Norwich bulletin., 1922-07-22
POINTERS ON TIE CAPITAL STOCK TAX

CT appreciation or depreciation of fix ed asset values such as real estate. buildings. etc. and the adjustment of the values of intangible assets ap- bearing on the books, including pat ents. trade marks and good will. While very few adjustments will usually be made to the liabilities reststement of the reserves are most fregtent. 1 Thus, the reserve for depreciation should be stated at that amount that 1 fairly measures the accrued deprecia- l, ton upon the depreciable property. A reserve for taxes, income, franchise, 1 etc, should be set up in order to fair i ly measure the true value of the cap- l ita1 stock at the time. AS the books of account of most corporations do l not carry such reserves, since ad- ditions to them are not deductible in | the Income Tax Law. this specfic sd . 1 Jusunent will have to be made in
 many cases. The reserve for bad debts 1 too should be adjszgted to the correct figure, where the books do not re- fleet it.
 l In determining the value of the stock l by means of quotations or outside sales prices, not required by Exhibit 1 3, the average value per share is ar-
 rved at by dividing the total quota tions or sales prices for the months T. which the quotations or outside sales prices are shown. However, this meth od is applicable only where no change occurred in the number of shares out standing during the year Where such a change did occur, the far average Ivalue is determined by multiplying the
 average market price per share for I the period during which the capital
 stock as of June 30, 1922 had been outstanding by the number of shares I outlined on the return, 1t is obvious
 that the result does not give the av- craze value per share but merely the T average while the same number of shares were outstanding as the num- Der outstanding as Of June 30, 1922
 In computing the value of the cap
 itaized earnings of the company fol
 Exhibit c. the starting point is the income reported to the federal govt
 ernment on the income tax returns
 The more frequent deductions that will
 De made from this amount are tht inceme taxes paid or accrued durins 1 the year as well as the actual de. ductions from income not allowed by
 the income tax law. The addition. most usually comprise dividends re . ceived from domestic cor borations, in terest on federal and municipal bonds etc. The adjusted and average incom,
 must be capitalized at a certain per centage to reflect the capitalized val 3 ue of the income. Neither the Law no [ the returns suggests the rate to b 2 used in capitalizing the average in come. The return does say. however that a percentage should be used tha : fairly represents, under the condition l, that obtain in the industry, what re r presentatiye enterprises must earn i = order to maintain their stock at pal ,, Thus, if a 20 per cent. return is nee n essary to keep the value of the sf,oc ql at par. the fair value of the averax t income in Exhibit c will be deter d mined by taking one hundred twenti . eths 61e0-2o) of the average earn s 1ngs. If 1S per cent. is a fair rat = the fair value of the stock for th e exhibit will be one hundred eighteenth t Il00-1s) of the average income, an IS so on.
 ' In the previous years, the reguls
 tions deemed the highest value ind ' cated by the three exhibits to be tt g fair average value of the stock, ar I based the tax there on. The regulation IS for the current year, however, chsnr r. this procedure in that the taxpayer -- not held down to any one of these e, 'f ltlbits in the determination of fs ! average value, but may submit wi, '- its return any other evidence tn; 'r more exclusively arrives at such va Jei ue.