the return shall be on Form 1120. For returns of insurance companies see article 623; of foreign corporations see article 624; and of affiliated corporations see section 240 of the statute and article 632. A corporation having an existence during any portion of a taxable year is required to make a return. A corporation which has received a charter, but has never perfected its organization, which has transacted no business and had no income from any source, may upon presentation of the facts to the collector be relieved from the necessity of making a return so long as it remains in an unorganized condition. In the absence of a proper showing to the collector such a corporation will be required to make a return. A corporation which was dissolved in 1924 prior to the enactment of the present statute is not relieved from the necessity of rendering returns thereunder for such portion of 1924 as elapsed before its dissolution. Section 239 (c) requires every corporation to include in its return a statement of such facts as will enable the Commissioner to determine the portion of the earnings, including gains, profits, and income not taxed, accumulated during the taxable year which have been distributed or ordered to be distributed, respectively, to its shareholders during such year. See also articles 406 and 407.

ART. 622. Returns by receivers.-Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income for such corporations on Form 1120, covering each year or part of a year during which they are in control. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. A receiver in charge of only part of the property of a corporation, however, as a receiver in mortgage foreclosure proceedings involving merely a small portion of its property, need not make a return of income. See articles 424 and 548.

ART. 623. Returns of insurance companies.-Insurance companies transacting business in the United States or deriving any income from sources therein are required to file returns of income. The return shall be on Form 1120, except that life insurance companies shall make return on Form 1120 L. As an aid in auditing the returns, wherever possible a copy of the report to the State insurance department should be submitted with the return. Otherwise a copy of Schedule D, parts 1, 3, and 4, of the report should be attached to the return, showing the Federal, State, and municipal obligations from

which the interest omitted from gross income was derived, and a copy of the complete report should be furnished as soon as ready for filing.

ART. 624. Returns of foreign corporations.-Every foreign corporation and corporation satisfying the conditions set forth under section 262, having income from sources within the United States, must make a return of income on Form 1120. If such a corporation has no office or place of business here, but has a resident agent, he shall make the return. Although the foreign corporation is not engaged in business in this country and has no office, branch, or agency in the United States, it is required to make a return if it has received income from sources within the United States. See articles 404, 550, and 572.

ART. 625. Returns for fractional part of year.—If a corporation, with the approval of the Commissioner, changes its accounting period from calendar year to fiscal year, from fiscal year to calendar year, or from one fiscal year to another fiscal year, a separate return shall be made for a fractional part of a year and the net income on such return shall be placed on an annual basis as provided in section 226(c). See article 431. In all other cases the credit of $2,000 against net income allowed a domestic corporation having a net income not exceeding $25,000 shall be reduced to such proportion of the full credit as the number of months in the period for which the return is made bears to twelve months.

CONSOLIDATED RETURNS OF CORPORATIONS

SEC. 240. (a) Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.

(b) 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 agreement, then on the basis of the net income properly assignable to each. There shall be allowed in computing the income tax only one specific credit computed as provided in subdivision (b) of section 236.

(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. A corporation organized under the China Trade Act, 1922, shall not be deemed to be affiliated with any other corporation within the meaning of this section.

(d) In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.

(e) For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation.

ART. 631. Affiliated corporations.-Consolidated returns are based upon the principle of levying the tax according to the true net. income of a single enterprise, even though the business is operated through more than one corporation. Where one corporation owns the capital stock of another corporation or other corporations, or where the stock of two or more corporations is owned by the same interests, a situation results which is closely analogous to that of a business maintaining one or more branch establishments. In the latter case, because of the direct ownership of the property, the net income of the branch forms a part of the net income of the entire organization.

ART. 632. Consolidated returns.-Affiliated corporations as defined in section 240 (c) and article 633, irrespective of the basis upon which returns were filed prior to 1924 under section 240 (a) of the Revenue Act of 1921, may elect to make separate returns or file a consolidated return in which will be reported the consolidated net income of the affiliated group. If return is made upon either of these bases, all subsequent returns must be made upon the same basis except as permission to change may be granted by the Commissioner. In applying for permission to change from one basis to the other there should be submitted a statement in the form of an affidavit executed by a person or persons qualified to sign the returns (see section 239) setting forth completely the reasons for making the request.

The consolidated return shall be filed on Form 1120 by the parent or principal reporting corporation in the office of the collector of the district in which it has its principal office. Each of the other affiliated corporations shall file in the office of the collector of its district Form 1122, along with the several schedules indicated thereon. The parent or principal corporation filing a consolidated return for the first time shall include in such return a statement setting forth, (a) the name and address of each of the subsidiary or affiliated corporations included in such return; (b) the par value of the total outstanding capital stock of each of such corporations at the beginning of the taxable year; (c) the par value of such capital stock held by the parent corporation or by the same interests at the beginning

of the taxable year; (d) in the case of affiliated corporations, the stock of which is owned or controlled by the same interests, a list of the individuals, partnerships, or corporations constituting such interests, with the percentage of the total outstanding stock of each affiliated corporation held by each of such individuals, partnerships, or corporations during all or any part of the taxable year; and (e) a schedule showing the proportionate amount of the total tax which it is agreed among them is to be assessed upon each affiliated corporation. If there are substantial changes of ownership during the taxable year, the information required under (b) and (c) above should show the conditions existing immediately subsequent to such changes.

Foreign corporations and corporations entitled to the benefits of section 262, and corporations organized under the China Trade Act, 1922, may not file consolidated returns; but see article 637.

ART. 633. When corporations are affiliated.-Two or more domestic corporations will be deemed to be affiliated (a) if one corporation owns at least 95 per cent of the voting stock of the other or others, or (b) if at least 95 per cent of the voting stock of two or more corporations is owned by the same interests. A corporation organized under the China Trade Act, 1922, will not be deemed to be affiliated with any other corporation within the meaning of this article. The words "the same interests" shall be deemed to mean the same individual, partnership, or corporation, or the same individuals, partnerships, or corporations, but when the stock of two or more corporations is owned by two or more individuals, by two or more partnerships, or by two or more corporations, the corporations will not be held to be affiliated unless the percentage of stock of such corporations held by each individual, each partnership, or each corporation is substantially the same in each of the corporations.

ART. 634. Change in ownership during taxable year.-(a) Where corporations are affiliated at the beginning of a taxable year but due to a change in stock ownership or control during the year the affiliated status is terminated, or (b) where corporations are not af filiated at the beginning of the taxable year but through change of stock ownership during the year become affiliated, a full disclosure of the circumstances of such changes of stock ownership shall be submitted to the Commissioner. Ordinarily in such cases the parent or principal company, under the conditions described in (a) above, should exclude from its return the income of such subsidiary or subordinate company from the date of the change of stock ownership, and under the conditions described in (b) above, should include in its return the income of such subsidiary or subordinate company from the date of the change of stock ownership. In

either case the subsidiary or subordinate corporation whose status is changed during the taxable year should make a separate return for that part of the taxable year during which it was outside of the af

filiated group.

Where, in accordance with the procedure set forth above, a return is made by a corporation for a period less than a year, the tax shall be computed in accordance with sections 226 and 239 and the articles thereunder. In any case in which the change of consolidated status is for a period so short as to be negligible, a consolidated return or separate returns for the entire period, as the case may be, may be filed; in such cases, however, there should accompany the return a complete statement setting forth the changes in the affiliated status occurring during the taxable year.

ART. 635. Domestic corporation affiliated with foreign corporation.A domestic corporation which owns a majority of the stock of a foreign corporation or of a corporation entitled to the benefits of section 262 will not be permitted to include the net income of such corporation in a consolidated return; but see article 637 regarding related trades or businesses owned or controlled by the same interests, as comprehended by section 240 (d). See subdivision (e) of section 238 and article 612 regarding credit for taxes on account of ownership of stocks of foreign corporations and of corporations entitled to the benefits of section 262.

ART. 636. Consolidated net income of affiliated corporations.-Subject to the provisions covering the determination of taxable net income of separate corporations, and subject further to the elimination of intercompany transactions (whether or not resulting in any profit or loss to the separate corporations), the consolidated taxable net income shall be the combined net income of the several corporations consolidated. Only one specific credit of $2,000, as provided in section 236 (b) and article 591, shall be allowed the consolidated group, and this only in case the net income of the group does not exceed $25,000; but if such net income is more than $25,000, the tax imposed by section 230 shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of the net income in excess of $25,000. In respect of the statement of gross income and deductions and the several schedules required under Form 1120, a corporation filing a consolidated return is required to prepare and file such statements and schedules in columnar form to the end that the details of the items of gross income and deductions for each corporation included in the consolidation may be readily audited.

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