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 of $2,000 (as provided in section 236); in computing the war-profits credit (as provided in section 311) only one specific exemption of $3,000; and in computing the excess-profits credit (as provided in section 312) only one specific exemption of $3,000.

(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.

(c) For the purposes of section 238 a domestic corporation which owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income. derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: Provided, That in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year.

TIME AND PLACE FOR FILING RETURNS.

SEC. 241. (a) That returns of corporations shall be made at the same time as is provided in subdivision (a) of section 227.

(b) Returns shall be made to the collector of the district in which is located the principal place of business or principal office or agency of the corporation, or, if it has no principal place of business or principal office or agency in the United States, then to the collector at Baltimore, Maryland.

Chapter III.

HOW INCOME FROM PATENTS, TRADE-MARKS AND COPYRIGHTS IS AFFECTED BY THE FEDERAL INCOME TAX LAW.

The Income Tax law of February 24, 1919, is clear in its intent to compel payment of tax upon all income derived from any source. Accordingly, income taxes must be paid on all income received in each year from patents, trade-marks and copyrights, whether such income is derived from

(a) Royalties received,

(b) Gains derived from sale of a patent, copyright, etc.,

(c) Moneys recovered because of infringement, or

(d) Profits of a business making patented (etc.) articles.

A. ROYALTIES.

Considering these several items briefly, it is believed to be clear from the wording of Section 213 that royalties must be included as income in the statement of Gross Income, for it specifies "dealings in property, real or personal, growing out of the ownership or use or interest in such property" and also "or gains or profits or income derived from any source whatever.

The Regulations of the Internal Revenue Bureau are specific.

"Royalties on patents are income" to the one receiving them. (Art. 48, Reg. 45 Rev. April 17, 1919.)

"Royalties received by a corporation in accordance with a contract by which it has assigned the patent rights to manufacture machines, etc., are income and should be so accounted for." (Art. 113, Reg. 33 Rev.) And conversely, reasonable payments of royalties to the inventor or patent owner are allowable deductions as necessary business expenses on the tax return of the one paying such royalties.

*

"A royalty paid by a corporation * * for use of a patent upon an article manufactured and sold by the corporation is deductible as a business expense, provided the amount so paid is reasonable, considering the value of the invention and its salability in the open market." (O. D. 440. 14-20-835.)

The subject of Royalties is more fully dealt with in a later chapter. (Chapter VII.)

B. PROFITS FROM SALE OF PATENTS, COPYRIGHTS, ETC. This is the source of income affecting the greatest number of inventors and owners of patents, copyrights, etc., and also the one most difficult for them to figure the income tax upon. This difficulty would be overcome if they understood clearly the COST VALUE of the patent, since the income tax must be paid upon the difference between the cost value of their patent (less, in some instances, any depreciations written off) and the sales price. An exception exists in the case of patents obtained before March 1, 1913, when the fair market value at March 1, 1913, is substituted for the cost price, March 1, 1913, being the date on which the original Income Tax Act of 1913 went into effect, and the exception has been continued in each subsequent Act.

On all patents obtained since March 1, 1913, the cost value to the inventor is the amount expended by him to secure the patent, and includes only the amount paid out to the Government, attorney, draftsmen, mechanics, etc., and in the purchase of materials used in the development of the invention. This method of computing the cost sets no value whatever upon the idea, and allows no compensation for the time or labor of the inventor himself in developing or patenting the idea, though the amount paid a helper for his time or labor may be included in the cost value. Most inventors consider this most unfair, but the wording of the Act and Department Rulings are clear upon this point.

"Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be

(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and (2) In the case of property acquired on and after that date, the cost thereof."

"A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the value as of March 1, 1913, if acquired prior to that date, or between the selling price and the cost, if acquired subsequently to that date. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patents or copyrights since February 28, 1913, or since the date of acquisition, if subsequently thereto." (Art. 40, Reg. 45 Rev.)

"If the patent or copyright was secured from the Government, its cost consists of the various Government fees, cost of drawings, experimental models, attorney fees, etc., actually paid." (Art. 167, Reg. 45 Rev.)

When the inventor disposes of his patent to another, the cost value of the patent to the purchaser is the amount paid. This amount can be readily determined if the consideration is entirely in cash, but in many cases the transaction is complicated by having the purchase price include stocks, bonds, or the like. In such cases, the parties should compute the market value of the stocks or bonds on the day of the transfer and add this market value to any cash received in determining the sales price.

"If a corporation purchased a patent and paid for it in stock or securities, its cost is the fair market value of the stock or securities at the time of the purchase." (Art. 167, Reg. 45 Rev.)

The subject of profits and gains from sales of patents, copyrights, etc., is treated more fully in several later chapters. Note chapter XI on Valuation of Patents, Copyrights, Etc., and Chapter VIII on Profits from Sales of Patents, Copyrights and the Like.

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C. MONEYS RECOVERED BECAUSE OF INFRINGEMENT.

It has been decided that an amount received as a recovery for infringement of a patent, copyright, etc., must be entered as income in the year it is received.

"A person may sue in one year on a pecuniary claim or for property, and money or property recovered on a judgment therefor rendered in a later year would be income in that year, assuming that it would have been income in the earlier year if then received. This is true of a recovery for patent infringement." (Art. 52, Reg. 45 Rev. April 17, 1919.) Conversely, the one who must pay over the award of damages for infringement cannot deduct it in his tax statement until the year of its judicial determination.

"A report of a master of chancery, appointed by an interlocutory decree in a suit for alleged infringement of a patent, assessing damages against the taxpayer, which report was filed during the taxable year, but was not confirmed until the following year when judgment was entered on the report, cannot be regarded as a determination of the amount of the claim, and no deduction for the earlier taxable year is permissible in regard to the judgment referred to." (Sec. 923. 1-9-94.)

That the total amount of the award should be reported by the one party as income and by the other as deductible expense has also been decided.

"The amount which a plaintiff should report as income or a defendant may deduct as an expense in the case of an award for damages on account of patent infringement is not affected by the amount of federal taxes which have been paid by the defendant. The amount to be re

ported or deducted is the total amount awarded by the courts." (O. D. 26. 1-19-38.)

The subject of moneys recovered because of infringement is more fully dealt with in a later chapter. (Chapter IX.)

D. PROFITS OF BUSINESS MAKING PATENTED ARTICLES.

It is clear under the wording of the Income Tax Act that profits of all corporations (other than certain named exceptions) must be entered as income in the year in which they are received. The exceptions named do not exempt companies making patented or copyrighted articles, and accordingly the profits must each year be entered on the tax return as income.

Section 230 (a) provides that

"There shall be levied, collected, and paid for each taxable year upon the net income of EACH corporation a tax at the following rates." while Section 231 specifies the exempt organizations and the exemptions run mainly to such organizations as are not organized for profit. (See page 133 of Appendix.)

"Every corporation, domestic or foreign, not exempt under Sec. 231 of the Statute, is liable to the tax. It makes no difference that a domestic corporation may receive no income from sources within the United States. On the other hand, a foreign corporation is taxed only on its income from sources within the United States." (Art. 503, Reg. 45 Rev.)

"A corporation is not exempt simply and only because it is primarily not organized and operated for profit. If income within the meaning of the law arises and accrues to a corporation which is not organized and operated for profit, such income will be subject to the tax imposed by this Act." (T. D. 2152. Feb. 12, 1915.)

It would appear that every corporation manufacturing or selling patented articles falls within the class of organizations doing business for profit. They should, therefore, put in their tax return exactly as do other corporations, the fact that they utilize a patent or copyright being of no avail to them except that they may in some circumstances increase the value of their capital investment to the extent of the value of such patent or copyright, and also that they may deduct each year, as depreciation, a pro rata proportion of the cost value of the patent or copyright.

The most important way in which patents or copyrights affect the net profits in any one year of corporations making patented or copyrighted articles is that depreciation of the patent or copyright may be charged off on the books proportionately each year during its life