NT UC-NRLF $<: 20S fl3fl Supplement TO THE Standard Manual of the Income Tax 1919 COPYRIGHT, 1919, STANDARD STATISTICS CO., Inc. 47 West Street, New York. u TABLE OF CONTENTS Page New Regulations 9 List of Forms of Return 45 Guide to Forms of Return 47 Stock Dividends 51 Corrections to the Manual 53 Specimen Forms of Return * * Special Folder sent herewith. Index Page Accounting' — Change in accounting period 13 Methods of 13 Period of '. 12 Additional Tax — On sale of mineral deposits 9 Alien- See "Nonresident Alien," Amortization — Additional requirements for 17 Cost which may be amortized , 16 Information in connection with 17 Method of 16 Period ; _ 16 Property, cost of which may be amortized 16 Redetermination of 17 Assets — Valuation of upon reorganization 44 BanlEs — Cash dividends paid by : 10 Capital — Impairment of 48 Citiz^xisliip — Who Is a citizen 9 Compensation — Personal services 13 Contracts — Long term - 14 Contributions — Deductible 16 Corporations — See "Personal Service Corporations." Affiliated corporations 41 Capital: Impairment of 43 Change in ownership 40 Consolidated net income of affiliated corporations 41 Depletion and depreciation: Allowance for 42 Dividend: Effect of ordinary dividend 42 Effect of stock dividend 43 Election to be taxed as corporation 44 Extension: For filing return calendar year 1918 12 For filing return fiscal year basis 12 Computation of estimate of tax 12 Fiscal years of affiliated corporations 41 Foreign corporations: Returns of 40 Invested Capital: Changes in during year 42 Reorganization : Valuation of assets upon 44 Successor to partnership 43 Undistributed income 35 Use of prescribed forms 40 5 Corrections to Manual — Averaging invested capital 65 Husband and wife .."".. 53 Life insurance policies ' " ' " 54 Prices of securities — correction C. M. & St. P. stock ........"!...!."]!! 55 Deductions — See "Depletion." Contributions deductible 16 Depletion — Account en books 23 Capital recoverable through: In case of timber 28 Computation of allowance for timber 28 Computation of allowance for: Gas wells 21 Gas wells in future !!.".!.'!.."."... 22 Oil and gas wejls, when quantity uncertain 22 Mines and oil wells 20 Deposits: Determination of cost of 19 Determination of fair market value of . 19 Revaluation of, not allowed 20 Division of, by owner and lessee 19 Mines, based on advance royalties 23 Mines, oil and gas wells 18 Capital recoverable through: In case of owner 18 In case of lessee 18 Oil and gas wells — Computation of — for combined holdings 22 Oil and gas wells: In years prior to 1916 27 Ore in mines, determination of quantity of 20 Oil in ground, determination of quantity of 20 Statement of — to be attached to return — timber 29 Statement of, to be attached to return: Mines 24 Oil and gas wells 24 Timber 28 Dividends — Effect of ordinary dividend 42 Effect of stock dividend 43 Paid by bank 10 Stock dividends, paid in 1918 51 Depreciation — Mines: Improvements of 27 Oil and gas wells: Improvements of 27 In years prior to 1916 27 Timber: Improvements of 29 Exemption — Personal and family 16 Extension — Filing of returns for the year 1918... 12 Taxpayers in Hawaii 12 "Ciduciary — Extension for filing returns 12 Perms — List of forms 45 Guide to forms 47 G-ross Income- See "Income." Husband and wife- Correction to Manual 53 Page Income- Basis of computation 11 Computation of 10 Items excluded : 15 Meaning of 10 Undistributed 35 Insurance — Paid to estate or individual beneficiaries 15 Inventories — At cost '. 38 At market 38 Need of 38 Valuation of 38 Invested Capital (Averagfing") — Correction to Manual 55 Idfe insurance companies — Correction to Manual 54 ]Losses — Allowance of net loss 39 Claim for allowance of 39 Scope of net losses , 39 Mines— Charges to capital and to expense 26 Depreciation of improvements 27 Discovery of 25 Mines, Oil and Gas Wells — See "Depletion." Net Income- See "Income." Basis of computation 11 Computation of 10 Net ]&08ses — See "Losses." Nonresident Alien — Definition of 30 Proof of residence 30 Residence: Loss of by alien 30 Status of: Determined by employer 30 Oil and Gas Wells — Charges to capital and expense 26 Depreciation of improvements 27 Depreciation in years prior to 1916 27 Discovery of 25 Proof of discovery 20 Partnerships — Corporation successor to partnership 43 Extension for filing return fiscal year basis 12 Payments — Deferred on sale of real estate: Installments , 14 Other than installments !!!!".."."!!!]""!!!! 14 Personal Services — See "Compensation." Page Personal Service Corporations — Credits allowed stockholders 34 Definition of : 31 Different rates fiscal year: Ending- in 1918 38 Ending- in 1919 34 Returns of: Calendar year 1918 31 Fiscal year ending in 1918 32 Fiscal year ending in 1919 or later 38 Taxation of stockholders: Calendar year 1918 32 • Fiscal year ending in 1918 32 Fiscal year ending in 1919 34 Prices of securities as of March 1, 1913 — Correction to Manual 55 Property — Basis for determining gain or loss 36 Exchange tor different kinds 37 Exchange of stock 37 Exchanges of 36 Gain or loss from exchange 36 Real Estate^ See "Property." Sale of involving deferred payments: Installments 14 Other than installments 14 Returns — See "Personal Service Corporations." Accounting period 12 Change in accounting period 13 Fiduciaries: Extension of time for filing returns 12 Forms of — Guide to forms 47 List of forms 45 Individuals: Extension of time for the year 1918 12 Stock Dividends — Principal list of stock dividends paid in 1918 52 Surtax — See "Additional Tax." Timber I^ands — See "Depletion" and "Depreciation." Charges to capital and to expense... 29 Revaluation of stumpage 28 Undistributed Income 35 Withholdingr at the Source-^ For the year 1918 .35 On non-resident aliens 25 Release of excess tax -witheld 35 Individuals CITIZENSHIP. (New Definition) Who Is a Citizen. — Every person born in the United States sub- ject to its jurisdiction, or naturalized in the United States, is a citizen. Wlien any naturalized citizen has left the United States and resided for two years in the foreign country from which he came, or for five years in any other foreign country, he is presumed to have lost his American citizen- ship; but this presumption does not apply to residence abroad while the United States is at war. An Italian, who has come to the United States and filed his declaration of intention of becoming a citizen, but who has not yet received his final citizenship papers, is an alien. A Swede, who, after having come to the United States and become naturalized here, returned to Sweden and resided there for two years prior to April 6, 1917, is presumed to be once more an alien. On the other hand, an individual born in the United States of citizen or resident alien parents, who has long since moved to a foreign country and established a domicile there, but who has nevei been naturalized therein or taken an oath of allegiance thereto, is still a citizen of the United States. The difference between resident alien in- dividuals and nonresident alien individuals, according to articles 311-314, is that a resident alien is one who is not a mere transient and a non- resident alien is one whose residence is not within the United States and is not a citizen of the United States. Art. 4, Reg. 45. SURTAX. (New Matter) Surtax on the sale of Mineral Deposits. — Where the taxpayer by prospecting and locating claims, or by exploring and discovering unde- veloped claims, has demonstrated the principal value of mines, oil or gas wells, which prior to his efforts had a merely nominal value, the portion of the surtax attributable to a sale of sucli property or of the taxpayer's in- terest therein shall not exceed 20 per cent of the selling price. Exploration work alone without discovery is not sufficient to bring a case within this provision. Shares of stock in a corporation owning mines, oil or gas wells do not constitute an interest in such property. To determine the applica- tion of this provision to a particular case, the taxpayer should first com- pute the surtax in the ordinary way upon his net income, including his net income from any such sale. The proportion of the surtax indicated by the ratio which the taxpayer's profit from the sale of tlie property bears to the sum of his total income plus the general deductions not chargeable against any particular item of gross income is the portion of the surtax attributable to such sale, and if it exceeds 20 per cent of the selling price of the property such portion of the surtax shall be reduced to that amount. Art. 13, Reg. 45. 9 « INCOME. Net Income. (This Amplifies H 12 Manual, page 183) Meaning of Net Income. — The tax imposed by the statute is upon income. In the computation of the tax various classes of income must be considered: (a) Income (in the broad sense), meaning all wealth which flows in to the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as "gains and profits," including gains derived from the sale or other disposition of capital assets. It is not limited to cash alone, for the statute recognizes as income- determining factors other items, among which are inventories, accounts receivable, property exhaustion and accounts payable for expenses in- curred. See sections 202 (a) (Basis for Determining Gain or Loss) and 213 (a) which defines (Gross Income) Manual P. 54, L. 73, Law; P. 60, L. 10, Law. Gross income, meaning income (in the broad sense) less Income which is by statutory provision or otherwise exempt from the tax imposed by the statute. See Manual P. 184, If 15 defining gross in- come, also Manual, Law P. 60, L. 10. Net income, meaning gross income less statutory deductions. The statutory deductions are in general, though not exclusively, expenditures, other than capital expenditures, connected with the production of income. See sections 214 (Deductions Allowed) and 215 (Items Not Deductible). Manual, Law P. 62, L. 8; Law P. 65, L. 13. Net income less credits. See credits allowed, Manual P. 216, If 104; also Manual Law P. 65, L. 30. The surtax is imposed upon net income; the normal tax upon net income less credits. Though taxable net income is wholly a statutory conception it follows, subject to certain modifications as to exemptions and as to some of the deductions, the lines of commercial usage. Statutory "net income" is, subject to these modifications, commercial "net income." This appears from the fact that ordinarily it is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. For instances in which net income is not to be computed in accordance with the taxpayer's method of accounting see articles 22 and 23, which defines the computation of net income. As to net income of corporations see sections 232 (Net Income Defined) ; 236 (Credits Al- lowed), of the statute, Manual, Law P. 75, L. 27; P. 79, L. 29. Art. 21, Reg. 45. Cash Dividends Paid by Bank. — If a bank declares a cash dividend In pursuance of a plan by which all or a part of the stockholders are to pay back to the bank the amount so paid for new stock, these dividends are cash dividends. Cash dividends received in 1918 are taxable at the 1918 rates in ac- cordance with a statement made by the Commissioner of Internal Rev- enue. No doubt this statement has been made on account of miscon- struction placed upon Section 201 (e). See "Standard Manual of In- come Tax for 1919," P. 53, L. 54. (The remainder of the ruling is a repetition of previous rulings]. — (This Amplifies Old Deflnitloxi — See Mannal, pagfe 256) Computation of Net Income. — Net income must be computed with respect to a fixed period. Ordinarily that period is twelve months and is known as the "taxable year." Items of income and of expendi- tures which as gross income and deductions are elements in the compu- tation of net income need not be in the form of cash. It is sufficient that such items, if otherwise properly included in the computation, can be valued in terms of money. The time as of which any item of gross 10 income or any deduction is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer's income. If the method of accounting regularly employed by him in keeping his books clearly reflects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner clearly reflects it. Art. 22, Reg. 45. (These Regulations With Respect to Accotuiting' Methods in Arts. 23, 24 and 25; Art. 23 and 24 Are a Distinct Improvement Over Former Regulations) Bases of Computation. — Approved standard methods of account- ing will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See section 200 (Manual, Law P. 52, L. 27) of the statute for definitions of "paid," "paid or accrued," and "paid or incurred." All items of gross income shall be included in the gross in- come for the taxable year in which they are received by the taxpayer, and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. See section 213 (Gross Income, Manual, Law P. 60, L. 10) of the statute. A taxpayer is deemed to have received items of gross income which have been credited or made available to him without re- striction. On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through conversion of the property. Art. 23, Reg. 45. ACCOUNTING. Methods of Accounting. — It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. See section 1305 (Manual, Law P. 161, L. 54) of the statute and article 1711 (Aids to Collection of Tax). Among the essentials are the following : (1) In all cases in which the production, purchase or sale of merchandise of any kind is an income-producing factor inventories of the merchandise on hand (including finished goods, work in process, raw materials and supplies) should be taken at the beginning and end of the year and , used in computing the net income of the year; (2) Expenditures made during the year should be properly classified as between capital and income, that is to say, that expenditures for items of plant, equipment, etc., which have a useful life extending sub- stantially beyond the year should be charged to a capital account and not to an expense account; and (3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion or obsolescence any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be charged against the property account or the appropriate reserve and not against current expenses. Art. 24, Reg. 45. 11 RETURNS. ANNUAL. Extension of Time to File. Corporations and Individuals. — By the filing of returns on or before March 15, 1919, an estimate of the amount of taxes due (Form 1031-T for corporations and Form 1040-T for individuals) accompanied by pay- ment of one-fourth of estimated amount of tax due, the time for filing such returns will be extended for 45 days from March 15. Pending the issuance of the new form of annual return (form 1120), corporations must ^le the tentative return (on form 1131-T), and pay at least a quarter of the tax by March 15. Corporation— Method of Computing Estimate of Tax. — Page 446, If 815, "Standard Manual of the Income Tax for 1919," shows the method of computing the estimate of the amount of tax to be re- ported on Form 1031-T. Fiduciaries. — Time for filing returns on Form 1041 is extended to May 15, 1919. Partnerships and Corporations With Fiscal Year Ending in 1918.— Partnerships and corporations having a fiscal year ending in 1918, which have secured an extension of time to file returns are granted an exten- sion to March 15, 1919, for filing such returns. (See T. D. 2796.) Taxpayers in Hawaii. — Sixty days' extension of time from March 15, 1919, for filing such returns. ACCOUNTING PERIOD. Accounting Period. — The return of a taxpayer is made and his income computed for his "taxable year," which means his fiscal year, or the calendar year if he has not established a fiscal y^ar. The term "fiscal year" means an accounting period of 12 months ending on the list day of any month other than December. No fiscal year will, how- ever, be recognized unless before its close it was definitely established as an accounting period by the taxpayer and the books of such taxpayer were kept in accordance therewith. The taxable year 1918 is the calendar year 1918, or any fiscal year ending during the calendar year 1918. See section 200 (Definitions — Manual, Law P. 52, L. 27) of the statute and article 1533 (Taxable Year, Withholding Agent and Paid). A taxpayer shall make his return for the taxable year 1918 on the basis of his an- nual accounting period (fiscal or calendar year), even though a part of such accounting period was included in a period for which he had pre- viously made return. Thus an individual whose accounting period ended June 30, 1918, and who had previously made a return for the calendar year 1917, should make a complete return in accordance with the provisions of the statute for the twelve months ending June 30, 1918. For adjustments to be made with respect to iweome included in both returns see section 205 (Fiscal Year with Different Rates — Manual, Law P. 55, L. 44) of the statute and articles 1622 and 1624, which de- fines fiscal year of corporation ending in 1918, and the fiscal year of an individual ending in 1918. A taxpayer making his first return for income tax shall make such return on the basis of his annual ac- counting period. See section 226 (Returns When Accounting Period Changed — Manual, Law P. 72, L. 43) of the statute and article 431. Except in the cases of a return for the taxable year 1918 and of 12 a first return for income tax a taxpayer shall make his return on the basis of the new accounting period in accordance with the requirements taxable year immediately preceding unless, with the approval of the Commissioner, he has changed the basis of computing his net income. Art. 25, Reg. 45. (See Manual, pag-e 256) Change in Accounting Period. — If a taxpayer changes his account- ing period, he shall as soon as possible give written notice to the collector for transmission to the Commissioner of such change and his reasons therefor. The Commissioner will not approve a change of the basis of computing net income unless such notice is given (a) at least 30 days before the due date of the taxpayer's return on the basis of his existing taxable year and (b) at least 30 days before the due date of his return on the basis of the proposed taxable year. If the change in the basis of computing the net income of the taxpayer is approved by the Commissioner, the taxpayer shall thereafter make his returns upon the basis (fiscal or calendar year) upon which he made his return for the of section 226 (Returns When Accounting Period Changed — Manual, Law P. 72, L. 43) of the statute and his net income shall be computed as therein provided. See article 431 (Returns When Accounting Period Changed). Art. 26, Reg. 45. COMPENSATION. (See "Standard Manual," pagfe 207, 1179) Compensation for Personal Services. — Where no determination of compensation is had until the completion of the services, the amount received is ordinarily income for the calendar year of its determination or receipt. Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price will be pre- sumed to be the fair value of the compensation received. Commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, retired pay of federal and other officers, and pensions or retiring allowances paid by the United States or private persons, are income to the recipients; as are also marriage fees, baptismal offerings, and so-called gifts and contributions received by a clergyman, evangelist or religious worker for services , rendered. Premiums paid by an employer on accident or health policies in favor of his employees as additional compensation of such employees are income to the employees. Compensation paid an employee of a cor- poration in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. See further articles 105-108, which deals with the subject more in full. Art. 32, Reg. 45. CONTRACTS. (New Matter.) Long Term Contracts. — Persons engaged in contracting operations, who have uncompleted contracts, in some cases perhaps running for periods of several years, will be allowed to prepare their returns so that the gross income will be arrived at on the basis of completed work; that is, on jobs which have been finally completed any and all moneys received in payment will be returned as income for the year in which the work was completed. If the gross income is arrived at by this method, the 13 deduction from gross income should be limited to the expenditures made on account of such completed contracts. Or the percentage of profit from the contract may be estimated on the basis of percentage of completion, in which case the income to be returned each year during the performance of the contract will be computed upon the basis of the expenses incurred on such contract during the year; that is to say, if one-half of the esti- mated expenses necessary to the full performance of the contract are in- curred during one year, one-half of the gross contract price should be re- turned as income for that year. Upon the completion of a contract if it is found that as a result of such estimate or apportionment the income of any year or years has been overstated or understated, the taxpayer should file amended returns for such year or years. Art. 33, Reg. 45. REAL ESTATE. Deferred Payments. (See Manual, p. 198, 1145.) Sale of Real Estate Involving Deferred Payments. — Deferred pay- ments sales of real estate ordinarily fall into two classes when con- sidered with respect to the terms of sale, as follows: (1) Installment transactions, in which the initial payment is relatively small (generally less than one-fourth of the purchase price) and the de- ferred payments usually numerous and of small amount. .They include (a) sales where there is immediate transfer of title when a small initial payment is made, the seller being protected by a mortgage or other lien as to deferred payments, and (b) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the agreed installments have been paid. (2) Deferred payment sales not on the installment plan, in which there is a substantial initial payment (ordinarily not less than one- fourth of the purchase price), deferred payments being secured by a mortgage or other lien. Such sales are distinguished from sales on the installment plan by the substantial character of the initial payment and also usually by a relatively small number of deferred payments. In determining how these classes shall be treated in levying the income tax, the question in each case is whether the income to be reported for taxation shall be based only on amounts actually received in a taxing year, or on the entire consideration made up in part of agi'ee- ments to pay in the future. Art. 41, Reg. 45. (See Manual, p. 198, 1T45.) Deferred Payment Sales of Real Estate Not on the Installment Plan. — In class (2) in the nevt to the last article the obligations as- sumed by the buyer are much better secured because of the margin afforded by the substantial first payment, and experience shows that the greater number of such sales are eventually carried out accord- ing to their terms. These obligations for deferred payments are therefore to be regarded as equivalent to cash, and the profit indi- cated by the entire consideration is taxable income for the year in which the initial payment was made and the obligations assumed. If the buyer defaults and the seller regains title to the land by agree- ment or process of law, retaining payments previously made, he may deduct from his gross income as a loss such proportion of the de- 14 faulted payments as was previously returned as income, provided that so much of the selling price previously received as has not been reported as income is accounted for in the inventory of the property by deduction from the original cost. Art. 43, Reg. 45. (This ruling: clears up the ciuestion of the non-taxability of officers and employees of a State or political subdivision, oooasioned by the omission of this specific exemption from the new Act.) What Excluded From Gross Income. — Gross income excludes the items of income specifically exempted by the statute and also certain other kinds of income by statute or fundamental law free from tax. Compensation paid its officers and employees by a State or political subdivision thereof, fees received by notaries public commissioned by States, and the income of State workmen's compensation insurance funds established by State statutes, are not taxable. Employees of universities receiving salaries paid in part or in whole from funds available under the Smith-Lever Act of May 8, 1914, who are officers or employees of a State, are not required to return as taxable incomes the salaries so received. Since June 25, 1918, no assessment of any federal tax may be made on any allotments, family allowances, compensation, or death or disability insurance payable under the War Risk Insurance Act of September 2, 1914, as amended, even though the benefit accrued before that date. Any return filed as the basis of an assessment to be made after June 25, 1918, should not include such benefits as part of taxable income. Art. 71, Reg. 45. INSURANCE (The followtugr parag'raph corrects ^392 of the Standard Manual of Income Tax.) Proceeds of Insurance. — (a) Upon the death of an insured the pro- ceeds of his life insurance policies, whether paid to his estate or to in- dividual beneficiaries (but not if paid to a corporation or partnership) are excluded from the gross income of the beneficiary, (b) During his life only so much of the amount received by an insured under life, en- dowment, or annuity contracts as represents a return, without interest, of premiums paid by him therefore is excluded from his gross income, (c) Whether he be alive or dead, the amounts received by an insured or his estate or other beneficiaries through accident or health insurance or under workmen's compensation acts as compensation for personal in- juries or sickness are excluded from the gross income of the insured, his estate and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly ex- cluded from the gross income of the individual injured or sick, if living, or his estate or other beneficiaries entitled to receive such damages, if dead. Art. 72, Reg. 45. EXEMPTIONS AND CREDITS. Personal and Family Exemptions — ^New Ruling Revoked. — By a ruling issued March 11, 1919, the instructions as to sub-dividing of personal and family exemption (provided for in paragraph 3, section 6 of in- structions on the new forms for individual returns) are made void. Under this ruling a person if married and living with wife (or hus- 15 band) on the last day of the year is allowed an exemption of $2,000. A taxpayer who, though unmarried, supported in his household on Dec. 31, one or more relatives who were dependent upon him, may claim th<» $2,000 exemption. Single persons, also married persons who were liv- ing apart on Dec. 31, and who have no dependents, may claim the $2,000 exemption. Additional exemption of $200 is allowed for each person who was dependent on the taxpayer on Dec. 31, if the dependent is un- der 18 years of age or is mentally or physically incapable of self-sup- port. w DEDUCTIONS. Expenses. (Standard Manual of Income Tax, pagre 247, If 212.) Contributions Deductible.— Gifts by individuals to War Chest, War Community, church and missionary funds are allowable deductions. AMORTIZATION. (An admirable exposition of the princinles of the Act relatinsr to.) Property the Cost of Which May Be Amortized. — The taxpayer may make a reasonable deduction from gross income not in excess of a sura sufficient to extinguish the cost of buildings, machinery, equip- ment, or other facilities constructed, erected, installed, or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war. A deduction on account of amor- tization will be allowed only in the case of enterprises or projects falling within the class of activities contributing to the prosecuton of the present war. See also articles 1601-1603, which give the scope of net losses and ailowance of net loss. Art. 181, Reg. 45. Cost Which May Be Amortized. — The total amount to be extin- guished by amortization is the difference between the original cost to the taxpayer of the property and its value to the taxpayer at the close of the amortization period (a) for sale or (b) for use, immediate or pros- pective, as part of the plant or equipment of a going business, whichever value is the larger, less any amounts otherwise deducted or deductible for wear, tear, obsolescence, and loss. In the case of property the con- struction or installation of which was commenced before April 6, 1917, and completed subsequently to that date, amortization will be allowed with respect only to the cost inciwred on or after April 6, 1917. Art. 182, Reg. 45. Amortization Period. — The period over which the deduction allowed is to be spread, or during which it is to be amortized, is the esti- mated period between the date of acquisition or completion of the property and the date upon which either (a) the property will become useless or (b) the taxpayer will be al)le to earn by operation or use a normal return upon the unamortized cost, whichever date is the earlier. Art. 183, Reg. 45. Method of Amortization. — The proportion of allowable deduction to be allocated to each taxable year of the amortization period will be, as nearly as may be determined, the same proportion which tt'* net income or profit derived during such taxable year bears to the entir« net income or profit derived during the amortization period from the operation or use of such property. Art. 184, Reg. 45. 16 Additional Requirements for Amortization. — Claims for amortization must be unmistakably differentiated in the return from all other claims for wear, tear, obsolescence, and loss. No such claim will be allowed unless it is reflected in any accounts submitted by the taxpayer to stockholders and in any credit statements by the taxpayer to banks, and is given full effect on his financial books of account. If Government or other contracts taken by the taxpayer contained recognition of amor- tization as an element in the cost of production, copies of such contracts shall be filed with the taxpayer's return, together with a statement and description of any sums received on account of amortization and the basis upon which they were determined. In any case in which an allowance has been made for amortization of cost the taxpayer will not be allowed to restore to his invested capital for the purpose of the war profits and excess profits tax anv portion of the amount covered by such allowance. Art. 185, Reg. 45. Redetermination of Amortization Allowance. — Redetermination of the deduction allowed on account of amortization may, or at the request of the taxpayer shall, be made by the Commissioner at any time within three years after the termination of the present war, and if as a result of an appraisal or from other evidence it is found that the deduction originally allowed was incorrect, the amount of tax due for each taxable year during the amortization period will be adjusted by additional assess ment or by refund. Art. 186, Reg. 45. Information to Be Furaished by Taxpayer. — To obtain the benefit of this provision of the statute the taxpayer must establish to the satisfaction of the Commissioner that the entire deduction claimed and the proportion claimed for any particular year are reasonable. The taxpayer shall also submit a supplementary statement setting forth the following information: (a) a description of the property in reasonable detail; (b) the date or dates on which the property was acquired, and from whom, or, if constructed, erected, or installed by the taxpayer, the dates on which such construction, erection, or installation was begun and completed; (c) evidence establishing the intention of the taxpayer on and after April 6, 1917, or on and after the date of acquisition or the date of beginning construction, erection, or installation, to devote such property or vessels to the production of articles (or, in the case of vessels, the transportation of articles or men) contributing to the prosecution of the present war; (d) the cost of construction, erection, installation, or acqui- sition; (e) the value of the property after termination of the amortiza- tion period; (f) a segregation of property which will have no value (except for salvage) following the amortization period, and of property which will have value after such period for use in a going concern or business; (g) all deductions from gross income otherwise taken or claimed with respect to such property; (h) the computation by which the total amount to be extinguished by amortization was determined; and (i) the computation by which the proportion of the amortization charge claimed as deduction in the taxable year for which return is being made was determined. Art. 187, Reg. 45. 17 DEPLETION. DEFIiETION OF MINES, OUm AND GAS WEI.I^S, OTHER NATURAl^ DEPOSITS AND TIMBER. (Compare Manual, p. 243, TJ 198.) (Items of Depletion amplify paragraphs in Manual.) Depletion of Mines, Oil and Gas Wells. — A reasonable deduction from gross income for the depletion of natural deposits and for the depreciation of improvements is permitted, based (a) upon cost, if acquired after February 28, 1913, or (b) upon the fair market value as of March 1, 1913, if acquired prior thereto, or (c) upon the fair market value within 30 days after the date of discovery in the case of mines, oil and gas wells discovered by the taxpayer after February 8, 1913, where the fair market value is materially disproportionate to the cost. The essence of this provision is that the owner of such property, whether it be a leasehold or freehold, shall secure through an aggregate of annual depletion and depreciation deductions a return of the amount of capital invested by him in the property, or in lieu thereof an amount equal to the fair market value as of March 1, 1913, of the properties owned prior to that date, or an amount equal to the fair market value within 30 days after the date of discovery of mines, oil or gas wells discovered by thv? taxpayer on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost; plus in any case the subsequent cost of plant and equipment (less salvage value), and ^ underground and overground development, which is not chargeable to current operating expense, but not including land values for purposes other than the extraction of minerals. Operating owners, lessors, and lessees are entitled to deduct an allowance for depletion, but a stockholder in a mining or oil or gas corporation is not. Art. 201, Reg. 45. Capital Recoverable Through Depletion Allowance in the Case of Owner. — In the case of an operating owner in fee or a lessor the capital remaining in any year recoverable through depletion allowances; is the sum of (a) the cost of the property, or its fair market value as of March 1, 1913, or its fair market value within 30 days after discovery,, as the case may be, plus (b) the cost of subsequent improvements and development not charged to current operating expenses, but minus (c)i deductions for depletion which have or should have been taken to date,, and (d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion. The value of the surface of the land should be taken into consideration. In no case, how- ever, may a lessor take deductions for depletion in any year during the continuance of the lease in excess of the royalties payable thereimder for such year, nor may he include in his capital recoveral3le through such an allowance any part of development costs not borne by the lessor. Art. 202, Reg. 45. Capital Recoverable Through Depletion Allowance in the Case of Lessee. — In the case of a lessee the capital remaining in any year recoverable through depletion allowances is the sum of (a) the cost of the leasehold, or its fair market value as of March 1, 1913, or its fair >^ market value within 30 days after discovery, as the case may be, plus (b) the cost of subsequent improvements and development not charged to current operating expenses, but minus (c) deductions for depletion which have or should have been taken to date, and (d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion. Any annual or periodical rents or royalties sup- 18 plementing the bonus or other amount paid for the lease may be charged to current operating expenses or to capital account, and in the latter event will form part of the capital returnable through deductions for depletion. Art. 203, Reg. 45. Apportionment of Deductions Between Lessor and Lessee. — As the value of property comprehends the interests of both lessor and lessee, no computation, for the purpose of depletion allowances, of the value of these interests separately as of any date which combined exceeds the value of the property in fee simple will be permitted. The same principle applies to holders of fractional interests. If the aggregate deduction claimed is deemed excessive, the Commissioner may request the owner or lessee to show that the valuation claimed does not exceed the fair market value of the property at a specified date determined in the manner explained in article 206. The lessor and lessee shall, with the approval of the Commissioner, equitably apportion the allowance in the light of the peculiar conditions in each case and on the basis of their respective interests therein. To the return of every taxpayer claiming an allowance for depletion in respect of (a) property in which he owns a fractional interest only or (b) a leasehold or (c) property subject to a lease, there shall be attached a statement setting forth the name and address and the precise nature of the holdings of each person interested in the property. Art. 204, Reg. 45. Determination of Cost of Deposits. — In any case in which a deple- tion or depreciation deduction is computed on the basis of the cost or price at which any mine, mineral deposit, mineral rights, or leasehold was acquired, the owner or lessee will be required upon request of th;3 Commissioner to show that the cost or price at which the property was bought was fixed for the purpose of a bona fide purchase and sale, by which the property passed to an owner, in fact as well as in form, dif- ferent from the vendor. No fictitious or inflated cost or price will be permitted to form the basis of any calculation of a depletion or depre- ciation deduction, and in determining whether or not the price or cost at which any purchase or sale was made represented the actual market value of the property sold, due weight will be given to the relationship or connection existing between the person selling the property and the buyer thereof. Art. 205, Reg. 45. Determination of Fair Marlcet Value of Deposits. — ^Where the fair market value of the property at a specified date in lieu of the cost thereof is the basis for depletion and depreciation deductions, such value must be determined, subject to approval or revision by the Commissioner, by the owner of the property in the light of the conditions and circum- stances known at that date, regardless of later discoveries or develop- ments in the property or in methods of mining or extraction. The value sought should be that established assuming a transfer between a willing seller and a willing buyer as of that particular date. No rule or method of determining the fair market value of mineral property is prescribed, but the Commissioner will lend due weight and consideration to any and all factors and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties, market value of stock or shares, royalties and rentals, value fixed by the owner for purposes of the capital stock tax, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property was in question, the amount at which the property may have been inventoried in probate court, disinterested appraisals by approved methods, and other factors. Art. 206, Reg. 45. 19 Revaluation of Deposits Not Allowed. — The cost of the property or its fair market value at a specified date, as the case may be, plus subsequent charges to capital account not deductible as current expense, will be the basis for determining the depletion and depreciation deduc- tions for each year during the continuance of the ownership under which the fair market value or cost was fixed, and during such ownership there can be no revaluation for the purpose of this deduction. This rule will not forbid the redistribution of the capital account over the esti- mated number of units remaining in the property in accordance with either of the next two articles. Art 207, Reg. 45. Determination of Quantity of Ore in Mine. — Every taxpayer claim- ing a deduction for depletion will be required to estimate with re- spect to each separate property the* total units (tons, pounds, ounces, or other units) of ores and minerals reasonably known or on good evidence believed to have existed in the ground on March 1, 1913, or on the date of acquisition of the property, or within 30 days after the date of discovery, as the case may be. In estimating the total units of ores and minerals for purposes of depletion the property must be considered in the condi- tion in which it was on March 1, 1913, or the date of acquisition, or within 30 days after the date of discovery, but if subsequently during the owner- ship of the taxpayer making the return additional recoverable mineral de- posits have been discovered or developed which were not taken into ac- count in estimating the number of units for purposes of depletion, or if it shall be discovered by working, development, or exploration that ground previously estimated to contain commercially recoverable mineral is barren or contains only commercially unworkable mineral, a new estimate of the recoverable units of ores or minerals shall be made and v/hen made shall thereafter constitute a basis for depletion. In the selection of the unit of estimate the custom or practice applicable to the type of mineral de- posit and the character of the operations thereon should be considered. The estimate of the recoverable units of ores or minerals for the pur- pose of depletion shall include (a) the ores and minerals "in sight," "blocked out," "developed," or "assured," in the usual or conventional meaning of these terms in respect of the type of deposit, and may also include (b) "prospective" or "probable" ores and minerals (in the same sense), i. e., ores and minerals that are believed to exist on the basis of good evidence, although not actually known to occur on the basis of existing developments, but "probable" or "prospective" ores and minerals may be computed for purposes of depletion only as extensions of known deposits into undeveloped ground. Art. 208, Reg. 45. Determination of Quantity of Oil in Ground. — In the case of either an owner or lessee it will be required that an estimate, subject to the approval of the Commissioner, shall be made of the probable recover- able oil contained in the territory with respect to which the investment is made as of the time of purchase, or as of March 1, 1913, if acquired prior to that date, or within 30 days after the date of discovery, as the case may be. The oil reserves must be estimated for all undeveloped proven land as well as producing land. If information subsequently ob- tained clearly shows the estimate to have been materially erroneous, it may be revised with the approval of the Commissioner. Art. 209, Reg. 45. Computation of Allowance for Depletion of Mines and Oil Wells. — When the cost or value as of March 1, 1913, or within 30 days after the date of discovery of the property shall have been determined, and the number of mineral units in the property as of the date of acquisition or valuation shall have been estimated, the division of the former amount 20 by the latter figure will give the unit value for purposes of depletion, and the depletion allowance for the taxable year may be computed by multiplying such unit value by the number of units of mineral extracted during the year. If, however, proper additions are made to the capital account represented by the original cost or value of the property, or un- foreseen extraordinary circumstances necessitate a revised estimate of the number of mineral units in the ground, a new unit value for purposes of depletion may be found by dividing the capital account at the end of the year, less deductions for depletion to the beginning of the taxable year «vhich have or should have been taken, by the number of units in the ground at the beginning of the taxable year. This number, unless a re- vision of the original estimate has been necessary, will equal the number of units in the ground at the date of original acquisition or valuation less the number extracted prior to the taxable year. If, however, a recalcula- tion is needed, the number of units at the beginning of the year will be the sum of the gross production of the year and the estimated mineral reserves in the property at the end of the year. Art. 210, Reg. 45. Computation of Allowance for Depletion of Gas Wells. — On account of the peculiar condition surrounding the production of natural gas it will be necessary to compute the depletion allowances for gas properties by methods suitable to the particular cases in question and acceptable to the Commissioner. Usually, the depletion of natural gas properties should be computed on the basis of decline in closed or rock pressure, taking into account the effects of water encroachment and any other modifying factors. The following methods may also be used. In many fields more or less additional evidence on depletion is to be had from such considerations as (a) details of production (performance record of well or property) ; (b) decline in open flow capacity; (c) comparison with life histories of similar wells or properties, particularly those now exhausted; and (d) size of reservoir and pressure of gas. In using the closed pressure decline method, the pressure at which wells are aban- doned may be subtracted from the observed pressures in order to determine the correct percentages. The estimates for properties in certain fields are subject to some further correction for various reasons, among which are (a) irregular encroachment of water or oil which reduces the rate of de- cline in pressure; (b) even though there be no encroachment of oil or water, the size of the reservoir remaining fixed, the pressure decline aoes not follow in exact and precise proportion to the amount withdrawn; and (c) as a rule less gas is marketed for 50 pounds of decline in the early history of the well than during the decline of a siniilar amount in the later history or after the pressure has become low. The gas producer will be expected to compute the depletion as accurately as possible and submit with his return a description of the method by which the computation was made. The following formula, in which the units of gas are pounds per square inch of closed pressure, may be used and is recommended: the quotient of the capital account recoverable through depletion allowances to the end of the taxable year, divided by the sum of the pressure at the beginning of the year less the sum of the pressures at the time of ex- pected abandonment (which quotient is the unit cost), multiplied by the sum of the pressures at the beginning of the taxable year plus the sum of the pressures of new wells less the sum of the pressures at the end of the tax year, equals the depletion allowance. Art. 211, Reg. 45. 21 Procedure for Computation of Depletion of Gas Wells in the Future. — ^A closed pressure reading of a gas well which has been produc- ing, or is near gas wells that have been producing, is reduced to a greater or less extent, depending on its location and the length of time it has been closed in. To get readings most useful for tax purposes it is necessary to record the len^h of time the well has been closed and to show how the pressure built up during this period. Several readings at successive times will tend to indicate the point at which the pressure becomes approxi- mately stationary, that is, the point at which the closed pressure ap- proaches as nearly as possible the maximum pressure which would be shown if the well and all others in the pool were closed for several months. The length of time required varies of course with the character of the sand, position of the packer, the location of the well with reference to other wells, the limits of the pool, and other considerations. The depth of the well, diameter of tubing, and line pressure when the well was shut off should be noted. Beginning with 1919, closed pressure readings of representative wells, if not of all wells, must be carefully made and kept. In order to standardize pressure readings, the well should remain closed until such time as the pressure will not build up more than 1 per cent of the total pressure in 10 minutes. Ordinarily 24 hours will suffice for this purpose, but some wells will need to remain closed for a longer period. If there is any water in the well it should be blown or pumped off before the well is closed. Since readings at the exact end of the fiscal year will ordinarily not be available, the pressure of that date may be obtained by interpolation or extrapolation, or in certain cases readings taken regularlj in September or some other month may be applicable to the end of the fiscal or tax year. As a general rule September closed pressure readingi taken regularly furnish the best indication of depletion and it is recom* mended that such readings be made with especial regularity and care. Where interpolated readings are used the data from which they are ob- tained should be given. Gauges should be of appropriate capacity consid- ering the pressure to be measured and should be frequently tested. Record should be kept of the numbers of the gauges, dates the gauges were tested, names of men testing, and other significant details. Art. 212, Reg. 45. Computation of Allowance Where Quantity of Oil or Gas Uncertain. — If for any reason the quantity of oil or gas on the property can not be determined with any degree of certainty, thus precluding the use of the unit cost method of computing depletion, the depletion deduction may be computed in accordance with some other method or rule satis- factory to the Commissioner. In case any method other than the unit cost method is proposed to be used by the taxpayer in computing his de- pletion allowance, a full description of the method used must be submitted with the return, together with a summary of the figures or calculations pertaining to such computation. Art. 213, Reg. 45. Computation of Depletion Allowance for Combined Holdings of Oil and Gas Wells. — (1) Oil Properties. — The recoverable oil belonging to the taxpayer shall be estimated separately on the smallest unit on which data are available, such as individual wells or tracts, and these added together into a grand total to be applied to the total capital account returnable through depletion. The capital account shall include the cost or value, as the case may be, of all oil or gas leases or rights within the United States and its possessions, plus all incidental costs of development not charged as expense nor returnable through depreciation. The unit value of the total recoverable oil or gas is the quotient obtained by divid- ing the total capital account recoverable through depletion by the total 22 estimated recoverable oil or gas. This unit multiplied by the total number of units of oil or gas produced by the taxpayer during the taxable year from all of the oil and gas properties will determine the amount which may be allowably deducted from the gross income of that year. This total depletion allowance divided by the total capital account returnable through depletion will give the percentage of depletion for the taxable year. This percentage must be applied to the capital account returnable through depletion of each separate leasehold and fee property included in the holdings of the taxpayer to find the proper amount deductible for depletion from the capital account of each tract at the end of the taxable year. (2) Gas Properties. — In the case of the gas properties of a taxpayer the depletion allowance for each pool may be computed by using the com- bined capital account returnable through depletion of all the tracts of gas land owned by the taxpayer in the pool and the average decline in rock pressures of all the taxpayer's wells in such pool as in the formula given in article 211. The total allowance for depletion of the gas properties of the taxpayer will be the sum of the amounts computed for each pool. Art. 214, Reg. 45. Depletion of Mine Based on Advance Royalties. — Where the owner has leased a mining property for a term of years with a require- ment in the lease that the lessee shall mine and pay for annually a specified number of tons or other agreed units of measurement of such mineral, or shall pay annually a specified sum of money which shall be applied in payment of the purchase price or agreed royalty per unit of such mineral whenever the same shall thereafter be mined and removed from the leased premises, the value in the ground, to the lessor for pur- poses of depletion of the number of units so paid for in advance of mining will constitute an allowable deduction from the gross income of the year in which such payment or payments shall be made; but no deduction for depletion by the lessor shall be claimed or allowed in any subsequent year on account of the mining or removal in such year of any ore or mineral so paid for in advance and for which deduction has been once made. If for any reason any such mining lease shall be terminated before the ore or mineral therein which has been paid for in advance has been niined and removed, and the lessor repossesses the leased property, an amount equal to the aggregate deductions for depletion allowed in respect of ore or mineral not mined and removed by the lessee, but still in the ground, will be deemed income to the lessor and will be returned as such ior the year in which the property is repossessed. Art. 215, Reg. 45. Depletion Account on Books. — Every taxpayer claiming and making a deduction for depletion and depreciation of mineral property shall keep accurate ledger accounts in which shall be charged the fair market value as of March 1, 1913, or within 30 days after the date of discovery, or the cost, as the case may be, (a) of the property, and (b) of the plant and equipment, together with such amounts expended for development of the property or additions to plant and equipment since that date as have not been allowed as expense in his returns. These ac- counts shall be credited with the amount of the depreciation and deple- tion deductions claimed and allowed each year, or the amount of the de- preciation and depletion shall be credited to depletion and depreciation reserve accounts, to the end that when the sum of the credits for deple- tion and depreciation equals the value or cost of the property, plus the amount added thereto for development or additional plant and equipment, less salvage value of the physical property, no further deduction for de- pletion and depreciation with respect to the property will be allowed. 23 If dividends are paid out of a depletion or depreciation reserve, the stock- holders must be expressly notified that the dividend is a return of capital and not an ordinary dividend out of profits. See article 1548 of Reg. 45, which provides in part that any distribution made from depletion or depreciation reserve is considered as a liquidating dividend and not as a part of surplus out of which ordinary dividends may be paid. Art. 216, Reg. 45. Statement to be Attached to Return Where Depletion of Mine Claimed. — To the return of the taxpayer claiming a deduction for depletion or depreciation or both there should be attached a statement setting out: (a) whether the owner is a fee owner or lessee or both; (b) a description of the property owned in fee, if any, and a description of the leasehold property, if any, including the date of acquisition and the date of expiration of the lease; (c) the fair market value as of March 1, 1913, or within 30 days of the date of discovery, or the cost, as the case may be, of the property owned in fee and the leasehold property, to- gether with a statement of the precise method by which the value or the cost of freehold and leasehold property was determined; (d) the estimated nimiber of units of mineral or ore at the date of acquisition or of valua- tion in the property owned in fee and in the leasehold property separately, gether with a statement of the precise method by which the value or the case the number of units of mineral or ore tor purposes of depletion; (e) the amount of capital applicable to each unit; (f) the number of units removed and sold during the year for which the return was made; (g) the total amount deducted on account of depletion and on account of depreciation, stated separately, up to the taxable year during the owner- ship of the taxpayer; and (h) any other data which would be helpful in determining the reasonableness of the depletion and depreciation deduc- tions claimed in the return. Art. 217, Reg. 45. Statement to be Attached to Return Where Depletion of Oil or Gas Claimed. — To each return made by a person owning or operating oil or gas properties, there should be attached a statement showing for each property the following information, which may be given in the form of a table, if desired, by taxpayers owning more than one property: (a) the fair market value of the property (exclusive of machinery, equip- ment, etc., and the value of the surface rights) as of March 1, 1913, if acquired prior to that date; or the fair market value of the property within 30 days after the date of discovery; or the actual cost of the property, if acquired subsequently to February 28, 1913, and not covered by the foregoing clause; (b) how the fair market value was ascertained, if the property came under the first or second head under (a) ; (c) the estimated quantity of oil or gas in the property at the time that the value or cost was determined; (d) the name and address of the person making the estimate and the manner in which this estimate was made, including a summary of the calculations; (e) the amount of capital applic- able to each unit (this being found by dividing the value or cost, as the case may be, by the estimated number of units of oil or gas in the prop- erty at the time the value or cost was determined) ; (f) the quantity of oil or gas produced during the year for which the return is made (in the case of new properties it is desirable that this information be furnished by months) ; (g) the number of acres of producing and proven oil or gas land; (h) the number of wells producing at the beginning and end of the taxable year; (i) the date of completion of wells finished during the taxable year; (j) the date of abandonment of all wells abandoned during the taxable year; (k) a property map nhowing the location of the property and of the producing and abandoned wells, dry holes, and proven 24 oil and gas land; (1) the average gravity of the oil produced on the tract; (m) the number of pay sands and average thickness of each pay sand or zone on the property; (n) the average depth to the top of each of the different pay sands; (o) any data regarding change in operating condi- tions, such as flooding, use of compressed air, vacuum, shooting, etc., which have a direct effect on the production of the property; (p) the monthly or annual production of individual wells and the initial daily production of new wells (this is highly desirable information and should be furnished wherever possible) ; (q) (for the first year in which the above informa- tion is filed for a property which was producing prior to the taxable year covered by the above statement the following information must be fur- nished) annual production of the tract or of the individual wells, if the latter information is available, from the beginning of its productivity to the beginning of the taxable year for which the return was filed; the average number of wells producing during each year; and the initial daily production of each well; and (r) any other data which will be helpful in determining the reasonableness of the depletion deduction. When a tax- payer has filed adequate maps with the Commissioner he may be relieved of filing further maps of the same properties, provided all additional in- formation necessary for keeping the maps up to date is filed each year. This includes records of dry holes, as well as producing wells, together with logs, depth, and thickness of sands, location of new wells, etc. By "production" is meant gross production of all oil or gas recovered from the wells and tanked or utilized. In those leases where no account is kept of the oil or gas used for fuel, the gross production will necessarily be that remaining after the fuel used in the property has been taken out. In cases of this kind an estimate of the fuel used from each tract should be given for each year. Art. 218, Reg. 45. Discovery of Mine. — The discovery of a mine or a natural deposit of mineral, whether it be made by an owner of the land or by a lessee, shall be deemed to mean (a) the bona fide discovery of a com- mercially valuable deposit of ore or mineral of a value materially in excess of the cost of discovery in natural exposure or by drilling or -Dther exploration conducted above or below ground, or (b) the development and proving of a mineral or ore deposit which has been abandoned or ap- parently worked out, or sold, leased, or otherwise disposed 02, by an owner or lessee prior to the development of a body of ore or mineral of sufficient size, quality, and character to determine it, in connection with the physical and geological conditions of its occurrence, to be a mineable deposit of ore or mineral having a value materially in excess of the cost of the proving and development. In determining whether a discovery has been made the Commissioner will take into account the peculiar conditions of the case, and every taxpayer claiming the value of a mineral deposit on the date of discovery or within 30 days thereafter for purposes of de- pletion will be required to attach to his return a statement setting forth the conditions and circumstances of the discovery and the size, character, and location of the deposit, together with the cost of discovery, its value, and the precise method used in determining the value. Art. 219, Reg. 45. Discovery of Oil and Gas Wells. — In order to take advantage of his discovery on or after March 1, 1913, of oil or gas wells, the tax- payer must show (a) that the tract for which such valuation is claimed was not as to the particular sand or zone discovery of which is claimed proven oil land at the time the so-called discovery was made, proven oil land being that which has been shown by finished wells, supplemented by geologic data, to be such that other wells drilled thereon are practically 25 certain to be commercial producers; (b) that the discovery was a bona fide discovery of a commercial well of oil or gas or both of these substances on the property in question, a commercial well being one whose production is such as to offer a reasonable expectation of at least returning the capital invested in such well through the sale of the oil or gas or both derived therefrom during its economic life; and (c) that the fair market value of the property was materially in excess of the cost. Art. 220, Reg. 45. Proof of Discovery of Oil and Gas Wells. — In order to meet the requirements of the preceding article to the satisfaction of the Com- missioner, the taxpayer will be required, among other things, to submit the following with his return: (a) a map of convenient scale, showing the location of the tract and discovery well in question and of the nearest pro- ducing well, and the development for a radius of at least 3 miles from the tract in question, both on the date of discovery and on the date when the fair market value was set; (b) a certified copy of the log of the discovery well, showing the location, the date drilling began, the date of completion and beginning of production, the formations penetrated, the oil, gas, and water sands penetrated, the casing record, and any other information tend- ing to show the condition of the well on the date the discovery was claimed; (c) the logs of enough other wells drilled prior to the date of completion of the discovery in the vicinity of the discovery well to con- vince the Commissioner that the sand or zone discovery of which is claimed was not known prior to the so-called discovery; (d) a sworn record of production, clearly proving the commercial productivity of the discovery well; (e) a sworn copy of the records, showing the cost of the property; and (f) a full explanation of the method of determining the value on the late of discovery or within 30 days thereafter, supported by satisfactory evidence of the fairness of this value. Art. 221, Reg. 45. Charges to Capital and to Expense in the Case of Mine. — In the case of mining operations all expenditures for plant equipment, development, rent, and royalty prior to production, and thereafter all major items of plant and equipment, shall be charged to capital account for purposes of depletion and depreciation. After a mine has been developed and equipped to its normal and regular output capacity, however, the cost of additional minor items of equipment and plant, including mules, motors, mine cars, trackage, cables, trolley wire, fans, small tools, etc., necessary to maintain the normal output because of increased length of haul or depth of working consequent on the extraction of mineral, and the cost of replacement of these and similar minor items of worn-out and discarded blant and equipment, may be charged to current expense of operations. Art. 222, Reg. 45. Charges to Capital and to Expense in the Case of Oil and Gas Wells. — Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of the property, drilling of wells, building of pipe lines, and development of the property may at the option of the taxpayer be deducted as an operating expense or charged to the capital account returnable through depletion. If in exercising this option the taxpayer charges these incidental expenses to capital ac- count, in so far as such expense is represented by physical property, it may be taken into account in determining a reasonable allowance for de- preciation. The cost of drilling nonproductive wells may be at the option of the operator be deducted from gross income as an operating expense or charged to capital accounts returnable through depletion and depreciation as in the case of productive wells. Casing -head -gas contracts have been 26 construed to be tangible assets and their cost may be added to the capital account returnable through depletion, following the rate set by the oil wells from which the gas is derived, or, if the life of the contract is shorter than the reasonable expectation of the life of the wells furnishing the gas, the capital invested in the contract may be written off through yearly allow- ances equitably distributed over the life of the contract. All oil pro- duced during the taxable year, whether sold or unsold, must be considered in the computation of the depletion allowance for the taxable year. Art. 223, Reg. 45. Depreciation of Improvements in the Case of Mine. — It shall be optional with the taxpayer, subject to thie approval of the Commissioner, (a) whether the cost or value of the mining property, including ores and minerals, plant and equipment, and charges and additions to capital ac- count not charged to expense and deducted as expense on the returns of the taxpayer, shall be recovered at a rate established by current exhaustion of mineral, or (b) whether the cost or value of the mineral and charges to capital account of expenditures other than for physical property shall be recovered by appropriate charges based on depletion and the cost or value of plant and equipment shall be recovered by reasonable charges for de- preciation calculated by the usual rules for depreciation qj according to the peculiar conditions of the taxpayers' case by a method satisfactory to the Commissioner. Nothing in these regulations shall be interpreted to mean that the value of a mining plant and equipment may be reduced by de- preciation or depletion deductions to a sum below the value of the salvage when the property shall have become obsolete or shall have been abandoned for the purpose of mining, or that any part of the value of land for pur- poses other than mining may be recoverable through depletion or de- preciation. Art. 224, Reg. 45. Depreciation of Improvements in the Case of Oil and Gas Wells. — Both owners and lessees operating oil or gas properties will, in addition to and apart from the deduction allowable for the depletion or return of capital as hereinbefore provided, be permitted to deduct a reasonable allowance for depreciation of physical property, such as ma- chinery, tools, equipment, pipes, etc., so far as not in conflict with the option exercised by the taxpayer under article 223. The amount deducti- ble on this account shall be such an amount based upon its capitalized value or cost equitably distributed over its useful life as will bring such property to its true salvage value when no longer useful for the purpose for which such property was acquired. Accordingly, where it can be shown to the satisfaction of the Comftiissioner that the reasonable expectation of the economic life of the oil or gas deposit with which the property is con- nected is shorter than the normal useful life of the physical property, the amount annually deductible for depreciation may for such property be based upon the length of life of the deposit. See articles 161-171 of Regulations 45, covering depreciation. Art. 225, Reg. 45. Depletion and Depreciation of Oil and Gas Wells in Years Before 1916. — If upon examination it is found that in respect of the entire drilling cost of wells, including physical property and incidental expenses, between March 1, 1913, and December 31, 1915, a taxpayer has been allowed a reasonable deduction sufficient to provide for the elements of exhaustion, wear and tear, and depletion, it will not be necessary to re- open the returns for years prior to 1916 in order to show separately in these years the portions of such deductions representing depletion and 27 depreciation, respectively. Such separation will be required to be made of the reserves for depreciation at January 1, 1916, and proper allocation between depreciation and depletion must be maintained after that date. In any case in which it is found that the deductions taken between March 1, 1913, and December 31, 1915, are not reasonable, amended returns may be required for these years. Art. 226, Reg. 45. Depletion of Timber. — A reasonable deduction from gross income for the depletion of timber and for the depreciation of improvements is permitted, based (a) upon cost if acquired after February 28, 1913, or (b) upon the fair market value as of March 1, 1913, if acquired prior thereto. The essence of this provision is that the owner of timber prop- erty, whether it be a leasehold or a freehold, shall secure through an ag- gregate of annual depletion and depreciation deductions a return of the amount of capital invested by him in the property, or in lieu thereof an amount equal to its fair market value as of March 1, 1913, plus in any case the subsequent cost of plant, equipment, and development which is not chargeable to currentoperating expenses, but not including cut-over land values. Art. 227, Reg. 45. Capital Recoverable Through Depletion Allowance in the Case of Timber. — In general, the capital remaining in any year recoverable through depletion allowances may be determined as indicated in articles 202 and 203 (Capital Recovered by Owmer or Lessee Through Depletion). In the case of leases the apportionment of deductions between the lessor and lessee should be made as specified in article 204. Where it becomes necessary to determine the cost or fair market value as of March 1, 1913, of the property, the rules laid down in articles 205 and 206 shoidd be followed so far as possible. Art. 228, Reg. 45. Computation of Allowance for Depletion of Timber. — An allowance for the depletion of timber in any taxable year shall be based upon the number of feet of stumpage cut during the year and the unit cost of the stumpage at the date of acquisition or the unit market value on March 1, 1913, if acquired prior thereto. The unit market value as of March 1, 1913, shall be the unit price at which the standing timber in its then condition and in view of its then environment could have been sold for cash or its equivalent. The amount of the deduction for depletion in any taxable year shall be the product of the number of feet of stumpage cut during the year multiplied by such unit cost or market value of the stumpage. Art. 229, Reg. 45. Revaluation of Stumpage. — The fair market value of stumpage when determined as of March 1, 1913, for the purpose of depletion allowances in the case of timber acquired prior thereto, shall be the basis for the determining the depletion deduction for each year during the con- tinuance of the ownership under which the fair market value of the stumpage was fixed, and during such ownership there can be no redetermi- nation of the fair market value of the stumpage for such purpose. How- ever, the unit market value of stumpage adopted by the taxpayer may subsequently be changed if from any cause such value, if continued as a basis of depletion, should upon evidence satisfactory to the Commissioner be found inadequate or excessive for the extinguishment of the fair mar- ket value of the timber as of March 1, 1913. Art. 230, Reg. 45. 28 Charges to Capital and to Expense in the Case of Timber. — In the case of timber operations all expenditures for plant, equipment, de- velopment, rent and royalty prior to production, and thereafter all major items of plant and equipment, shall be charged to capital account for pur- poses of depreciation. After a timber operation and plant has been de- veloped and equipped to its normal and regular output capacity, the cost of additional minor items of equipment and the cost of replacement of minor items of worn-out and discarded plant and equipment may be charged to current expenses of operations. Art. 231, Reg. 45. Depreciation of Improvements in the Case of Timber. — The cost or value as of March 1, 1913, as the case may be, of development not represented, by physical property having an inventory value, and such cost or value of all physical property which has not been deducted and allowed as expense in the returns of the taxpayer, shall be recoverable through depreciation. It shall be optional with the taxpayer, subject to the approval of the Commissioner, (a) whether the cost or value, as the case may be, of the property subject to depreciation shall be recovered at a rate established by current exhaustion of stumpage, or (b) whether the cost or value shall be recovered by appropriate charges for depreciation calculated by the usual rules for depreciation or according to the peculiar conditions of the taxpayer's case by a method satisfactory to the Com- missioner. In no case may charges for depreciation be based on a rate which will extinguish the cost or value of the property prior to the termination of its useful life. Nothing in these regulations shall be in- terpreted to mean that the value of a timber plant and equipment, so far as it is represented by physical property having an inventory value, may be reduced by depreciation deductions to a simi below the value of the salvage when the plant and equipment shall have become obsolete or worn out or shall have been abandoned, or that any part of the value of cut- over land may be recoverable through depreciation. Art. 232, Reg. 45. Statement to be Attached to Return Where Depletion of Timber Claimed. — To the return of the taxpayer claiming a deduction for deple- tion or depreciation or both there should be attached a statement setting out (a) whether the owner is an owner in fee or a lessee or both; (b) a description of the property owned in fee, if any, and a description of the leasehold property, if any, including the date of acquisition and the date of expiration of the lease; (c) the cost of the freehold and the leasehold property; (d) the number of feet of timber removed and sold during the year for which the return was made; (e) the total amount deducted on account of depletion and on account of depreciation, stated separately, up to the taxable year during the ownership of the taxpayer; and (f) any other data which would be helpful in determining the reasonableness of the depletion and depreciation deductions claimed in the return. The tax- payer shall keep accurate ledger accounts as outlined in article 216 (cost, market value at March 1, 1913, value at time of discovery, etc.), and in general should comply with the requirements of the regulations relating to the depletion of mines and oil and gas wells so far as applicable. _ Art. 233, Reg. 45. 29 NON-RESIDENT ALIEN. Definition of. (New DefiniUon.) Who is a Non-resident Alien Individual. — "Non-resident alien in- dividual" means an individual (a) whose residence is not within the United States, and (b) who is not a citizen of the United States. Any alien living in the United States who is not a mere transient is a resident of the United States for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to his stay. The best evidence of such intentions is afforded by the conduct, acts, and declarations of the alien. The typical transient is one who stops for a short time in the course of a journey through the United States, some- times performing labor, sometimes not, or one who enters the United States intending only to stop long enough to carry out some purpose, object, or plan not involving an extended stay. A mere floating inten- tion, indefinite as to time, to return to another country is not sufficient to constitute him a transient. Art. 311, Reg. 45. Proof of Residence of Alien. — An alien's statements as to his in- tention with regard to residence are not conclusive, but when un- equivocal will determine the question of his intention, unless his con- duct, acts, or other surroundng circumstances contradict the statements. It sometimes occurs that an alien who genuinely intends his stay to be transient may put off his departure from time to time by reason of changed conditions, remaining a transient though living in the United States for a considerable time. The fact that an alien's family is abroad does not necessarily indicate that he is a transient rather than a resident. An alien who enters this country intending to make his home in a foreign country as soon as he has accumulated a sum of money sufficient to provide for his journey abroad is to be considered a transient, provided his expectation in this regard may reasonably, considering the rat« of his saving, be fulfilled within a comparatively short time. Art. 312, Reg. 45. Loss of Residence by Alien. — It will be presumed that an alien who has established a residence in the United States, as outlined above, continues to be a resident until he or his family evidence an inten- tion to change their residence to another country by starting to remove. Thus, alien residents who, following the armistice agreement of Novem- ber, 1918, take steps toward returning to their native countries, as by applying for passports, are to be regarded as residents for that portion of the taxable year which elapsed up to the time such step was taken. Art. 313, Reg. 45. Duty of Employer to Determine Status of Alien Employees. — Aliens employed in the United States are prima facie regarded as nonresidents. If wages are paid without withholding the tax (see articles 361-372), the employer should be provided with written proof of facts which overcome the presumption that such alien is a nonresident. Such facts include the following: (a) If an alien has been living in the United States for as much as one year immediately prior to the time he entered the employment of the withholding agent, or if he has been regularly employed by a resident (individual or corporation) in the same coimty for as much aa three months immediately prior, he may be treated as a resident in the absence of facts known to the employer showing that he is in fact a transient, such as one of the types mentioned under article 80 311. The facts with regard to the length of time the alien has thus lived in the country or county and has been so regularly employed may be established by the certificate of the alien, (b) The employer may also obtain evidence to overcome the prima facie presumption of nonresidence by securing from the alien form 1078 (revised), properly executed, or an equivalent certificate of the alien establishing residence. Having secured such evidence from the alien, the employer may rely thereon unless the statement of the alien was false and the employer has reasonable eause to believe it false, and may continue to rely thereon until the alien ceases to be a resident under the provisions of article 313 (see above). An employer who seeks to account for failure to withhold in the past, if he did not secure form 1078 (revised) or its equivalent at the time, is permitted to prove the former status of the alien by any material evidence. Art. 314, Reg. 45. FERSONAI^ SERVICE CORPORATIONS. Followingr (Arts. 324 to 333) are new reg'ulations relatinif to "Personal Service Corporations." Personal Service Corporations. — Personal service corporations are defined in section 200 of the statute ("Standard Manual, 1919," page 52, line 45). See articles 1523-1532. Such corporations are not subject to taxation under the statute as corporations, unless they make returns for fiscal years beginning in 1917, but are required to make returns of income. See sections 205, 231, 239, 304 and 335 of the statute and the articles thereunder; "Standard Manual, 1919," para- graphs *246, 522, 501, 711, 792 and 915, respectively. The Individual stockholders of personal service corporations are, however, taxable upon their distributive shares of the net income of such corporations in the same manner as the members of partnerships. They are also taxable upon certain other amounts actually distributed. See sections 201 (Dividends, "Standard Manual, 1919," Law, page 53, line 11) and 213 (Gross Income Defined, "Standard Manual, 1919," law, page 60, line 10) of the statute. Section 303 of the statute contains provisions for the taxation of a corporation a part of the net income of which "(constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business), which, if constituting the sole trade or business, would bring it within the class of 'personal service cor- porations.' " Art. 324, Reg. 45. Personal Service Corporation Making Return on Calendar Year Basis. — Personal service corporations making returns on the calendar year basis are not subject to taxation as corporations under the statute, The individual stockholders are, however, subject to taxation (a) upon their distributive shares of the net income of the corporation for its tax- able year whether distributed or not, and (b) upon the earnings or profits of the corporation accumulated since February 28, 1913, and prior to January 1, 1918, distributed during such taxable year. See section 201 of the statute and articles 1541 and 1542 ; all relating to dividends and other distributions by corporations. The net income of a personal service corporation shall be computed, as in the case of a partnership, in the ^me manner and on the same basis as is provided in section 212 (definition of net income) of the statute for the computation of the net income of an individual, except that the deduction of certain kinds of contributions or gifts allowed individuals shall not be permitted. 31 See sections 212, 213, 214 and 215 of the statute and the articles thereunder. These sections of law relate to gross and net income and deductions therefrom. See "Standard Manual, 1919," pages 59 to 65. Art. 325, Reg. 45. Taxation of Stockholders of Personal Service Corporation With Calendar Year. — A stockholder of a personal service corporation at the close of the calendar year 1918, and any subsequent calendar year, is required to account for and is taxable upon his proportionate share of the net income of the corporation for such taxable year which remains undis- tributed at that time. A stockholder who receives any amount in distribu- tion of the net income of the corporation accumulated since December 31, 1917, which has not been accounted for by a stockholder as undistributed income, is required to account therefor and is taxable thereon. A stock- holder who receives any amount in distribution of earnings or profits of the corporation accumulated since February 28, 1913, and prior to January 1, 19i^, is required to account therefor and is taxable thereon; but he is not required to account for any earnings or profits accumulated prior to March 1, 1913. See section 201 of the statute and articles 1541 and 1542 on the subject of dividends. Art. 326, Reg. 45. Personal Service Corporation Making Return for Fiscal Year Begin- ning in 1917 and Enging in 1918. — If the fiscal year of a personal service corporation began in the calendar year 1917 and ended in the cal- endar year 1918, it is, as a corporation, subject to income and exceSS profits taxes for the part of such fiscal year which falls within the calendar year 1917. The amounts for which such a corporation is liable are such pro- portions respectively of the income taxes for the entire fiscal year, com- puted in accordance with Title I of the Revenue Act of 1916 as amended hj the Revenue Act of 1917 and with Title I of the Revenue Act of 1917, and of the excess profits taxes computed in accordance with Title II of the Revenue Act of 1917 for the entire fiscal year, as the portion of such fiscal year falling within the calendar year 1917 is of the entire period. See sections 205 and 335 of the statute and article 1621, relative to fiscal years. Amounts previously paid by the corporation on account of income taxes for such fiscal year shall be credited toward the pay- ment of the income taxes for the portion of the fiscal year falling within the calendar year 1917. Any excess shall be credited or re- funded in accordance with the provisions of section 252 (Refunds) of the statute. Amounts previously paid by the corporation on account of excess profits taxes for any period beginning on or after January 1, 1918, shall be immediately refunded as a tax erroneously or illegally collected. See section 335 of the statute and article 1034; also see "Standard Manual, 1919," paragraph 2906. Art. 327, Reg. 45. Taxation of Stockholders of Personal Service Corporation with Fiscal Year Ending in 1918. — An individual stockholder of a personal serv- ice corporation with a fiscal year ending in 1918 is, moreover, subject to taxation (a) upon his distributive share of the net income of the corpora- tion for its fiscal year whether distributed or not, and (b) upon the earn- ings or profits of the corporation accumulated since February 28, 1913, and prior to the beginning of such fiscal year, distributed during such fiscal year. See section 201 of the statute and articles 1541 and 1542. Such part of a stockholder's distributive share of the net income of a corpora- tion for its fiscal year as is attributable to the calendar year 1918 is tax- 32 able at the rates for such calendar year, and such part of such distribu- tive share aa is attributable to the calendar year 1917 is taxable at the rates for such calendar year, but is not subject to normal tax. See sec- tion 205 (fiscal years) of the statute. The part of a stockholder's distributive share of the net income of a corporation for its fiscal year attributable to the calendar year 1918 is found by determining his distributive share of the net income of the corporation for its fiscal year, whether distributed or not, in the same manner as if the fiscal year were the calendar year 1918, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The part of a stockholder's distribu- tive share of the net income of a corporation for its fiscal year attribu- table to the calendar year 1917 is found by determining the net income of the corporation for its fiscal year in accordance with tlje law applicable to the calendar year 1917 and determining the stock- holder's distributive share thereof by adding to the amounts of such net income distributed to him during such fiscal year his proportion of the net income of such fiscal year remaining undistributed at the close thereof, and then taking the proportion of such distributive share which the part of such fiscal year falling within the calendar year 1917 bears to the full fiscal year. Art. 328, Reg. 45. Applicable of Different Tax Rates in the Case of Fiscal Year Enging in 1918. — ^Any deductions, exemptions, or credits to which the stockholder of a personal service corporation with a fiscal year ending in 1918 is entitled shall first be applied against his income subject to the rates for the calendar year 1918, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1917. See section 206 (parts of income subject to rates for different years) of the statute and article 1641. The proportionate share of a stockholder of any excess profits tax imposed upon the cor- poration under the Revenue Act of 1917, with respect to that part of the fiscal year falling within the calendar year 1917, is plainly and properly chargeable against income taxable at the rates for that year and shall be credited against such income of the stockholder. In determining the rates of tax applicable to the amounts of the distributive shares of the stockholders attributable to the calendar years 1917 and 1918, respec- tively, the amounts subject to the rates for the calendar year shall be placed in the lower brackets of the rate schedule provided in the present statute, and the amounts attributable to the calendar year 1917 in the next higher brackets of the rate schedule applicable to that year. See section 1 of Title I of the Revenue Act of 1916, and sections 1 and 2 of Title I of the Revenue Act of 1917 (Income law). Art. 329, Reg. 45. Personal Service Corporation Making Returns for Fiscal Year End- ing in 1919 or Later. — If the fiscal year of a personal service corpora- tion began in the calendar year 1918 or later and ends in the calendar year 1919 or later, it is not subject to taxation as a corporation under the statute. An individual stockholder is, however, subject to taxation (a) upon his distributive share of the net income of the corporation for its fiscal year whether distributed or not, and (b) upon the earnings or profits of the corporation accumulated since February 28, 1913, and prior to January 1, 1918, distributed during such fiscal year. See section 201 (Dividends) of the statute and articles 1541 and 1542. Art. 330, Reg. 45. 33 Taxation of Stockholders of Personal Service Corporation with Fiscal Year Ending in 1919.— Such part of a stockholder's distributive share of the net income of a personal service corporation for its fiscal year ending in 1919 as is attributable to the calendar year 1919 is taxable at the rates for such calendar year, and such part of such distributive share as is attributable to the calendar year 1918 is taxable at the rates for such calendar year. See section 205 (fiscal years) of the statute and article 1621. The part of a stockholder's distributive share of the net income of a corporation for its fiscal year attributable to the calendar year 1919 is found by determining his distributive share of the net income of the corporation for its fiscal year, whether distributed or not, in the same manner as if the fiscal year were the calendar year 1919, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The part of a stockholder's distributive share of the net in- come of a corporation for its fiscal year attributable to the calendar year 1918 is found by determining his distributive share of the net income of the corporation for its fiscal year, whether distributed or not, in the same manner as if the fiscal year were the calendar year 1918, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. Art. 331, Reg. 45. Application of Different Tax Rates in the Case of Fiscal Year Ending in 1919. — Any deductions, exemptions, or credits to which the stockholder of a personal service corporation with a fiscal year ending in 1919 is entitled shall first be applied against his income subject to the rates for the calendar year 1919, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1918. See section 206 (parts of income subejct to rates for different years) of the statute and article 1641. In determining the rates of tax applicable to the amounts of the distributive shares of the stock- holders attributable to the calendar years 1918 and 1919, respectively, the amounts subject to the rates for the calendar year 1919 shall be placed in the lower brackets of the rate schedule provided in the statute and the amounts attributable to the calendar year 1918 in the next higher brackets of the rate schedule applicable to that year. Art. 332, Reg. 45. Credits Allowed Stockholders of Personal Service Corporation. — A stockholder of a personal service corporation is entitled to credit, for the purpose of the normal tax only, for amounts received in distribution of earnings or profits of the corporation accumulated since February 28, 1913, and prior to January 1, 1918, or, in the case of a personal service corporation with a fiscal year ending in 1918, prior to the beginning of the fiscal year. See sections 201 (Dividends) and 216 (Credits) of the statute and articles 1541 and 301. In addition to the credits ordi- narily allowed to an individual, a stockholder of a personal service corporation is entitled to the following credits: (a) a credit against net income for the purpose of the normal tax only of his propor- tionate share of such dividends from a corporation subject to tax and of such interest not entirely exempt from tax upon obligations of the United States and bonds of the War Finance Corporation as are re- ceived by the personal service corporation, and (b) a credit against income tax of the stockholder's proportionate share of income, war profits, and excess profits taxes of the personal service corporation paid or accrued during the taxable year to a foreign country upon income derived from sources therein, or to any possession of the United States, subject to the limitations of section 222 (Credit for Taxes) of the statute. See articles 381-384, relating to credit for taxes. Art. 333, Reg. 45. 34 CORPORATION PROFITS. When Taxable to Stockholders. Profits of corporations Taxable to Stockholders.— Where a domestic or foreign corporation permits its gains and profits to accumulate for the purpose of preventing the imposition of the surtax upon such income if distributed to its stockholders, it shall not be subject to the income tax as a corporation, but its stockholders shall be subject to tax in the same way as the stockholders of a personal service corporation, except that the war profits and excess profits tax on the corporation shall first be deducted from its net income before computing the proportionate shares of the stockholders. See section 218 (Partnerships and Personal Service Corporations) of the statute and articles 324-333. In any case the Commissioner or a collector may require a corporation to furnish a statement of its gains and profits and of the names, addresses, and shareholdings of the stockholders, and if upon the basis of such statement or other evidence the Commissioner certifies that in his opinion its accumulation of profits is unreasonable for the purposes of the business the corporation and its stockholders shall make their returns accordingly. Art. 351, Reg. 45. WITHHOLDING AT THE SOURCE. Non-Resident Aliens. (Standard Manual 1919, p. 69, line 48.) Agent of — Responsibility of. In the case of tax-free bonds, the coupons of vs^hich are paid without deduction of the 2% tax required by law to be withheld and paid by the issuing corporation, the agent for a non-resident alien is not required to withhold and pay the full normal tax of 8% on such interest. The proper procedure is to make a return in behalf of such non-resident alien individual (on Form 1040, revised) and to take credit on such return for the 2% tax withheld. Withholding in 1918. — In cases prior to the date of the passage of the Revenue Act of 1918, where a withholding agent pursuant to the Revenue Acts of 1916 and 1917 withheld only 2 per cent from the income of nonresident alien individuals, he need return only such sura. In all such cases where a withholding agent withheld the tax pursuant to the Revenue Acts of 1916 and 1917 from the income of foreign corpora- tions not engaged in trade or business within the United States and not having any office or place of business therein, he need return only the sum withheld, to an amount not in excess of the aggregate sum required to be withheld by the terms of the Revenue Act of 1918 from the income paid over by the withholding agent. Art. 368, Reg. 45. Release of Excess Tax Withheld. — Any sum withheld for tax since December 31, 1917, in excess of the amount prescribed by the Revenue Act of 1918, shall be released by the withholding agent and paid over to the person from whom it was withheld or his proper representa- tive. With reference to how a debtor corporation may release and pay over the amoun+ of tax so withheld in a case where a bank or oth<^r col- lection agency detached the ownership certificate which accompanied an interest coupon and substituted its own certificate (form 1059), which 35 does not disclose the name and address of the bond owner, in such cases the withholding agent shall request the bank or collection agency to dis- close the name and address of the owner of the bonds, as shown by the original certificate, and it shall be the duty of the bank or collection agency to make such disclosure to the withholding agent. Where with- holding agents have so released any excess of tax, an itemized statement showing the names, addresses and amounts refunded should be attached to the annual list returns (form 1013), in order to reconcile any dis- crepancy between the aggregate amount of taxes returned as shown by the monthly list returns (form 1012) and the aggregate amount as shown by the annual list return. Art. 369, Reg. 45. GAIN OR LOSS. Basis for Determining. Basis for Determining Gain or Loss from Sale or Exchange of Proerty. — For the purpose of ascertaining the gain or loss from the sale or exchange of property the basis is (a) its fair market price or value as of March 1, 1913, if acquired prior thereto, or (b), if acquired on or after that date, its cost or its approved inventory value. What the fair market price or value of property was on March 1, 1913, is a question of fact to be established by any evidence which will reasonably and adequately make it appear. See also section 203 (Inventories) of the statute and articles 1581-1585. Art. 1561, Reg. 45. Exchanges of Property. — Gain or loss arising from the acquisition and subsequent disposition of property is realized when as the result of a transaction between the owner and another person the prop- erty is converted into cash or into property (a) that is essentially dif- ferent from the property disposed of and (b) that has a market value. In other words, both (a) a change in substance and not merely in form, Knd (b) a change into the equivalent of cash, are required to complete or close a transaction from which income may be realized. By way of illustration, if a man owning ten shares of listed stock exchanges his stock certificate for a voting trust certificate, no income is realized, because the conversion is merely in form; or if he exchanges his stock for stock in a small, closely held corporation, no income is realized if the new stock has no market value, although the conversion is more than formal; but if he exchanges his stock for a liberty bond, income may be realized, because the conversion is into independent property having a market value. The exchange oi a so-called convertible bond for stock pursuant to such a privilege grant ea in the bond will produce income if the stock Toceived in exchange has a fair market value in excess of the cost or fair market value as of March 1, 1913, of the bond. Art. 1563, Reg. 45. Determination of Gain or Loss from Exchange of Property. — The amount of income derived in the case of an exchange of property, as of stock for a bond, is the excess of the fair market value at the time of exchange of the bond received in exchange over the original cost of the stock exchanged for it, or over the fair market price or value of such stock as of March 1, 1913, if acquired before that date. The amount of income derived from a subsequent sale of the bond for cash is the excess. s3f the amount so received over the fair market value of such bond when acquired in exchange for the stock. On the other hand, if the property received in exchange is substantially the same property or 36 has no market value, then no gain or loss is realized, but the new property is to be regarded as substituted for the old and upon a sale of the new property the amount of income derived is the excess of the amount so received over the cost or fair market value as of March 1, 1913, of the old. But see article 1566, relative to gain or loss from stock exchanged for other stock. Art. 1564, Reg. 45. Exchange for Different Kinds of Property. — (a) If property is ex- changed for two different kinds of property, such as bonds and stock, the bonds having a market value and the stock none, the value of the bonds is to be compared with the cost or fair market value as of March 1, 1913, of the original property, as the case may be. If the market value of the bonds is less than such cost or value, the difference represents the cost of the stock. If the market value of the bonds is greater than such cost or value, the difference is taxable income at the time of the exchange and whenever sold the entire proceeds of the stock will be taxable, (b) If property is exchanged for two different kinds of property, such as bonds and stock, neither having a market value, the cost or fair market value as of March 1, 1913, of the original property should be apportioned, if possible, between the bonds and stock for the purpose of determining gain or loss on subsequent sales. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the bonds or stock is realized until out of the proceeds of sales shall have been recovered the entire cost or fair market value as of March 1, 1913, of the original property. Art. 1565, Reg. 45. Exchange of Stock for Other Stock of No Greater Par Value. — In general, where two corporations unite their properties by either (a) the dissolution of corporation B and the sale of its assets to corporation A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A, or (e) the consolidation of the corporations, no taxable income is received from the transaction J)y A or B or the stock- holders of either, provided the sole consideration received by B and its stockholders in (a), (b), (c) and (d) is stock or securities of A, and by A and B and their stockholders in (e) is stock or securities of the con- solidated corporation, in any case of no greater aggregate par or face value than the old stock and securities surrendered. For the purpose of ascertaining the gain derived or loss sustained from the subsequent sale of any stock of A or of the consolidated corporation so received, the original cost to the taxpayer or the fair market price or value as of March 1, 1913, of the stock of B or A in respect of which the new stock was issued, less any untaxed distribution made to the taxpayer by A out of the former capital or surplus of B, or by the consolidated corporation out of the former capital or surplus of A or B, is the basis for determining the amount of such gain or loss. Art. 1566, Reg. 45. Exchange of Stock for Other Stock of Greater Par Value.— If in the case of any reorganization, merger or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock and securities exchanged, income will be realized from the transaction by the recipients of the new stock or securities to an amount limited by (a) the excess of the par or face value of the new stock or securities over the par or face value of the old and (b) the excess of the fair market value of the new stock or securities over the cost or fair market value as of March 1, 1913, of the 37 old. In other words, the taxable profit will be (a) or (b), whichever is less. Upon a subsequent sale of the new stock or securities their costs to the taxpayer will be the cost or fair market value as of March 1, 1913, of the old stock and securities, plus the profit taxed on the exchange. Art. 1567, Reg. 45. INVENTORIES. Need of Inventories. — In order to reflect the net income correctly, inventories at the beginning and ending of each year are neces- sary in every case in which the production, purchase or sale of merchan- dise is an income-producing factor. The inventory should include raw materials and supplies on hand that have been acquired for sale, con- sumption or use in productive processes, together with all finished or partly finished goods. Title to the merchandise included in the inventory should be vested in the taxpayer and goods merely ordered for future delivery and for which no transfer of title has been effected should be excluded. The inventory should include merchandise sold but not shipped to the customer at the date of the inventory, together with any mer- chandise out upon consignment. It should also include merchandise pur- chased, although not actually received, to which title has passed to the purchaser. In this regard care should be exercised to take into the accounts all invoices or other charges in respect of merchandise properly included in the inventory, but which is in transit or for other reasons has not been reduced to physical possession. Art. 1581, Reg. 45. Valuation of Inventories. — Inventories should be valued at (a) cost or (b) cost or market, whichever is lower. Whichever basis was adopted by a taxpayer in respect of the taxable year 1917 must be continued unless upon application to the Commissioner permission is granted to change. If basis (b) is used it must be applied to each item in the inventory and not to a part only. Inventories should be recorded in a legible manner and properly computed and summarized and should be preserved as a part .of the accounting records of the taxpayer. Art. 1582, Reg. 45. Inventories at Cost. — Cost means: (1) In the case of merchandise purchased, the invoice price less trade or other discounts except strictly cash discounts approximating a fair interest rate, which may be deducted or not at the option of the tax- payer provided a consistent course is followed. To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be the goods most recently purchased. (2) In the case of merchandise produced by the taxpayer, (a) the cost of raw materials and supplies entering into or consumed in connection with the product, (b) expenditures for direct labor, (c) indirect expenses incident to and necessary for the production of the particular article, including in such indirect expenses a reasonable proportion of management expenses, but not including any cost of selling or return on capital whether by way of interest or profit. In any industry in which the usual rules for computation of cost of production are inapplicable, costs may be approximated upon such basis as may be reasonable and in conformity with established trade practice in the particular industry. Art. 1583, Reg. 45. 38 Inventories at Market. — Market means the current bid price pre- vailing at the date of the inventory for the particular merchandise, and is applicable to goods purchased and on hand and to basic materials in goods in process of manufacture and in finished goods on hand, ex- clusive, however, of goods on hand or in process of manufacture for delivery upon firm sales contracts at fixed prices entered into before the date of the inventory. Where no open market quotations are avail- able the taxpayer must use such evidence of a fair market price as may be available to him, such as specific transactions in reasonable volume entered into in good faith, or compensation paid for cancellation of contracts for purchase commitments. The burden of proof will rest upon the taxpayer in each case to satisfy the Commissioner of the correctness of the prices adopted. It is recognized that in the latter part of 1918, by reason among other things of governmental control not having been relinquished, conditions were abnormal and in many commodities tnere was no such scale of trading as to establish a free market. In such a case, when a market has been established during the succeeding year, a claim may be filed in accordance with the provisions of section 214 (a) (12) of the statute for a recomputation of the net income of the preceding taxable year and an adjustment of the income and war excess profits taxes. See article 261 (Income Tax in Porto Rico and Philippine Islands). Art. 1584, Reg. 45. NET LOSSES. Scope of Net Losses. — As used in the statute the term "net loss" means either a business operating loss or a loss realized by a bona fide sale of property constructed, installed or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war. The amount of net loss claimed must represent an actual net loss over and above all income, including tax-free income. Such losses will be allowable only in respect of a taxpayer having a taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, and after one claim has been allowed no further claim can be considered. Art. 1601, Reg. 45. Claim for Allowance of Net Loss. — A taxpayer having such a net loss may file a claim vrith the collector of the district in which the taxpayer's return for the preceding year was filed. Such claim should state the name and address of the taxpayer and should contain a concise statement of the amount of the loss sustained and the basis upon which it has been computed, together with all pertinent facts necessary to enable the Commissioner to determine the allowability of the claim. Each claim should be supported by an affidavit. Art. 1602, Reg. 45. Allowance of Net Loss. — The amount allowed by the Commissioner in respect of any such claim shall be deducted from the net income for the taxable year 1918, and the taxes imposed by this title shall be recomputed accordingly. Any amount found to be due him shall be credited or refunded to the taxpayer in accordance with the provisions of section 252 (Refunds). In any case in which it is found by the Com- missioner that such net loss is in excess of the net income of such preceding taxable year, the taxpayer may carry forward the amount of such excess and claim it as a deduction in computing net income for the succeeding taxable year. Art. 1603, Reg. 45. 39 Corporations RETURNS Returns of Foreign Corporations. — Every foreign corporation liaving 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. It is not necessary, however, for it to be required to I make a return that the foreign corporation shall be engaged in business in this country or that it have any office,) branch or agency in the United States. Article 548, Regulations 45, defines income of a foreign corporation as income received from sources within the United States. Art. 625, Reg. 45. (AmpUficatioji of "Standard Manual 1919," TT712, TI713, 11729, IT 730) Use of Prescribed Forms. — Copies of the prescribed return forms will be furnished corporations by collectors. Failure on the part of any corporation liable to tax to receive a prescribed blank form will tiQ^, however, excuse it from making the return. Corporations not sup- plied with the proper forms should make application therefor to the col- lector in ample I time to have their returns prepared, verified and filed with the collector on or before the last due date. Each corporation should carefully prepare its return so as fully and clearly to set forth the data therein called )for. Imperfect or incorrect returns will not be accepted as meeting the requirements of the statute. In lack of a pre- scribed form a statement made by a corporation disclosing its gross income and the deductions therefrom }may be accepted as a tentative return, and if filed within the prescribed time a return so made will relieve the corporation from liability to penalties, provided that without unnecessary delay such aUentative return is replaced by a return made on the proper form. Article 442, Regulations 45, and "Standard Manual, 1919," paragraphs 509 and 510, relate to extension of time for filing returns. Art. 626, Reg. 45. CHANGE IN OWNERSHIP Change in Ownership During Taxable Year. — When one corporation owns substantially all the stock of another corporation at the be- ginning of any taxable year, but during the taxable year sells all or a majority of such stock to outside interests I not affiliated with it, or when one corporation during any taxable year acquires substantially all the capital stock of another corporation with which it was not) previously affiliated, a full disclosure of the circumstances of such changes in owner- ship shall be submitted to the Commissioner. In accordance with the peculiar circumstances in each case the Commissioner may require separate or consolidated returns to be filed, to the end that the tax may 40 be equitably assessed. Article 631, Regulations 45, and "Standard Man- ual, 1919," paragraph 711, deal with the subject of affiliated corpora- tions. Art. 634, Reg. 45. AFFILIATED CORPORATIONS (Amplication of "Standard Manual 1919," 1[711) Domestic Corporation AfiSliated With Foreign Corporation.— A do- mestic corporation which owns a majority of the stock of a foreign corporation shall not be permitted or required to include the net income or invested capital of such foreign corporation in a con- solidated return, but for the purpose of section 238 of the statute (Credit for Taxes) a domestic corporation which owns a majority of the voting stock of a foreign corporation shall be entitled to credit in respect of any income, war profits or 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 in an amount equal to the proportion which the amount of any dividends (not deductible under section 234 (deductions) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign cor- poration upon or with respect to which such taxes were paid. But 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. A domestic cor- poration seeking such credit must comply with those provisions of sub- division (a) of article 383 (Conditions of Allowance of Credit) which are applicable to credits for taxes already paid, except that in accord- ance with article 611 (Credit for Foreign Taxes) the form to be used in form 1118 instead of form 1116. Art. 636, Reg. 45. (Amplification of "Standard Manual 1919," IT 711) Consolidated Net Income of Affiliated Corporations. — Subject to provisions covering the determination of taxable net income of separate corporations, and subject further to the elimination of inter- company transactions, the consolidated taxable net income shall be the combined net income of the several corporations consolidated, except that the net I income of corporations coming within the provisions of article 635 (Corporations Deriving Chief Income from Government Contracts) shall be excluded. In respect of the statement of gross income and de- ductions and the several schedules required under form 1120, a cor- poration filing a consolidated return is I 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. Art. 637, Reg. 45. (New Matter) Different Fiscal Years of Affiliated Corporations. — In the case of all consolidated returns, consolidated invested capital must be computed as of the beginning of the taxable year of the parent or principal reporting company and consolidated income must? be computed on the basis of its fiscal year. Whenever the fiscal year of one or more subsidiary or other affiliated corporations differs from the fiscal I year 41 of the parent or principal corporation, the Commissioner should be fully advised by the taxpayer in order that provision may be made I for assess- ing the tax in respect of the period prior to the beginning of the fiscal year of the parent or I principal company. Art. 638, Reg. 45. DEPLETION AND DEPRECIATION. Surplus and Undivided Profits: Allowance for Depletion and Depreciation. — Depletion, like depreciation, must be recognized in all cases in which it occurs. Depletion attaches to each unit of mineral or other property removed, and the denial of a deduction in computing net income under the Act of August 5, 1909, or the Hmitation upon the amount of the deduction allowed under the Act of October 3, 1913, does not relieve the corporation of its obligation to make proper provision for depletion of its property in computing its surplus and undivided profits. Adjustments in respect of depre- ciation or depletion in prior years will be made or permitted only upon the basis of affirmative evidence that as at the beginning of the taxable year the amount of depreciation or depletion written off in prior years was insufficient or excessive, as the case may be. Where deductions for depreciation or depletion have either on the books of the corporation or in its returns of net income been included in the past in expense or other accounts, rather than specifically as deprecia- tion or depletion, or where capital expenditures have been charged to expense in lieu of depreciation or depletion, a statement indicating the extent to which this practice has been carried should accompany the return. Art. 839, Reg. 45. INVESTED CAPITAL, CHANGES IN. Changes in Invested Capital During Year. — The invested capital as of the beginning of any period of one year or less should be adjusted by an appropriate addition or deduction for each change in invested capital during the period. The amount so added or de- ducted in each case is the amount of the change averaged for the time remaining in the period during which it is in effect. The frac- tion used in finding such average is the number of days remaining in the period (including the day on which the change occurs) over the number of days in the period. Thus if a return is made for the calendar year ending December 31, 1918, and if $100,000 f additional capital was paid in on February 17, 1918, this addition to invested capital is in effect for 318 days, and the amount to be added to the invested capital as of the beginning of the year would be 318/365 of $100,000, or $87,123,29. If $50,000 of this amount was withdrawn on October 31, 1918, the amount to be deducted would be 62/365 of $50,000, or $8,493.15. Art. 853, Reg. 45. DIVIDENDS. Effect of Ordinary Dividend. — ^A dividend other than a stock divi- dend affects the computation of invested capital from the date when the dividend is payable and not from the date when it is declared, except that where no date is set for its payment the date when declared will be considered also the date when payable. For the purpose of computing invested capital a dividend paid after the expiration of the first sixty days of the taxable year will be deemed 42 to be paid out of the net income of the taxable year to the extent of the net income available for such purpose on the date when it is payable. See Article 857, Regulations 45, and "Standard Manual, 1919," paragraph 835, relative to method for determining available net in- come. The surplus and undivided profits as of the beginning of the taxable year will be reduced as of the date when the dividend is payable by the entire amount of any dividend paid during the first sixty days of the taxable year and by the amount of any other dividend in excess of the current net income available for its payment. From the date when the dividend is payable the amount which the several stockholders are entitled to receive will be treated as if actually paid to them, whether or not it is so paid in fact, and the surplus and undivided profits, either of the taxable year or of the preceding years, will in accordance with the foregoing provisions be deemed to be reduced as of that date by the full amount of the dividend. Amounts paid to stockholders in anticipation of dividends, or amounts withdrawn by stockholders in excess of dividends de- clared, will in computing invested capital have the same effect as if actually paid as dividends. See also Article 813 (Borrowed Capital or Paid-in Surplus), and see generally section 201 (Dividends, "Stand- ard Manual, 1919," page 53, line 11) and articles 1541-1548, Regulations 45, Dividends.* Art. 858, Reg. 45. Effect of Stock Dividend. — The payment of a stock dividend has no effect upon the amount of invested capital. Such items as ap- praised value of good will, appreciation in value of real estate or other tangible property, etc., although carried to surplus and dis- tributed as stock dividends, can not in this matter be capitalized and included in computing invested capital. If a corporation has paid a stock dividend in excess of its true surplus, it can not be deemed to have any greater invested capital than could have been computed had no such stock dividend been paid. Art. 859, Reg. 45. CAPITAL, IMPAIRJMENT OF. Impairment of Capital. — Capital or surplus actually paid in is not required to be reduced because of an impairment of capital in the nature of an operating deficit, except where there has been directly or indirectly a liquidation or return of their investment to the stockholders, in which case full effect must be given to any liquidation of the original capital. Art. 860, Reg. 45. CORPORATIONS SUCCESSOR TO PARTNERSHIP. Net Income and Invested Capital of Predecessor Partnership or Individual. — If the predecessor trade or business was carried on by a partnership or individual, the corporation shall make its return of the net income and invested capital of such trade or business as nearly as may be in the same manner as if such trade or business had been carried on by a corporation. It shall submit with its return a statement setting forth (a) the manner in which such trade or business was carried on and (b) the points, if any, in which the provisions of the statute and of the regulations are not fully applicable to the determination of the net income or invested capital of the predecessor trade or business for the pre- war period. In no case shall the deduction from gross income for salary or compensation for personal services exceed the salaries or compensation 43 customarily paid at that time by corporations or partnerships of similar size and standing engaged in like or similar trades or businesses for similar services under like responsibilities. Art. 932, Reg. 45. Election to be Taxed as Corporation. — A business enterprise (a) which is organized as a corporation before July 1, 1919, (b) in which capital is and has been a material income -producing factor, and (c) which was previously owned by a partnership or individual, may elect to be taxed as a corporation on its net income from January 1, 1918, to the date of organization of the corporation. In such event the corporation shall be treated as if in existence since January 1, 1918, for the purposes of the income tax, the war profits and excess profits tax, and the capital stock tax. But this option is not extended to a business enterprise with a net income for the taxable year 1918 less than twenty per cent of its invested capital. Art. 933, Reg. 45. VALUATION OF ASSETS UPON REORGANIZATION. Adjustment for Asset Differently Valued in Prewar Invested Capital. — In any case in which as a result of a reorganization or for any other reason any asset in existence both during the taxable year and any prewar year is included in computing the invested capital for the taxable year, but is not included in computing the invested capital for such prewar year, or is valued on a difl'erent basis in computing the invested capital for the two years, the difference resulting therefrom shall not be included in determining the difference 10 per cent of which is added to or deducted from the war profits credit under section 311 (a) (2) (Credits, Law," Standard Manual, 1919," page 92, line 38). In any such case the corporation shall make the readjustment required by the statute, and shall submit with its return a full statement of the difference in such valuations and of the facts which give rise to such difference. See also section 331 of the statute (Reorganization After March 3, 1917," Standard Manual, 1919," page 98, line 54) and article 941 (Valuation of Assets After Reorganization). Art. 934, Reg. 45. 44 List of Forms (For Guide to Forms see p. 47.) The symbol (*) indicates the Income and Excess Profits tax forms issued by the Treasury Department for use during the years 1918 and 1919. The numbers not bearing the symbol refer to forms in use prior to the year 1918. No. Style. * 46 — Claim for Refund. Taxes Erroneously or Illegrally Collected. * 47 — Claim for Abatement. Taxes Erroneous or Xlleg-ally Assessed. 'i'lOOO — Ownership Certificate. Tax to be Paid at Source. *1001 — Ownership Certificate. Tax Not to be Paid at Source. *1001-A — Ownership Certificate. Tax Not to be Paid at Source (Dividends on Stock of Poreigrn Corporations and Interest on Bonds of Foreisfn Countries and Corporations). 1009 — Porm of Oath Required of a Withholding- Agfent When Actlugf for Another in Pilingr a Return. ♦1012 — Monthly Return of Normal Income Tax to be Paid at Source (Interest on Bonds and Other Similar Obligfations of Domestic and Resident Oblig-ation of Domestic and Resident Corpora- tions and Poreig-n Corporations Having" a Paying" Ag"ent in United States). 1012-A — (Pollow Sheet for 1012.) *1013 — Annual Return of Normal Tax to be Paid at Source (Same Explanation as Form 1012). 1015 — Ownership Certificate — Fiduciary. The Source. 1019 — Ownership Certificate— Fiduciary. Not the Source. 1030 — Insurance Company Return (Including" Mutual Life and Mutual Marine). 1030- A — Mutual Insurance Company Return (Other Thau Mutual Life and Mutual Marine). 1031 — Corporation Income Tax Return (For All Except Railroad and Insurance Companies). ♦1031-T — Tentative Return and Estimate of Corporation Income and Profits Taxes and Request for Extension of Time. *1040 Individual Income Tax Return. For Net Income of More than $5,000. *1040-A— Individual Income Tax Return. For Net Incomes of Not More Than $5,000. ♦1040-F — Schedule of Farm Income and Expenses. *1040-T — Tentative Return and Estimate of Individual Income Tax for 1918 and Request for Txtension of Time. ♦1042 — Annual Return of Normal Income Tax to be Paid at Source (Salaries, Wag-es, Rent, etc., Paid to Nonresident Alien Indi- viduals and Foreign Corporation [Not Eng"ag"ed in Trade or Business Within the United States and Not Having" Any Office or Place of Business Therein]). 45 LIST OF FORMS — Continued. No. Style. 1043-A — Annnal Iiist Return of Amount of Normal Tax Withheld on Foreiirn Income hy Iiicensed Bank or Collectingf Ag'encles. 1044 — ^Monthly :List Return of Amount of Normal Income Tax Withheld by Pirst Bank or Collecting' Agfency Receiving: Coupons and Interest Orders Not Accompanied by Certificates of Owners. 1044-A — Annual list return (Made up from Pomr 1044). *1058 — Substitute Certificate— Tax Not to be Paid at Source (Interest on Bonds and Other Similar Obligfations of Domestic and Resident Corporations). *1059 — Substitute Certificate. — Tax to be Paid at Source (Interest on Bonds and Other Similar Oblig'ations, etc.). 1063 — Exemption Certificate— Pirms, Orgranizations and Pidnciaries. 1065 — Partnership Return. 1071 — Exemption Certificate — Banks or Bankers, Either Poreigrxi or Domestic. *1078 — Certificate of Alien Claimingf Residence in U. S. 1086 — Ownership and Exemption Certificate— Nonresident Alien Plrm, Orgfanization, etc. 1087 — Ownership Certificate — Disclosing* Actual Owner of Stock. 1088 — Certificate for Claiming* Deductions — ^Individuals. 1090 — Railroad Corporations (1917). 1095 — Excess Profits Tax (1917). *1096 — Annual Information Return of Payments, etc., of $1,000 or More. ^1096-A — ^Monthly Information Return Payments of Interest on Bonds of Domestic and Poreign Corporations and Countries and Divi- dends on Stock of Poreig'n Corporations. *1096-B — Annnal Information Return. Pajonents of Interest, etc. (same as 1096-A). ^1098 — Report of Income Paid to Nonresident Aliens, Individuals and Poreign Corporations During Calendar Year 1918. 'i'1099 — Report of Income of $1,000 or More Paid during* the Calendar Year 1918. 1100 — Brokers Information Returns. 1101 — Individual Excess Profits Tax Return for Calendar Year 1917. 1102 — Partnership Excess Profits Tax Return. 1103 — Corporation Excess Profits Tax Return. 1105 — Receipt for Income and Excesss Profits Tax for 1917. *1107 — Same as Porm 1105 Receipt €or 1918. 1112 — Corporation Undistributed Net Income Tax Return. ♦1114 — Application for Permission to Establish a Replacement Pund. 1116 — Credit for Taxes. 1117 — Bond Pending Determination of Credit for Taxes. * 1118 — Credit for Foreign Taxes. 1119 — Bond Pending* Determination of Credit for Poreig*u Taxes. ♦1120 — Corporation Income and Profits Tax Return. 4'1122 — Information Return of Subsidiary or Affiliated Corporation. *1123 — Statement of Tax Due (Income, War Profits and Excess Profits Taxes for 1918). 46 Guide to Forms Abatement of Assessed Taxes and Penalties — Form Claim for 47 Actual Owner of Stock — Certificate showing 1087 Agrent for Nonresident Alien — Annual return of Foreign corporation other than insurance company — Annual return 1120 Interest on bonds and dividends on stock of domestic corporations: Tentative return 1031-T Foreign insurance company — Interest on bonds and dividends on stock of domestic corporations 1030 Foreign Mutual Insurance Co. — Interest on bonds and dividends on stock of corpora- tions to be made by representative 1030-A Individual — * Income of $5,000 or less 1040-A Income of more than $5,000 1040 Tentative return 1040-T Alien Claimingr Residence in TJ. S. — Certificate of 1078 Banks and Bankers — Substitute certificate, claiming personal exemption 1058 Substitute certificate, not claiming personal exemption 1059 Banks or Bankers (Foreign or Domestic) — Exemption certificate in connection with — Foreign dividends payable in U. S. to nonresident alien 1071 Foreign securities payable in U. S 1071 Beneficiary — See "Fiduciary." Annual return of income received through fiduciary — Income of more than $5,000 1040 Income of $5,000 or less 1040-A Tentative return 1040-T Bond — Pending determination of credit for taxes 1117 Pending determination of credit for foreign taxes 1119 Brokers' Information Returns 1100 Certificates — See "Ownership Certificates" and "Substitute Certificates of Own- ership." See "Exemption Certificates." See "Alien Claiming Residence in U. S." See "Ownership and Exemption Certificate." Deductions, certificates for claiming 1088 Claims — Abatement of assessed taxes and penalties 47 Refund of paid taxes and penalties 46 CoUectingf Agfent — See "Withholding Agents." Corporations — Affiliated Corporations — Information return 1122 Affiliated or Subsidiary — Information return of 1122 47 GUIDE TO FORMS— Continued. Corporations — Continued. Annual returns of — Form Domestic corporations other than Insurance companies 1120 Tentative return : 1031-T Domestic corporations other than railroad and insurance com- panies (Income — Year 1917) 1031 Excess Profits Tax — 1917 1103 Income and Profits taxes — 1918 1120 Insurance companies, including mutual life and mutual ma- rine 1030 Mutual insurance companies, other than mutual life and mutual marine 1030-A Railroad corporations 1090 Undistributed net income _ 1112 Claims for exemption from withholding at source or income — • Bonds, mortgages, etc., see 1001 Replacement Fund, application for permission to establish 1114 Tax due — statement of — Income and Profits Tax — 1918 1123 Credit for Taxes 1116 Credit for Poreigfn Taxes 1118 Deductions — Individuals — Certificate for claixung' 1088 Excess Profits Tax — ^^^ Returns for 1917 1095 Corporations 1103 Individuals 1101 Partnerships 1102 Execntor — Annual return — Estate during period of administration — Income of more than $5,000 1040 Income of $5,000 or less 1040-A Tentative return 1040-T For and in behalf of deceased person — Income of more than $5,000 1040 Income cf $5,000 or less 1040-A Tentative return 1040-T For and in behalf of estate when distributed 1041 Excess Tax 'Withheld — Claim for refund 46 Exemption. Certificate- Firms, organizations, and fiduciaries 1063 Farmers — Income and expense return 1040-F Fiduciary — List return of tax withheld on income paid, and undistributed income payable to beneficiaries 1041 Ownership certificates — Paid at source 1015 Not paid at source 1019 Foreign Corporations — Annual Returns of — Foreign Insurance Co. — The actual owner of stock of which citizen or resident is actual owner 1030 Interest on bonds and dividends on stock of domestic corporations to be made by representative 1030 Foreign Mutual Insurance Co. — Actual owner of stock of which citizen or resident is the actual owner 1030 Interest on bonds and dividends on stock of domestic corporations to be made by representative 1030 Foreign Corporations, other than Insurance Companies — Actual owner of stock of domestic corporation of which a citizen or resident is actual owner 1120 Tentative return ) 1031-T Interest on bonds and dividends on stock of domestic corporations, to be made by representative 1120 Tentative return 1031-T Foreign Partnership — Ownership certificate. Bonds — To be furnished with coupons detached from bonds of domes- tic corporations — Claiming exemption 1001 Not claiming exemption 1000 48 GUIDE TO FORMS— Continued. G-uardian — Form Annual return in behalf of — Minor — Income of more than $5,000 1040 Income of $5,000 or less 1040-A Tentative return 1040-T Incoiue and Profits Tax Return — Annual returns of — Income of more than $5,000 _ 1040 Income of $5,000 or less 1040-A Tentative return _ 1040-T Schedule of farm income and expense 1040-F Corporations 1120 Excess Profits Tax — Annual return year 1917 1101 Ownership certificate — Bonds, mortgages, etc. — Claiming exemption 1001 Not claiming exemption 1000 Individual — Annual return of — Income of more than $5,000. 1040 Income of $5,000 or less 1040-A Tentative return 1040-T Information Returns — Brokers 1100 Payments of $1,000 or more — Annual letter of transmittal 1096 Detail payments 1099 Payments of interest on bonds and dividends on stock of foreign corporations — Monthly return 1096-A Annual return 1096-B Payments to nonresident alien individuals and foreign corpora- tions in calendar year 1918 1098 Joint Owners of^Bonds — Ownership certificate bonds, etc. — Claiming exemption 1001 Not claiming exemption 1000 Joint Iiessors of Property — Ownership certificate — Claiming exemption 1001 Not claiming exemption 1000 Non-Resident Aliens — See "Ownership and Exemption Certificate," Annual (Individual) Returns — (To be used by agent or representative) — Income of more than $5,000..* 1040 Income of $5,000 or less 1040-A Tentative return 1040-T Ownership certificate — Foreign bonds, to accompany interest coupons, payable in U. S 1071 Oath — Required of withholding agent when making return for another..l009 Ownership Certificates — Fiduciaries — To be paid at source 1015 Not to be paid at source 1019 Showing actual owner of stock 1087 Tax to be paid at source 1000 Tax not to be paid at source 1001 Tax not to be paid at source (dividends on stock of foreign cor- porations and interest on bonds of foreign countries and cor- porations) 1001-A Ownership and Exemption Certificate — Nonresident alien firm, organization, etc 1086 Partnerships — Claims of exemption from withholding at source (bond interest) 1001 (Bond interest.) Partnership Return 1065 Excess profits tax return 1917 1102 49 GUIDE TO FORMS— Continued. Railroad Corporations — Form Returns of — for 1917 1090 Receipt for Incoxue and Excess Profits Taxes — Year 1917 1105 Year 1918 1107 Record Owner of Stock — Citizen or resident — Annual return for and in behalf of non-resident actual owner — Income of more than $5,000 1040 Income of $5,000 or less 1040-A Tentative return 1040-T Refund of Paid Taxes and Penalties — Claim for 46 Replacement Fund — Application for permission to establish 1114 Representative of Non-Resident Allen — See "Agent of Foreign Insurance Co." Subsidiary Corporations — Information returns 1122 Substitute Certificates of Ownership — For use of responsible banks or bankers — Tax not to be paid at source 1058 Tax to be paid at source 1059 Tax Sue- Statement of — Income, war profits and excess profits — ^year 1918 1123 Trustees Under Mortgrage — Claim for exemption from withholding at source of — Income, bonds, etc : 1001 Undistributed Net Income— Corporations 1113 Widow — Annual return at end of year in which husband died — Income of more than $5,000 : 1040 Income of $5,000 or less :..... .•. 1040-A Tentative return 1040-T Withliolding- Agents — List returns of tax withheld — Domestic Bonds — Monthly return 1012 Follow sheet for monthly return ..— : 1012-A Annual return 1013 Miscellaneous Income — Annual return 1042 Annual return (foreign income) ^ 1043-A Oath required of withholding agent when acting for another in filing return 1009 Return of tax withheld by first bank or collecting agent when cou- pons or orders are not accompanied by certificate of owner- ship — Monthly 1044 Annual 1044-A 50 Stock Dividends Paid in 1918 Provision is made in the Revenue Act of 1918 that stock dividends received by a taxpayer between Jan- uary 1 and November 1, 1918, both dates inclusive, or which during such period are authorized and declared, and entered on the books of the corpora- tion, and are received by a taxpayer' after November 1, 1918, and before the expiration of thirty days after the passage of this act, shall be taxed to the recipient at the rates prescribed by law for the years in which the corporation accumulated the earnings or profits from which such dividend was paid, but the dividend shall be deemed to have been paid from the most recently accumulated earnings or profits. On the following page is a partial list of stock divi- dends paid during the year 1918 : 51 Class of Name Stock Date Paid ; Amount Paid in Stock % Per Cent of Surplus or Profits Distributed from Years 1918 1917 1916 % % % Feb. 1 21/2 — _ 41.6 58.4 May 1 21/^ 100 Aug. 1. 2y2 74.8 25.2 Nov. 1 2y2 32.4 67.6 Dec. 7 15 100 Feb. 15 2 100 _ — May 15 2 100 Jan. 2 V2 100 Feb. 1 % 100 Mar. 1 % 100 April 1 % 100 May 1 % 100 June 1 % 100 July 1 % 100 Aug. 1 % 100 Sept. 1 % 100 Oct. 1 % 100 Nov. 1 % 100 ^Dec. 1 % 100 June 15 6 100 Feb. 1 5 33.23 66.77 Jan. 15 2 100 July 15 2 100 June 3 25 35.4 62.4 2.2 'Dec. 2 15 100 April 10 20 39.901 60.099 April 1 1 100 Mar. 7 4 100 Aug. 15 4 100 Feb. 15 2 100 May 15 2 100 Oct. 1 20 100 Mar. 3 25 100 Amer. Light & Traction Com. Amer. Light & Traction Com. Amer. Light & Traction Com. Amer. Light & Traction Com. Amer. Sumatra Tobacco Com. By-Products Coke Corp Com. By-Products Coke Corp Com. Cities Service Com. Cities Service Com. Cities Service Com. Cities Service Com. Cities Service Com. Cities Service -t Com. Cities Service Com. Cities Service Com. Cities Service Com. Cities Service Com. Cities Service Com. Cities Service Com. Crown Oil Com. General Chemical Com. General Electric Com. General Electric Com. Gulf States Steel -__- Com. Keystone Tire & Rubber Com. Lorillard (P.) Co _ Com. Middle West Utilities Com. Porto Rican Amer. Tob Com. Procter & Gamble Com. Semet-Solvay Co Com. Semet-Solvay Co Com. Weyman-Bruton Co ^ Com. VMieeling Steel & Iron Com. *Declared prior to November 1, 1918. 52 Corrections IN THE STANDARD MANUAL OF THE INCOME TAX FOR 1919 On account of the delay in the passage of the new Revenue Act and the Hmited time allowed by the Treasury Depart- ment in which to file returns, the compilation of the Standard Manual of the Income Tax for 1919 was made at as early a date as possible in response to a pressing demand by the pub- lic for authentic advance information in connection with the new legislation . During the construction of the Standard Manual of the Income Tax for 1919 we were constantly in touch with the officials of the Treasury Department in order to assist both the Government and the public in the administration of the law through the medium of our several publications in a practical manner, endeavoring to simplify its interpretation so as to be easily understandible to the ordinary taxpayer. In the absence of any new regulations and in consequence of our efforts to place this data in the hands of the taxpaying public at the earliest possible moment, several rulings were subsequently made which completely reversed the former procedure and which necessitates our calling attention to several corrections to be noted in the Standard Manual, as follows : [1] HUSBAND AND WIFE In the case of a husband and wife making separate returns, each claiming one-half the marital exemption, the amount of tax shown on page 15 is to be $360 instead of $480. The reason for this change is that previously the normal tax has always been computed on the joint income of husband and wife, while under the new regulation recently 53 issued, the Department holds that the normal tax as well as the sur- tax shall be computed on the separate incomes of each and the tax shall be levied according to the manner in which they divide the exemption of $2,000. This is a decided advantage to the taxpayer, as may be seen by the example, as the normal tax rates are 6% on the first $4,000 over the exemption of $2,000, and 12% on an amount over the first $4,000 ; thus in this case if the tax was computed on the combined net income of husband and wife instead of on the separate incomes, the tax would be 6% on $4,000 and $12% on $2,000, making a total of $480 instead of Husband $5,000 Half exemption 1,000 Wife $3,000 Half exemption 1,000 Amt. Taxable $2,000 Rate of Tax 6% $120 Amt. Taxable $4,000 Rate of Tax 6% $240 Husband's Tax $240.00 Wife's Tax 120.00 Total Tax. $360.00 [2] In the case of husband and wife, as outlined in paragraph 236 on page 253, the statement that a return must be made in the case of either having a net income equal to or in excess of $1,000 is in error, as a return is not required in the case of husband and wife living together unless the combined net income equals or exceeds $2,000. [3] LIFE INSURANCE POLICIES Up to the time of going to press, the Department had ruled that the proceeds of life insurance policies payable to the estate of a decedent when received by an executor or administrator were taxable to the amount by which such proceeds exceeded the premiums paid by the decedent as outlined in paragraph 392, page 300, of the Standard Manual. This ruling was reversed by Article 72 of the new Regulations No. 45, which specifies that upon the death of the insured the proceeds of his life insurance policies, whether paid to his estate or to individual bene- ficiaries (but not if paid to a corporation or partnership) are to be excluded from the gross income of the beneficiary. [4] AVERAGING INVESTED CAPITAL In the matter of invested capital, the illustration of making average adjustments where changes in invested capital occurred during the tax- able year as shown in paragraph 914, on page 482, outlines the adjust- 54 ments on a monthly basis. This method of averaging invested capital has been reversed by Articles 853 and 854 of Regulations No. 45, which provide that instead of the capital being averaged monthly, the adjust- ments shall be computed according to the exact number of days dur- ing the period which the change in capital affected. As an illustration, if a return was made for the calendar year ending December 31st, 1918, and if $100,000 of additional capital was paid in on February 7th, 1918, this addition to invested capital was in effect for 318 days and the amount to be added to the invested capital as of the beginning of the year would be 318/365 of $100,000, or $87,123.29. If $50,000 of this amount was withdrawn on October 31st, 1918, the amount to be de- ducted would be 62/365 of $50,000, or $8,493.15. [5] CHICAGO, MILWAUKEE AND ST. PAUL STOCK On page 1019 of the Manual in the section dealing with the price of securities on March 1st, 1913, the security listed on line 12 and line 13 as Central Mexico & Southern Pacific, Common and Preferred, should be corrected to read "Chicago, Milwaukee & St. Paul, Common and Preferred." 55 A Special Day-to-Day Tax Service That Will Keep You Posted Throughout the Year and a Special Offer New Rulings May Beduee Or Increaselfimr Ikx I AST year, the Treasury Department issued more than 100 separate Rul- ' ings and Regulations — an average of nearly two every week — having to do with various phases of the tax payable during 1918 and figured against 1917 Income or Profits. In addition, hundreds of cases were taken into £ourt for deci- sion, either by the Government or by various corporations, banks or individuals affected. The new Revenue Bill under which you must figure the tax to be paid this year against last year's Income or Profits, is likely to occasion an even greater number of special rulings or interpretations and court decisions than the old law did. Un- less you have a simple, convenient and trouble-saving way of keeping posted on all these new rulings or decisions as they are rendered, you are likely to overlook points of vital importance — points that may mate- rially reduce or increase your tax. The Standard Loose Leaf Income Tax Service — which is a day-to-day service is- sued in handy loose leaf form (entirely separate and distinct from the Standard Manual of the Income Tax), and which covers a period of one year — provides a simple and sure way of keeping constantly up to date throughout the year on all the various points subject to change or revised interpretations through new rulings of the Treasury Department or through Court De- cisions. It automatically informs you im- mediately of all new developments in any way affecting any of the Federal Taxes. And such information on a single point — although hundreds will be included — may easily be worth more to you than the total cost of the entire year's service. The Three Men In Char^ .^jnJ fie Specialz^dvice Privilege The Standard Loose Leaf Income Tax Service is under the personal direction of Mr. Edward J. Fath.. Included as a part of this Service — and additional to the regular day to day bulle- tins — each subscriber receives three Special- Advice Coupons, each coupon entitling the subscriber to submit any special or peculiar accounting problem or question to Mr. Fath for his opinion and advice. Mr. Fath is the expert formerly in charge of the administration of the Income Taxes for the United States Government in the Second New York District, which includes the Wall Street Zone. Because of this ex- perience and his minute familiarity with every phase of the law and its interpreta- tion and practical application, Mr. Fath's advice on any point can be considered as authoritative. Associated with Mr. Fath in the manage- ment of this Tax Department are Mr. Frank A. Roche, who was Mr. Fath's successor as Deputy Collector of Internal Revenue for the Second District of New York (Wall Street Zone), and Mr. S. L, Heacock, form- erly acting head of the Capital Stock Divi- sion of the Bureau of Internal Revenue in Washington. Tour Services In One The Standard Loose Leaf Income Tax Service — issued" for use in connection with the Standard Manual of the Income Tax, although entirely distinct from the Manual — includes four separate tax services in one: (a) The full Text, together with Analy- sis and Explanation of all new Treasury Rulings, Regulations or Interpretations affecting the Income Tax. (b) The full Text, together with Analy- sis and Explanation of all new Treasury Rulings, Regu- lations or Interpretations af- fecting the War Excess Profits Tax. (c) The tuU Text, together with Analysis and Explana- tion of all new Treasury Rul- ings, Regulations or Interpre- tations affecting the Inheri- tance Tax. (d) (This feature is most important and helpful.) A cumulative supplement, fre- quently revised, to be inserted within the pocket on the front cover of your "Standard Manual of the Income Tax," containing a brief but adequate digest of all treasury decisions, rulings and other tax data in the loose-leaf sheets (a), (b) and (c). This places practically under one cover (the Manual plus the Supplement) all tax information, revised to date. This Supple- ment will enable you at any time to see and absorb at a glance the gist of every tax decision and ruHng handed down from the publication of the "Manual" to the end of the tax year. Careful and complets Indexing of all Bulletins as issued — together with cross-reference where necessary to any point or provision more fully covered in the pages of the Standard Manual it- self — makes the cumula- tive informatibn sup- plied through this Loose Leaf Service always quick and easy to locate. Each service is complete in itself — that is, each tax is treated separately — and is supplied in handy Loose Leaf Bulle- tin form, with a permanent Loose Leaf Leather Ring Binder for holding the Bulle- tins. To provide for instant identification of the particular tax treated in each Bulletin as issued, the Bulletins are printed on different colors of bond paper — one color for the Bulletins on the Incom6 Tax, another color for the War Profits Tax, a third for the Inheritahce Tax, and a fourth .color for the Digest of Decisions. The Ring Binder is also arranged to provide for quick and easy fil- ing of the Bulletins in their proper order, grouping and indexfng, thus forming a con- venient and permanent refer- ence. The scope of this Loose Leaf Service is broad. It in- cludes far more than merely a reprint and orderly arrange- ment and indexing of Treas- ury Rulings and Court Decisions. It sup- plies additional information and side lights on the practical application of all auch rulings. When necessary, each new ruling or decision will be preceded by a common- sense digest. Also, when necessary, there will be an illustration of each ruling show- ing how it applies. Thus, this Service will not only instantly show you whether you or your business will be affected by any new development, but also, just how you will be affected. Our Exeeptional Facilities For KeepuigKbu Informed Through this Loose Leaf Service^ the Standard Statistics Company gives- its subscribers the immediate benefit of its exceptional facilities and of its accounting experience. With a special information-gathering Bureau of our own in Washington, in con- stant touch by our own private wire with our New York oflSce, and with our own day- and-night printing plant, we are able to offer a fast and accurate Income Tax Service which will keep you posted up. to within twenty-four hours. This Leather Binder is arranged in four divisions, thus providing for keeping the Loose Leaf Bulle- tins in their proper order as fast as supplied, and also making them always available for reference. Special Short Time Offer Saves Ifbu^S The regular charge for the Standard Loose Leaf Tax Service — four services in one — is $30 a year. However, subscribers to the Standard Manual of the Income Tax can secure this day-by-day Loose Leaf Service at a net cost of only $25, by taking advantage of our offer to apply the full price paid for the Manual as a credit on the Loose Leaf Service. For your convenience in arranging for the Loose Leaf Service, you will find enclosed a special Order Card which you can use as the equivalent of a $5 bill — we will accept this card as a $5 payment or credit to apply on the Loose Leaf Service, providing the card is used within 15 days from the time you receive it. To head off any chance of forgetting, wq suggest that you sign and return this card at once. It will not be necessary to send a check — simply mail the card; we will then enter your order and start the service immediately, and send you a bill for $25 ($30 less the $5 credit) which can be paid later a:t your convenience. Standard Statistics Company Inc., 47- 49 West Street New York m m m m