax laws every corporation was held to be "a separate and distinct entity" and the tax was imposed upon each separately. The only exception is stated in the following regulation:

REGULATION. "If subsidiary corporations exist in name only, or are mere agents or integral parts of the parent corporation and as such transact no business and have no income of and for their own account, and incur no expenses, all business being transacted, all income being received and all expenses being paid directly by the parent company, no separate accounts being kept by or for such subsidiaries, it will be considered that such subsidiary concerns do not have any taxable income within the meaning of this title, and so long as they are so operated no tax liability will be asserted against them." (Reg. No. 33, 1918, ¶ 617.)

ment, then on the basis of the net income properly assignable to

each. . . . .

NEW "GOVERNMENT CONTRACT"

MAKE SEPARATE RETURNS.

CORPORATIONS MUST

LAW. Section 240. (a). . . . Provided, That there shall be taken out of such consolidated net income and invested capital, the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income and the remainder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capital and net income. . . .

The intention of this section evidently was to prohibit any relief being granted to a new subsidiary corporation which has been organized by an existing corporation to handle war

contracts.

LAW. Section 1408. . The Commissioner shall (when not violative of the technical military or naval secrets of the Government) have access to all information and data relating to any such contract, undertaking, or agreement, in the possession, control or custody of any department, bureau, board, agency, officer or commission of the United States, and may call upon any such department, bureau, board, agency, officer or commission for a full statement and description of any allowance for amortization, obsolescence, depreciation or loss, or of any valuation, appraisal, adjustment or final settlement, made in pursuance of any such contract, undertaking, or agreement.

Miscellaneous "Information" Returns

Corporation returns of dividends paid.-In order that the Treasury may be able to check the returns of those who receive dividends the law provides that, upon request by the Commissioner, corporations must file returns of dividends paid.

LAW. Section 254. That every corporation subject to the tax imposed by this title and every personal service corporation shall,

when required by the Commissioner, render a correct return duly verified under oath, of its payments of dividends, stating the name and address of each stockholder, the number of shares owned by him, and the amount of dividends paid to him.'.

Brokers' returns of customers' profits and losses.—

LAW. Section 255. That every individual, corporation, or partnership doing business as a broker shall, when required by the Commissioner, render a correct return duly verified under oath, under such rules and regulations as the Commissioner, with the approval of the Secretary, may prescribe, showing the names of customers for whom such individual, corporation, or partnership has transacted any business, with such details as to the profits, losses, or other information which the Commissioner may require, as to each of such customers, as will enable the Commissioner to determine whether all income tax due on profits or gains of such customers has been paid.

Copies of government contracts.

LAW. Section 1408. That every person who on or after April 6, 1917, has entered into any contract, undertaking, or agreement, with the United States, or with any department, bureau, officer, commission, board, or agency under the United States or acting in its behalf, or with any other person having contract relations with the United States, for the performance of any work or the supplying of any materials or property for the use of or for the account of the United States, shall, within thirty days after a request of the Commissioner therefor, file with the Commissioner a true and correct copy of every such contract, undertaking, or agreement.

Whoever fails to comply with such request of the Commissioner shall be guilty of a misdemeanor and shall be punished by a fine of not more than $1,000, or by imprisonment for not more than one year, or both. . . .

Returns under systems of "information at source" and "payment at source."-Returns by withholding agents, treated more in detail later, are required of the various classes of withholding agents covered by the regulations.

[Former Procedure] The 1917 law specified that the return include information regarding "the tax years and the applicable amounts in which such dividends were earned." This was necessary because in 1917 dividends were taxable at the rates which were in force during the years to which the dividends were applicable, under the rule that dividends were deemed to have been paid out of most recently accumulated surplus. (1917 law, Section 26.)

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