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PREFACE

In making this study, the fixing of proper limits to its scope has constituted a major problem. Place accounting or separate accounting which provides for the allocation of profit on a geographical basis is so new and the opportunities for research are so unlimited that the investigator is constantly tempted to stray too far afield. From the beginning, however, it was clear that no single solution would apply to manufacturing and mercantile concerns, railroads, banks, and insurance companies alike, and that the special problems relating to such different types of businesses could not be adequately covered in a report of this nature. Since the allocation of profit on goods manufactured in one country and sold in another was conceded to be the most pressing problem, this study has been restricted to industrial and commercial enterprises, principally the former. A further limitation was effected by acting on the assumption that for accounting and tax purposes a subsidiary corporation must be treated either as an independent concern or as a branch. If the subsidiary is really autonomous, there would seem to be no reason why its taxable income should not be determined by the methods which apply to independent concerns. If the subsidiary, however, is not autonomous in fact, it must be regarded essentially as a branch, and the accounting methods hereafter described will generally apply.

The limits fixed for this study suggest the fields for further work. The problem of allocating profit to an assembly plant of a foreign automobile manufacturing company is so different from the problem of allocating profit to an establishment engaged in the production of some basic raw material that accounting methods must vary widely. No general scheme of allocation which fails to recognise such differences can be satisfactory. Methods for allocating profit to subsidiary companies should also be more fully studied. While it is, in general, true that subsidiaries must be regarded either as separate business entities or as branches, special problems in connection with dividends, losses and other features nevertheless arise. The importance of this form of organisation is in itself a sufficient reason for further investigation. Finally, much work should be devoted to the theoretical aspects of the subject. It is probable — indeed, it is practically certain — that profit can never be allocated with a high degree of scientific precision. The element of human judgment will always bulk large in the results, but there is nevertheless room for much refinement of method. In particular, accounting or statistical methods for the analysis of distribution costs must be developed and introduced by the different industries. Although during the course of this study considerable time has been devoted to the problem of distribution cost, only a limited amount of material on this subject has been included in the report. The questions raised were highly controversial, and, in the absence of any generally accepted practice, they could not be answered authoritatively. It was recognised, moreover, that, even if theoretically sound methods were developed, they could be of little use in taxation for some time because of the relatively small number of concerns which have the most modern and complete cost systems.

The purpose of this report, then, is to analyse, explain, and evaluate certain methods of allocation which are practicable under present conditions, to determine whether a system of separate accounting for the different establishments of an enterprise does or can be made to provide the most satisfactory basis for the allocation of taxable income, and to lay a foundation for further work. If the author has succeeded in attaining some of these objectives, it will be due in no small degree to the generous co-operation of others. Up to the time of his death, Dr. T. S. ADAMS was a constant inspiration and valued counsellor. Dr. Mitchell B. CARROLL, Director of the Study of the Allocation of Income, has not only made available much useful material which would otherwise have been unobtainable, but he had also had an important part in shaping the report to meet immediate needs. Out of an exceptionally broad experience, Mr. H. B. FERNALD, Chairman of the American Institute of Accountants’ Special Committee on Double Taxation, has furnished actual cases, described the methods and practices of different businesses, and made numerous valuable suggestions. Dr. Joseph J. KLEIN, Mr. Norman G. CHAMBERS, Mr. Donald ARTHUR, and Mr. Allan DAVIES, members of the Special Committee of the American Institute of Accountants, have likewise rendered valuable assistance. It would be impossible to mention all who have assisted directly or indirectly in this study. I am indebted to Professor Fred R. FAIRCHILD and to my other colleagues at Yale University for numerous suggestions, to Professor W. A. PATON, of the University of Michigan, and to a number of business men, lawyers, and accountants for their comments on the preliminary copy of this report. Although many persons have kindly offered their assistance in the preparation of this report, they are in no wise responsible for the opinion expressed herein. The author assumes full responsibility for opinions stated and for any errors which may be found.

Ralph C. JONES.

New Haven, Connecticut.

March 18th, 1933.

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