PART VII.-MISCELLANEOUS.

SEC. 335. (a) That if a corporation (other than a personal service corporation) makes return for a fiscal year beginning in 1917 and ending in 1918, the tax for the first taxable year under this title shall be the sum of: (1) the same proportion of a tax for the entire period computed under Title II of the Revenue Act of 1917 which the portion of such period falling within the calendar year 1917 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title at the rates specified in subdivision (a) of section 301 which the portion of such period falling within the calendar year 1918 is of the entire period. Any amount heretofore or hereafter paid on account of the tax imposed for such fiscal year by Title II of the Revenue Act of 1917 shall be credited toward the payment of the tax imposed for such fiscal year by this title, and if the amount so paid exceeds the amount of the tax imposed by this title, the excess shall be credited or refunded to the corporation in accordance with the provisions of section 252.

(b) If a corporation makes return for a fiscal year beginning in 1918 and ending in 1919, the tax for such fiscal year under this title shall be the sum of: (1) the same proportion of a tax for the entire period computed under subdivision (a) of section 301 which the portion of such period falling within the calendar year 1918 is of the entire period, and (2) the same proportion of a tax for the entire period computed under subdivision (b) or (c) of section 301 which the portion of such period falling within the calendar year 1919 is of the entire period.

(c) If a partnership or a personal service corporation makes return for a fiscal year beginning in 1917 and ending in 1918, it shall pay the same proportion of a tax for the entire period computed under Title II of the Revenue Act of 1917 which the portion of such period falling within the calendar year 1917 is of the entire period.

Any tax paid by a partnership or personal service corporation for any period beginning on or after January 1, 1918, shall be immediately refunded to the partnership or corporation as a tax erroneously or illegally collecteu.

SEC. 336. That every corporation, not exempt under section 304, shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, in the same manner, and subject to the same conditions, as is provided in the case of returns and payment of income tax by corporations for the purposes of Title II, and all the provisions of that title not inapplicable, including penalties, are hereby made applicable to the taxes imposed by this title.

SEC. 337. That in the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this title attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest."

Chapter V.

THE WAR AND EXCESS PROFITS TAX WITH RELATION TO PATENTS, TRADE-MARKS AND COPYRIGHTS.

Since the War and Excess Profits Tax is levied upon all corporations except those not organized or operated for profit, it follows that every corporation engaged in making or selling patented, trademarked or copyrighted articles is subject to these taxes, the only exceptions being those whose net income for the year is less than $3,000.

The law, as set forth in the preceding chapter, appears complicated and bewildering with its first, second and third brackets and varying percentages of credits, but analysis shows it to be quite simple and understandable. Remember also that except in the year 1918 the third bracket does not apply.

To illustrate the approved method of computing taxes under this law, an example is given below of a statement prepared for the most difficult year to figure, 1918, of a corporation having an invested capital of $500,000 and a net income for the year 1918 of $250,000:

Amount of Net Income in Excess of Excess Profits Credit and not in
Excess of 20% of Invested Capital, taxable at 30%. . . .

Amount of Tax under First Bracket.

$500,000

20%

$100,000 43,000

.$ 57,000 30%

$ 17,100

Net Income . . .

SECOND BRACKET.

20% of Invested Capital....

Amount of Income in Excess of 20% of Invested Capital, taxable at 65%

Amount of Tax under Second Bracket...

Plus Tax under First Bracket.

Total Tax under First and Second Brackets..

.$250,000 100,000

.$150,000 65%

.$ 97,500

17,100

.$114,600

THIRD BRACKET.

Assuming the corporation had an average capital of $250,000 for the years 1911, 1912 and 1913 (the pre-war period) and an average net income during that period of $50,000, the tax under the Third Bracket would be as follows:

80% of Net Income in Excess of War Profits Credit.
Total Tax under First and Second Brackets....
Amount by which 80% Net Income in Excess of War Profits Credit
exceeds the Tax as Computed under the First and Second Brackets
(This amount to be added)

Plus Tax under First and Second Brackets..

Total Tax under First, Second and Third Brackets.

$172,000 80%

. $137,600 114,600

23.000 114,600

. $137,600

For the year 1919 and subsequent years the Third Bracket is eliminated and the percentages under the First and Second Brackets reduced to 20% and 40% respectively.

The principal way in which the War and Excess Profits Tax affects patents, trade-marks, copyrights and similar intangible property is

in the limitation specified in valuing such intangibles with relation to the total Capital Invested and the total stock or shares of the corporation. The highest amount permissible for all the intangible property of a corporation paid in for stock or shares is 25% of the total stock or shares of the corporation outstanding at the beginning of the taxable year, and the valuation may be held to be less than that percentage if the actual cash value of the intangibles when paid in was less.

Paragraphs 4 and 5 of Section 326 read as follows:

"Invested Capital shall include:

(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding

(a) The actual cash value of such property at the time paid in. (b) The par value of the stock or shares issued therefor, or (c) In the aggregate, 25% of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, WHICHEVER IS LOWEST;

(5) Intangible property bona fide paid in for stock or shares on or after March 3, 1917, in an amount not exceeding

(a) The actual cash value of such property at the time paid in. (b) The par value of stock or shares issued therefor, or

(c) In the aggregate 25% of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year, WHICHEVER IS LOWEST,

provided that in no case shall the total amount included under para-graphs (4) and (5) exceed in the aggregate 25% of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year."

Paragraph (c) of section 326 further specifies:

"(c) There shall be deducted from Invested Capital as above defined a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of admissible and inadmissible assets held during the taxable year."

The Regulations of the Internal Revenue Bureau are worded to enforce these provisions of the Act with regard to patents, trademarks, copyrights and the like.

"The term 'intangible property' means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands and other like property." (Sec. 325, Par. a.)

"Intangible property includes patents and good will and other like property." (Art. 811, Reg. 45, Rev.)

"Invested Capital within the meaning of the Statute is the capital actually paid in to the corporation by the stockholders, including the

surplus and undivided profits, and is not based upon the present net worth of the assets, as shown by an appraisal or in any other manner. * * * The Invested Capital of a corporation includes, generally speaking, (a) the cash paid in for stock, (b) the tangible property paid in for stock, (c) the surplus and undivided profits, and (d) the intangible property paid in for stock (to a limited amount), less, however, the same proportion of such aggregate sum as the amount of inadmissible assets bears to the total assets. * * * The fair market value of the assets as of March 1, 1913, has no bearing on Invested Capital." (Art. 831, Reg. 45, Rev.)

"A and B, who own most of the stock of a company, invented certain machinery, for which patents were issued to them. The company paid the cost of the patents and used them as though it owned them, without compensation to the inventors. In 1916 the patents were put upon the books of the company at a certain value and a stock dividend declared. Even assuming that the patents were not formally assigned to the company until 1916, the Committee is clearly of the opinion that the patents were not specifically paid for by the issuance of stock, nor by any amount of cash. It is concluded, therefore, that the value at which the patents were placed upon the books of the company may not be included in its Invested Capital for War Profits and Excess Profits Tax purposes." (A. R. R. 9, 1-20-665.)

"When a domestic corporation exchanges patent rights and cash for stock in a foreign corporation which derives no income from sources within the United States, the shares of stock so received are admissible assets in determining the Invested Capital of the domestic corporation and are to be valued at cost or the amount of cash advanced plus the value of the patent right at the time of exchange, which value can not be taken as exceeding the value of the shares of stock issued therefor." (T. B. R. 67, 22-19-538.)

This limitation particularly affects corporations which are organized for the purpose of exploiting a patent or copyright. It has long been the custom of inventors to organize a company to put their patented articles on the market, and to assign the patent to the company in return for a large block of stock-usually more than 25% of the total stock. Such companies in making up their statement of Capital Invested under this law will have to limit their statement of the valuation of the patent and all other intangibles owned by them to not more than 25% of the total stock. And if all of the stock is not issued, the amount must be limited to 25% of the stock outstanding at the beginning of the taxable year.

There has been more criticism directed by inventors and their attorneys against this phase of the law than to any other. The limitation is believed to be too conservative and to have a tendency to throttle the marketing of inventions.

One outgrowth of the limitation prescribed by this law has been that new companies recently organized to exploit patented inventions