i 
 
 UNIVERSITY 
 
 OF CALIFORNIA 
 
 LOS ANGELES 
 
 SCHOOL OF LAW 
 LIBRARY
 
 SUPPLEMENT TO TREASURY DECISIONS 
 (T. O. 30a9) 
 
 TREASURY DEPARTMENT 
 UNITED STATES INTERNAL REVENUE 
 
 III 
 
 REGULATIONS 50 
 
 ( Revised ) 
 
 RELATING TO THE 
 
 CAPITAL STOCK TAX 
 
 UNDER THE 
 
 / 
 
 REVENUE ACT OF 1918 
 
 Approved June 21,1 920 
 
 WASHINGTON 
 
 GOVERNMENT PRINTING OFFICE 
 
 1920
 
 / 
 
 5 
 so
 
 :! 
 
 u. REGULATIONS 
 
 RELATINfi TO THE 
 
 CAPITAL STOCK TAX 
 
 UNDER 
 
 TITLE X OF THE REVENUE ACT OF 1918. 
 
 [Public, No. 254, 65th Congress. H. R. J2863.] 
 
 CONTENTS. 
 
 Page. 
 
 Section iOOO (a). Effective date 5 
 
 Article 1 . Due date of tax 5 
 
 Section 1. Corporations defined and distinguished 5 
 
 Article 2. Corporations 5 
 
 3. Associations and joint-stoc'-' companies 5 
 
 4. Limited partnerships as corporations 6 
 
 5. Limited partnerships as partnerships G 
 
 6. Partnership banks 6 
 
 7 . Massachusetts trusts G 
 
 8. Domestic corporations 7 
 
 9. Foreign corporations 7 
 
 Section 1000 (a) (1). Tax on domestic corporations 7 
 
 Article 10. Basis of the tax: "Carrying on or doing business" 7 
 
 11. "Carrying on or doing business " illustrated 8 
 
 12. Not "doing business " 9 
 
 13. Rate of tax 9 
 
 14. Fair average value of capital stock 10 
 
 - 15. Surplus and undiwled profits 10 
 
 16. Deduction of §5,000 10 
 
 Section 1000 (a) (3). Tax on foreign corporations 11 
 
 Article 17. Basis of the tax 11 
 
 18. Capital employed in the L^'nited States 11 
 
 19. Capital employed in the United States illustrated 12 
 
 20. Rat! of tax 12 
 
 21. Measure of tax 12 
 
 Section 1000 (b). Tax on stock insurance companies 12 
 
 Article 22. Stock insurance companies 12 
 
 Section 1000 (c). Tax on mutual insurance companies 13 
 
 Article 23. Mutual insurance comj^any 13 
 
 24. Domestic mutual insurance company: rate of tax 13 
 
 25. Foreign mutual insurance company: rate of tax 14 
 
 Section 1000 (c). Exemption from tax 14 
 
 231. Exempt organizations 14 
 
 200. "Personal service corporation" defined 15 
 
 1. " Government contract " defined 15 
 
 (3)
 
 Section 1,000 (c). Exemption from, tax — Continued. Page. 
 
 Article 26. Corporation not in business during preceding year 15 
 
 27. Exempt organizations 16 
 
 (1) Labor, agricultural or horticultural organizations 16 
 
 (2) Mutual saving-s banks 16 
 
 (3) Fraternal beneficiary societies, ordera or associations 17 
 
 (4) Domestic building and loan associations and cooper- 
 
 ative banks mthout capital stock 17 
 
 (5) Cemetery companies 17 
 
 (6) Corporations organized and operated exclusively for re- 
 
 ligious, charitable, scientific, or educational purposes, 
 
 or for the prevention of cruelty to children or animals 17 
 
 (7) Business leagues, chambers of commerce, or boards of 
 
 trade 18 
 
 (8) C^i^dc leagues or organizations. . .- 19 
 
 (9) Clubs 19 
 
 (10) Farmers' or other mutual hail, cyclone, or fire insur- 
 
 ance companies, mutual ditch or irrigation com- 
 panies, mutual or cooperative telephone companies, 
 
 or like organizations of a purely local character 19 
 
 (11) Farmers', fruit growers', or like associations 20 
 
 (12) Corporations organized for the exclusive purpose of 
 
 holding title to property, etc 20 
 
 (13) Federal land banks and national farm-loan associations 20 
 
 (14) Personal service corporations 20 
 
 Article 28. Return by corporation claiming exemption 22 
 
 Section 330. Election to be taxed as corporation 23 
 
 Article 29. Election to be taxed as corporation 23 
 
 Section 1000 (d). Returns public records 24 
 
 Article 30. Inspection of returns 24 
 
 Section 1305. Return of tax 25 
 
 Article 31. Return by domestic corporation 25 
 
 32. Return by foreign corporation 25 
 
 33. Time for making return 25 
 
 34. Tentative return 26 
 
 35. Return by affiliated corporation 26 
 
 Section 1307. Payment of tax -• 27 
 
 Article 36. Time for payment of tax 27 
 
 37. Abatement and refund of taxes 27 
 
 Section 1313. Fractional part of cent 28 
 
 Article 38. ^Yhen fractional part of cent may be disregarded 28 
 
 Section 1314. Medium of payment of tax 28 
 
 Article 39. Payment of tax by uncertified checks 28 
 
 40. Procedure with respect to dishonored checks 29 
 
 Section 1004. Credit for former tax 29 
 
 1005. Doing business without payment of tax 29 
 
 Article 41. Doing business without payment of tax 29 
 
 Section 1308. Penalties. _ 30 
 
 Article 42. Penalty for nonpayment of tax 30 
 
 43. Penalties for failure to make return and for false return 30 
 
 Section 1309. Authority for regulations 31 
 
 Article 44. Promulgation of regulations - - - 31
 
 CAPITAL STOCK TAX. 
 
 EFFECTIVE DATE. 
 
 Sec. 1000 (a). That on and after July 1, 1918, in lieu of the tax imposed by 
 the first subdivision of section 407 of the revenue act of 191G —   * * *. 
 
 Article 1. Due date of tax. — Tlie tax became effective as of 
 July 1, 1918, and is to be paid annually in advance for each, year 
 begianing July 1, in lieu of the capital stock tax imposed by the 
 Revenue Act of 1916. The tax for the year ending June 30, 1919, 
 although necessarily not payable in advance, was payable upon notice 
 and demand by the collector. See article 36. Special taxes, of which 
 this is one, become due on the first day of July in each year, or on 
 commencing any trade or business on which such tax is imposed. 
 In the former case the tax is for one year, and in the latter case it is 
 for the period from the first day of the month in which the liabihty 
 to the special tax is incurred to the first day of July following. But 
 see article 26. No portion of the tax is refundable where a corpora- 
 tion ceases to do business during the year. 
 
 CORPORATIONS DEFINED AND DISTINGUISHED. 
 
 Section 1. That when used in this Act — 
 
 ***** 
 
 The term "corporation" includes associations, joint-stock companies, and 
 insurance companies; 
 
 The term "domestic" when applied to a corporation or partnership meana 
 created or organized in the United States; 
 
 The term "foreign" when applied to a corporation or partnership meana 
 created or organized outside the United States; 
 
 The term "United States" when used in a geographical sense includes 
 only the States, the Territories of Alaska and Hawaii, and the District of 
 Columbia; 
 
 Art. 2. Corporations. — The term "corporation" includes associa- 
 tions, joint-stock companies, whether created by statute or by con- 
 tract, and insurance companies, but not partnerships, properly 
 so called, and whether or not organized for profit or having a capital 
 stock represented by shares. 
 
 Art. 3. Associations and joint-stock companies. — Associations and 
 joint-stock companies include organizations, by whatever name 
 known, which act or do business in an organized capacity, whether 
 created under and pursuant to State laws, agreements, declarationa 
 
 (5)
 
 of trust, or otherwise, the net income of which, if any, is distributable 
 among the members or shareholders on the basis of the capital stock 
 held by each, or, where there is no capital stock, on the basis of the 
 proportionate share of capital which each has or has invested in the 
 business or property of the organization. But see articles 4, 5, 6, 7. 
 An organization, the membership interests in wliich arc transferable 
 without the consent of all of the members, however the transfer may 
 be otherwise restricted, and the business of which is conducted by 
 trustees or du^ctors and officers "vvdthout the active participation of 
 all the members as such, is an association. 
 
 Art. 4. Limited partnerships as corporations. — Partnei-ships with 
 limited liability or partnership associations autliorized by the statutes 
 of Pennsylvania and a few other States are only nominally partner- 
 ships. Such so-called limited partnerships, offering opportunity for 
 limiting the liability of all the members, providmg for the trans- 
 ferability of partnership shares, and capable of holding real estate 
 and bringmg suit in the common name, are moi-e trvAj corporations 
 than partnerships, and are taxable as corporations. In all doubtful 
 cases limited partnerships will be treated as corporations unless they 
 submit satisfactory proof that they are not m effect so organized. 
 Michigan partnership associations are corporations. The liability of 
 Virginia limited partnerships is determined in each case from a 
 consideration of the certificate of partnership and all pertinent facts 
 relative thereto. 
 
 Art. 5. Limitecl partnerships as partnerships. — So-called limited 
 partnerships of the type authorized by the statutes of Nev/ York and 
 most of the States are partnerships and not corporations within the 
 meaning of the statute. Such limited partnerships which can not 
 limit the liability of the general partners,, although the special partner 
 enjoy limited liability so long as they observe the statutory conditions, 
 which are dissolved by the death or transfer of the interest of a 
 general partner, and which can not hold real estate or sue in the 
 partnership name, are so like common law partnerships that they 
 can not be difi'erentiatecl therefrom for tax purposes. Michigan and 
 Illmois limited partnerships are partn.ershi])s. California special 
 partnerships are partnerships. 
 
 Art. 6. Partnership banks. — A partnership bank, conducted like a 
 corporation and so organized that the interests of its members may be 
 transferred without the consent of the other members, is a joint-stock 
 company or association within the meaning of the statute. A 
 partnership bank, the mterests of whose membei^ can not be so 
 transferred, is a partnership. 
 
 Art. 7. Massachusetts trusts, — The test of liabiUty in all cases 
 involving trusts of the Massachusetts type is whether the cestuis que 
 trustent have by the terms of the trust agreement a voice in tlie
 
 management or control of the trust. Where the trustees are m com- 
 plete control of the busmess, the beneficiaries having no control except 
 the right of filling vacancies among the trustees or of consenting to a 
 modification of the terms of the trust or of dissolving the trust, no 
 association exists. If, however, the cestuis que trustent have a 
 voice m the control or management of the Ijusmess of the trust, 
 whether through the right to elect trustees periodically or to remove 
 the trustees or to restrict the trustees as to the management of the 
 trust or otherwise, the trust is an association within the meaning 
 of the statute. Where the trustees hold in their own right a sufficient 
 number of the certificates of beneficial interest to constitute control 
 as between the beneficiaries, the trust will be held to be an association 
 regardless of the powers conferred upon the trustee by the instrument 
 creating the trust. 
 
 Art. 8. Domestic corporations. — A domestic corporation is a cor- 
 poration created or organized in the United States, which includes the 
 States, Territories of Alaska and Hawaii, and the District of Columbia. 
 
 Art. 9(, Foreign corporations. — A foreign corporation is a corpora- 
 tion created or organized outside the United States as defined in 
 
 article 8. 
 
 TAX ON DOMESTIC CORPORATIONS. 
 
 Sec. 1000 (a) (1). Every domestic corporation shall pay annually a special 
 exciae tax with, respect to carrjdng on or doing business, equivalent to $1 for 
 eacb. §1,000 of so much of the fair average value of its capital stock for the 
 preceding year ending June 30 as is in excess of $5,000. In e.stimating the 
 value of capital stock the surplus and undivided profits shall be included; 
 
 Art. 10. Basis of the tax: "Carrying- on or doing business." — The 
 basis of the tax in the case of a domestic corporation is ''carrying on 
 or doing business" in the capacity of a corporation, association, or 
 insurance company. The words ''carrying on or doing business" 
 must be given their ordinaiy and natural signification. "Business" 
 is a very comprehensive term and embraces whatever occupies the 
 time, attention or labor of men for the purpose of livelihood or profit. 
 In other words, business necessarily involves the idea of gain. The 
 true basis of distinction is, in the first instance, between — 
 
 (a) A corporation organized for the purpose of doing business 
 
 as above defined, and 
 (6) A corporation organized for the sole purpose of owning and 
 holding property and distributing its avails; 
 and, in the second instance, between — 
 
 (c) A corporation of class (a) which is continuing the body and 
 substance of the business for which it was organized or is 
 still active and maintaining its organization for the pur- 
 pose of continued eft'orts in the pursuit of profit or gain, 
 and
 
 8 
 
 (d) A corporation vrhich; although included in class (a), has 
 substantial!}" retired from the business for which it was 
 organized and has reduced its activities to the mere own-- 
 ership and holding of property, distributing its avails, 
 and doing only the acts necessary to the maintenance of 
 its corporate existence and the private management of its 
 purely internal affairs. 
 The distinction in each case must depend upon the peculiar facts in 
 the case. Corporations of class (a) will be presumed to be subject 
 to the tax unless they submit proof, satisf actor\r to the Commissioner, 
 that they are not actually canning on or doing business. If a cor- 
 poration claim exemption on the ground that it belongs to class (h), 
 it will be required to file an excerpt from its charter setting forth 
 its corporate powers together with a full and comprehensive state- 
 ment showing the nature of the activities in which it is and has been 
 actually engaged. If it claim exemption on the ground that it be- 
 longs to class (d), it will be required to furnish a copy of any amend- 
 ment of its charter, resolution of its board of directors., or other 
 evidence, satisfactory to the Commissioner, showing that it has 
 reduced its activities to the mere ownership of property, receipt of its 
 avails, and the doing of only what is necessary to the maintenance 
 of its corporate existence. 
 
 Art. 11. "Carrying on or doing- business" illustrated. — Corpora- 
 tions organized for the purpose of and actually engaged in such 
 activities as buying, selling, or dealing in mineral or timber land or 
 other real estate; leasing property, collecting rents, managing office 
 buildings, making investments of profits; leasing lands and collect- 
 ing royalties, managing wharves, dividing profits; and in some cases 
 investing the surplus, are engaged in ''carrying on or doing business" 
 within the meaning of the statute. 
 
 A corporation organized for the purpose of, and actually engaged 
 in, buying mineral or timber land or other real estate and holding it 
 with a view to future sale at an advance is carrying on or doing 
 business. 
 
 A corporation organized for the purpose of owning and leasing 
 real estate which has leased all of the property under its control is 
 stiU engaged in doing business unless, under the terms of its lease, 
 its activities have been reduced to the mere receipt and distribution 
 of the avails of the leases at the actual cost of so doing. If it is still 
 maintaining its organization for the purpose of continued effort in 
 the pursuit of profit and gain it is doing business. 
 
 A corporation owning or managing real estate which leases aU of its 
 property but under the terms of the lease is required to maintain or 
 keep the property in repair is doing business.
 
 A corporation engaged in mining or in developing and speculating 
 in mineral lands is doing business. 
 
 A corporation engaged in buying and selling securities or other 
 property is doing business even though for a period it makes no 
 purchases or sales because of unfavorable market conditions. 
 
 A corporation formed to take over miscellaneous stocks, bonds, or 
 other property (as of an estate), to negotiate sales of various items 
 from time to time as opportunity and judgment dictate, and to dis- 
 tribute the profits from time to time as liquidation is effected, is, 
 while so engaged, carrying on or doing business. 
 
 A parent corporation which finances or manages the operations of 
 its subsidiaries is doing business. 
 
 A so-called holding company vrhich, under its charter, is authorized 
 to a,nd does, in addition to receiving and distributing the avails of 
 the property or securities, held by it, finance the operations of its 
 subsidiaries, is engaged in doing business. 
 
 A corporation organized for the purpose of taking over and holding 
 securities, timber land, coal lands, or other real estate, is held to be 
 doing business, if it makes investments or reinvestments of its surplus 
 income or funds in excess of an amount necessar)^ to maintain its 
 original investments. 
 
 Art. 12. Not "doing business." — ^Holding companies as dis- 
 tinguished from parent corporations, and corporations all of whose 
 property and business is operated by, or is in the hands of, a receiver 
 or the Alien Property Custodian, are not doing business. 
 
 A holding company is defined as one whose corporate powers are 
 limited to the mere owning and holding of property and distribution 
 of its avails, or one wMch, although incorporated for the purpose of 
 doing business as defined in article 10, has substantially retired from 
 the business for which it was organized and has reduced its activities 
 to the mere ownership and holding of property, distributing its avails, 
 and doing only such acts as are necessary to the maintenance of its 
 corporate existence and the private management of its purely internal 
 affairs. 
 
 A holding company, as above defined, will not be considered to be 
 doing business by reason of the reinvestment of its surplus income or 
 funds to the extent only of maintaining its original investments. 
 
 Art. 13. Rate of tax. — The tax is at the rate of $1 for each full 
 $1,000 of the fair average value of the capital stock of the corpora- 
 tion in excess of the prescribed deduction of $5,000. The tax is com- 
 puted not upon the par value of the stock, but upon the fair average 
 value for the preceding yesiT, or for the period during which it has been 
 issued, if less than a year, of the capital stock outstanding at the date 
 of the incidence of the tax. In the case of a domestic corporation it 
 181415°— 20 2
 
 10 
 
 is on an entirely different basis from tlie excess profits tax, wiiich is 
 concerned with invested capital and not with the fair average value 
 of the capital stock. Stock in the treasury of a corporation is not 
 regarded as outstanduig unless pledged as security for a debt. No 
 deduction is allowed corporations organized in the United States for 
 capital invest-C'd outside of the United States. If the corporation, is 
 doing business it is taxed on its entire capital stock even though most 
 of it may not be employed in the business. 
 
 Art. 14. Fair average value of capital stock. — The fair average 
 value of the capital stock for the purpose of determining the amount 
 of the capital stock tax must not be confused with the market value 
 of the shares of stock vfhere it may be necessary to determine such 
 value under other jirovisions of the revenue laws. The fair average 
 value of the capital stock, the statutory basis of the tax, is not nee- 
 essaj-ily the book value or the value based on prices realized in current 
 sales of shares of stock or even the value, determined by capitalization 
 of earnings, although it maybe more directly dependent upon the last. 
 It should nsualiy be capable of appraisal by officers of the corporo- 
 tion having a special knowledge of the affairs of the corporation and 
 general knowledge of the line of business in v\^hich it is engaged. 
 Provision is accordingly made in Exhibit C of Form 707 (Eevised) 
 for the tentati^'e determination of the fair value of the capital stock 
 by capitalizing the net earnings of the corporation on a percentage 
 basis fixed by its officers as fairh^ representmg the conditions obtaining 
 in the trade and hi the locality. But such fair value, except in the 
 case of insurance companies, must not be set at a sum less tlian the 
 reconstructed book value shown by Exliibit A, unless the corporation 
 is materially affected by extraordmar}^ conditions whicli support a 
 lower valuation. In any such ease a full explanation must accom- 
 pany the return. The Commissioner ■will estimate the fair value of 
 the ^'apital stock in cases regarded as involving any understatement 
 or undervaluation. For the method of computing the fair average 
 value of capital stock in the case of insurance companies see articles 
 22 and 24. 
 
 Aet. 15. Sm-plus aud midivided profits. — The surplus and undivided 
 profits of a corporation must be included in estunatmg the fair 
 average value of its capital stock. If the fan* average value be de- 
 termined from the book value, the surplus and undivided profits 
 are included in the assets, if from sales, they are necessarily a factor 
 in determining the market pricie, and if from net income, they are 
 reflected to a greater or less extent in the earnings. 
 
 Art. 1G. Deduction of S5,000. — From tlie total fair average value 
 of the capital stock the sum of S.5,000 is to be deducted, and the tax 
 is ujK)u each full $1,000 td' any balance. Ac<'ordingly, corporations 
 the fau' average value of whose capital stock is not more than $5,000
 
 11 
 
 arc uot subject to tax, but for tlie purpose of avoiding error every 
 corporation is required to file a return as directed in article 31. 
 
 TAX ON FOREIGN CORPORATIONS. 
 
 Sec. 1000. (a) (2) Every foreigu corporation shall pay annually a 
 special excise tax with respect to carrjdng on or doing business in the 
 United States, equivalent to ?1 for each ?1.000 of the a^-erage amount of 
 capital employed in the transaction of its business in the United tStato.3 
 during the preceding year ending June thirtieth. 
 
 Art. 17. Basis of tlie tax. — Tlie basis of the tax in the case of 
 a foreign corporation is "carrying on or doing business in the United 
 States.-' A foreign corporation is carrying on or doing business in 
 the United vStates if it maintains an agent or an office or warehouse in 
 the United States, or, in the case of an insurance company, if it v/rites 
 insurance policies here, or in any other way enters the United States 
 for the purposes of its business. The purchase of supplies in the 
 Umted States in the furtherance of continued efforts in the pursiiit 
 of profit or gain is carrying on or doing business in the United States. 
 
 Aet. 18. Capital employed in the United States. — The "capital 
 employed in the transaction of its business in the United States" 
 means the portion of the total ca|)ital, surplus, and undivided profits, 
 of the foreign coriDoration, utilized for the purpose of domg business 
 in tlie United States. A foreign corporation may have income from 
 sources v/ithin the United States for the purpose of the income tax, 
 and yet not have capital employed in the transaction of busmess 
 here for the purpose of the capital stock tax. Compare articles 
 91-93 and 550 of Regulations 45. A foreign corporation not actu- 
 ally doing business in the United States is not subject to tax, and 
 accordmgly the investment of a part of its funds in United 
 States stocks and securities will not constitute capital employed m 
 its business in the United States. For the definition of "doing 
 business" see article 10. If a corporation does busmess here, then, 
 although the mere investment of funds in United States securities 
 is not such a taxable employment of capital, such investment v.'ill 
 constitute capital employed in the transaction of business in the 
 United States, if made in a subsidiary corporation which the foreign 
 corporation uses as an instrumentalitv for the successful conduct of 
 its own business in the United States. Thus the investment of the 
 funds of a foreign corporation in the purchase of facilities, although 
 apparently independent, for the purpose of its busmess here, or the 
 purchase of stock and securities of a subsidiary corporation for the 
 same purpose, will constitute the employment of capital in the 
 transaction of business in the United States. A foreign, corporation 
 may not escape taxation by organizmg, or purcliasing the stock of 
 another corporation to o^\^l the facilities which the foreign corpora- 
 tion needs in its busniess. See article 352, Regulations 45.
 
 12 
 
 Art. 19. Capital employed in the United States illustrated. — A 
 foreign corporation may employ capital in the transaction of its busi- 
 ness in the United States in various ways. For example, the invest- 
 ment of funds in property in the United States used in its business, 
 in stocks and securities of subsidiary; corporations as explamed in 
 article 18, in bills and accounts receivable representing bushiess 
 done in the United States,, in merchandise kept here for sale, in 
 materials manufactured here, and in deposits in United States banks 
 maintained for use in business here. Generally speaking, approxi- 
 mately such proportion of the entire capital of a foreign corporation 
 will ])resumably be employed in the transaction of its busmess in 
 the United States as the gross amount of its business in the United 
 States bears to its total gross business, but this will not always be 
 true, since a corporation may conceivably transact a greater or less 
 volume of business in one country than in another on the same 
 amount of capital. 
 
 Art. 20. B,ate of tax. — The tax is at the rate of $1 for each full 
 $1,000 of the capital of a foreign corporation actually employed in 
 the transaction of its business in the United States, and is in all cases 
 to be computed on the basis of the average amount of capital so 
 employed during the preceding 3"ear ending June 30. The measure 
 of the tax is accordingly different from that in the case of domestic 
 corporations v/hich pay a tax measured by the fair average value of 
 their capital stock. No deduction from the total fan- average amount 
 of capital so employed is allowed in computing the tax. 
 
 Art. 21. Measure of tax. — The measure of the tax is the average 
 amount of capital employed in the transaction of business in the 
 United States during the preceding fiscal year. It will usually be 
 sufhcicnt to determine the amount of capital so employed at the 
 beginning of each year and the amount so employed at the end of 
 such year, and to divide the sum of such amounts by two. Where, 
 however, there have been material changes in the amount of capital, 
 the average amount should be determined with due regard to the 
 times at which such changes occurred. A foreign corporation may, 
 if it so desire, compute the average amount of capital employed on a 
 monthly basis. 
 
 TAX ON STOCK INSURANCE COMPANIES. 
 
 Sec. 1000. (b) In computing the tax in the case of insurance companiee 
 such deposits and reserve funds as they are required by law or contract to 
 maintain or hold for the protection of or payment to or apportionment among 
 policyholders shall not be included. 
 
 Art. 22. Stock insurance companies. — Insurance companies having 
 a capital stock as distinguished from mutual insurance companies 
 axe taxable u])on the same basis as other corporations, whether 
 domestic or foreign, except that in computing the tax such reserve
 
 13 
 
 fimds, which incUide deposits, as they are required by law or con- 
 tract to maintain or hold for the protection of, or payment to, or 
 apportionment among, policyholdei*s, are not to be included. In 
 the case of such companies the tax will be computed by deducting 
 from the total book value of the assets the amomit of the actual 
 liabilities and legal reserves, unless the facts in the case indicate that 
 the book value of the assets is substantially different from their 
 fair market value, in which case it is permissible to make proper 
 adjustment. In a case requiring such adjustment the market value 
 of the shares of stock as shov/n by Exhibit B or the net earnings of 
 the company as shov/n by Exhibit C in Form 707 (Revised) shall be 
 considered, as well as the fair value of the assets. 
 
 TAX ON MUTUAL INSURANCE COMPANIES. 
 
 Sec. 1000. (c) * * * The taxes imposed by this section shall apply to 
 mutual insurance companies, and in the case of every such domestic company 
 the tax shall be equivalent to $1 for each $1,000 of the excess over $5,000 of 
 the sum of its surplus or contingent reserves maintained for the general use of 
 the business and any reserves the net additiens to vrhich are included in net 
 income under the provisions of Title II, as of the close of the preceding 
 accounting period used by such company for purposes of making its income 
 tax return: Promded, That in the case of a foreign mutual insurance com- 
 pany the tax shall be equivalent to §1 for each §1,000 of the same proportion 
 of the sum of such surplus and reserves, which the reserve fund upon busineea 
 transacted within the United States is of the total reserve upon all business 
 transacted, as of the close of the preceding accounting period used by such 
 company for purposes of making its income tax return. 
 
 Art. 23. Mutual insurance company. — The tax applies to domestic 
 and foreign mutual insurance companies. A mutual protective asso- 
 ciation organized under a statute, whose only source of revenue is 
 the assessments paid by its members and whose net income for each 
 year is paid into a reserve fund, constituting the sole resource of 
 the company, aside from current assessments, for the payment of 
 losses, is an insurance company within the meaning of the statute. 
 A voluntary unincorporated association of employees formed for 
 the purpose of relieving sick and aged members and the dependents 
 of deceased members is an insurance company, whether the fund 
 for such purpose is created vdioUy by membership dues or partly 
 by contributions from the employer. 
 
 Art. 24. Domestic mutual insurance company : rate of tax. — The 
 tax is $1 for each full $1,000 of the excess over $5,000 of the sum of 
 (a) the surplus or contingent reserves maintained for the general use 
 of the business, and (b) any reserves the net additions to which are 
 included in net income for the purpose of the income tax, in both 
 cases figured as of the close of the last taxable year of the company. 
 The net addition required by iavv^ to be made within the taxable year 
 to reserve funds, including in the case of assessment insurance com-
 
 14 
 
 panies the actual deposit of sums with. State or Ten-itorial officers 
 pursuant to lavr as additions to guarantee or reserve funds and, in 
 the case of corporations issuing policies covering life, health, and 
 accident insiu-ance combined in one policy, issued on the weekly 
 premium payment plan, continuing for life and not subject to can- 
 cellation, including such portion of the net addition not required by 
 law, made within the taxable year to reserve funds as is needed for 
 the protection of the holders of such combination pohcies, is not in- 
 cluded in net income for the pm'pose of the income tax. See Regu- 
 lations 45 and particularly articles 568-570 thereof. 
 
 Ar'f. 25. Foreign matual insurance compa.ny: rate of tax. — The 
 tax is $1 for each full $1,000 of the same proportion of the sum of 
 (a) and (1^) in the last article which the reserve fund upon business 
 transacted within the United States is of the total reserve upon all 
 business transacted, calculated as of the close of the last taxable year 
 
 of the company. 
 
 " EXEMPTION FROM TAX. 
 
 Sec. 1000. (c) The taxes imposed hy this eoction shall not apply in any 
 year to any corporation wliich was not engaged in husiness (or in the case of a 
 foreign corporation not engaged in business in the United States) daring the 
 preceding year ending June 30, nor to an>'- corporation ennmerated in Fac- 
 tion 231. '■' •■■■ •■ 
 
 Sec. 231. That the following organizations shall l)e exempt from taxa- 
 tion under this title — 
 
 (1) Labor, agricultural, or horticultural organizations; 
 
 (2) Mutual savings banks not having a capital stock represented by shares; 
 
 (3) Fraternal beneficiary societies, orders, or associations, (a) operating 
 under tlie lodge system or for the exclusive benefit of the members of a fra- 
 ternity itself operating under the lodge system, and (b) providing for the 
 payment of life, sick, accident, or other benefits to the members of such 
 society, order, or association or their dependents; 
 
 (4) Domestic building and loan associations and cooperative banks with- 
 out capital stock organized and operated for mutual purposes and without 
 profit; 
 
 (5) Cemetery companies owned and operated exclusively for the benefit 
 of their members; 
 
 (G) Corporations organized and operated exclusively for religious, charit- 
 able, scientific, or educational purposes, or for the prevention of cruelty to 
 children or animals, no part of the net earnings of which iniu-es to the bene- 
 fit of any private stockholder or individual; 
 
 (7) Business leagues, chambers of commerce, or l)oards of trade, not or- 
 ganized for profit and no part of the net earnings of which inures to the benefit 
 of any private stockholder or individual; 
 
 (8) Ci\'ic leagues or organizations not organized for profit luit operated 
 exclusively for the promotion of social welfare; 
 
 (9) Clubs organized and operated exclusively for pleasure, recreation, and 
 other uonprofitable purposes, no i)art of the net earnings of which inures t<* 
 the benefit of any private stockholder or member;
 
 15 
 
 (10) Farmers' or otlier mutual hail, cyclone, or fire insui;ance companies, 
 mutual ditch or irrigation companies, mutual or cooperative telephone 
 companies, or like organiJ^ations of a purely local character, the income of 
 which consists solely of assessments, dues, and fees collected from niembera 
 lor the sole purpose ()f meeting expenses; 
 
 (11) Farmers', fruit growers', or like associations, organized aud uperated 
 as sales agents for the purpose of marketing the products of members and 
 turning back to them the proceeds of sales, less the necessary selling expenses, 
 on the basis of the quantity of produce furnished by them; 
 
 (12) Coii^oratiuns organized for the exclusive j)urpose of holding title to 
 property, collecting income therefrom, and turning over the entire amount 
 thereof, less expenses, to an organization whicli itself is exempt from the tax 
 imposed by this title; 
 
 (13) Federal land banks aud national farm-loan associations as provided 
 in section 26 of the act approved July 17, 191G, cutitled "An Act to pru\ide 
 capital for agricultural development, to create standard forms of inA'cstmcnt 
 based upon farm mortgage, to equalize rates of interest npori fcirm loans, to 
 furnish a market for United States bonds, to create Government depositaries 
 and financial agents for tlic United States, and for other jjui^poses"; 
 
 (14) Personal service corporations. 
 
 Sec. 200. That when used in this title — 
 
 * * * -K- ->r 
 
 The term "personal service corporation " means a corporation whose income 
 is to ))e ascribed primarily to the activities of the j^rincipal ov.-jiers or stock- 
 holders who are themselves regularly engaged in tlie active conduct of the 
 affairs of the corporation and in which c:iipital (whether invested or borrov/ed) 
 is not a material income-producing factor; but does not include any foreign 
 corporation, nor any corporation 50 per centum or more of whose gross income - 
 consists either (1) of gains, profits t>r income derived from trading as a prin- 
 cipal, or (2) of gains, profits, commissions, or other income, derived from a 
 Government contract or contracts made between April 6, 1 917, and November 
 11, 1918, both dates inclusive; * * * 
 
 Section 1. That when used in tliis Act — 
 
 * * * * ■"• 
 
 The term "Government contract" means (a) a contract made with the 
 United States, or with any department, bureau, oflScer, commission, board, 
 or agency, under the United States and acting in its behalf, or with any agency 
 controlled by any of the above if the contract is for the benefit of the United 
 States, or (b) a subcontract made with a contractor perfoj'ming such a con- 
 tract if the products or services to be furnished under the subcontract are 
 for the benefit of the United States. The term "Government contract or 
 contracts made between April 6, 1917, and November 11, 1918, both dates 
 inclusive" when applied to a c(mtract of the kind referred to in clause (a) 
 of this paragraph, includes all such contracts wliich, although entered into 
 dmiug such period, were originally not enforceable, but which have been or 
 may become enforceable by reason of subsequent validation in pursuance 
 of law; 
 
 Art. 2G. Corporation not in business during preceding year. — Tlie 
 tax being payable in advance does not apply to any corporation 
 which was not engaged in busiiiess during any part of the fiscal 
 year preceding the year for whicli the tax is due, but if it w%as in 
 business cvc-n one day of the })receding year and one day of the
 
 16 
 
 taxable year it is subject to the tax. There is no relation between 
 the amount of the tax payable and the length of time the corpora- 
 tion was in business. A corporation, engaged in business during a 
 part of the preceding year, but not engaged in business at the begin- 
 ning of tlie taxable year, is not required to make any return if it is 
 dissolved or in process of dissolution, but if it is only temporarily 
 inactive and subsequently during the year reengages in business it 
 should file a return in the month in which it recommences business 
 and pay the tax due from the first of such month to the end of the 
 taxable year. A corporation organized and beginning corporate 
 activities on or after July 1, is not subject to tax for the remainder 
 of tlie taxable period in which the company was organized, unless, 
 as of Jvly 7, it takes over the business of an organization which 
 was subject to capital stock tax, in which event the new corpora- 
 tion is required to file a return and pay the tax. In the case of 
 foreign corporations ''engaged in business," mea.ns the transaction of 
 any business within the United States. 
 
 Art. 27. Exempt organizations. — Tiie tax does not apply to the 
 following corporations : 
 
 (1) Labor, agricultural or horticultural organizations; 
 
 Agricultiu'al or liorticultiiral organizations exempt from tax do not include 
 corporations engaged in growing agricultm-al or horticultural products or 
 raising live stock or similar products for profit, but include only those organ- 
 izations which, ha\dng no net income inuring to the benefit of their members, 
 are educational or instructi^-e in character and haA-e for their purpose the 
 betterment of the conditions of those engaged in these pursuits, the improve- 
 ment of the grade of their products, and the encoirragement and promotion 
 of these industries to a higher degree of efiiciency. Included in this class 
 as exempt are organizations such as county fairs and like associations of a 
 quasi-public character, which, through a system of awards, prizes, or pre- 
 miums are designed to encourage the production of better li-s'e stock, better 
 agricultiu-al and horticultural products, and whose income, derived from 
 gate receipts, entry fees, donations, etc., is used exclusively to meet the 
 necessary expenses of upkeep and operation. Societies or associations which 
 have for their purpose the holding of annual or periodical race meets, from 
 which profits iniu-e or may inure to the benefit of the members or stock- 
 holders, do not come within the terms of this exemption. A corporation 
 engaged in the business of raising stock or poultry, or growing grain, fi'uits, 
 or other products of this character, as a means of livelihood and for the pm*- 
 pose of gain, is an agricultiual or horticultural society only in the sense that 
 its name indicates the kind of business in which it is engaged, and it is not 
 exempt from tax. (Art. 512, Reg. 45.) 
 
 (2) Mutual savings banks; 
 
 A Alassachusetts savings bank, otherwise exempt, which establishes an in- 
 surance department under the statutes of that State, does not thereby become 
 subject to tax. * * * . (Art. 513, Reg. 45.)
 
 17 . 
 
 (3) Fraternal beneficiary societies, orders or associations; 
 
 A fraternal beneficiary society is exempt from tax only if operated under 
 the "lodge system," or for the exclusive benefit of the members of a society 
 eo operating. "Oi')erating under the lodge system" means carr^dng on ita 
 activities under a form of organization that comprises local branches, 
 chartered by a parent orga^nization and largely self-governing, called lodges, 
 chapters, or the like. In order to be exempt it is also necessary that the 
 society have an established system for the paj^ment to its members or 
 their dependents of life, sick, accident, or other benefits. (Art. 514, Reg. 45.) 
 
 (4) Domestic building and loan associations and cooperative banks, 
 without capital stock; 
 
 A building and loan association entitled to exemption is one organized 
 piu-suant to the laws of the United States or of some State or Territoiy thereof, 
 which accumulates funds to be loaned to its members and to be repaid in 
 small periodical installments. The statute requires that the members of the 
 association shall share in its profits on substantially the same footing. Sub- 
 ject to this requirement, it does not prevent exemption that the association 
 issues prepaid stock entitled to a specified percentage of the profits. Where, 
 however, the association issues paid-up stock, the holders of which are 
 entitled to a fixed dividend and also to share in the profits with all the 
 other holders of stock, it is not exempt. (A-rt. 515, Reg. 45.) 
 
 Where a building and loan association lias no other featui-e which 
 renders it liable to tax, it will ordinarily not be subject to tax 
 merely because (1) it has paid-up shares which arc (a) preferred 
 as to earnings and (b) have a definite rate of interest which may be 
 higher than the rate of dividends paid on other stock, or (2) its 
 balance sheets show that it is loaning considerable sums to non- 
 members, or (3) it is a regular borrower of large sums of money which 
 it uses for loans to members, the dues paid by members being entirely 
 inadequate for the business transacted by it. 
 
 (5) Cemetery companies; 
 
 A cemetery company having a. capital stock represented by shares, or 
 which is operated for profit or for the benefit of others than its members, does 
 not come within the exempted class. A cemetery company of which all lot 
 owners are members, issuing preferred stock entitling the holder to a semi- 
 annual dividend of four per cent, and whose articles of incorporation provide 
 that the preferred stock shall be retii-ed at par as soon as suflicient funds are 
 realized from sales and that all funds realized in addition thereto shall be used 
 by the company for the care and improvement of the cemetery property, is 
 within the exemption. (Art. 516, Reg. 45.) 
 
 (6) Corporations organized and operated exclusively for religious, 
 charitable, scientific, or educational purposes, or for the prevention of 
 cinielty to children or animals; 
 
 The exemption applies only to a corporation or association. It does not 
 include the case of a trust, under which the trustee is authorized to use the 
 trust property for religious purposes. In order to be exempt the corporation 
 or association must meet three tests: (a) It must be organized and operated
 
 18 
 
 for one or more of the specified purposes; (b) it must be organized and operated 
 exclusively for such purposes; and (c) no part of its income must inure to the 
 benefit of private stoclcholders or individuals. 
 
 (1) Chaiitable corporations ijiclude an association for the relief of the 
 families of clergymen, even though tlie latter make a contribution to the fund 
 established for this purpose; or for furnishing the ser-vdces of trained nurses to 
 persons imable to pay for them ; or for aiding the general body of litigants by 
 improving the efficient administration of justice. Educational corporations 
 may include an association whose sole purpose is the instruction of the public. 
 This is true of an association to promote acquaintance with the Spanish 
 language and literature, although it has incidental amusement features; of an 
 association to increase knowledge of the civilization of another coimtry; and 
 of a Chautauqua association -vvhoso primary purpose is to give iectiu'es on 
 subjects useful to the Individ iial and beneficial to the community and whose 
 amusement featiues are incidental to this purpose. But associations formed 
 to disseminate controversial or partisan propaganda are not educational 
 within the meaning of the statute. ^ ■■" * Scientific corporations include 
 a,n association for the scientific study of lav/, to the end of impro^'ement in it-3 
 administration. (Art. 517, Reg. 4r>.) 
 
 A corporation organized and. operated exclusiA^el}'^ for the purpose of 
 maintaining a syinpiiony orchestra and giving musical concerts^ the 
 programs being of an educational character, and no part of the net 
 earnings inm'ing to the beneiit of any private stockhoidei- c.v indi- 
 vidual, is orgaixized for '"educational purposes."' 
 
 (2) Where a religious corporatJou. owns a large quantity of farm land and 
 works it, and also manufactures and sells clothing and other articles for 
 profit, it is not operated exclusively for religious puiposes and is not exempt, 
 even though its pioperty is held in common and its profits do not inure to 
 the benefit of indi^-idual members of the society. 
 
 (3) It does not prevent exemption that private individuals, for v/hose 
 benefit a charity is organized, receive the income of the coi-poration or asso- 
 ciation. The statute refers to individuals having a personal and private 
 interest in the activities of the corporation, such as stockholders. If, how- 
 ever, a corporation issues "voting shares," which entitle the holders upon 
 the dissolution of the corporation to receive the proceeds of its property, 
 including accumulated income, the right to exemption does not exist, even 
 though the by-laws provide that the shareholders shall not receive any 
 dividend or other return upon theii' shares. (Art. 517, Reg. 45.) 
 
 (7) Business leagues, chambers of commerce or hoards of trade: 
 
 A business league is an association of persons having some common busi- 
 ness interest, which limits its activities to work for such common interest 
 and docs not engage in a regular business of a kind ordinarily carried on for 
 profit. Its work need not be similar to that of a chamber of commerce or 
 board of trade. An association engaged in furnishing information to })r.i- 
 spective investors to enable them to make sound investments is not such 
 a league, since its members have no common business interest, and it is 
 not exempt, even though all of its income is devoted to the purjwse stated. 
 A clearing house association not organized for profit, no part of the net 
 income of which inures to any private stockholder or individual, is exempt 
 provided its activities are limited to the exchange of checks and similar
 
 w 
 
 work for the common Ijenefit of its members. An associatiou of persona 
 who arc engaged in the business of carrying freight ami passengers by boats 
 propelled by steam, -which is designed to promote the legitimate objects 
 of such business, and all of the income of ^vhich is derived from membership 
 dues and is expended for office expenses and the salary of a secretary-treasurer, 
 is exempt from tax. An incorporated cotton exchange, Avhose shares carry 
 the right to dividends, is organized for profit and is not exempt. (Art. 518, 
 Reg. 45.) 
 
 (S) Civic leagues or organizations ; 
 
 A corporation having cax>ital stock and possessing a charter which authorize3 
 it to buy, impro\e, and sell real estate is organized for profit within the 
 meaning of the statute and is not exempt from tax as a civic league or organiza- 
 tion, even though it no longer exercises such powers for profit and is operated 
 exclusively for the promotion of social welfare. (Art. 519, Reg. 45.) 
 
 (9) Clubs; 
 
 The exemption applies to practically all social and recreation clu]>s whicli 
 are supported by membership feco, dues, and assessments. If a club, by 
 reason of the comprehensive powers granted in its charter, engages in traffic, 
 in agriculture or horticulture, or in the sale of real estate, timber, etc., for 
 profit, such club is not organized and operated exclu.si\'ely for pleasure, 
 recreation, or social purposes, "^ * *. (Art. 520, Reg. 45.) 
 
 (10) Farmers' or other mutual Iiail, cyclonC; or fire insurance com- 
 panies, mutual ditch or irrigation companies^ mutual or cooperative 
 telephone companies, or like organizations of a purely local character; 
 
 It is necessary to exemption that the income of the company be derive^i 
 solely from assessments, due.=, and fees collected from mem-bers. If income is 
 received from other soru'ces, the corporation is not exempt, even though iis 
 additional income is tax exemj)t. Income, however, from sources other than 
 those specified does not prevent exemption ^vhere its receipt is a mere incident 
 of the business of the company. Thus the receipt of interest ujxjn a working 
 bank balance, or of the proceeds of the sale of badges, office supplies, or equip- 
 ment will not defeat the exemption. The same is true of the receipt of 
 interest upon Liberty bonds, where they were purchased as a patriotic duty 
 and were aftervv'ards sold. WTiere, however, such bonds are bought as a per- 
 manent investment, the receipt of the interest destroys the exemption. The 
 receipt of what is in substance an entrance fee, charged by a mutual fire 
 insurance company as a condition of membership, does not render the com- 
 pany taxable, although this fee is called a premium. ]5ut the issuance of 
 policies for stipulated c^sh premiums prevents exemption. A local exchange ^ 
 or association to insure the owners of automobiles against fire, theft, collision, 
 public liability, and property damage is exemjDt, since it T>erfornis functions 
 of the same character as a mutual fire insurance company and is a like organ- 
 ization \vithiu the meaning of the statute. A local reservoir and ditch com- 
 pany may likewise be exempt from tax. The exemption does not include a 
 telephone clearing association, whose business is to apportion toll rat-e3 
 between independent telephone companies handling the same calls and 
 whose income consists of compensation paid by such companies and reccipta 
 from the sale of form blanks. The phrase "of a purely local character'' 
 qualilies only "like organizations." (Art. 521, Reg. 45.)
 
 20 
 
 (11) Fai'mcrs', fruit growers', or like associations; 
 
 (a) Cooperative associations, acting as sales agents for farmers or others, in 
 order to come v.-ithin the exemption must establish that for their own account 
 they have no net income. Cooperative dairy companies, which are engaged 
 in collecting milk and disposing of it or the products thereof And distributing 
 the proceeds, less necessary operating expenses, among thek members upon 
 the basis of the quantity of milk or of butter fat in the milk fui-nished by 
 Buch members, are exempt from the tax. If the proceeds of the business are 
 distributed in any other way than on such a proportionate basis, tlie company 
 will bo subject to tax. A farmers' association is not exempt from taxation 
 where in accounting to fai'mers furnishing produce for the proceeds of sales it 
 deducts more than the necessary selling expenses incun-ed. (b) Cooperative 
 associations acting as purchasing agents, distributing to members in the guise 
 of rebates profits mode from nonmembers are not exempt from taxation. 
 (Art. 522, Reg. 45.) 
 
 (12) Corporations organized for the exclusive purpose of holding 
 title to property, collecting income therefrom, and turning over the 
 entire amount thereof, less expenses, to an organization which itself is 
 exempt from the income tax; 
 
 (13) Federal land banks and national farm loan associations as 
 provided in section 26 of the act approved July 17, 1916, entitled 
 "An. act to provide capital for agricultural development, to create 
 standard forms of investment based upon farm mortgage, to equalize 
 rates of interest upon farm loans, to furnish a market for United 
 States bonds, to create Government depositaries and financial agents 
 for the United States, and for other purposes"; 
 
 (14) Pereonal service corporations. (For definition, see Sec. 200, 
 Rev. Act of 1918, p. 15.) 
 
 Corporations to be exempt under this classification must possess 
 (l) the following positive attributes: 
 
 (a) The corporation's gross income must be derived principally 
 
 from compensation for personal services rendered by it to 
 the persons with whom it does business. 
 
 (b) The gross income must be primarii}^ due to the activities of 
 
 the principal owners or stocklioldcrs who must be personally 
 actively engaged in the business. 
 
 (c) At least 80 per cent of the capital stock must be owned by 
 • persons who are regularly engaged in the active conduct of 
 
 the business. 
 
 (d) The gross income of brokerage and agency corporations must 
 
 be based solely upon commissions; 
 and (2) the following negative attributes: 
 
 (c) The business of the corporation must be one in which cap- 
 ital is not a material income-producing factor. The larger 
 the amount of capital actually used the stronger is the pre- 
 sumption that capital is necessary and is a material income- 
 producing factor, and that the corporation is not a personal- 
 service corporation.
 
 21 
 
 (f ) The corporation must not engage in buying or selling nor base 
 
 its profits upon a difference in price between the buyer and 
 seller nor assume any such risks as those of market fluctua- 
 tions, bad debts, or failure to accept shipments. 
 
 (g) The corporation must not make loans or advances directly or 
 
 indirectly, in order that it may render more satisfactory 
 service to its principals or customers, 
 (h) The corporation must not ovni a controlling interest in a cor- 
 poration other than a pei'sonal-service corporation, 
 (i) The corporation must not employ the services of others than 
 the principal stockholders to an extent materially affecting 
 the gross income. 
 In determining v/hether a corporation is a personal-service corpora- 
 tion, no v/eight can be given to the fact that the invested capital of 
 the corporation for the purpose of the v>\ar profits and excess-profits 
 tax or the actual investment of the principal ov^ners or stockholders 
 is comparatively small. The test cstabhshed by the statute vv'ith re- 
 spect to capital is entire!}" different. That test is the nature of the 
 profession or business as indicated (a) by the kind of service it renders 
 and (b) the extent to v/hich capital is required to can}" on such pro- 
 fession or business. If the use of cajDital is necessary or more than 
 incidental, capital is a material income-producing factor and the cor- 
 poration is not a personal-service corporation. No corporation is a 
 personal-service corporation if it carries on business of a kind which 
 ordinarily requires the use of capital, irrespective of whether the 
 owners or stockholders have actually invested a substantial amount 
 of capital. 
 
 The term "capital" means not only capital actually invested by 
 the owners or stockholders, but also capital secured in other ways. 
 Thus if capital is borrowed either directly as shown by bonds, deben- 
 tures, certificates of indebtedness, notes, bills payable, or other 
 paper, or indirectly as shown by accounts payable or other forms of 
 credit, or if the business of the corporation is in any Avay financed 
 by or through any of the owners or stockholders, these facts will be 
 deemed evidence that the use of capital is necessary. If a substan- 
 tial amount of capital is used to finance or carry the accounts of 
 chents or customers, it wiU be inferred that because of competition 
 or other reasons such practice is necessary in order to secure or hold 
 business which otherwise would be lost, and that the corporation is 
 not a personal-service corporation. If a corporation engaged in an 
 agency, brokerage, or commission business regularly employs a sub- 
 stantial amount of capital to lend to principals, to buy and carry 
 goods on its own account, or to buy and carry odd lots in order that 
 it may render more satisfactory service to its principals or customers, 
 it is not a personal-service corporation. In general the larger the
 
 22 
 
 amount of the capital actually used the stronger is the evidence that 
 capital is necessary and is a material income-producmg factor and 
 that the corporation is not a personal-service corporation. 
 
 Merchandising or trading, either cUrectly or indirect!}", in commodi- 
 ties or the services of others is not rendering personal service. Hov.- 
 ever, ordinary clerical assistance, and in technical or highly special- 
 ized lines of business, services of others may be emploj^ed to a limited 
 extent without causing liability to attach, provided the income 
 attributable to such employees is negligible as compared with tlie 
 total income of the corporation. 
 
 No definite and conclusive tests can be prescribed by which it can 
 be iinall}' determined in advance of an examination of the corpora- 
 tion's return whether or not it is a personal service corporation. The 
 foregoing general principles will govern in the classification. 
 
 To bo exempt from capital stock tax corporations must have pre- 
 viously been granted full classification as personal service corporations 
 for the purpose of Federal income and profits taxes under Regula- 
 tions 45. revised. 
 
 Government contracts may include (a) a contract with the United States, 
 {b) a contract with an agency of the United States, (c) a contract with an 
 agency of such agency, and (d) a subcontract ^Yith a contractor under any such 
 contract ; provided in every case the contract or subcontract is for the benefit of 
 the United States, Unenforceable contracts suT:»sequently ratified are treated 
 as though made when originally executed, * * * (Art. 1510, Reg. 45.) 
 
 "" ■"■ * A corporation is not a personal service corporation merely because 
 less than 50 per cent of its gross income was derived from trading as a principal 
 or from Government contracts. * •» * (Art. 1524, Beg. 45.) 
 
 A more detailed discussion of the subject may be had by reference 
 to Regulations 45, Revised. 
 
 Art, 28. Eeturn by corporation claiming exemption. — Where tlie 
 officers of a corporation are of the opinion that it is exempt from the 
 tax under section 231 of the Revenue Act of 1918, or on account of 
 not being engaged in business, Form 707 (Revised) should be filled 
 out and filed Avith the collector, together vnth a comprehensive 
 statement of the reasons for claiming exemption. In such case the 
 fair value should be reported on page 1 of the form, but the tax not 
 computed, notation "Exemption claimed" being made instead. If 
 exemption has been allowed for the preceding taxable year and there 
 has been no change in the status or conditions of the company 
 then the first 14 lines of Form 707 (Revised) should be completed 
 and a statement attached to the effect that exemption is claimed for 
 the same reasons as for the previous year and that the same status 
 and conditions of the company exist for the taxable period in ques- 
 tion. In this way the records of the collectors' offices will be com- 
 plete and corporations will avoid requests for the filing of returns
 
 23 
 
 and iiunecessarv correspondcnoe. ThiD determination of liability 
 rests in tiie fii'st instance with the Commissioner of Internal Hevenue 
 and without complete information it is impossible to malce a decision, 
 
 ELECTION TO BE TAXED AS CORPORATION. 
 
 Sec. 330. In the case of the orgamzation as a corporation Ijefore JvAj 1, 1^19, 
 of any trade or business in which capital is a material in<:onie-prod''a-cing i-actor 
 sead which was previously owned by a partnership or individnai, the net in- 
 c-onie of srich trade or l>iisine83 from January 1, 1918, to the date of such reor- 
 ganization maj- at the oi)tion of the individual or partnership ))e taxed as xhe 
 net income of a corporation is taxed under Titles II and III; in ■v^lddi event 
 t%ie net income and invested capital of such trade or 1)usineHs shall be eom- 
 pirted as if such corporation had been in existence on and aftei Janiiain- 1, 1918, 
 and the undistributed profits or earnings of such trade or business shull not 
 be subject to the surtax imposed in section 211, but amonnts distributed t)n 
 or after January 1, 1918, from the earnings of such trade or business shall be 
 taxed to the recipients as dividends, and all the provisions of Titles II and 
 III relating to corporations shall so far as practieal)le apply to such trade or 
 business : Provided, That this paragraph shall not apply to any trade or busi- 
 ness the net income of 'whieh for the taxable year 1918 vras less than 20 per 
 centum of its invested capital for such year: Provided further, That any tax- 
 payer who takes advantage of this paragraph shall pay the tax imposed by 
 section 1000 of this Act and by the first subdivision of section 407 of the 
 Revenue Act of 191C, as if such taxpayer had been a corporation on and after 
 January 1, 1918, with a capital stock having no par value. 
 
 Akt. 29. Election to be taxed as corporation. — A business enter- 
 prise (a) which was organized as a corporation before July 1, 1919, 
 (b) in wliich capital is and has been a material income-producing 
 factor, and (c) which was previously owned by a partnership or indi- 
 vidual, 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 pr(Sfits 
 and excess profits tax, and the capital stock tax. The adoption of 
 any other date than January 1, 1918, for such pm-pose is not per- 
 missible. But this option is not extended to a business enterprise 
 with a net income for the taxable year 1918 less than 20 per ceiit of its 
 invests capital. 
 
 The clauses of section 407, Revenue Act of 1916, as amended, and 
 section 1000, Revenue Act of 1918, which require that a corporation 
 must have been engaged in business some part of a year preceding 
 the taxable period in order to be liable for the tax, are not applicable 
 to corporations filing returns luider section 330 of the Revenue Act 
 of 1918; that is to say, organizations electing to report as corporations 
 under the provisions of this section, are required to file capital stock 
 tax returns for the six months' period from January 1 to June 30, 
 1918, and for all subsequent taxable periods.
 
 24 
 
 RETURNS PUBLIC RECORDS. 
 
 Sec. 1000. (d) Section 257 shall apply to all returns filed with the Cummis- 
 sioner for purposes of the tax imposed by this section. 
 
 Sec. 257. That retxmis upon which the tax has been determined by the 
 Commissioner shall constitute pu1)lic records; l)ut thej'- shall be open to 
 inspection only upon order of tlie President and under rides and regulations 
 prescribed by the Secretary and approved by the President: Provided, That 
 the proper officei's of any State imposing an income tax may, upon the request 
 of the governor thereof, have access to the returns of any corporation, or to 
 an abstract thereof showing the name and income of the corporation, at such 
 times and in such manner as the Secretary may prescribe: Provided further , 
 That all bona fide stockholders of record owning 1 per centum or more of the 
 outstanding stock of any corporation shall, upon making request of the 
 Commissioner, be allowed to examine the annual income retimis of such 
 corporation and of its subsidiaries. Any stockholder who pursuant to the pro- 
 visions of this section is allowed to examine the return of any corporation, 
 and who makes known in any manner whatever not pro\dded by law tlie 
 amount or soru-ce of income, profits, losses, expenditures, or any particidar 
 thereof, set forth or disclosed in any such retxim, shall be guilty of a mis- 
 demeanor and be punished by a fine not exceeding $1,000, or by imprison- 
 ment not exceeding one year, or both. 
 
 The Commissioner shall as soon as practicable in each year cause to be 
 prepared and made available to public insi^ection in such manner as he may 
 determine, in the office of the collector in each internal-revenue district and in 
 such other places as he may determine, lists containing tlie names and the 
 post-office addresses of all individuals making income-tax returns in such 
 district. 
 
 Art. 30. Inspection of returns. — The returns upon whicli the tax 
 has been determined by the Commissioner, although public records, 
 are in general open to inspection only to the extent authorized by the 
 President. All bona fide stockholders of record o^viiing 1 per cent or 
 more of the outstanding stock of any corporation shall, upon making 
 request of the Commissioner, be allowed to examine the amiual 
 income returns of such corporations and of its subsidiaries, but such 
 privilege of examination is personal and can not by power of attorney 
 be delegated by the stockholder to another. Only such officers of 
 any State as are charged with the enforcement of a State income-tax 
 law shall have access to the returns of any corporation, or to an 
 abstract thereof showing the name and income of the corporation, 
 at such times and in such manner as the Secretary may prescribe, 
 and then only in case the information is to be used by them in con- 
 nection with such enforcement. Any stockholder who is allowed 
 to examine the return of any corporation, and who makes known 
 in any manner whatever not provided by law the amount or source 
 of income, profits, losses, expenditures, or any particular thereof, 
 set forth or disclosed in any such return, shall be guilty of a mis- 
 demeanor and be punished by a fine not exceeding $1,000, or by 
 imprisonment not exceeding 1 year, or both.
 
 25 
 
 RETURN OF TAX. 
 
 Sec. 1305. That all administrative, special, or stamp provisions of law, 
 including the law relating to the assessment of taxes, so far as applicable, 
 are hereby extended to and made a part of this act, and every person liable 
 to any tax imposed by this act, or for the collection thereof, shall keep such 
 records and render, under oath, such statements and returns, and shall com- 
 ply with such regulations as the Commissioner, -vyith the approval of the Sec- 
 retary, may from time to time prescribe. 
 
 Whenever in the judgment of the Commissioner necessary he may require 
 any person, by notice served upon him, to make a return or such statements 
 as he deems sufUcient to show whether or not such peraon is liable to tax. 
 
 The Commissioner, for the purpose of ascertaining the correctness of any 
 return or for the purpose of making a return where none has been made, ia 
 hereby authorized, by any revenue agent or inspector designated by him 
 for that purpose, to examine any books, papers, records, or memoranda bear- 
 ing upon the matters required to be included in the return, and may require 
 the attendance of the person rendering the return or of any ofhcer or employee 
 of such person, or the attendance of any other person having knowledge in 
 the premises, and may take his testimony with reference to the matter 
 required by law to be included in such return, with power to administer 
 oaths to such person or persons. 
 
 Art. 31. Return by domestic corporation. — Every domestic cor- 
 poration shall make retm-n on Form 707 (Revised), regardless of the 
 par value of its capital stock. Also see articles 28 and 33. The 
 fair average value of the capital stock of a corporation and the tax 
 payable thereon shall be determined in accordance with the instruc- 
 tions in the form, which provides in Exhibit A for the book or fair 
 value of the assets, in Exhibit B for the market value of the shares^ 
 and in Exhibit C for the value of the capital stock based on the 
 capitalized earnings. All the information called for must be given in 
 every case where it is procurable. 
 
 Art, 32. Return by foreign corporation. — Every foreign corpora- 
 tion carrying on or doing business in the United States shall make 
 return on Form 708 (Revised), irrespective of the amount of capital 
 employed in this country in the transaction of its business. The 
 capital actually employed in the transaction of the business of a 
 foreign corporation in the United States and the tax payable thereon 
 shall be calculated in accordance with the instructions on the form. 
 See also articles 17, 18, 19, 20, and 21. 
 
 Art. 33. Time for making return. — It shall be the duty of every 
 corporation liable to the tax on or before the 31st day of July in each 
 year to make a return, verified by oath, to the collector of the district 
 in which its prmcipal place of business is located. If any corporation 
 fails to make and file a return within the time prescribed by law or by 
 regulation made under authority of law, or makes, willfuUy or other- 
 wise, a false or fraudulent return, the collector or deputy collector shall 
 make the return from his own knowledge and from such information 
 as he can obtain through testimony or otherwise. In any such case
 
 26 
 
 the Commissioner may, from his ov/ii knowledge and from such infor- 
 mation as he can obtain through testimony, or otherwise, make a 
 return or amend any return made by a collector or deput)^ collector. 
 Any return so made and subscribed by the Commissioner, or by a 
 collector or deputy collector and approved by the Commissioner, shall 
 be prima facie good and sufficient for all legal purposes. If on ac- 
 count of sickness or absence of the officer of the corporation charged 
 with making the return, it is impossible to prepare and file a return on 
 or before the 31st day of July (the due date), the collector, upon 
 application in writing, may allow an extension of time not exceeding 
 30 days from July 31, m which to file the return. If extension is 
 granted, the letter of the collector should be attached to the return. 
 On no account is the Commissioner of Internal Revenue or the 
 collector authorized to grant an extension of time in which to file 
 capital stock tax returns in excess of 30 days from July 31, the due 
 date. If for reasons, other than absence or sickness, beyond the 
 control of the officers making the return, it becomes impossible to file 
 a completed return within the time prescribed by law, a tentative 
 return may be filed, thus avoiding penalty for failure to file within 
 the prescribed time. See followmg article. 
 
 Akt. 34. Tentative return. — The filing of a tentative return will 
 avoid the penalty for delinquent filing, but does not authorize the 
 withholding of the tax. The regulations do not permit the filing of a 
 tentative return to stay indefinitely the filmg of a completed return 
 and the collection of the tax due; therefore, a tentative return clearly 
 marked "Tentative return" should be prepared in as complete a 
 manner as possible, including, among other information, a basis for 
 the computation of the tax — that is, an estimate by the officers of the 
 corporation of the approximate fair value of the capital stock in order 
 that an initial assessment may be made. When the completed return 
 is filed, it should be clearly marked "Completed return," showing that 
 a tentative return was filed. Such action will prevent duplicate assess- 
 ments and ordmary penalties. In every case a statement should be 
 attached to the tentative return, mdicating the approximate date the 
 completed return may bo expected. Upon receipt of the completed 
 return any adjustment necessary in the assessment of the correct tax 
 due will be made. 
 
 Art. 35. Return by affiliated corporation. — Although section 240 
 of the Revenue Act of 1918 requii'cs a consolidated rctm'nfor affiliated 
 corporations for the piu"pose of income tax, /or the imrpose of cnpital 
 stock tax each corporation must render a separate return in complete form. 
 So-called subsidiary corporations, all or a part of the stock of wliich 
 is owned by another corporation, must render separate retui'iis, the 
 same as every other corporation. No deductions from the assets are 
 permitted on account of intercompany balances, and the sharehold-
 
 27 
 
 inga must be reported in the ''Fair value" column at their actual 
 worth at the time of making the retui-n. No deduction is allowed in 
 the retm-n of one corporation for the tax paid by another. 
 
 If the fair value is determined by any method other than liereia 
 provided, the following requirements must be complied %vith: (a) The 
 parent company must submit v\^ith its return a list of all subsidiaries 
 and the districts in which the retm-ns were filed ; (b) the retm-n of the 
 subsidiary company must show the name of the parent company and 
 the district in which the retm-n was filed ; (c) the method of determin- 
 ing the fair value, if other than by Exhibits A, B, and C, must be 
 fully explained ; (d) a copy of any agreement existing between parent 
 company and subsidiary must be fm-nished, or a statement made that 
 none exists; and (e) a combined balance sheet and a combined net 
 income statement must be submitted for consideration in connection 
 with any estimate of fair value made on behalf of the reporting 
 corporation. 
 
 PAYMENT OF TAX. 
 
 Sec. 1307. That ia all cases where the method of collecting the tax imposed 
 by this act is not specifically pro%'ided in tliia act, the tax shall be collected 
 in such manner as the Commissioner, with the approval of the Secretary, 
 may prescribe. 
 
 Art. 36. Time for payment of tax. — All assessments shall be made 
 by the Commissioner. The collector shall within 10 days after re- 
 ceiving any list of taxes from the Commissionei* give notice to each 
 corporation liable to pay any tax stated therein, to be left at its place 
 of business or to be sent by mail, stating the amount of such tax and 
 demanding pajrment thereof. If such corporation does not pay the 
 tax within 10 days after the service or the sending by mail of such 
 notice, it shall be the duty of the collector to collect the tax with a 
 penalty of 5 per cent additional upon the amount of the tax and in- 
 terest at the rate of 1 per cent a month. A collector has no authority 
 to extend the time for payment of the tax, and any extension gi-anted 
 by him will bo at his own risk. All taxes are payable direct to the 
 collector of internal revenue of the district in which retm-n is filed. 
 The collector may accept payment of the tax when the return is filed 
 as an ''advance collection," subject to any adjustment later found 
 necessary, but no corporation is requii'ed to pay the tax until 
 after notice and demand. Tax due from a corporation is legally col- 
 lectible from the stockholders or others who have received its assets 
 upon liquidation. 
 
 Art. 37. Abatement and refund of taxes. — Section 3220 of the 
 Revised Statutes, as amended by section 1316 of the Revenue Act of 
 1918, provides: 
 
 Sec. 3220. The C'ommisaioner of Internal Revenue, Bubject to regulations 
 prescribed by the Secretary of the Trcasriry, is authorized to remit, refund, 
 and pay back all taxes erroneously or illegally assessed or collected, all
 
 28 
 
 « 
 
 penalties collected ■without authority, and all taxes that appear to be un- 
 justly assessed or excessive in amount, or in any manner wrongfully collected; 
 also to repay to any collector or deputy collector the full amount of such sums 
 of money as may be recovered against him in any court, for any internal- 
 revenue taxes collected by him, ■\7ith the cost and expenses of suit; also all 
 damages and costs recovered against any assessor, assistant assessor, collector, 
 deputy collector, agent, or inspector, in any suit brought against him by 
 reason of an^-thing done in the due performance of his official duty, and 
 shall make report to Congress at the beginning of each regular session of 
 Congress of all transactions imder this section. 
 
 Section 3225 of the Revised Statutes^ as amended by section 1316 
 of the Revenue Act of 191 8^ however, provides: 
 
 Sec. 3225. When a second assessment is made in case of any list, state- 
 ment, or return, -svliich in the opinion of the collector or deputy collector 
 was false or fraudulent, or contained any understatement or undervaluation, 
 such assessment shall not be remitted, nor shall taxes collected under such 
 assessment be refunded or paid back, or recovered by any suit, imless it is 
 proved that such list, statement, or return was not willfully false or fraudu- 
 lent and did not contain any willful understatement or xmder valuation. 
 
 For the procedure regarding claims for abatement or refund, see 
 Regulations 14 (Revised). 
 
 FRACTIONAL PART OF CENT. 
 
 Seq. 1313. That in the payment of any tax under this act not payable 
 by stamp a fractional part of a cent shall be disregarded unless it amounts 
 to one-half cent or more, in wMch case it shall be increased to 1 cent. 
 
 Art. 38. When fractional part of cent may be disregarded. — In 
 the payment of the tax, and in each step or computation necessary 
 in determining its amount, a fractional part of a cent may be dis- 
 regarded unless it amounts to one-half cent or more, in which case 
 it shall be increased to 1 cent. 
 
 MEDIUM OF PAYMENT OF TAX. 
 
 Sec. 1314. That collectors may receive, at par with an adjustment for ac- 
 crued interest, certificates of indebtedness issued by the United States and 
 uncertified checks in pajrment of incotne, war-profits and excess-profits taxes 
 and any other taxes payable other than by stamp, during such time and under 
 sitch regulations as the Commissioner, with the appro^-al of the Secretary, 
 shall prescribe; but if a check so received is not paid by the bank on which 
 it is drawn the person by whom such check has been tendered shall remain 
 liable for the pajonent of the tax and for all legal penalties and additions the 
 same as if such check had not been tendered. 
 
 Aet. 39. Payment of tax by uncertified checks. — Collectors may 
 accept uncertified checks in payment of taxes, provided such checks 
 are collectible at par — that is, for their full amount, without any 
 deduction for exchange or other charges. The collector will stamp on 
 the face of each check before deposit the words, "This check is in 
 payment of an obligation to the United States and must be paid at 
 par. No protest," with his name and title. The day on which the
 
 29 
 
 collector receives the check will be considered the date of payment so 
 far as the taxpayer is concerned, unless the check is returned dishon- 
 ored. If one check is remitted to cover the taxes of two or more 
 corporations, the remittance must be accompanied by a letter of 
 transmittal stating (a) the name of the drawer of the check; (b) the 
 amount of the check; (c) the amount of any cash, money order, or 
 other instrument included in the same remittance; (d) the name of 
 each corporation whose tax is paid by the remittance; (e) the 
 amount of the payment on account of each corporation ; and (f) the 
 kind of tax paid. 
 
 Art. 40. Procedure with respect to dishonored checks. — If the bank 
 on which any such check is drawn shall refuse to pay it at par, the 
 check shall be returned through the depositary bank and be treated 
 in the same manner as a bad check. All expenses incident to the 
 attempt to collect such a check and the return of it through the 
 depositary bank must be paid by the drawer of the check to the bank 
 on which it is drawn, since no deduction can be made from amounts 
 received in payment of taxes. See section 3210 of the Revised 
 Statutes. If any taxpayer whose check has been returned uncol- 
 lected by the depositary bank shall fail at once to make the check 
 good, the collector shall proceed to collect the tax as though no check 
 had been given. A taxpayer who tenders a certified check in pay- 
 ment for taxes is not released from his obligation until the check has 
 been paid. See chapter 191 of the act of March 2, 1911. 
 
 CREDIT FOR FORMER TAX. 
 
 Sec. 1004. That if the tax imposed by section 407 or 408 of the Revenue 
 Act of 1916, for the fiscal year ending June 30, 1919, has been paid by any 
 pereon subject to the corresponding tax imposed by this title, collectors 
 may issue a receipt in lieu of special tax stamp for the amount by ■R-hich 
 the tax under this title is in excess of that paid or payable and evidenced 
 by stamp under the Revenue Act of 1916. Such receipt shall be posted as 
 in the case of the special tax stamp, as provided by law, and with it, within 
 the place of business of the taxpaj^er. 
 
 If the corresponding tax imposed by section 407 of the Revenue Act of 
 1916 was not payable by stamp, the amount paid under such section for 
 any period for which a tax is also imposed by this title may be credited 
 against the tax imposed by this title. 
 
 DOING BUSINESS V/ITHOUT PAYMENT OF TAX. 
 
 Sec. 1005. That any person who carries on any business or occupation for 
 which a special tax is imposed by sections 1000, 1001, or 1002, without having 
 paid the special tax therein provided, shall, besides being liable for the pay- 
 ment of such special tax, be subject to a penalty of not more than $1,000 or 
 to imprisonment for not more than 1 year, or both. 
 
 Art. 41. Doing business without payment of tax. — Every corpora^ 
 tion which does business without having paid the tax is liable to a 
 penalty of .$1,000. A corporation paying the capital stock tax is
 
 30 
 
 not on that account exempt from any occupational tax. For other 
 penalties see articles 42 and 43. 
 
 PENALTIES, 
 
 Sec.] 308. (a) That any person required under Titles * * * x, * * * 
 to pay, or to collect, account for and pay over any tax, or required by law 
 or regulations made under authority thereof to make a return or supply any 
 information for the purposes of the computation, assessment or collection of 
 any siich tax, who fails to pay, collect, or truly account for and pay over any 
 such tax, make any such return, or supply any such information at the 
 time or times required hj law or regulation shall in addition to other penalties 
 provided by law be subject to a penalty of not more than $1,000. 
 
 (b) Any person who willfully refuses to pay, collect, or truly account for 
 and pay over any such tax, make such return or supply such information at the 
 time or times required by law or regulation, or who -willfully attempts in 
 any manner to evade such tax shall be guilty of a misdemeanor, and in addi- 
 tion to other penalties provided by law shall be fined not more than 110,000 
 or imprisoned for not more than 1 year, or both, together with the costs of 
 prosecution. 
 
 (c) Any person who willfully refuses to pay, collect, or truly account for 
 and pay over any such tax shall in addition to other penalties provided by 
 law be liable to a penalty of the amount of the tax evaded, or not paid, col- 
 lected, or accounted for and paid over, to be assessed and collected in the 
 same manner as taxes are assessed and collected: Provided, hov)ever, That no 
 penalty shall be assessed under this subdivision for any offense for which a 
 penalty may be assessed under authority of section 3176 of the Revised 
 Statutes, as amended, or of section 605 or 629 of this act, or for any offense for 
 which a penalty has been recovered under section 3256 of the Revised 
 Statutes. 
 
 (d) The term "person" as used in this section includes an officer or em- 
 ployee of a corporation or a member or employee of a partnership, who 
 as such officer, employee, or member ia under a duty to perform the act 
 in respect of which the violation occurs. 
 
 Art. 42. Penalty for nonpayment of tax. — (a) Any corporation 
 which fails to pay the tax when due and payable is liable to a penalty 
 of SI, 000. If it willfully refuses to pay or willfull}^ attempts to evade 
 the tax, it is liable also to a fine of $10,000 and costs and to a 100 per 
 cent penalty to be added to the tax. See also article 41. (b) Any 
 officer or employee of a corporation who in the course of his duty fails 
 to pay the tax when due and payable is liable to a penalty of $1,000. 
 If he willfully refuses to pay or willfull,y attempts to evade the tax, 
 he is liable also to a fine of $10,000 and costs and to imprisonment 
 for a year, and to a penalty of the amount of the tax unpaid or 
 evaded. 
 
 Art. 43. Penalties for failure to make return and for false re- 
 turn. — (a) Any corporation which fails to make a return within the 
 required time is liable to a penalty of $1,000. If it willfully refuses 
 to make a return it is liable also to a fine of $10,000 and costs. 
 (b) Any officer or employee of a corporation who in the course of his 
 duty fails to make a return within the required time is liable to a penalty
 
 31 
 
 of $1,000, If lie willfully refuses to make a return he is liable also to 
 a fine of $10,000 and costs and to imprisonment for a year, (o) Sec- 
 tion 3176 of the Revised Statutes, as amended by section 1317 of the 
 Revenue Act of 1918, also provides: 
 
 lu ca?e of any failure to make and file a return or list within the time pre- 
 scribed by law, or prescribed by the Commissioner cf Internal Revenue or 
 the collector in pursuance of law, the Commissioner of Internal Revenue shall 
 add to the tax 25 per centum of its amount, except that when a return is filed 
 after such time and it is shown that the failure to file it was due to a reason- 
 able cause and not to willful neglect, no such addition shall be made to the 
 tax. In case a false or fraudulent return or list is ^vilU'ully made, the Commis- 
 sioner of Internal Revenue shall add to the tax 50 per centum of its amount. 
 
 The amount so added to any tax shall be collected at the same time and in 
 the same manner and as part of the tax unless the tax has been paid before 
 the discovery of the neglect, falsity, or fraud, in which case the amoiuit so 
 added shall be collected in the same manner as the tax. 
 
 AUTHORITY FOR REGULATIONS. 
 
 Sec. 1-309. That the Commissioner, with the approval of the Secretaiy, is 
 hereby authorized to make all needful rules and regulations for the enforce- 
 ment of the provisions of this act. 
 
 Art. 44. Promulgatiou of regulatious. — In pursuance of the 
 statute the foregomg regulations are hereby made and promulgated 
 and all rulmgs inconsistent herewith are hereby revoked. 
 
 Paul F. Myers, 
 
 Acting Commissioner of Internal Bevenue. 
 
 Approved June 21, 1020: 
 R. C. Leffingwell, 
 
 Acting Seer etai'y oftlie Treasury. 
 
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