To get deduction: The full percentage of the pre-war period can not be used. Therefore, take 9 per cent (the maximum) of $1,500,000. To the amount of $135,000 thus obtained add $3,000, the fixed allowance. The result is $138,000, the total allowable deduction. To compute tax: 20 per cent of net income in excess of the deduction ($138,000) and not in excess of 15 per cent of 1917 capital ($225,000) means that $87,000 is subject to the 20 per cent rate, the tax being.. $17,400 25 per cent of net income in excess of 15 per cent (225,000) and not in excess of 20 per cent ($300,000) of 1917 capital means that $75,000 is subject to the 25 per cent rate, the tax being.... 35 per cent of net income in excess of 20 per cent ($300,000) and not in excess of 25 per cent ($375,000) of 1917 capital means that $75,000 is subject to the 35 per cent rate, the tax being..... 45 per cent of net income in excess of 25 per cent ($375,000), in this case means that $75,000, the remainder of the net income is subject to the 45 per cent rate, the tax being.. Total Tax 18,750 26,250 33,750 .$96,150 No. 6 (Increase of capital during the taxable year; the monthly average) On January 1, 1917, a corporation's capital was $100,000; on June 1, 1917, it was increased to $200,000, and again on October 1, 1917, to $250,000. There were: 5 months at $100,000. 4 months at $200,000. 3 months at $250,000. The average invested capital for 1917, for the purpose of the Excess Profits Tax computation would be the average, or $170,833.33. No. 7 (Without invested capital, or when invested capital is merely nominal) A professional man has a net income from the practice of his profession for 1917 of $30,000. The only deduction in such a case would be $6,000. The tax in such a case would be per cent of net income ($30,000) in excess of the deduction ($6,000) which means that $24.000 would be subject to the 8 per cent rate, the tax being $1,920. 417.-OLD EXCESS PROFITS TAX LAW REPEALED-TAX IS CREDITED. The Excess Profits Tax provisions of the Act of March 3, 1917, are repealed by the Excess Profits Tax provisions of the Act of October 3, 1917. However, any tax paid under the old law will be allowed as a credit under the new law.. If the amount paid under the old law is in excess of the amount due under the new law, a claim for refund may be filed. 418.-MUNITIONS TAX REPEALED AT END OF 1917. The Munition Manufacturers' Tax, imposed by the Act of September 8, 1916, remains in effect during the year 1917, but no longer. The War Revenue Act provides for its repeal at the end of the year 1917 and at the same time reduces the tax rate applicable to 1917 from 121⁄2 to 10 per cent. This tax is upon the net profits derived during the year by every person, partnership or corporation manufacturing and disposing of (a) Gunpowder and other explosives, except blasting powder and dynamite used for industrial purposes; (b) Cartridges, loaded and unloaded, caps or primers, except (c) projectiles, shells or torpedoes, shrapnel and fuses; (e) electric motor boats, submarine or submersible vessels; 419.-PAYMENT OF TAX. The Excess Profits Tax is to be paid when the Income Tax is paid. The provisions of the Income Tax law with respect to time of assessment and time and form of payment apply. CHAPTER XXVII CAPITAL STOCK TAX ON CORPORATIONS 420.-AN EXCISE TAX. The Capital Stock Tax is an excise tax upon the "doing of business" by a corporation. It is what is known as a "Special Tax," and was first imposed by the Act of September 8, 1916. It is still in effect and has proved one of the most troublesome of the Federal taxes, owing to the basis of assessment. 421.-FAIR VALUE OF STOCK THE MEASURE. The measure of the tax is the fair value of capital stock, with surplus and undivided profits to be included in ascertaining such fair value. The statute says that “fair value" shall be the basis of assess ment but the Treasury Department has at various times by regulation, tried to make the basis "fair market value." In this it has not entirely succeeded for the simple reason that the impossibility of giving a "fair market value" to the stock of every corporation engaged in business is so obvious that it does not require explanation. Certainly by arbitrary methods prescribed in general rules the best that can be done in many cases toward determining a “fair market value" is a haphazard attempt at approximation. 422. THE TAX YEAR. The period for which this tax is paid is the fiscal year of the Government—from July 1 of one year to June 30 of the following year. This is the case with all of the Special taxes. 423. WHEN TO MAKE RETURN. The return, or disclosure of liability, must be filed during the month of July. (The next return due after the publication of this book is to be filed in July, 1918, for the fiscal year beginning July 1. 1918 and ending June 30, 1919.) If the return is not filed in July, a penalty attaches for delinquency equal to 50 per cent of the amount of the tax. Also the corporation is liable to prosecution for doing business without having paid the Special Excise tax. A domestic corporation should file return on Form 707; a foreign corporation on Form 708. 424.-TAX RATE. The tax is imposed at the rate of 50 cents for each full $1,000 of the fair value of the corporation's issued and outstanding capital stock. (Note the word "full," above.) For example: A corporation's return on Form 707 shows a fair value of capital stock of $675,490, in excess of the exemption. Its tax would be $337.50, computed on $675,000, the amount of $490 (being less than $1,000) being disregarded. 425.-BASIC QUALIFICATIONS. A corporation, to be subject to this tax, must have been organized for profit; it must also have a capital stock represented by shares. 426. BOTH DOMESTIC AND FOREIGN. Both domestic and foreign corporations are subject to the tax(a) A domestic corporation, which was engaged in business in the preceding fiscal year (that is, the fiscal year ending June 30, just preceding the July in which return must be filed) and which is continuing in business in the fiscal year beginning in the July when it must file. return. (See illustration below.) (b) A foreign corporation engaged in business in the United States, as explained above. Illustration, referring to (a), above: A corporation not engaged in business in the fiscal year, July 1, 1917-June 30, 1918, would not be subject to the tax even though it should engage in business during the year 1918 subsequent to June 30, 1918. Again, a corporation engaged in business during the whole or a part of the fiscal year, July 1, 1917– June 30,1918, but not continuing in business subsequent to June 30, 1918, would not have to file a return in July, 1918. The corporation would have to be engaged in business for at least a part of the fiscal year, July 1, 1917-June 30,1918, and continue in business subsequent. to June 30, 1918 (that is in the fiscal year beginning July 1, 1918) to be liable to file a return in July, 1918, and pay tax for the fiscal year beginning with that month. 427.-EXEMPTION. A domestic corporation is allowed an exemption of $99,000. The tax is imposed upon fair value of capital stock only in excess of $99,000. (Note: See paragraph "Amount Requiring Return," below.) A foreign corporation, if it makes a return showing its entire capital is entitled to that proportion of $99,000 which its capital invested in the United States bears to its entire invested capital. 428.-AMOUNT REQUIRING RETURN. But a return must be filed by a domestic corporation if the fair value of the outstanding capital stock is $75,000 or over. This is the ruling of the Department. In other words, the Department is to be the judge as to whether tax is due, with the margin between $75,000 and $99,000 within which to work. A great many corporations, under this ruling, have to file returns but do not have to pay the tax. 429. WITH NET INCOME OF $6,000. Recently the Department instructed its field officers to check over the Income Tax assessment lists and call upon every corporation with an annual net income of $6,000 or more to show cause why it should not have filed Capital Stock Tax returns for past fiscal years, if it did not do so. It is therefore suggested that every corporation whose net income has amounted to $6,000 or more a year, look closely to the value of its outstanding capital stock and, if it find that it should have filed Capital Stock Tax returns, do so at once before demand is made upon it. By voluntary filing, accompanied by a showing that failure to file was due to a misunderstanding of the law, a corporation can avoid the penalties that otherwise would be incurred. 430.-BELOW $75,000, NOT REQUIRED TO FILE. If a corporation's outstanding capital stock has a fair value of less than $75,000, it is not required to file a return. But it should be on the safe side, and look carefully into the question of its liability. There seems to be a conviction in official quarters that this law has not been obeyed, and the penalties of the law will be enforced, should the filing of a return have to be forced by investigation. A corporation should look closely into its own case, as outlined in this and preceding paragraphs, and make sure of its position. 431.-RETURN BY FOREIGN CORPORATION. A return is required of every foreign corporation engaged in business in the United States, regardless of the value of its capital, or of the capital invested in the United States. |