ZONING ORDINANCE HELD VALID.-The Supreme Court of Kansas, in Ware v. City of Wichita, 214 Pac. 99, holds that, under express grants of legislative power conferred upon cities of the first class having 20,000 inhabitants, such cities may plan and create reasonable zoning districts for the future systematic development of the city, and provide therein for residential, commercial and industrial districts, and prohibit the construction of buildings at variance with such plan of development. The city ordinance in controversy, adopted pursuant to express statutory authority, and which forbids the construction of a business building in a residential district, is a valid exercise of the police power, and does not violate any provision of state or federal Constitution.

We quote from the court's opinion as follows:

"The next contention is that the zoning ordinance and the statute which authorizes it have the effect of taking defendant's property or of diminishing its value without compensation. It often happens that a valid exercise of the police power has such effect. The most common examples of this are found in statutes and ordinances relating to the health, safety, or morals of the people. With the march of the times, however, the scope of the legitimate exercise of the police power is not so narrowly restricted by judicial interpretation as it used to be. There is an aesthetic and cultural side of municipal development which may be fostered within reasonable limitations. See Paola v. Wentz, 79 Kan. 148, 152, 153, 98 Pac. 775, 131 Am. St. Rep. 290; Remington v. Walthall, 82 Kan. 234, 108 Pac. 112, 31 L. R. A. (N. S.) 957. Such legislation is merely a liberalized application of the general welfare purposes of state and federal Constitutions. We note that the Supreme Court of Texas rejects this view (Spann v. City of Dallas, 111 Tex. 350, 235, S. W. 513, 19 A. L. R. 1387) in considering an ordinance of the city of Dallas which prohibited the construction of business buildings in a residence district, but the Dallas ordinance appears to have been founded on the mere general grant of legislative authority conferred on Texas municipalities. We have held invalid a somewhat similar Kansas municipal ordinance which had no stronger basis for its support. Smith v. Hosford, 106 Kan. 363, 187 Pac. 685. See, also, City of Goodland v. Popejoy, 98 Kan. 183, 157 Pac. 410. But an express grant of power to cities of 20,000 inhabitants to enact zoning ordinances followed the Smith-Hosfield decision

at the next regular session of the Legislature. Laws 1921, c. 100. Even the Texas decision takes note of a possible justification for such ordinances, made pursuant to an express grant of legislative power.

"Another decision strongly relied on by the defendants in error is In re Opinion of the Justices, 234 Mass. 597, 127 N. E. 525. The decision sustains the validity of an ordinance segregating manufacturing and commercial buildings from homes and residences. But the ordinance, it appears, was passed under an express amendment to the Constitution of Massachusetts, granting to the Legislature the express power to limit buildings, according to their use or construction, to specified districts of cities and towns. We have in Texas no such constitutional provision.' Spann v. City of Dallas, supra, 111 Tex. 361, 235 S. W. 517, 19 A. L. R. 1387.

"It need hardly be said that a valid statute expressly granting to cities such power is just as potent as a constitutional provision to the same effect. In considering federal constitutional inhibitions upon the power of the states touching municipal regulations on the use of property, the Opinion of the Justices of Massachusetts is so instructive that we quote pertinent excerpts therefrom:

# *

"While the Supreme Court of the United States has not decided, so far as we are aware, that the exercise of the police power cannot rest on aesthetic considerations alone as its sole basis, we draw the inference from what has been said on that subject that at present at all events that foundation, standing alone, hardly would be regarded as sufficient, but it may be considered in a subsidiary way. It is only in an incidental way that, in carrying out that cardinal object regard may be given to considerations bearing upon a municipal adornment or embellishment. Enhancement of the artistic attractiveness of the city or town can be considered in exercising the power conferred by the proposed act only when the dominant aim in respect to the establishment of districts based on use and construction of buildings has primary regard to other factories lawfully within the scope of the police power.''

*

"Would you mind driving a little slower, old

man?"

"Not getting scared, are you?"

"Oh, no, nothing like that, but I'd hate to take an unfair advantage of my life insurance company."-New York Sun.

SPECIAL ASSESSMENT UNDER THE REVENUE ACTS OF 1918 AND 1921

By Walter E. Barton*

Congress foresaw when the Acts of 1917, 1918 and 1921 were enacted that the excess and war profits taxes would result in exceptional hardship in certain cases, and made provision for special relief. I refer to Section 210 of the Act of 1917, and Sections 327 and 328 of the Acts of 1918 and 1921. This article will be limited to the Acts of 1918 and 1921, in view of the fact that most cases arising under the Act of 1917 are either settled, or barred by the Statute of Limitations.

The special relief granted by these sections is sometimes called "special assessment." Special assessment consists in levying on a corporation entitled to it, an excess profits tax which bears the same ratio to the net income of such corporation for the taxable year as the average excess profits tax of representative corporations engaged in a like or similar trade or business, bears to their average net income for such year.

Authority to administer Sections 327 and 328 is reposed in the Commisioner of Internal Revenue. This power, according to the debates of the Senate, is greater than has ever been granted to department officials before. It was intended that it be exercised wisely and justly, for

"If exercised wisely it will be a relief to the institutions of the country, and many of them will need it, but if exercised unjustly or unwisely, there will be a frightful discrimination between business concerns and industries of the country.'

A discussion of special assessment resolves itself into two principal questions:

(1) Speech of Senator Smoot, Cong. Rec. of Dec. 14, 1918, p. 666.

*Member of the Washington, D. C., Bar, Co-author of Barton and Browning's Federal Income Tax Laws, Correlated and Annotated.

(1) When is a corporation entitled to special assessment?

(2) What is the measure of relief granted by special assessment?

WHEN IS A CORPORATION ENTITLED TO SPECIAL

ASSESSMENT?

Section 327 of each of the Acts of 1918 and 1921, provides that special assessment shall be given:

"(a) Where the Commissioner is unable to determine the invested capital as provided in Section 326;""

Such a case may arise where tangible property has been paid in for stock or shares at a value substantially in excess of the par value thereof, but due to lack of evidence the correct value of such tangible property, as of the date paid in, cannot be determined, so as to entitle the corporation to a paid-in surplus. Another example is where the corporation has erroneously charged capital items to expense over a period of years, and it is impossible on account of the state of its records, or for some other reason, to readjust the capital accounts so as to show the true invested capital.

"(b) In the case of a foreign corporation; "3

"(e) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commisioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively;" In order to determine statutory invested capital it is necessary to evaluate tangible and intangible property separately, where both have been paid in for stock or shares, for the reason that there is a limitation placed upon the amount of intangible prop

(h) Where the capitalization of the corporation is ultra-conservative.14 An instance of this kind usually occurs in longestablished corporations and particularly in close corporations which have been in business for many years.

(i) Where tangible property has been paid in for stock or shares substantially in excess of the par value thereof, but due to loss of records or for some other reason the actual cash value thereof cannot be determined so as to entitle the corporation to a paid in surplus.15

(j) Where large amounts have been expended in experimental work which have not been capitalized, but which have resulted in the development of a secret formulae of great value to the corporation.16

(k) Abnormal conditions existing in the pre-war period;17 for instance, where the invested capital during the pre-war period was non-productive, resulting in a small pre-war net income compared with other representative corporations.18

(1) Where a corporation is placed in a position of substantial inequality because of the time or manner of organization.19

(m) Where the capital employed is very small.19

(10) Bull. 47-20-1318, A. R. R. 326, C. B. 3, p. 361. (11) Bull. 48-20-1330, A. R. R. 327, C. B. 3, p. 362. (12) Bull. 50-20-1348, A. R. R. 332, C. B. 3, p. 362. (13) Bull. 20-20-945, A. R. R. 110, C. B. 2, p. 303. (14) Bull. 28-21-1730, A. R. R. 538, C. B. 5, p. 301; Bull. 17-21-1588, A. R. R. 464, C. B. 4, p. 401. (15) Bull. 37-21-1817, A. R. R. 556, C. B. 5, p. 304. (16) Bull. 1-11-147, L. O. 1090, C. B. 1-1, p. 383. (17) Bull. 19-20-927, O. 1000-A, C. B. 2, p. 299. (18) Bull. 20-20-944, A. R. R. 104, C. B. 2, p. 301; Bull. 28-21-1730, A. R. R. 538, C. B. 5, p. 301. (19) Bull. 1-11-147, L. O. 1090, C. B. 1-1, p. 383.

Congress limited the application of subsection (d) by providing that it should not. apply to any case

"(1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital." This provision should be construed literally. It provides that special assessment shall not be given where the tax is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital. If the invested capital is normal and the tax appears to be comparatively high, an attempt should be made to determine abnormal conditions affecting the income of the corporation, which, if existing, should entitle the corporation to special relief, notwithstanding the fact that the invested capital is normal.

The application of subsection (d) is further qualified by the provision that it shall not apply in a case

"(2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions or other income derived on a cost-plus basis from a government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive."

Corporations assumed no risk under costplus contracts with the United States Government during the war. Hence Congress saw fit to deprive such corporations of the relief granted by this section.

WHAT IS THE MEASURE OF RELIEF GRANTED BY SPECIAL ASSESSMENT?

After it is determined that a corporation is entitled to relief under the aforesaid provisions of the law, it is equally important to obtain the exact relief to which such corporation is entitled. This is not a simple matter, for it involves the determination of the correct ratio of excess profits tax to net income which such corporation should pay. Section 328 (a) in part provides:

"In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such a year. In the case of a foreign corporation 20 the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations."

For instance, if the average excess profits tax of the representative corporations selected is equal to 43.5% of their average net income (in excess of the specific exemption of $3,000), the corporation entitled to special assessment will be required to pay an excess profits tax equal to 43.5% of its own net income (in excess of the specific exemption of $3,000).21

A corporation entitled to special assessment is not compared with all of the corporations engaged in the same industry. Usually five or six representative corporations are selected. The difficulty consists in selecting the proper corporations for comparison; for if one group is selected the average tax may be high, and if another

(20) The Act of 1921 adds: "or of a corporation entitled to the benefits of Sec. 262." Sec. 262 applies to corporations deriving income from sources within a possession of the United States. See footnote 3, page 331.

(21) In the case of foreign corporations or corporations entitled to the benefits of Sec. 262, the specific exemption of $3,000 is not considered.

group is selected the average tax may be low. The intent of the law is that a group of comparatives shall be selected which will be equitable to the taxpayer and also to the government.

It is further provided in section 328 (a) that:

"In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under section 326 and which are as nearly as may be, similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances.''

Thus it will be seen that Congress prescribed a basis for the selection of comparatives. In making this selection only corporations satisfying the following conditions shall be included:

(1) Representative corporations engaged in a like or similar trade or business.

(2) Representative corporations whose statutory invested capital can be determined satisfactorily under section 326.

(3) Representative corporations which are as nearly as may be similarly circumstanced with respect to