Golden Cycle Corp. v. Commissioner

Phillips,

concurring: Section 240 of the Revenue Act of 1918 provides that corporations which are affiliated shall make a consolidated return of net income and invested capital. It further provides that in such case the total tax shall be computed in the first instance as a unit. The total tax can be computed as a unit only by computing income and invested capital as a unit for the affiliated group. Section 326 of the Revenue Act of 1918 lays down the procedure to be followed in computing invested capital.

The problem here is to determine the invested capital of this affiliated group. It is my opinion that, in applying section 326, we must look at the unit and include in invested capital (1) the actual cash bona fide paid in to this unit for stock or shares; (2) actual cash value of tangible property, other than cash, bona fide paid in to this unit for stock or shares; (3) paid-in or earned surplus computed on a consolidated basis; (4) intangible property bona fide paid in to the unit for stock, to the extent permitted by the statute. If this be correct, invested capital is not affected by the sale of assets by one group in this unit to another group in the unit, nor is invested capital affected by the purchase by one corporation in the unit of the capital stock of another, except as all or a part of the purchase price may have gone outside of the unit and serve to reduce invested capital.

The primary purpose of the invested capital provision in the statute is to fix an amount upon which the corporation is to be allowed to earn income before the balance is subjected to tax. Roughly speaking, this amount represents the amount risked in the business, measured by the amount originally invested and accumulated earnings, excluding appreciation in value not realized upon by sale. It is the amount which is so risked upon which income may be earned which will be exempt from excess-profits tax. Where we have a group of corporations and the necessity of computing their invested capital as a unit, we look to see what has been risked and continues to be risked; what has been paid into this group from sources outside the group and not returned to such sources. Transactions within the group, among its members, are to be disregarded, for it is only that which comes into the group from outside sources in payment for its stock or as paid-in or earned surplus that is to be used in measuring invested capital. I am of the opinion that the Commissioner correctly determined invested capital by excluding an appreciation in value of assets which took place while such assets were in the hands of a member of the group and which appreciation represents no new capital put at risk in the business and therefore I concur in the conclusion reached in the prevailing opinion.