ART. 862. Purchase of stock.-Where a corporation either directly r indirectly, as for example through a trustee, has prior to the taxble year bought its own stock, either for the purpose of retirement r of holding it in the treasury or for other purposes, the entire cost f such stock must be deducted from the aggregate invested capital s of the beginning of the taxable year, if such deduction has not lready been made. Where such stock is purchased during the taxble year a deduction from the invested capital as of the beginning of the taxable year and effective from the date of such purchase is equired only to the extent that such stock has not been purchased ut of the undivided profits of the taxable year. See article 857. The full amount derived in cash or its equivalent from the resale of uch stock may be included in the invested capital from the date of uch resale, unless such stock had been purchased out of earnings of The taxable year. See article 542.

ART. 863. Invested capital and other measures of capital. (a) The nvested capital as here defined may differ from the capital as shown n the books of the corporation. In such event no changes should be made in the books themselves. The corporation should, however, n all cases keep a permanent record of the adjustments which are nade in computing invested capital. (b) Section 1000 of the statute mposes a tax on the fair value of the capital stock of corporations. As in the case of the war profits and excess profits tax the invested captal is based upon the actual investment of the stockholders in the corporation, irrespective of the present value of its assets, and in the case of the capital stock tax the fair value looks to the present value of the corporation's assets, irrespective of the amount of the investnent of the stockholders therein, the amount determined as the fair alue of the capital stock for the purpose of the capital stock tax can ave no bearing upon the determination of invested capital. See Iso article 1561.

ART. 864. Affiliated corporations: invested capital. The invested apital of affiliated corporations, as defined in section 240 (b) of the tatute and article 633, for the taxable year is the invested capital f the entire group treated as one unit operated under a common ontrol. As a first step in the computation a consolidated balance heet should be prepared in accordance with standard accounting practices, which will reflect the actual assets and liabilities of the affilited group. In preparing such a balance sheet all intercompany items, uch as intercompany notes and accounts receivable and payable, hould be eliminated from the assets and the liabilities, respectively, nd proper adjustments should be made in respect of intercompany rofits or losses reflected in inventories which at the beginning or nd of the taxable year contain merchandise exchanged between the orporations included in the affiliated group at prices above or below ost to the producing or original owner corporation. Such con

solidated balance sheet will then show (a) the capital stock of the parent or principal company in the hands of the public; (b) the consolidated surplus belonging to the stockholders of the parent or principal company; and (c) the capital stock, if any, of subsidiary companies not owned by the parent or principal company, together with the surplus, if any, belonging to such minority interest. In computing consolidated invested capital the starting point is furnished by the total of the amounts shown under (a), (b) and (c) above. This total must be increased or diminished by any adjustments required to be made under the provisions of sections 325, 326, 330 and 331 of the statute and articles 811-818, 831-869, 931-934 and 941 of the regulations, except as otherwise provided in articles 865-868.

ART. 865. Affiliated corporations: intangible property paid in.(1) In respect of corporations whose affiliation is in the nature of parent and subsidiary companies: (a) in the case of intangible property bona fide paid in for stock or shares prior to March 3, 1917, there may be included in invested capital an amount not exceeding the actual cash value of such property at the time paid in, or the par value of the stock or shares issued therefor, or in the aggregate 25 per cent of the par value of the total stock or shares of the consolidation outstanding on March 3, 1917 (determined as indicated in items (a) and (c) in article 864), or in the aggregate 25 per cent of the par value of the total stock or shares shown on the consolidated balance sheet, being the amount of the capital stock included in items (a) and (c) in article 864 at the beginning of the taxable year, whichever is lowest; and (b) in the case of intangible property bona fide paid in for stock or shares on or after March 3, 1917, there may be included in invested capital an amount not exceeding the actual cash value of such property at the time paid in, or the par value of the stock or shares issued therefor, or in the aggregate 25 per cent of the par value of the total stock or shares shown by the consolidated balance sheet, being the amount of the capital stock included in items (a) and (c) in article 864 outstanding at the beginning of the taxable year, whichever is lowest.. (c) When intangible property has been acquired in part before and in part after March 3, 1917, the amounts shall be ascertained, respectively, under (a and (b) above and in the aggregate shall in no case exceed 25 per cent of the par value of the total stock or shares outstanding at the beginning of the taxable year shown in the consolidated balance sheet, being the amount of the capital stock included in items (a) and (c) in article 864.

(2) In respect of corporations affiliated by reason of ownership by the same interests, the limitations set forth in paragraphs (4) and (5) of subdivision (a) of section 326 of the statute shall be applied to each corporation separately and the aggregate of the intangible property, so valued, shall be included in invested capital in the con

idated return. In respect of each of the affiliated corporations e aggregate of the amounts ascertained under the provisions of ragraphs (4) and (5) shall in no case exceed 25 per cent of the tstanding capital stock of such corporation at the beginning of taxable year.

ART. 866. Affiliated corporations: inadmissible assets. Where justment is required in respect of inadmissible assets in accordce with the provisions of subdivision (c) of section 326 of the atute, such adjustment shall be made on the basis of the consolited balance sheet with due regard to the adjustments and eliminaons set forth in articles 864 and 865 and to the provisions of articles 5-818.

ART. 867. Affiliated corporations: stock of subsidiary acquired for sh.-When all or substantially all of the stock of a subsidiary rporation was acquired for cash, the cash so paid shall be the sis to be used in determining the value of the property acquired. ART. 868. Affiliated corporations: stock of subsidiary acquired for ock.—Where stock of a subsidiary company was acquired with the ock of the parent company, the amount to be included in the conlidated invested capital in respect of the company acquired shall e computed in the same manner as if the net tangible assets and the tangible assets had been acquired instead of the stock. If in acordance with such acquisition a paid-in surplus is claimed, such aim shall be subject to the provisions of article 837.

ART. 869. Affiliated corporations: invested capital for prewar eriod. The invested capital of affiliated corporations for the prewar eriod shall be computed on the same basis as the invested capital r the taxable year, except that where any one or more of the cororations included in the consolidation for the taxable year were in istence during the prewar period, but were not then affiliated as rein defined, then the average consolidated invested capital for e prewar period shall be the average invested capital of the cororations which were affiliated in the prewar period plus the aggregate the average invested capital for each of the several corporations hich were not affiliated during the prewar period. Full recognition, ›wever, must be given to the provisions of section 330 of the statute, rticularly the last paragraph thereof, and of articles 931–934. ART. 870. Insurance companies.-The reserve funds of insurance mpanies, the net additions to which are deductible from gross come under the provisions of section 234 of the statute, cannot be cluded in computing invested capital. See sections 325 and 26(b) and articles 569 and 814.

ART. 871. Foreign corporations.-Inasmuch as the war profits id excess profits tax in the case of a foreign corporation is not based 1 the invested capital of the corporation, but is computed in accord

ance with section 328 of the statute, the provisions of section 326 and of articles 831-870 have no application to foreign corporations. For the same reason, when rendering a return of income on form 1120 for a foreign corporation, no entry of invested capital should be made thereon. See article 962.

SPECIAL CASES.

SEC. 327. That in the following cases the tax shall be determined as provided in section 328:

(a) Where the Commissioner is unable to determine the invested capital as provided in section 326;

(b) In the case of a foreign corporation;

(c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property. paid in for stock and for bonds, respectively;

(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profits upon a normal invested capital nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. ART. 901. Treatment of special cases. In the cases specified in section 327 of the statute the tax will be specially determined under the provisions of section 328, but the tax will not ordinarily be computed under section 328 merely because the corporation's form or manner of organization, or the limitations imposed by section 326, result in a greater tax than would otherwise be payable. A corporation which comes within the provisions of subdivision (d) of section 327 may make application for assessment under the provisions of section 328, which application shall be attached to its return in the form of a statement setting forth in full: (a) the reasons why the tax should be so determined; (b) the facts upon which such reasons are based; (c) an exact description of each trade or business or important branch of a trade or business carried on by it; (d) a statement of the invested capital and net income for each year since the beginning of the prewar period; and (e) a statement showing the amount of gains, profits, commissions or other income derived on a cost plus basis from Government contracts made after April 5, 1917, and before November 12, 1918, and

owing the per cent which such income is of the total income of e corporation. See sections 1 and 326 and articles 831-871 and 510.

COMPUTATION OF TAX IN SPECIAL CASES.

SEC. 328. (a) In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business bears to their average net income (in excess of the specific exemption of $3,000) for such year. In the case of a foreign corporation the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations.

In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are, as nearly as may be, similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances. (b) For the purposes of subdivision (a) the ratios between the average tax and the average net income of representative corporations shall be determined by the Commissioner in accordance with regulations prescribed by him with the approval of the Secretary.

In cases in which the tax is to be computed under this section, if the tax as computed without the benefit of this section is less than 50 per centum of the net income of the taxpayer, the installments shall in the first instance be computed upon the basis of such tax; but if the tax so computed is 50 per centum or more of the net income, the installments shall in the first instance be computed upon the basis of a tax equal to 50 per centum of the net income. In any case, the actual ratio when ascertained shall be used in determining the correct amount of the tax. If the correct amount of the tax when determined exceeds 50 per centum of the net income, any excess of the correct installments over the amounts actually paid shall on notice and demand be paid together with interest at the rate of of 1 per centum per month on such excess from the time the installment was due.

(c) The Commissioner shall keep a record of all cases in which the tax is determined in the manner prescribed in subdivision (a), containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, and the amount of invested capital as determined under such subdivision. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257. ART. 911. Computation of tax in special cases. In the cases specied in section 327 of the statute the tax is to be computed by comarison with representative corporations whose invested capital can satisfactorily determined under section 326 and which are engaged a like or similar trade or business and similarly circumstanced. he provisions of section 328 do not permit the determination of a eneral average for any trade or business. In each case which comes nder the provisions of section 327 the Commissioner will determine, nearly as may be, the group or class of corporations with which the

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