paid-in or earned surplus and undivided profits employed in the business. Borrowed money and property were ex

cluded.1

This act was repealed by the act of October 3, 1917, which substituted a "war excess profits tax," effective from January 1, 1917. The new act was designed to apply to enterprises making large war profits, as the title indicates. The tax on the income of corporations was at the following rates:

20% of net income between the excess profits credit (see below) and 15% of invested capital.

25% of net income between 15% and 20% of invested capital. 35% of net income between 20% and 25% of invested capital. 45% of net income between 25% and 33% of invested capital. 60% of net income in excess of 33% of invested capital.

It applied to all trades and businesses, including professions and occupations, except officers and employees of the United States or a political subdivision, corporations exempt from the income tax, and insurance businesses of the type exempt under the act of March 3, 1917, as explained above.

Domestic 2 corporations were entitled to an excess profits credit of $3,000, and domestic partnerships, citizens, or residents were entitled to a $6,000 credit. These enterprises and also foreign corporations and partnerships, and nonresident alien individuals were entitled to a credit for the same percentage of invested capital for the year, which the average annual net income of the pre-war period (1911, 1912, 1913) was of the invested capital for the same period, except that the percentage was limited to not less than 7 nor more than 9; if invested capital could not be ascertained, the credit was determined by taking the average credit for the trade or industry. Where the invested capital was nominal or no invested capital existed, the excess profits tax 1 See Chapters XIX-XXII.

2 Domestic as used here has reference to location within the United States rather than a particular state.

was 8% of net income in excess of the specific exemptions mentioned above.

Income of corporations from 1911 to 1912 to be used in the computation was the income as returned under the act of 1909 plus income taxes paid to the United States. For 1913 the income returned under the act of 1913 plus income taxes paid and minus dividends received was to be used. Income for the taxable year of a corporation was the amount returned under the 1917 act minus dividends received. Income of partnerships and individuals for pre-war years and the taxable year were computed as under the act of 1917, minus dividends received. Certain other details connected with the computation of invested capital under the 1917 act will be found hereinafter.

On February 24, 1919, the 1918 law was signed by the President. This law was effective from January 1, 1918, and repealed the 1916 and 1917 laws. Invested capital was again given a prominent place in the computation of the tax but its application was limited to the corporate form of enterprise.1 Its importance for the year 1918 may be indicated by the following summary of the surtax rates applicable to corporations during that year:

There were three corporate surtaxes or supertaxes, each separately computed, and designated (a), (b) and (c) below. The higher of (a) and (b) would ordinarily govern, but if the invested capital for the year were less than $106,250 (which is the result of equating the various possibilities of (a), (b), and (c)), (c) would be the method applied if a lower tax would result.

(a) Excess profits tax: 30% of the net income for the year in excess of (1) 8% of the invested capital for the taxable year plus (2) $3,000, but not in excess of 20% of the invested capital, and 65% of the net income in excess of 20% of the invested capital.

(b) War profits tax: 80% of the net income in ex1 See Chapters XIX-XXII for details.

cess of (1) 10% of the invested capital for the taxable year plus (2) $3,000; or if the corporation had a prewar period the exemption which could be used in place of the 10% of invested capital was the average net income for the pre-war period plus or minus 10% of the increase or decrease in invested capital since that time.

(c) Limitations tax: 30% of the net income in excess of $3,000 but not in excess of $20,000, plus 80% of the net income in excess of $20,000.

Rates of taxation under the Civil War acts varied from 3% to 10%, with specific exemptions of from $600 to $2,000 for each family unless the husband and wife did not live together and the wife had a separate income beyond the control of her husband. A brief résumé of the tax rates applicable to ordinary income follows:

The 1894 act contemplated the taxation of corporate net profits at 2% and individual income at the same rate but in excess of $4,000, while under the 1909 law corporations were taxed at 1% of net income in excess of $5,000.

The income tax act effective March 1, 1913, provided a normal tax of 1% on the net incomes of individuals and corporations, with an exemption of $3,000 to single persons and $4,000 to married couples. Surtaxes, on individuals only, were levied for the first time as follows:

When the 1916 law was passed, however, the normal tax was raised to 2% for both individuals and corporations, the exemptions to individuals remained the same, and the surtaxes were increased to the following:

Income

Tax

Income

Tax

$ 20,000 to $ 40,000.... 1% $ 250,000 to $300,000.. 8%

300,000 to 500,000.. 9% 500,000 to 1,000,000..10%

40,000 to

60,000.... 2%

1,000,000 to

1,500,000..11%

The amendment of October 3, 1917, did not change the normal taxes and the surtaxes, but levied an additional normal tax of 2% on individuals, an additional 4% on corporations and the following additional surtaxes on individuals:

Income

Tax

Income

Тах

$ 5,000 to $ 7,500... 1% $ 100,000 to $ 150,000..22%

10,000... 2%

7,500 to

150,000 to

10,000 to

200,000..25%

12,500 to

250,000..30%

15,000 to

300,000..34%

20,000 to

500,000..37%

40,000 to

750,000..40%

60,000..... 10%

80,000 to 100,000. 18%

....

The exemptions for individuals were lowered to $1,000 for a single person and $2,000 for married couples with an additional exemption for the first time of $200 for each dependent child under 18 or a dependent incapable of selfsupport because mentally or physically defective. An additional 10% tax was declared on corporate income undistributed six months after the end of the calendar or fiscal year, except income which was retained for reasonable requirements in the business or invested in obligations of the United States.

SOME DEFECTS OF EARLIER ACTS

Acts that are retroactive in their application do not give the individual or corporation time to adjust his or its affairs to the tax imposition, with the result that they work great hardship on the taxpayer. All of the acts which have become effective have been retroactive. The enactment of five radically different laws in a few years certainly is contrary to all principles of taxation. Under such circumstances it was impossible to get interpretations and court decisions that would guide the taxpayer on ambiguities of the law.

Former acts did not provide for making returns on the basis of income and expenses accrued rather than paid and for that reason caused the taxpayer endless trouble in arriving at his income for tax purposes. At present there seems to be a distinct trend toward the elimination of arbitrary limitations on deductions, acceptance of established business customs and institutions, and recognition of the accountant's definition of profits.1

The 1909 law was brief and general in character and left to the administration much latitude in interpretation. The 1913 law contained restrictions on deductions which caused frequent complications, one being that deduction of losses could only cover those incurred "in trade." Corporations had to pay on dividends received from other corporations regardless of whether or not the other corporations were subject to income tax. Collection at the source in the 1913 law was a cause of trouble but much more so than the necessity of having to give information at the source under the 1916 act.

The 1909 law allowed nothing for depletion, and the 1913 law limited the allowance for depletion in the case of mines to 5% of the gross value of the product at the mine.

1 That is, all earnings accrued within the period less all accrued and probable losses.