Capital account

“ The proprietorship or net worth of a corporation, as of the single proprietorship and partnership, is the excess of its assets over its liabilities. This excess is shown in the books by two accounts or two groups of accounts, viz., the Capital Stock account—or accounts—which represents the amount of outstanding shares; and the Surplus account—subdivided and carried under other titles, if desirable—which represents the excess of the proprietorship over the amount of capital stock. Each stockholder’s share in the corporation is determined by the number of shares he possesses. ”

“ Illogical as it may appear in view of the usual English practice, this account is credited with the capital stock and bonds issued to establish the undertaking, and is debited with the fixed assets in which the capital funds have been invested, the intent of the law being that the capital funds raised should be applied to purchase of fixed equipment with which to earn revenue and that all other expenditures should be made from revenue. If the fixed assets exceed at any time the fixed liabilities and capital, it means that the excess has been supplied out of revenue. ”

“ Many corporations, without legally capitalizing any part of their profits, had assigned definitely some part or all of the annual balances remaining after paying the usual cash dividends, to the uses to which permanent capital is ordinarily applied. Some of the corporations doing this, transferred such balances on their books to 'surplus' account-distinguishing between such permanent 'surplus' and the 'undivided profits' account. ”

“ When we borrow money or discount a note, we do it because we need cash capital, and the interest paid is a capital expense or a direct source of loss. Exchange charged for the collection of notes and drafts belongs in the same class. All interest paid for the use of money, and exchange paid for the collection of notes, drafts, and checks, should be debited to interest account. When we save the discount by prepayment of bills, the discount is earned by the use of capital. All such earnings are a direct source of profit and should be credited to interest account. ”

“ Borrowed Capital.—It may happen that a firm is obliged to borrow funds from outside in order to increase its working capital. For instance, the partners may have no available private funds for further investment and yet may not desire to admit new capital on a profit-and-loss-sharing basis. Such loans usually are on a long-time basis, and should not be included in the Notes Payable account. ”

“ No bank may declare, record in an account or pay to shareholders any portion of profits, or
make any transfer of profits, if such transfer or payment results in a reduction of its capital or
reserves below the minimum levels required under this Law or as required by regulation or
order of the CBI.
3. No bank may distribute profits to shareholders before extinguishing all expenses related to
the establishment and initial organization of the bank.
4. There is no limit to the amount of capital that can be placed in the bank in any given
calendar period. ”

“ It is this latter group of accounts which, as they are carried in the ledger, have both right-side and left-side balances. The income accounts, which tend to increase capital and which, when merged with the capital accounts at the beginning of the period, add to that capital, have right-side balances. The accounts which tend to decrease capital, that is, the expense accounts, because they are subtraction items, have left-side balances. [Pg 77] The net increase (or decrease) in capital for the period is the excess (or deficit) of the total income accounts over the total expense accounts. ”

“ Shares of stock in railroad companies, mining companies, manufacturing companies, and other corporations are represented by certificates showing that the owner is entitled to an interest, expressed in money value, in the entire capital and property of the corporation; but the property of the corporation which constitutes its invested capital may consist mainly of real and personal property, which, in the hands of individuals, no one would think of calling 'moneyed capital,' and its business may not consist in any kind of dealing in money, or commercial representatives of money. ”

“ So long as every dollar of stock issued by a corporation is represented by a dollar of property, no harm can result to individuals or the public from distributing stock to stockholders.... All that can be required in any case is that there shall be an actual capital in property representing the amount of share capital issued. ”

“ Surely the legislative intent that the full value of the stock authorized and required to be subscribed, in other words, the entire capital, shall be, in fact, paid in when required,-that it shall be real, and not merely nominal,-is plain enough when the authority to exist as a corporation and to do business is given on condition that the capital subscribed shall not be less than a specified sum. ”

“ Kinds of Records.—A business must have assets and usually must incur liabilities; a plant must be used, stock-in-trade must be bought, and sold, and usually sufficient capital must be provided for the extension of credit to customers. Capital for the payment of the operating expenses of the business, the maintenance of the plant, the payment of salaries and wages of employees, and so forth must at all times be provided. While it is true that the balance sheet shows the financial condition of the business, it gives little information as to the volume of business operations. ”

“ The respondent can include in its equity invested capital only that portion of its profits from installment payments which it has actually received and on which it has already paid income taxes in the years of receipt. ”

“ They show that he or his assignors, immediate or remote, have contributed capital to the enterprise, that he is entitled to a corresponding interest proportionate to the whole, entitled to have the property and business of the company devoted during the corporate existence to attainment of the common objects, entitled to vote at stockholders' meetings, to receive dividends out of the corporation's profits if and when declared, and, in the event of liquidation, to receive a proportionate share of the net assets, if any, remaining after paying creditors. ”

“ In Great Britain it is well settled that where a corporation, whether authorized or unauthorized by law to increase its capital stock, accumulates and invests part of its earnings, and afterwards apportions them among its shareholders as capital, the amount so apportioned must be deemed an accretion to the capital of each share, the income of which only is payable to a tenant for life. ”

“ Now, the whole income of the company as yet was hardly sufficient to pay 5% on the original capital of 1677 million livres. The receipts from the taxes, &c., could be precisely calculated, and it would be many years before the commercial undertakings of the company—with which only some trifling beginning had been made—would yield any considerable return. People began to sell their shares, and to buy coin, houses, land—anything that had a stable element of value in it. ”

“ We think the assets transferred to petitioner by the community groups represented 'contributions to capital' within the meaning of § 113 (a) (8) (B) and required no reduction in the depreciation basis of the properties acquired. [10] The values which the taxpayer received were additions to 'capital' as that term has commonly been understood in both business and accounting practice; [11] conformably with this usage the pertinent Treasury Regulations have consistently recognized that contributions to capital may originate with persons having no proprietary interest in the business. ”

“ The term 'income,' when applied to the investment of the stockholder in a corporation, had, before the adoption of the Sixteenth Amendment, been commonly understood to mean the returns from time to time received by the stockholder from gains or earnings of the corporation. A dividend received by a stockholder from a corporation may be either in distribution of capital assets or in distribution of profits. ”

“ Should the value of the net assets comprising plant, equipment, etc., or the earnings for a number of years serve as a basis in arriving at the ratio of exchange in cash or stock? What relative weight should be given to the various items? A concern with large assets when not running its plant to full capacity would be averse to having the apportionments based on earnings. The corporation with relatively small assets but with large earnings on the capital invested would not want the value computed on net assets. ”

“ Often, especially in a growing business, only a part, sometimes a small part, of the year's profits is in property capable of division; the remainder having been absorbed in the acquisition of increased plant, quipment, stock in trade, or accounts receivable, or in decrease of outstanding liabilities. When only a part is available for dividends, the balance of the year's profits is carried to the credit of undivided profits, or surplus, or some other account having like significance. ”

“ The capital is not an ideal, fictitious, arbitrary sum of meney set down in the articles of association, but, in the theory and practical operation of the system, is composed of substantial property, and which gives value and solidity to the stock of the institution. ”

“ A corporation agrees to purchase a mine, issuing $1,000,000.00 full paid stock in payment. The owner of the mine, to whom the stock is issued, agrees to donate to the company $500,000.00 of his stock to provide working capital. Subsequently, $100,000.00 of this stock is sold at 50% of its face value; $200,000.00 at 60%; [338] $100,000.00 at 70%; and $100,000.00 at par. Working capital is maintained at the amount realized from the sale of the donated stock. Make all entries to show these transactions, it being understood that all subscriptions are paid in cash. ”

“ Manifestly this argument must be rejected, since the amendment applies to income only, and what is called the stockholder's share in the accumulated profits of the company is capital, not income. As we have pointed out, a stockholder has no individual share in accumulated profits, nor in any particular part of the assets of the corporation, prior to dividend declared. ”

“ Therefore, when a distribution of earnings is made by a corporation among its stockholders, the question whether such distribution bution is an apportionment of additional stock representing capital, or a division of profits and income, depends upon the substance and intent of the action of the corporation, as manifested by its vote or resolution; and ordinarily a dividend declared in stock is to be deemed capital, and a dividend in money is to be deemed income, of each share. ”

“ It includes money in the hands of individuals, employed in a similar way, invested in loans, or in securities for the payment of money, either as an investment of a permanent character, or temporarily, with a view to sale or repayment and reinvestment. In this way the moneyed capital in the hands of individuals is distinguished from what is known generally as personal property. ”

“ Long-established principles govern the application of the more favorable tax rates to long-term capital gains: (1) There must be first, a 'capital asset,' and second, a 'sale or exchange' of that asset (§ 117 (a) ) ; (2) 'capital asset' is defined as 'property held by the taxpayer,' with certain exceptions not here relevant (§ 117 (a) (1) ) ”