Taxable Years Taxable Years Taxable Years were those amounts which would result in the tax computed under subsection (d). Sec. 721. (f) Abnormal income from exploration, etc.—If by reason of taking into account, in determining constructive average base Sec. 721. (f) Abnormal income Sec. 721. (f) Abnormal income from exploration, etc.-If by rea- from exploration, etc.-If by reason of taking into account, in deter- son of taking into account, in determining constructive average base mining constructive average base period net income under section period net income under section 722, exploration, discovery, pros- 722, exploration, discovery, pros- period net income under section pecting, research, or development pecting, research, or development 722, exploration, discovery, prosof tangible property, patents, for- of tangible property, patents, for-pecting, research, or development mulae, or processes, or any combi-mulae, or processes, or any combi-of tangible property, patents, fornation of the foregoing, extending nation of the foregoing, extending mulae, or processes, or any combiover a period of more than 12 over a period of more than 12 months, such constructive average months, such constructive nation of the foregoing, extending base period net income is higher base period net income is higher over a period of more than 12 than it would be without such tak- than it would be without such tak-months, such constructive average ing into account, only such portion ing into account, only such portion base period net income is higher of the income in the taxable year of the income in the taxable year than it would be without such takresulting from such activity which resulting from such activity which is of a class described in subsection is of a class described in subsection ing into account, only such portion (a) (2) (C) as is attributable to (a) (2) (C) as is attributable to of the income in the taxable year another taxable year under this sub- another taxable year under this sub-resulting from such activity which chapter shall be deemed attribut- chapter shall be deemed attribut is of a class described in subsection able to a year other than the tax- able to a year other than the taxable year. able year. Sec. 721, I. R. C., supra, as originally enacted in Sec. 201, Excess Profits Tax Act of 1940, is shown in fn. 26, p. 822. Sec. 721, I. R. C., as shown in the footnote was amended by Sec. 5, Excess Profits Tax Amendments of 1941, and by Sec. 221 (a), R. A. of 1942, to read as shown above. Sec. 222 (f), R. A. of 1942, provides that Sec. 721 (a) (2) (B), I. R. C., supra, shall not apply with respect to any taxable year beginning after Dec. 31, 1941. For Sec. 721, I. R. C., before amendments and taxable years in respect of which see Sec. 722. General relief-Constructive average base period net income.27 average Sec. 721, I. R. C., supra, as originally enacted in Sec. 201, Excess Profits Tax Act of 1940, is shown in fn. 26, p. 822. Sec. 721, I. R. C., as shown in the footnote was amended by Sec. 5, Excess Profits Tax Amendments of 1941, to read as shown above in ordinary type down to and including Sec. 721 (c) (1) and also as shown in Sec. 721 (c) (2) and Sec. 721 (d) in stricken through ordinary type. Sec. 17 of said Act makes amendment applicable as of Oct. 8, 1940, the date of enactment of Excess Profits Tax Act of 1940. Sec. 721 (c) (2) and Sec. 721 (d), I. R. C., supra, shown in stricken through ordinary type, again amended by Sec. 221 (a), R. A. of 1942, to read as shown in Sec. 721 (c) (2) and Sec. 721 (d) in italics and also by addition of Sec. 721 (e) and Sec. 721 (f) as shown in italics. Sec. 221 (b) of said Act makes amendment applicable to taxable years beginning after Dec. 31, 1939. Sec. 222 (f), R. A. of 1942, provides that Sec. 721 (a) (2) (B), I. R. C., supra, shall not apply with respect to any taxable year beginning after Dec. 31, 1941. Sec. 722. General relief-Constructive average base period net income.27 27 Sec. 722, I. R. C., as originally enacted by Sec. 201, Excess Profits Tax Act of 1940, as amended by Sec. 6, Excess Profits Tax Amendments of 1941, and as amended by Sec. 202 (g), Revenue Act of 1941, is shown as follows: (a) (2) (C) as is attributable to another taxable year under this subchapter shall be deemed attributable to a year other than the taxable year. Sec. 721, I. R. C., supra, as originally enacted in Sec. 201, Excess Profits Tax Act of 1940, is shown in fn. 26, p. 822. Sec. 721, I. R. C., as shown in the footnote was amended by Sec. 5, Excess Profits Tax Amendments of 1941, to read as shown above in italics down to and including Sec. 721 (c) (1) and also as shown in Sec. 721 (c) (2) and Sec. 721 (d) in stricken through italics. Sec. 17 of said Act makes amendment applicable as of Oct. 8, 1940, the date of enactment of Excess Profits Tax Act of 1940. 221 Sec. 721 (c) (2) and Sec. 721 (d), I. R. C., supra, shown in stricken through italics, again amended by Sec. (a), R. A. of 1942, to read as shown in Sec. 721 (c) (2) and Sec. 721 (d) in underlined italics and also by addition of Sec. 721 (e) and Sec. 721 (f) as shown in underlined italics. Sec. 221 (b) of said Act makes amendment applicable to taxable years beginning after Dec. 31, 1939. Sec. 722. General relief-Constructive average base period net income.27 (As enacted by Sec. 201, Excess Profits Tax Act of 1940) Sec. 722. Adjustment of abnormalities in income and capital by the commissioner. For the purposes of this subchapter, the Commissioner Taxable Years Beginning in 1940 were those amounts which would result in the tax computed under subsection (d). Sec. 721. (f) Abnormal income from exploration, etc.—If by reason of taking into account, in determining constructive average base period net income under section 722, exploration, discovery, prospecting, research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months, such constructive average base period net income is higher than it would be without such taking into account, only such portion of the income in the taxable year resulting from such activity which is of a class described in subsection (a) (2) (C) as is attributable to another taxable year under this subchapter shall be deemed attributable to a year other than the taxable year. Sec. 721, I. R. C., supra, as originally enacted in Sec. 201, Excess Profits Tax Act of 1940, is shown in fn. 26, p. 822. Sec. 721, I. R. C., as shown in the footnote was amended by Sec. 5, Excess Profits Tax Amendments of 1941, to read as shown above in italics down to and including Sec. 721 (c) (1) and also as shown in Sec. 721 (c) (2) and Sec. 721 (d) as shown in stricken through italics. Sec. 17 of said Act makes amendment applicable as of Oct. 8, 1940, the date of enactment of Excess Profits Tax Act of 1940. Sec. 721 (c) (2) and Sec. 721 (d), I. R. C., supra, again amended by Sec. 221 (a), R. A. of 1942, to read as shown in Sec. 721 (c) (2) and Sec. 721 (d) in underlined italics and also by addition of Sec. 721 (e) and Sec. 721 (f) as shown in underlined italics. Sec. 221 (b) of said Act makes amendment applicable to taxable years beginning after Dec. 31, 1939. Sec. 722. General relief-Constructive average base period net income.27 Taxable Years Beginning in 1939 shall also have authority to make such adjustments as may be necessary to adjust abnormalities affecting income or capital, and his decision shall be subject to review by the United States Board of Tax Appeals. Sec. 710 (a), I. R. C., makes amendment applicable to taxable years beginning after Dec. 31, 1939. Taxable Years Beginning before 1939 (As amended by Sec. 6, Excess Profits Tax Amendments of 1941) Sec. 6. Abnormal base period earnings. Section 722 of the Internal Revenue Code is amended to read as follows: Taxable Years Taxable Years Taxable Years Sec. 722. (a) General rule.-In Sec. 722. (a) General rule.—In Sec. 722. (a) General rule.-In any case in which the taxpayer es- any case in which the taxpayer es- any case in which the taxpayer establishes that the tax computed un- tablishes that the tax computed un-tablishes that the tax computed under this subchapter (without the der this subchapter (without the der this subchapter (without the benefit of this section) results in an benefit of this section) results in an benefit of this section) results in an excessive and discriminatory tax excessive and discriminatory tax excessive and discriminatory tax and establishes what would be a and establishes what would be a and establishes what would be a fair and just amount representing fair and just amount representing normal earnings to be used as a normal earnings to be used as a constructive average base period net constructive average base period net income for the purposes of an ex- income for the purposes of an excess profits tax based upon a com- cess profits tax based upon a comparison of normal earnings and parison of normal earnings and earnings during an excess profits earnings during an excess profits tax period, the tax shall be tax period, the tax shall be determined by using such con- determined by using such constructive average base period net structive average base period net income in lieu of the average base income in lieu of the average base period net income otherwise deter- period net income otherwise determined under this subchapter. In mined under this subchapter. determining such constructive aver- determining such constructive average base period net income, no re-age base period net income, no regard shall be had to events or condi- gard shall be had to events or conditions affecting the taxpayer, the tions affecting the taxpayer, the industry of which it is a member, or industry of which it is a member, or taxpayers generally occurring or taxpayers generally occurring or existing after December 31, 1939, existing after December 31, 1939, except that, in the cases described except that, in the cases described in the last sentence of section 722 in the last sentence of section 722 (b) (4) and in section 722 (c), re-│(b) (4) and in section 722 (c), regard shall be had to the change in gard shall be had to the change ir fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except that, in the cases described in the last sentence of section 722 (b) (4) and in section 722 (c), regard shall be had to the change in "Sec. 722. Adjustment of abnormal base period net income. "(a) GENERAL RULE.-In the case of a taxpayer whose first taxable year under this subchapter begins in 1940, if the taxpayer establishes "(1) that the character of the business engaged in by the taxpayer as of January 1, 1940, is different from the character of the business engaged in during one or more of the taxable years in its base period (as defined in section 713 (b) (1)); or '(2) that in one or more of the taxable years in such base period normal production, output, or operation was interrupted or diminished because of the occurrence of events abnormal in the case of such taxpayer; and (3) the amount that would have been its average base period net income (A) if the character of the business as of January 1, 1940, had been the same during each of the taxable years of such base period; and (B) if none of the abnormal events referred to in paragraph (2) had occurred; and (C) if in each of such taxable years none of the items of gross income had been abnormally large, and none of the items of deductions had been abnormally small; and "(4) that the amount established under paragraph (3) is greater than the average base period net income computed under section 713 (d) or section 742, as the case may be, then the amount established under paragraph (3) shall be considered as the average base period net income of the taxpayer for the purposes of this subchapter. (b) RULES FOR APPLICATION OF SUBSECTION (a).— For the purposes of subsection (a) — "(1) High prices of materials, labor, capital, or any other agent of production, low selling price of the In product of the taxpayer, or low physical volume of sales owing to low demand for such product or for the output of the taxpayer, shall not be considered as abnormal. (2) The character of the business engaged in by the taxpayer as of January 1, 1940, shall be considered different from the character of the business engaged in during one or more of the taxable years in its base period only if— "(A) there is a difference in the products or services furnished; or "(B) there is a difference in the capacity for production or operation; or "(C) there is a difference in the ratio of nonborrowed capital to total capital; or "(D) the taxpayer was in existence during only part of its base period; or 66 (E) the taxpayer acquired, before January 1, 1940, all or part of the assets of a competitor, with the result that the competition of such competitor was eliminated or diminished. (3) The average base period net income determined under subsection (a) (3) shall be computed in the same manner as provided in section 713 (d), except paragraphs (2) and (4), but for such purposes computing excess profits net income and deficit in excess profits net income on the basis of the assumptions made in subsection (a) (3). "(4) If subsection (a) (1), or both subsections (a) (1) and (a) (2) are applicable to any taxpayer, its average base period net income under subsection (a) (3) shall not exceed the excess profits net income (as computed for the purposes of subsection (a) (3)) for the last taxable year in such base period. For the purposes of this paragraph, if such last taxable year is of less than twelve months, the excess profits net income for such taxable year shall be placed on an annual basis Taxable Years Beginning in 1940 Sec. 722. (a) General rule.-In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such con structive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayers generally occurring or existing after December 31, 1939, except that, in the cases described in the last sentence of section 722 (b) (4) and in section 722 (c), regard shall be had to the change in Taxable Years Beginning in 1939 by multiplying by twelve and dividing by the number of months included in such taxable year. "" (c) LIMITATION ON APPLICATION OF GENERAL RULE. -This section shall not be applicable unless "(1) the tax under this subchapter for the taxable year computed without reference to this section, exceeds 6 per centum of the taxpayer's normal-tax net income for such year; and 66 (2) the application of this section would result in a diminution of the tax otherwise payable under this subchapter for the taxable year by more than 10 per centum thereof. "(d) EXTENT OF REDUCTION IN TAX UNDER THIS SECTION. The application of this section shall not reduce the tax payable under this subchapter for the taxable year below 6 per centum of the taxpayer's normaltax net income for such year. The tax under this subchapter computed with the application of subsection (a) shall be increased by an amount equal to 10 per centum of the tax computed without reference to this section. "(e) APPLICATION FOR RELIEF UNDER THIS SECTION. -The taxpayer shall compute its tax and file its return under this subchapter without the application of this section. The benefits of this section shall not be allowed unless the taxpayer, within six months from the date prescribed by law for the filing of its return, makes application therefor in accordance with regulations to be prescribed by the Commissioner with the approval of the Secretary, except that if the Commissioner in the case of any taxpayer with respect to the tax liability of any taxable year— "(1) issues a preliminary notice stating a deficiency in the tax imposed by this subchapter such taxpayer may, within ninety days after the date of such notice, make such application, or Taxable Years Beginning before 1939 "(2) mails a notice of deficiency (A) without having previously issued a preliminary notice thereof or (B) within ninety days after the date of such preliminary notice, such taxpayer may claim the benefits of this section in its petition to the Board or in an amended petition in accordance with the rules of the Board. If the application is not filed within six months after the date prescribed by law for the filing of the return, the application of this section shall not reduce the tax otherwise determined under this subchapter by an amount in excess of the amount of the deficiency finally determined under this subchapter without the application of this section. If the average base period net income has been determined under subsection (a) for any taxable year, the Commissioner may, by regulations approved by the Secretary, prescribe the extent to which the limitations prescribed by this subsection may be waived for the purpose of determining the tax under this subchapter for a subsequent taxable year." Sec. 17, Excess Profits Tax Amendments of 1941, makes foregoing amendment effective on Oct. 8, 1940. (As amended by Sec. 202 (g), Revenue Act of 1941) Sec. 202. (g) Adjustment of abnormal base period net income.-Section 722 (c) (placing a limit on the amount of relief afforded under section 722) is amended by adding at the end thereof a new sentence to read as follows: "For the purposes of this subsection and subsection (d) the taxpayer's normal-tax net income shall be computed without deduction of the tax imposed by this subchapter.". Sec. 205, Revenue Act of 1941, makes foregoing amendment applicable to taxable years beginning after Dec. 31, 1940. Taxable Years Beginning in 1943 Taxable Years Beginning in 1942 Taxable Years Beginning in 1941 the character of the business under the character of the business under the character of the business under section 722 (b) (4) or the nature section 722 (b) (4) or the nature of the taxpayer and the character of the taxpayer and the character of its business under section 722 of its business under section 722 (c) to the extent necessary to estab- (c) to the extent necessary to establish the normal earnings to be used lish the normal earnings to be used as the constructive average base as the constructive average base period net income. period net income. section 722 (b) (4) or the nature of the taxpayer and the character of its business under section 722 (c) to the extent necessary to establish the normal earnings to be used as the constructive average base period net income. Sec. 722. (b) Taxpayers using average earnings method.-The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because Sec. 722. (b) (1) in one or more taxable years in the base period normal production, output, or operation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer, Sec. 722. (b) (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry, Sec. 722. (b) (3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period, Sec. 722. (b) Taxpayers using Sec. 722. (b) Taxpayers using average earnings method. The tax average earnings method.—The tax computed under this subchapter computed under this subchapter (without the benefit of this section) (without the benefit of this section) shall be considered to be excessive shall be considered to be excessive and discriminatory in the case of and discriminatory in the case of a taxpayer entitled to use the ex-a taxpayer entitled to use the excess profits credit based on income cess profits credit based on income pursuant to section 713, if its aver- pursuant to section 713, if its average base period net income is an in-age base period net income is an inadequate standard of normal earn- adequate standard of normal earnings becauseings because Sec. 722. (b) (1) in one or more taxable years in the base period normal production, output, or operation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer, Sec. 722. (b) (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or be cause of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry, Sec. 722. (b) (3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period, Sec. 722. (b) (1) in one or more taxable years in the base period normal production, output, or oper ation was interrupted or diminished because of the occurrence, either immediately prior to, or during the base period, of events unusual and peculiar in the experience of such taxpayer, Sec. 722. (b) (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a mem ber was depressed by reason of temporary economic events unusual in the case of such industry, Sec. 722. (b) (3) the business of the taxpayer was depressed in the base period by reason of conditions generally prevailing in an industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) sporadic and intermittent periods of high production and profits, and such periods are inadequately represented in the base period, Sec. 722. (b) (4) the taxpayer, Sec. 722. (b) (4) the taxpayer, Sec. 722. (b) (4) the taxpayer, either during or immediately prior either during or immediately prior either during or immediately prior to the base period, commenced busi- to the base period, commenced busi-to the base period, commenced business or changed the character of the ness or changed the character of the | ness or changed the character of the business and the average base business and the average base business and the average base period net income does not reflect period net income does not reflect period net income does not reflect the normal operation for the entire the normal operation for the entire the normal operation for the entire |